On further inspection Greenlight Capital's unfortunate relations with Punch Taverns went down more or less as I had thought: they had an un-wall-crossed conversation with management that David Einhorn took to be a sign to sell, and sold without ever agreeing to keep any information confidential. One key and sort of amusing difference - if you believe Greenlight's explanation - is that, contrary to what I and the FSA thought, the sell signal in Einhorn's mind wasn't "Punch is going to raise equity." It was "the CEO of this company thinks it's a piece of crap." Which I guess is also material nonpublic information.
Anyway here is something Einhorn said on his call yesterday:
The Decision Notice ... doesn't seem object to my having sold the stock. The problem is that I didn't get permission first. "It was a serious error of judgement on Mr Einhorn’s part to make the decision after the Punch Call to sell Greenlight’s shares in Punch without first seeking any compliance or legal advice despite the ready availability of such resources within Greenlight." It was already obvious to me that I was clear to trade. I have no idea why a compliance officer would have reached a different conclusion. It is highly unlikely that asking would have led to a decision to restrict ourselves.
Here is an alternative view:
[I]n my prior career we were always trained to not even come close to walking fine lines like this. The golden rule was “If you have to ask if it’s ok, just don’t do it.” In other words, at my former firm, Einhorn’s defense of "We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we do not believe we were given any such information" probably wouldn’t fly with my compliance department (which is not to say that it would be illegal, just that Compliance doesn’t want to deal with the headache of arguing about it).
This is a view that some of you share. It's a totally sensible view, particularly if you're a compliance officer. You may all think that I run a massive insider trading ring from Dealbreaker World HQ, but this is actually the policy I follow in my own life. (Implicitly. I actually follow a far stricter and more effective two-pronged policy of (1) almost never trading anything and (2) always losing money when I do. Just try and catch me, feds!) When crossing the line could mean jail time, I think it's a good idea to stay far, far away from that line.
But of course Einhorn didn't think he was close to the line of insider trading. Not because he's an idiot, and also not because he is a sophisticated UK lawyer with a deep knowledge of all the nuances of insider trading law. Rather, like you and me and Kid Dynamite, he thought there was a bright line, but instead of the bright line of "never trade after talking to company management about the company's plans," he thought it was "never trade after signing an NDA." He thought this line was so bright and clear that it wasn't worth bothering to check with compliance.*
You could see why he'd think that. For one thing, it's true. I mean, it is the explicit law in the US - you need a violation of a duty of confidentiality in order to be guilty of illegal insider trading - and, while it's less obviously true in England, before yesterday the precedents there sort of worked the same way as under US law.
Maybe more important, it's a bright-line rule that lets him do his job. Another thing that was off a bit in my post yesterday was my claim that, with rare exceptions, "getting a call from a bank saying 'we need to lock you up on company X' is never a good sign." I stand by this claim in the capital-raising context, which is what I - and the FSA, and probably Punch's bankers - thought the Punch call was all about. But Einhorn made the good point that he often takes wall-crosses for entirely non-capital-raising reasons, to discuss potential corporate plans with management, some of which could I suppose be good news. He also does lots of non-wall-crossed calls for similar reasons, with less sensitive information. Detailed research, including talking with management, is how he is able to earn his 2%. And in this case he interpreted the Punch call to be more about strategy than about sounding him out for a capital raise.
Again, there are good reasons for having the sort-of bright line that we have in the US. For one thing, there's the issue I mentioned yesterday: companies that want to prevent big holders from selling stock and driving down the price before an offering can, under the FSA's interpretation, do so unilaterally. On that call in 2009, Punch and its bankers tried over and over again to get Einhorn to sign an NDA. This is probably not just because they were dying to tell him the "secret bad things" about the company, or because they were desperate for his sage advice. Rather, they wanted to keep a 13% shareholder from dumping his stock a week before they launched an equity deal. Their little ruse didn't work - but next time they won't even need to try it. An unsolicited email to a shareholder saying "hey, we're thinking about selling stock next week, any views? PS don't tell anyone" would be enough to taint the shareholder and keep them from trading.
There's also some value in management and investors having conversations that don't restrict the investors from trading. In those conversations, management will of course be able to control how much inside information is or is not given out - with rare-ish exceptions, the investor's plans won't be as material as management's. A rule like the US Reg FD regime, where management gets in trouble for making selective disclosure of material information to some investors but not others, puts the burden on management to determine what information about its plans is material, and keep that information to itself.
That makes sense. Maybe Punch was dead set on raising capital and was calling investors to see if they were interested. (That seems right to me.) Maybe Punch was just considering raising capital as one of many options and was bouncing random ideas off smart people. (That seems to be Einhorn's view.) They knew which one was true. If it was the former, then they shouldn't be telling anyone without a wall-cross; if the latter, maybe having those chats was fine. But, again according to Einhorn, they told him that it was just a hypothetical chat, and he didn't take away from it that a deal was imminent. Then a deal came a week later. The FSA has not punished anyone at Punch or its bankers for telling Einhorn about the deal - which, fine, different set of rules from the US. But it's kind of weird to hold Einhorn, rather than Punch, responsible for knowing how serious its plans to raise equity were.
Greenlight, Punch and Insider Trading – Or Not [Kid Dynamite]
* Possibly fun hypothetical question: If Einhorn had checked with a compliance officer, is he right that the compliance officer would have said "no NDA = no problem, and anyway it's no biggie, lots of CEOs think their stock is overvalued when it's trading below book, go ahead and dump all the stock tomorrow"? If so, would a £7mm fine be enough to get that compliance officer fired?