Is David Einhorn Guilty of Insider Trading?

[jacobwolinsky]

Curious for your guys thoughts http://www.valuewalk.com/2012/01/is-david-einhorn-guilty-of-insider-trading/#.TyA1WG-CkhU

[T-bone1]

It sounds like they were selling out of the stake, found out the bad news (which was material non-public information) and kept on selling just as they were.  I would assume Einhorn is very ethical, and it would be something along the lines of: He knew, but didn't tell the trader or portfolio manager who was already selling.

 

I think this is a weird quirk in insider trading law.  Lets say you are Warren Buffett and you own 5.1% of a stock and the managers of (lets say Moody's) think you are going to sell out and since it will be reported it will tank their stock.  Can they tell you bad or good material non-public information to prevent you from acting?

 

In short, without knowing the guy personally, I would be willing to bet that Einhorn didn't do anythign unethical.

 

Don't forget Buffett and Munger were investigated and nearly nailed to the wall for market manipulation . . .

[jacobwolinsky]

I know I agree this story is being updated. Greenlight also issued press release.

[Parsad]

Never liked the guy!  Smart, but the fact that he's never spoken about New Century while sitting on the board, and constantly criticizing others in the financial industry was a stickler for me.  Second largest mortgage bankruptcy in the United States, and this guy never utters a word about what happened there, what he knew, and if there was anything he should have done.  Cheers!   

[twacowfca]

It sounds like they were selling out of the stake, found out the bad news (which was material non-public information) and kept on selling just as they were.  I would assume Einhorn is very ethical, and it would be something along the lines of: He knew, but didn't tell the trader or portfolio manager who was already selling.

 

I think this is a weird quirk in insider trading law.  Lets say you are Warren Buffett and you own 5.1% of a stock and the managers of (lets say Moody's) think you are going to sell out and since it will be reported it will tank their stock.  Can they tell you bad or good material non-public information to prevent you from acting?

 

In short, without knowing the guy personally, I would be willing to bet that Einhorn didn't do anythign unethical.

 

Don't forget Buffett and Munger were investigated and nearly nailed to the wall for market manipulation . . .

 

That's all spin.  Go to the source, the facts established by the FSA criminal investigation.

 

  The criminal investigation section of The Financial Services Administration says that Einhorn personally talked to a broker who was involved in the final stage of the effort of the chain of bars to raise equity funding and told Einhorn about it.  Immediately, Einhorn phoned in a sell order for the stock which he owned, selling large numbers of shares over the next few days.

 

The FSA says that Einhorn's statement that he didn't know that his actions were insider trading was not credible, and that such actions bring the financial services industry into disrepute.

[T-bone1]

more information here, with Einhorn response:

 

http://www.businessinsider.com/david-einhorn-tells-his-side-of-the-story-on-the-fsas-insider-trading-fine-2012-1

[twacowfca]

more information here, with Einhorn response:

 

http://www.businessinsider.com/david-einhorn-tells-his-side-of-the-story-on-the-fsas-insider-trading-fine-2012-1

 

Einhorn's a big boy.  He knows every aspect of laws and regulations about securities trading.  The fact is that the FSA criminal investigation determined that his excuses were not credible.

[ubuy2wron]

David is a master of Spin. Prolly no one is better at it than him right now. Of course he had material non public information the CEO of the company in question should also been fined. In Davids and others case however I am not sure a fine is enough. How many times have agressive hedgies gotten an "edge" and not been charged. For the truely unscrupulous this is just a tax. I am not putting Einhorn in this camp just saying.

[PlanMaestro]

David is a master of Spin.

 

Not sure about that. His own version looks bad and the arrogance does not help.

[mpauls]

From the information gathered, I think this is total bs.  Though, he may have walked the line, he technically does not appear to have done anything wrong. 

 

I will be surprised if anything material about Einhorn comes from this.  He already has a legitimate edge and does not need to take short-cuts.  It is rare to see competent investors take short-cuts, because they can and do outperform on their own merit.  Short-cuts are almost always taken by those who can't otherwise succeed-e.g. the likes of SAC capital.

 

 

[mpauls]

lol, he said, "This resembles insider dealing as much as soccer resembles football."  Soccer is Football. 

 

 

[Rabbitisrich]

It's difficult for me to see how it wasn't an insider trade. If the crux of your defense rests upon the notion that the CEO merely suggested the possibility and size of an equity issuance, but didn't commit to an exact date, then you probably did something wrong. Investors can make money from knowing the likely size of dividend/buyback changes before the fact.

