Einhorn/Greenlight refused to be wall-crossed, requested that they were not given any inside information, FSA accepts they did not believe they had inside information, broker also disputes that inside information was passed
The Financial Services Authority has fined David Einhorn and his hedge fund, Greenlight Capital, £7.2 million for engaging in market abuse in relation to an anticipated significant equity fundraising by Punch Taverns Plc (Punch) in June 2009. From the FSA press release:
“On 9 June 2009, Einhorn was a party to a telephone conference in which it was disclosed to him by a corporate broker acting on behalf of Punch Taverns Plc that Punch was at an advanced stage of the process towards a significant equity fundraising. This was inside information and Einhorn should have appreciated this.
A matter of minutes after the telephone conversation had concluded and on the basis of that inside information Einhorn gave instructions to sell all of Greenlight’s holding in Punch. At the time these instructions were given Greenlight held 13.3% of Punch’s issued equity.
Over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch from 13.3% to 8.89%.
On 15 June 2009, Punch announced a fundraising of £375 million. Following the announcement the price of Punch shares fell by 29.9%. Greenlight’s trading had thereby avoided losses of approximately £5.8 million for the funds under Greenlight’s management.”
The broker was Bank of America Merrill Lynch (see Update below).
Einhorn’s position is that he and Greenlight:
- Specifically refused to be wall-crossed either ahead of or on the telephone conversation.
- Did not believe that any inside information had been conveyed during that conversation.
- Understand that none of the parties thought that inside information had been disclosed.
- Took all reasonable precautions and exercised all due diligence to avoid committing, and reasonably believed that they had not committed, market abuse.
- Relied on Punch management and the other insiders on the telephone conversation not to give Einhorn inside information, or to tell him if they inadvertently did so.
FSA’s position: Einhorn should have identified that he had received inside information
The FSA accepts that Einhorn’s trading was not deliberate market abuse, because he did not believe he had inside information. However, the FSA’s position is that Einhorn should have realised that he had received inside information during the telephone conversation and should not have traded on that information:
“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. Investment professionals are expected to handle inside information carefully regardless of whether they have been formally wall-crossed. 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.
Tracey McDermott, acting director of enforcement and financial crime, said:
“Einhorn is an experienced professional with a high profile in the industry. We expect someone in his position to be able to identify inside information when he receives it and to act appropriately. His failure to do so is a serious breach of the expected standards of market conduct.”
Einhorn’s response to the fine can be read in this piece from FT Alphaville.
UPDATE 26 January 2012: The Financial Times names the broker involved as Andrew Osborne, who was employed at Bank of America Merrill Lynch at the time of the telephone conference. The FT also reports that the FSA is considering fining Mr Osborne around £350,000, against which he is considering an appeal, and that Mr Osborne ”does not believe that he gave the hedge fund executive [i.e. Mr Einhorn] inside information”.
UPDATE 27 January 2012: The Greenlight compliance officer and a trader at JP Morgan Cazenove have also been fined\ by the FSA for their actions (or lack of actions) in this affair.
UPDATE 16 February 2012: The Bank of America Merrill Lynch broker, Andrew Osborne, has been fined £350,000 by the FSA. A transcript of the disputed conference call has also been released by the FSA. See Broker fined £350,000 in Einhorn / Greenlight Capital / Punch Taverns market abuse affair – and FSA releases transcript of conference call.
UPDATE 18 April 2012: An interesting note on this from Kingsley Napley, making the point that Einhorn could have considered the “mosaic” defence.
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