Is Einhorn’s Apple Activism Insider Trading?
It must be nice to be a cherubic-looking billionaire hedge-fund manager who can get himself on financial cable TV whenever he wants, talk up his book and make millions of dollars out of it. Welcome to the world of David Einhorn, the 44-year-old founder of Greenlight Capital Inc., an $8 billion fund in New York.
Einhorn worked his magic again on Feb. 7, first in an on-air telephone conversation with CNBC and then during a 19-minute conversation with Bloomberg TV. Einhorn’s topic-du-jour was Apple Inc.’s refusal to share any of its $137 billion pile of cash with its shareholders. He has proposed that Apple issue $50 billion of perpetual preferred stock with a 4 percent dividend, which he has calculated would return $35 billion to shareholders. He has also sued Apple in federal court to get the company to take out of its proxy statement a proposal that, if approved by shareholders on Feb. 27, would prevent the company from ever issuing preferred stock.
Einhorn’s verbal and legal assaults on Apple were big news. In addition to becoming lead stories on Bloomberg and CNBC, Einhorn made the front pages of the Financial Times and the Wall Street Journal and of the New York Times’s business section.
Not surprisingly, all the news media attention combined with Einhorn’s Houdini-like powers to mesmerize -- and the prospect that he might prevail in forcing Apple to share some of its cash with the people who actually own the company -- sent Apple stock up 3 percent on Feb. 7 and 1.4 percent more on Feb. 8. Einhorn owns more than 1.3 million Apple shares -- it’s Greenlight’s largest single holding. During those two trading sessions Einhorn made at least $26 million in Apple alone -- for less than 30 minutes of chatting.
That’s nice work if you can get it. And Einhorn can, seemingly, whenever he wants. He also did it May 1, 2012, when just by asking a few innocuous-sounding questions on an Herbalife Ltd. earnings call he caused the stock to fall to $56 a share from $70. Einhorn was short an undisclosed amount of stock, but you can surmise that the $14-a-share drop that day netted him many millions of dollars.
Einhorn isn’t alone, of course. There’s a small group of billionaire “activist” investors -- among them Carl Icahn, Daniel Loeb and Bill Ackman (all of whom happen to be on one side or the other of the Herbalife battle) -- who specialize in getting on TV, talking their books and making a killing. Come to think of it, Warren Buffett does the same thing (maybe he taught them all).
Ackman made news the world over on Dec. 20 when he announced at a special session of the Ira Sohn Investment Conference -- where activist investors routinely talk their books, to much public acclaim -- that he was short more than 20 million shares (worth more than $1 billion) of Herbalife stock, which fell to about $26 from $42.50 in the days after his three-hour presentation. Bingo: A $320 million week for Ackman.
On Jan. 9, when Loeb announced both in a public filing with the Securities and Exchange Commission and in an investor letter (immediately leaked to the news media) that his hedge fund owned 8.9 million Herbalife shares, or 8.2 percent of the total, Herbalife stock was on the move again, this time up 10 percent in a day or two. Loeb netted an instant $27 million or so.
The prevalence of this kind of behavior raises serious questions about the fairness of billionaire-activist hedge-fund managers, such as Einhorn, Icahn, Loeb and Ackman, who can get the media’s attention at a moment’s notice and force it to play by the rules they set, knowing very well that by just opening their mouths and stating their case they will move markets and make a ton of money.
In fairness to these guys, they’re very clever and their track records as investors give them huge credibility with other investors. There’s no question that today David Einhorn has a lot more credibility than he did in May 2008, when he was predicting -- and betting on -- the collapse of Lehman Brothers. Many people ignored Einhorn on Lehman, only to regret it when the firm collapsed that September. That’s to his credit, frankly. But the truth is, these wise guys know very well that they have this kind of sway over the markets, and they’re willing to use it to pad their bank accounts whenever they please, apparently with impunity.
To me, talking your book seems a lot like insider trading. They know investors will listen to them. They get conviction in a stock -- long or short -- and build up their positions without anyone knowing. And then when the position is built, they go on national television to talk about it, and the stock moves in their direction. That’s a license to print money, and so that’s exactly what they’ve been doing.
No, the practice doesn’t break insider-trading laws as they’re now written and enforced. That doesn’t change the fact that in our newfangled information age -- replete with a cable-TV news hole that can’t get enough of them -- these activist investors have a huge, unfair advantage over everyone else. And they will continue to press it unless they’re stopped.
Looking into this behavior, and perhaps pushing Congress to think about legislating it, isn’t likely to be the first thing on Mary Jo White’s agenda as she takes over the Securities and Exchange Commission. But it should be awfully near the top.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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