 

The fact that the CEO provided the scale of issuance, particularly following concrete action to monetize pubs, suggested that likely=certain.

[Kraven]

Based on a quick read of the articles, it seems to be more of a grey situation than people make it out to be.  He was on a call with the CEO, CFO, etc.  It is described as an "open" call.  Does that mean open in the sense that there was no agenda, or open in the sense that there were others on the call?  He hears some information that clearly is important.  A company with issues may engage in a capital raise, etc.  It would seem to be material and people need to remember that at least in the US (I don't know the standard in the UK, but assume it's similar) what is material is essentially what a reasonable investor would believe impacts their investment decision.  But was it actually non-public?  That is, was it a secret that they needed this capital infusion?  I would venture to say that for many people on this board, a struggling company with balance sheet issues may need to raise capital.  And if there were others on the call, were they other hedge funds, etc?  Was it actually non public?  The timing is clearly suspect as he apparently sold immediately after the call.

 

At the end of the day, it seems to me that this is probably something more along the lines of the Martha Stewart situation.  More bad judgment than a deliberate attempt to break the law.  Of course scienter (knowledge that what one is doing is wrong) isn't needed.  All that is necessary is that one is in possession of the info and acts on it.  Again, the UK might be different.  It wouldn't surprise me though that a busy guy like Einhorn who is jumping on one call after another hears something and it jives with what he was thinking anyway and just like on auto pilot he implements it.  I'm not saying this wasn't wrong if he did it, but this strikes me (perhaps incorrectly) as more Martha Stewart than Galleon. 

[PlanMaestro]

But was it actually non-public?  That is, was it a secret that they needed this capital infusion?

 

Einhorn's recalled his analyst saying, "We want to sell our shares and we would like to sell all of them. It's price sensitive and it's rather timely....We think there are a bunch of shareholders who know secret bad things... We might have a window to sell before bad news comes out and the stock plummets."

 

I wonder if a transcript of the conference call will leak.

 

[onyx1]

More bad judgment than a deliberate attempt to break the law. 

 

Agreed.  He entered a grey area where a reasonable case can be made either way.  His big mistake was failure to exercise an abundance of caution, or use the Buffett standard of WSJ page A1.  He should have known better and as his public profile increases he will get less of the benefit of the doubt.

 

As a matter of habit, I try to conclude each conversation with an insider by confirming that material non-public information was not disclosed.  Had Einhorn asked that simple question on the recorded call, he would not be in the trouble he finds himself in today.

 

[Parsad]

lol, he said, "This resembles insider dealing as much as soccer resembles football."  Soccer is Football.

 

Yeah, his proof reader (legal counsel) should probably have caught that.  Or he could also just be saying, yeah I traded on insider information.  Cheers!

[Parsad]

Doesn't matter if it is a grey area.  If it's grey, don't tread there!  Pretty simple.  Cheers!

[Kraven]

More bad judgment than a deliberate attempt to break the law. 

 

Agreed.  He entered a grey area where a reasonable case can be made either way.  His big mistake was failure to exercise an abundance of caution, or use the Buffett standard of WSJ page A1.  He should have known better and as his public profile increases he will get less of the benefit of the doubt.

 

As a matter of habit, I try to conclude each conversation with an insider by confirming that material non-public information was not disclosed.  Had Einhorn asked that simple question on the recorded call, he would not be in the trouble he finds himself in today.

 

I disagree if he had asked that question he wouldn't be in trouble today.  The insider himself does not determine whether the information is material and non-public.  It could perhaps give one some guidance, but isn't legal protection in my view.  But I could be wrong.

[Kraven]

Doesn't matter if it is a grey area.  If it's grey, don't tread there!  Pretty simple.  Cheers!

 

Yes, absolutely and I meant to say that (I was thinking it).  Always if someone is unclear they shouldn't tread there, just as you said.  If you don't know, don't do it.  Get advice.  And yes, for all the hedgies out there, that may mean that you can't do something in 2 seconds, but instead might need to wait a few minutes (or more).

[PlanMaestro]

lol, he said, "This resembles insider dealing as much as soccer resembles football."  Soccer is Football.

 

Hehehe, there may be much more to that USA vs ROW cultural argument. I do not talk to management, but the one time I was invited by a hedge fund to join a conversation I was shocked by the questions they asked. Luckily, the CFO played a masterful avoidance game but I wonder how many American hedge funds and analysts are getting away with those type of questions.

