UK insider trading fine against Einhorn a non-starter in U.S., experts say

January 27, 2012

By Stuart Gittleman

NEW YORK, Jan. 27 (Thomson Reuters Accelus) – The circumstances that led to UK trading-abuse penalties against U.S. fund manager Greenlight Capital and its portfolio manager David Einhorn probably would not have led to a similar case in the United States, securities lawyers told Thomson Reuters.

The UK Financial Services Authority (FSA) this week fined Greenlight Capital, a U.S. fund manager, and David Einhorn, its portfolio manager, for selling shares after receiving a tip that the issuer was planning an offering that would dilute the fund’s position. 
The FSA found that Einhorn, an experienced portfolio manager who was prominent in the investment industry, told a broker whose firm was involved in the offering, which was set for about a week ahead, that he did not want to be made an insider.

The next day in a call that “was expressly set up on a ‘non-wall crossed’ basis” – UK jargon for not being material non-public information – the broker and an executive of the issuer told Einhorn about the offering and its expected impact on his fund’s position.

Einhorn then sold his fund’s position in the issuer ahead of the announcement and the resulting price drop, thereby avoiding significant losses.

The fact pattern would be unlikely to occur in the U.S., and if it did, the Securities and Exchange Commission (SEC) would probably not file charges, the lawyers said.

“It’s far enough out on the edge for me to wonder whether the SEC would bring the case,” said Peter Henning, a former SEC enforcement lawyer and federal prosecutor who teaches law at Wayne State University in Detroit.

First of all, a U.S. issuer would probably not tell Einhorn about the offering because SEC Regulation FD prohibits issuers from selectively providing market-moving information without releasing it publicly reasonably soon thereafter, Henning said.

In addition, a broker or investment banker involved in the transaction and acting on behalf of the issuer would also be subject to Reg FD because the broker becomes a “temporary insider,” Henning added.

By not requiring what is in practice equal access to market-moving information within the same market cycle, rules in the UK are more lenient than in the U.S.

But considering Einhorn’s actions to be insider trading is “probably a bridge too far” for the SEC, even in “very tough times for fiduciary duty and confidentiality,” Henning said.

“I wouldn’t put anything past the SEC but it strikes me as – even for them – quite a stretch,” said Lyle Roberts, a Dewey & LeBoeuf partner and author of the securities fraud website The 10b-5 Daily.

For one thing, Einhorn did not violate a duty or agreement of confidentiality – a “non-disclosure agreement,” as the FSA put it – that was in place when he sold, or caused to be sold, the issuer’s shares, Roberts said.

The facts are different than in the SEC’s case against Mark Cuban, who allegedly sold shares after being told he was an insider but refused to accept this designation, Henning said.

It is easier to put the Cuban case to a jury because he allegedly said “Now I’m screwed” after receiving material non-public information but sold his shares before they became diluted, Henning said.

Einhorn, on the other hand, had a reasonable basis to believe he had not crossed the wall, since he “appears to have expressly refused to enter into a confidentiality agreement,” Roberts noted.

Nevertheless, “anyone getting this type of information should be extremely careful,” Henning warned. Especially in the wake of criminal convictions stemming from the use of tips from corporate insiders, including through expert network consultants, asset managers who trade on potentially illicit information are in a “free-fire zone,” he added.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( 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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