Einhorn/Greenlight Capital fine highlights duty for investors to seek absolute clarity over inside information

January 26, 2012

By Martin Coyle and Alex Robson

LONDON/NEW YORK, (Thomson Reuters Accelus) – A decision by the UK Financial Services Authority (FSA) to fine hedge fund manager David Einhorn and his Greenlight Capital fund 7.3 million pounds ($11.5 million) has highlighted the need for professional investors to ascertain clearly what constitutes inside information, securities lawyers said. The FSA said that it fined Einhorn 3.64 million pounds and Greenlight Capital 3.65 million pounds for using inside information that he obtained from a broker before selling shares in a UK public company in 2009. Einhorn’s is the biggest scalp by far of the FSA’s renewed determination to punish market manipulation as part of its “credible deterrence” policy.

The regulator said that Einhorn learned from a telephone conversation with the broker that British pub company Punch Taverns was on the verge of a significant equity fundraising, prompting the New York-based financier to sell down his holdings before an anticipated fall in the shares.

This decision allowed Einhorn to avoid losses of around 5.8 million pounds ($9 million), the FSA said. “The FSA accepted that Einhorn’s trading was not deliberate because he did not believe that it was inside information. However, this was not a reasonable belief,” the regulator said.

“This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn’s prominent position as president of Greenlight and given his experience in the market.”


Brian McDonnell, a partner and head of the financial services regulatory group at Olswang in London, said that the FSA had had “two bites of the cherry” in pursuing both Einhorn individually and his hedge fund for the same behaviour. It attributed his behaviour to the fund, he said.

McDonnell pointed out that Einhorn specifically requested not to be made an insider on the call with the company’s broker and subsequently argued that he had not in fact received inside information. But the FSA stated that while in isolation none of the discrete pieces of information disclosed to Einhorn would amount to inside information, taken together the pieces of information were inside information according to its objective test.

“It may be this concession by the FSA that caused it not to bring a criminal prosecution against Mr Einhorn, as although he (and his hedge fund) are based in the U.S., the matter would appear to come within the jurisdiction of the UK by reason of Section 62 of the Criminal Justice Act 1993.

“One would have thought that this would normally be a case the FSA would have been happy to prosecute given it is an experienced hedge fund manager. Some might say he has got off lightly given the treatment of hedge fund insider dealers by the U.S. authorities,” he told Thomson Reuters.

He said that individuals needed to take care when they think they might be in receipt of sensitive information: “The case stresses the importance of taking compliance or legal advice in circumstances where there may be any doubt as to whether information could be inside information,” McDonnell said.

There were many hurdles to pass before a piece of information was considered “inside information” but individuals needed to err on the side of caution, said Richard Everett, a partner at Lawrence Graham. Market professionals needed to be clear about the potential difficulties they might face when dealing with similar situations. “If one is a professional there is an even stronger driver than before to treat this kind of call with the utmost caution,” Everett told Thomson Reuters.

Market professionals needed to ask, if they were unsure, Everett said. “He’s clearly not naïve as far as the FSA is concerned, and that has clearly had some influence in whether they were inclined to believe there was a proper basis for believing it wasn’t inside information.”

Compliance could play a useful role in ensuring this type of situation was avoided, Everett said. “Compliance can make suggestions to the traders and analysts that with this type of conversation the status of any information is disclosed and always afterwards check before acting in the light of the call.”

Jonathan Herbst, a partner at Norton Rose, said: “I think that the interesting generic point is that it emphasises how seriously [the FSA] takes systems and controls issues, even when there is no allegation that the use of inside information was deliberate. It has signalled this approach over some period and this is one of the cases which illustrates its line on the issues,” he told Thomson Reuters.

Ruth Gevers, a partner at consultancy Promontory, who was involved with the case when she used to work at the FSA, said that experienced investors had a duty to recognise if something was inside information. “This case highlights that buy-side and sell-side firms need to ensure that their wall crossing procedures and training are robust and well recognised and that the individuals understand that the onus is on them to comply with these regulations and recognise inside information when they see it.

“Overseas investors are a target for FSA if they commit market abuse in UK markets,” Gevers added.

