LONDON/NEW YORK David Einhorn's reputation as one of the hedge fund industry's most respected investors took a bit of a hit on Wednesday when Britain's financial regulator imposed a 7.2 million pounds ($11 million) fine on him and his Greenlight Capital fund for alleged trading abuses.
Britain's Financial Services Authority (FSA) said it fined Einhorn 3.64 million pounds ($5.67 million) and Greenlight Capital 3.65 million pounds for using inside information he obtained from a broker before selling shares in a UK public company in 2009.
The regulator said Einhorn had learned from a telephone conversation with the broker that British pub company Punch Taverns was on the verge of a significant equity fundraising, prompting Einhorn to sell down his holdings before an expected fall in the shares.
This decision allowed Einhorn to avoid losses of around 5.8 million pounds, the FSA said.
On Wednesday, Einhorn told investors that he did not believe he or the firm had any inside information when it traded the stock. He said 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.
The FSA said Einhorn's decision to sell stock in the wake of the call allowed Greenlight to avoid losses of around $9 million (5.8 million pounds).
"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."
On his call with investors on Wednesday, Einhorn said the British regulator was determined to "score a win against a high profile American hedge fund."
Einhorn, one of the hedge fund industry's best known managers after big, successful bets against financial firms including Lehman Brothers, said the FSA's action was unjust and inconsistent with its prior enforcement precedent, but had decided to settle to focus on managing his business.
MATTER OF MINUTES
The FSA said Einhorn gave instructions to sell all of Greenlight's holdings in Punch a "matter of minutes" after the telephone call on 9 June 2009.
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 on 15 June 2009. Following the announcement the price of Punch shares fell by 29.9 percent, the FSA said. It fined Einhorn 3.64 million pounds ($5.67 million) and Greenlight Capital 3.65 million pounds.
While the regulator said the trading infraction was inadvertent and not deliberate, the fine may put some tarnish on 43-year-old Einhorn, a stalwart of the hedge fund community who is known for public crusades against abuses by public companies.
In the letter to investors and on a conference call, Einhorn 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."
The FSA fine comes after a year of mixed results for Einhorn and Greenlight.
While the average U.S. hedge fund lost about 5 percent in 2011, last year Einhorn's flagship fund rose 2.9 percent.
However, the hedge fund manager lost out on a high-profile bet last year when his effort to buy a significant minority stake in the New York Mets broke down over the summer. He is a life-long fan of the baseball team.
Recently, Einhorn made headlines when he targeted Green Mountain Coffee Roasters, claiming the company's accounting practices and long-term earnings power are questionable. The company's stock tumbled about 50 percent after the short position was made public.
Einhorn isn't 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 after he was found guilty of insider trading on a convertible bond sale for Japan's Sumitomo Mitsui Financial Group.
Settlements over alleged insider trading offenses in the U.S naturally differ from case to case. In New York this week, hedge fund firm Diamondback Capital Management settled allegations of insider trading with the U.S. Securities and Exchange Commission 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.
Asked by an investor if the firm had made or would make any changes to compliance procedures, Einhorn said 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 U.K companies in the future. ($1 = 0.6416 British pounds)
(Reporting by Tommy Wilkes & Katya Wachtel; additional reporting by Sudip Kar-Gupta and Laurence Fletcher; Editing by Elaine Hardcastle, Helen Massy-Beresford, Matthew Goldstein and Bernard Orr)