FSA fines US hedge fund giant £7.2m for insider trading

The Financial Services Authority has fined David Einhorn, owner of the prominent US hedge fund Greenlight Capital and his fund £7.2 million for engaging in market abuse.

The abuse was in relation to an anticipated significant equity fundraising by Punch Taverns in June 2009 with Einhorn individually having to pay around £3.6 million of the total fine.

The regulator said 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 that the firm was at an advanced stage of the process towards a significant equity fundraising.

This, said the FSA, 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 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, according to the FSA which said investment professionals are expected to handle inside information carefully regardless of whether they have been formally wall-crossed.

The FSA 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.