Greenlight’s Einhorn Ordered Trades ‘Within Minutes’ of Tip

Greenlight Capital Inc. Chairman David Einhorn ordered traders to sell shares in Punch Taverns Plc “within minutes” of getting inside information on the firm’s plan to sell equity, the U.K.’s finance regulator said.

The hedge fund avoided a loss of 5.8 million pounds ($9.1 million) when Punch fell 29.9 percent after it announced plans to raise 375 million pounds in June 2009. Einhorn, 43, was told of the plans to sell equity by a broker representing Punch, the Financial Services Authority said yesterday.

Greenlight said the market abuse was “inadvertent.” The New York-based firm and Einhorn were fined a total of 7.2 million pounds by the regulator for insider trading. The fine and legal fees are being paid by Greenlight and Einhorn and won’t affect investors, he said in a letter yesterday.

“Einhorn’s defense, good as it is, does not change the fact that the fund avoided significant losses ahead of other uninformed market participants and investors who did suffer losses,” said Joe Seet, a senior partner at Sigma Partnership in London, which advises hedge funds on compliance.

According to the FSA, a week before Punch announced the sale, some shareholders and potential investors were notified of the share sale by a company the FSA referred to as “Firm X.” The firm contacted Greenlight about the Punch issuance, and Einhorn declined to discuss it on a “wall crossed” basis, where it’s agreed to share inside information on the condition that it’s not acted on, the regulator said.

Following Day

The following day, a corporate broker from Firm X and Punch management had a 45-minute conference call with Einhorn, during which inside information was disclosed to him, the FSA said. Einhorn was told the sale would probably happen in about a week.

Goldman Sachs Group Inc. and Merrill Lynch & Co. arranged the share sale, according to a filing at the time of the stock offering. The broker who briefed Einhorn was Merrill Lynch’s Andrew Osborne, a member of its corporate broking unit in London, according to two people with knowledge of the case. He has since left the firm, which is now part of Bank of America, said one of the people. Both people declined to be identified because the regulator hasn’t disclosed the broker’s identity.

Found only in the U.K., corporate brokers are appointed by companies to liaise with institutional shareholders and offer strategic advice, often leading to underwriting and corporate-finance work.

Osborne wasn’t immediately available for comment. A colleague who answered the telephone at his former office declined to provide his contact details. He is listed on the FSA’s register as being “inactive” since Nov. 30. CityAM reported Osborne’s involvement yesterday.

Bank of America

John Mcivor, a Bank of America spokesman, and Jo Carss, a Goldman Sachs spokeswoman, declined to comment on the FSA probe.

The FSA, which said the trade wasn’t deliberate or reckless, is imposing stricter supervision after being criticized for failing to prevent the U.K.’s worst financial crisis since World War II. The fine against Einhorn, 3.64 million pounds ($5.7 million), is the second-largest civil penalty levied against an individual by the FSA after a $9.6 million fine against Dubai-based investor Rameshkumar Goenka in November.

FSA spokesman Chris Hamilton said related enforcement actions against third parties in the Greenlight case are continuing, declining further comment on the targets.

Einhorn and the firm “completely disagree” with the FSA, the fund manager told investors in his letter yesterday. He also said he didn’t violate any U.S. securities laws.

‘Don’t Believe Now’

“I didn’t believe in 2009, and I don’t believe now, that there was anything wrong with our conduct,” Einhorn said. “We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we don’t believe we were given any.”

John Nester, a spokesman for the U.S. Securities & Exchange Commission, declined to comment on whether the agency has investigated the trades.

“Immediately” after the call, Einhorn told Greenlight traders to sell all Punch shares, the FSA said.

The firm sold 11.65 million shares, reducing its holding from 13.3 percent to 8.9 percent over the next four days. The firm, which bought Punch shares between June 2008 and January 2009, had never sold or tried to sell them before that day.

Einhorn’s firm had initially invested in Punch because it thought the shares were mispriced by the market and was unlikely to issue equity, according to the UK regulator.


Greenlight, wholly-owned by Einhorn, had around 31 employees in 2009, according to the FSA. The $7.8 billion Greenlight Capital LP fund returned 2.9 percent last year and has produced annualized returned of 20 percent since the fund started in May 1996, according to a letter sent to investors.

Einhorn, who profited from a bet against Lehman Brothers Holdings Inc. before that firm collapsed in 2008, in May called for Microsoft Corp.’s board to replace Chief Executive Officer Steve Ballmer. Also last year, he offered $200 million for a 33 percent stake in the New York Mets baseball team before withdrawing the bid. In 2006, he finished 18th in the World Series of Poker’s main event.

Einhorn said yesterday that Greenlight would offer investors a “one-time opportunity” to redeem by March 31. The firm also plans to open its funds to existing partners and to new investors to replace any redemption requests they receive until March 1.

‘Experienced Professional’

“Einhorn is an experienced professional with a high profile in the industry,” said Tracey McDermott, the FSA’s acting enforcement chief. “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.”

On a conference call yesterday with investors and the media, Einhorn gave his version of events. A Greenlight analyst was approached by an investment banker for Punch, asking if Greenlight, as the second largest shareholder, would be willing to have a conversation, he said. The analyst said Greenlight would be happy to talk but wouldn’t sign a non-disclosure agreement and didn’t want to receive any information that would restrict it from trading the stock.

The call took place on June 9, with Einhorn, Punch’s chief executive and chief financial officers, and the investment banker, Einhorn said. Two other investment bankers were listening on the call, though they didn’t take part in the conversation, he said.

Stock Offering

On the call, the CEO said he was considering a stock offering, and Einhorn said he thought it was a bad idea for shareholders and a good idea for bankers, Einhorn said. In response to Einhorn’s question about whether Punch stock was fairly valued, the CEO replied the valuation was fair, though he would “put a discount on it,” given the risks of not being able to make debt payments that were coming due in 18 months, Einhorn said.

“This was a sobering moment,” Einhorn said. He said he asked the CEO if the decision had been made to issue more stock, and the CEO replied that no decision had been made, and the company was just exploring its options as it looked to raise money.

A spokeswoman for Punch Taverns yesterday declined to comment on the FSA fine or the case.

Einhorn, who said he turned over a tape of the conversation to the FSA, said the experience would cause him to “rethink our efforts when speaking with UK companies.”

At the end of the call, Einhorn said he told the CEO that he planned to sell his shares. The CEO offered to tell him more if he signed the non-disclosure agreement, and again Einhorn declined, the hedge fund manager said.

“This resembles insider trading as much as soccer resembles football,” said Einhorn.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE