David Einhorn Will Say What Stocks He Owns When He's Good and Ready
David Einhorn is angry because, in November, a Seeking Alpha writer with the ironic-insofar-as-it-is-not-actually-ironic-even-though-it-sounds-like-it-should-be pseudonym "Valuable Insights" told the world that Einhorn's Greenlight Capital was secretly accumulating a position in Micron Technology. (He was.) This revelation caused Micron's stock to go up, probably, and so increased Einhorn's costs of accumulating that position by ... ooh, I don't know, some amount of money. 1
That's sort of a cost of doing business as an activist hedge fund, but this case is unusual: Leaks happen, but they don't often happen in blog posts attributable to a named but pseudonymous individual. Usually it's like, a broker tells his buddy, who tells another buddy, and there's a bit of discreet front-running, but none of the buddies post their front-running on Seeking Alpha. Valuable Insights did, and so now Einhorn has gone to court to demand that Seeking Alpha tell him who Valuable Insights is. You can read his petition here.
Will he win? I don't know. There's a long history of people suing media-esque entities (blogs! Seeking Alphas!) to demand that they give up their source-esque people (sources! anonymous commenters!), but I haven't really paid much attention to any of it. It feels too squishy and First-Amendment-y for my tastes. My impression is that sometimes people go to jail rather than give up identities, though I guess I don't expect that of Seeking Alpha.
So I won't handicap his chances, though I love that he's trying. As the petition says, "the only persons to whom Greenlight disclosed its position in Micron were persons subject to a contractual, fiduciary, or other duty to maintain the confidentiality of that information: Greenlight's employees, legal counsel, prime and executing brokers, fund administrator, and other agents." Obviously Einhorn thinks very highly of some of those people; he probably likes his employees, for instance.
Almost as obviously, he must think some of those people are dirtbags. Nobody trusts executing brokers! Why would they? Leaks happen, right? Usually you just go around suspecting that one of your brokers is the source, and you grumble about it and hope to one day catch him in the act. Today might be the day! Einhorn has a chance to find out who leaked his position. Why not take it, even if the odds aren't great?
The other thing I love about this case is that Einhorn was required to disclose his position. He was legally required to, and did, file a Schedule 13F on Nov. 14, the same day as the Seeking Alpha post, disclosing all of his equity holdings as of Sept. 30, 2013. Except one: 2
On November 14, 2013, Greenlight filed a Form 13F with the U.S. Securities and Exchange Commission ("SEC"), disclosing its various holdings for the quarter ending September 30, 2013 (the "Third Quarter 13F"). Form 13F is a report of equity holdings that certain investment managers must file with the SEC on a quarterly basis pursuant to the federal securities laws. The SEC makes Forms 13F publicly available on its website.
Greenlight did not disclose its position in Micron on the Third Quarter 13F. Rather, in keeping with its efforts to protect the confidentiality of its investing secrets, Greenlight requested Confidential Treatment regarding its Micron stock in a letter to the SEC also dated November 14, 2013 (the "Confidentiality Letter"). In the Confidentiality Letter, Greenlight indicated its intent to continue to build its position in Micron. As noted to the SEC in the Confidentiality Letter, disclosure of Greenlight's position would materially impair or possibly eliminate Greenlight's ability to successfully pursue its investment strategy.
That's perfectly permissible; here is the SEC guidance on requesting confidential treatment for ongoing acquisition programs. But you can see from the guidance that there's a sort of suspicion about it. The SEC is generally a believer in more disclosure, including of hedge-fund positions, and you need to explain exactly why disclosure would be bad in order to avoid it. On the other hand, hedge funds, particularly concentrated-value activist investors like Einhorn whose mere voice on the phone can move a stock, are big believers in secret stake-building. The business model is (1) buy stock, (2) move stock, so you could see why doing it in the reverse order would not be especially profitable.
The thing is that there's been a big push in some circles to make hedge-fund disclosure rules more restrictive, lowering thresholds and speeding up deadlines so that funds have to disclose smaller stakes faster. This would give corporate boards more warning about activist stakes, giving boards more power to defeat activist initiatives. Companies, you may have heard, find activists distasteful, and they are not big fans of arguments like Einhorn's that secrecy is essential to their business (or that their business is essential). And those companies occasionally get the ear of the SEC. In the future, hedge funds are more likely to have to disclose more than less.
Here, Einhorn asked for an exemption from SEC disclosure requirements in order to secretly build up a 4.5 percent, $1.2 billion stake in a public company. That's the sort of thing that the anti-activist side would point to as a failure of disclosure. But Einhorn is not afraid to defend his business model: When someone else did the disclosure for him, he took that someone else to court. I like that confidence. 3
According to his court filing, Einhorn was buying Micron stock from July 2 through Nov. 19, 2013, accumulating a total of 23 million shares before Sept. 30, 2013. He has 47.7 million shares now, implying that he bought some 24.7 million shares from Oct.1 through Nov. 19, or almost 700,000 shares a day. The stock rose by 54 cents (2.8 percent) in the two days after the Seeking Alpha post, though it then fell back; the S&P 500 was up by 0.9 percent in those same two days, so I guess attribute 1.9 percent (36 cents) to Valuable Insights. Apply that over five trading days of buying (3.4 million shares) and you get like $1.2 million of extra costs.
Here I'm just assuming he bought at the same pace over the whole six weeks, which seems a little unlikely -- presumably he bought faster just before the end, which would increase the costs. On the other hand, I'm arbitrarily assigning 100 percent of Micron's above-S&P price move to this disclosure, which is surely wrong. Anyway. It cost Einhorn something. I'd take the under on $1.2 million, but I guess we'll see in court, or probably not really.
Incidentally, Greenlight submitted the 13F and confidentiality letter a few hours after the Seeking Alpha post, eliminating the possibility that someone at the SEC was the leaker.
I guess if you want to keep the disclosure system as it is, you need to demonstrate that your secret accumulations really are secret. You could imagine the SEC justifying stricter disclosure rules by saying, well, this stuff leaks anyway, so they might as well disclose it so everyone gets it at the same time. So it's important for the hedge funds who want to be able to build stakes in secret to be vigilant about their secrecy, if they want to be allowed to maintain it..
(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)
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