It was notable to see the Regulatory Decisions Committee (RDC) reaffirming in a contested case the “serious though not deliberate” formula, which FSA has often used in settled market abuse cases, said Angela Hayes, a partner at Mayer Brown International LLP. “Previously this had been regarded as the ‘badge’ of carefully negotiated wording in the Final Notice in the course of settlement discussions,” Hayes told Thomson Reuters.

“This decision underlines that in cases where FSA finds that conduct was deliberate or reckless then it will be seeking criminal sanctions,” she said.


Einhorn, one of the hedge fund industry’s best known managers after big, successful bets against financial firms, notably Lehman Brothers, said that the FSA’s action was unjust and inconsistent with its prior enforcement precedent, but he had decided to settle in order to focus on managing his business. “Rather than continue an arduous fight, we have decided to put this matter behind us and concentrate on managing our business,” Einhorn said in a statement.

“We didn’t believe in 2009, and we don’t believe now, that there was anything wrong with our conduct and our actions.”

Einhorn similarly told investors in a letter that he felt the FSA’s actions were “unjust and in contradiction to the law and the facts” and added “what the FSA has found is not a violation of any U.S. securities laws.”

Einhorn held a conference call with investors yesterday afternoon to discuss the trade. He said that he did not believe he or the firm had any inside information when it traded the stock. He said that the chief executive of Punch Taverns had reiterated to him during that conference call that no formal decision to issue equity had been made at the time their conversation took place.

“It was unambiguous,” Einhorn told Greenlight investors during a conference call. “Nothing had been decided. Nothing was imminent. I was told no decision had been made and Punch was simply exploring strategic alternatives” to raise funds. Einhorn said that the FSA was determined to “score a win against a high profile American hedge fund.”

Asked by an investor if the firm had made or would make any changes to compliance procedures, Einhorn said that Greenlight’s chief compliance officer would now also be its global chief compliance officer, and said Greenlight would have to rethink how it speaks with UK companies in the future. Greenlight has some $8 billion in assets under management.


The FSA said that Einhorn gave instructions to sell all of Greenlight’s holdings in Punch a “matter of minutes” after the telephone call from the broker on June 9, 2009. The broker was not identified. At the time these instructions were given Greenlight held 13.3 percent of Punch’s issued equity, and over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch to 8.89 percent. Punch announced a fundraising of 375 million pounds ($588 million) on June 15, 2009. Following the announcement the price of Punch shares fell by 29.9 percent, the FSA said.

While the regulator said that the trading breach was inadvertent and not deliberate, the fine may put some tarnish on Einhorn, who is known for public crusades against abuses by public companies.

In the letter to investors, Einhorn, 43, reassured clients that the fine and all legal expenses related to the case would be paid in full by the management company and himself at “no expense to investors.” Going further, Einhorn offered clients a one-time opportunity to redeem from the normally closed fund for March 31.

“We want every partner to be comfortable and excited to be invested with us,” Einhorn wrote. “We plan to open the funds to our existing partners and to new investors to replace any redemptions we receive and possibly to raise some additional capital for new investments.”


Einhorn is not the first fund manager to be fined in the UK for insider trading. In 2006, the FSA fined former GLG fund manager Philippe Jabre a then-record 750,000 pounds ($1.2 million) after he was found guilty of insider trading on a convertible bond sale for Japan’s Sumitomo Mitsui Financial Group. Einhorn’s fine is the second highest for an individual after the FSA fined Dubai-based private investor Rameshkumar Goenka $9.6 million last year for manipulating the closing price of Reliance Industries on the London Stock Exchange.

Settlements over alleged insider trading offences in the U.S differ from case to case. In New York this week, Diamondback Capital Management, a hedge fund, settled allegations of insider trading with the U.S. Securities and Exchange Commission (SEC) for $9 million. Diamondback was accused of earning illegal profits as part of a $62 million insider trading ring that benefited from insider information on Dell Inc’s earning announcements in 2008. Meanwhile, U.S. prosecutors recently charged two former Diamondback employees with securities fraud violations in the investigation.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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