 

"Einhorn asked Punches’ CEO straight out if there was a capital raised definitively planned"

 

 

[onyx1]

More bad judgment than a deliberate attempt to break the law. 

 

Agreed.  He entered a grey area where a reasonable case can be made either way.  His big mistake was failure to exercise an abundance of caution, or use the Buffett standard of WSJ page A1.  He should have known better and as his public profile increases he will get less of the benefit of the doubt.

 

As a matter of habit, I try to conclude each conversation with an insider by confirming that material non-public information was not disclosed.  Had Einhorn asked that simple question on the recorded call, he would not be in the trouble he finds himself in today.

 

I disagree if he had asked that question he wouldn't be in trouble today.  The insider himself does not determine whether the information is material and non-public.  It could perhaps give one some guidance, but isn't legal protection in my view.  But I could be wrong.

 

Its likely not protection, but by bringing the issue to the open all of the "he-said-she-said" claims are minimized, and disipline is imposed on both sides of the conversation.  It keeps one from acting alone and pointing fingers later.  In this case if Punch said yes, Einhorn would not have traded.  If Punch said no, but was later found to have passed material information, then Einhorn would not appear as culpable as he is today (or even better use the answer as a reminder to use his moral compass and stay away from a potentially bad situation).

[Kraven]

More bad judgment than a deliberate attempt to break the law. 

 

Agreed.  He entered a grey area where a reasonable case can be made either way.  His big mistake was failure to exercise an abundance of caution, or use the Buffett standard of WSJ page A1.  He should have known better and as his public profile increases he will get less of the benefit of the doubt.

 

As a matter of habit, I try to conclude each conversation with an insider by confirming that material non-public information was not disclosed.  Had Einhorn asked that simple question on the recorded call, he would not be in the trouble he finds himself in today.

 

I disagree if he had asked that question he wouldn't be in trouble today.  The insider himself does not determine whether the information is material and non-public.  It could perhaps give one some guidance, but isn't legal protection in my view.  But I could be wrong.

 

Its likely not protection, but by bringing the issue to the open all of the "he-said-she-said" claims are minimized, and disipline is imposed on both sides of the conversation.  It keeps one from acting alone and pointing fingers later.  In this case if Punch said yes, Einhorn would not have traded.  If Punch said no, but was later found to have passed material information, then Einhorn would not appear as culpable as he is today (or even better use the answer as a reminder to use his moral compass and stay away from a potentially bad situation).

 

You may be right, but I don't think so.  If it was me I would seek legal advice on a matter of such importance.  Get some guidance from your lawyers on what is appropriate. 

[Guest Hester]

This is definitely a gray area, but as Buffett says, never even get close to the line. Mark Cuban did basically the same thing in 2004 with a US internet company and walked away unscathed. Moral of the story; If you're going to venture into this gray area, do it in the SEC's jurisdiction.

[AZ_Value]

What story are you guys reading?

Or put differently, what am I missing here?

 

Here's what I'm reading:

 

Einhorn is on the phone with the CEO who tells him all kind of bearish news, including that they will need to raise equity. There is nothing I'm reading that tells me that it was a public conference call where anybody could have just called in.

After the call, Einhorn hangs up and immediately calls his trader to tell him to unload Greenlight's position before anybody else knows about the planned equity raise.

 

Is this what you guys are reading also? So because he's claiming that he told the CEO he didn't want to sign any NDA that makes it OK??

 

I agree with Sanjeev, anything gray, just stay away from it; it's really not that complicated if you put morals and ethics first;

But for me, this is some pretty darkish gray we're dealing with if you want my opinion.

 

 

[twacowfca]

More bad judgment than a deliberate attempt to break the law. 

 

Agreed.  He entered a grey area where a reasonable case can be made either way.  His big mistake was failure to exercise an abundance of caution, or use the Buffett standard of WSJ page A1.  He should have known better and as his public profile increases he will get less of the benefit of the doubt.

 

As a matter of habit, I try to conclude each conversation with an insider by confirming that material non-public information was not disclosed.  Had Einhorn asked that simple question on the recorded call, he would not be in the trouble he finds himself in today.

 

That's no free pass.  It's the reasonable man test that applies.  It's better to avoid any questions about market sensitive topics.  Then, if something material to trading should be revealed anyway, don't trade on it.  If something material reinforces a trading strategy in progress, cancel future trades until the news becomes public.