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More People Will Soon Have The Opportunity To Share David Einhorn's Insider-Trading Confusion

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Finally someone's listening to us, I guess:

While prominent hedge-fund manager David Einhorn was the focus of the latest alleged insider-trading case this week, a supporting actor in the drama belongs to a fraternity of London bankers that also is under increased scrutiny.

Andrew Osborne, until last month a so-called corporate broker in the sprawling London outpost of Bank of America Corp.'s Merrill Lynch investment-banking unit, is alleged to have passed sensitive information to Mr. Einhorn, according to people familiar with the matter.

The U.K.'s Financial Services Authority is planning to fine Mr. Osborne £350,000 pounds ($549,674) for his role in the matter, said these people on Thursday.

This is not to be confused with the other other fines in the Greenlight case, which include Greenlight's poor London trader being fined because he should have known that his boss should have known that he was breaking the law, or something. This is the guy who told Einhorn, on a non-wall-crossed call with him and Punch Taverns management, that Punch was going to raise £350mm, which Einhorn may or may not have laughed off as fee-seeking banker bluster. It comes from this Wall Street Journal article about "corporate brokers" - basically, as far as I can tell, ECM banker types who, um, do a lot of calling of investors and saying "how would you feel about a £350mm capital raise at Punch, hypothetically of course?" - and about how the UK is cracking down on insider trading. Just like the US is. Sort of:

The FSA has so far won 11 criminal convictions since it began to crack down on insider trading in the wake of the financial crisis of 2008, and it is prosecuting 15 other individuals. While this represents an increased effort to combat white collar crime by the FSA, it compares with an average of nearly 50 civil cases brought annually by the U.S. Securities and Exchange Commission. Meanwhile, federal prosecutors in the U.S. have been much more aggressive than their U.K. counterparts, winning 56 convictions or guilty pleas in 63 insider-trading cases brought in the same period. Regulators in the U.S. have more tools to pursue such cases, such as using wiretaps, experts say.

It's not just that the FSA is more chill, historically, than the SEC about insider trading. There's also the fact that they have a different view of what it is:

The US has a very narrow definition of insider trading, but it polices the arena with great vigour, putting hundreds of people in jail and using techniques such as wiretapping and deals with insider witnesses that some in the UK find unacceptable. The UK, by contrast, has an extremely broad definition – market abuse can be unintentional – that has only recently begun to be enforced in any meaningful way.

We've talked about those differences before: US insider trading enforcement mostly means going after people who learned stuff about companies from people who were not supposed to tell them that stuff, but did anyway because they were friends or bribed or blackmailed or whatever. When companies want to tell shareholders things, the burden is mostly on them to get the investor to agree not to trade - if Punch were a US company and told Einhorn about its capital raising plans/hypothetical musings without an NDA, Punch would be violating Regulation FD but he'd probably be free to trade. In the UK that distinction doesn't seem to exist much, and so corporate brokers are a target. From the Journal again:

Mr. Osborne isn't the first corporate broker to catch the attention of the FSA during the recent sweep. ... A related area that has attracted some scrutiny from regulators involves dinners and other meetings that investment bankers at the top Wall Street and City of London firms have held with small groups of major investor clients such as hedge funds, during which sensitive information has sometimes been passed, people familiar with the matter have said. ... At a conference last month, Jamie Symington, an official in the FSA's enforcement division, said it is "very obvious that these sorts of communications create a real risk of inside information being passed…and being abused." ... Simply offering an investor the opportunity to cross the wall can be tantamount to receiving material, non-public information, especially in cases such as Punch's, in which an action such as the rights issue has been long speculated in the market.

That last part, if you take it seriously, means that if a company ever wants to have a wall-crossed conversation with an investor, just requesting that conversation may violate the law both for the company and for the investor. Which is sort of mind-boggling because the wall-crossed deal is market practice on both sides of the Atlantic, and has obvious advantages for companies.

But the rest of it makes sense. There is an advantage to companies in having their brokers wine and dine and pass little tidbits on to investors, because that gets the companies (and their brokers) in the investors' good graces when they need money. "Remember how I made you all that money before earnings last year? Great. I'm putting you down for $20mm of this rights offering." But while that's good for companies, and good for the investors getting the tips, it's not so hot for other investors. And when everyone's Occupying everything, it looks kind of bad when corporations, banks and hedge funds are having cozy dinners that exclude the rest of us.

It's all reminiscent of this:

The Commission has become increasingly concerned about the growing incidence of "selective disclosure" of material corporate information. In many reported incidents, companies selectively disclosed important information – such as upcoming earnings figures – in conference calls or meetings that are open only to selected securities analysts and/or institutional investors, and which exclude members of the public and the media. Those privy to selectively disclosed information have an unfair advantage over other investors, who learn of the information only if and when the issuer later makes full public disclosure. By that time, the information often has resulted in a significant change in the share price or higher than usual trading volume.

That's the SEC's throat-clearing before implementing Regulation FD, outlawing all that monkey business in the US. In 1999/2000. In some ways the UK is 12 years behind the US in dealing with these issues. And over the last 12 years, the US has a pretty standard set of rules and practices - wall-crossing, NDAs, etc. - that comply with US insider trading and Reg FD rules, and those practices have become industry standard in much of the world, including in the UK. So the UK's new-found desire to have its own insider trading crackdown, combined with its pretty different view of what insider trading is and who's responsible for it, is going to be pretty interesting, and will create some surprises for a lot of people who thought they knew the rules.

'Corporate Broking' Faces Scrutiny in U.K. [WSJ]

Gulf between US and UK ‘insider trading’ [FT]

More Fines in Greenlight Insider Case in Britain [DealBook]


After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information:

David Einhorn Said No To A Capital Raise, Kept The Door Open For A Pub Crawl

Remember how David Einhorn got in trouble in England for insider trading on Punch Taverns stock and he was all "what?" and we were all "what?"? Well, you can judge it for yourself because now the entire disputed call with Punch is available online (at the back of this). So go read it, or read the highlights here. The FSA still thinks it's insider trading, but the count of people confused by the whole thing is rising, and now includes the Merrill banker on the call. There's lots of insider traderiness on this side of the pond today too so we should talk about that in a bit. For now, though, two other things. One is quick - no one can resist one part of the call and I can't either so here it is: DAVID EINHORN: Hi, I’m sorry I didn’t get to see you when you were in New York. PUNCH CEO: No, no, we -- well, we’ve -- we’ve only had the chance to speak once, although we have seen [reference to Greenlight Analyst] a few times since then. DAVID EINHORN: Oh, you’re -- you’re -- you’re getting more than -- than I could help with anyway. So, this is good. PUNCH CEO: Okay. That’s fair enough. Well, one day we’ll get you around on a pub crawl around some English pubs. DAVID EINHORN: Oh, that sounds fun. PUNCH CEO: It is. You’re right. English readers: Is it? I just assumed that Punch Taverns are rather grim places, like TGI Friday's but with more ... punching? ... but maybe I'm totally off base here. Also, here is a hypothesis: vice investments do well because, for the same level of profitability, they get more analyst/investor coverage and enthusiasm. Wouldn't you rather go on a pub crawl instead of like a tour of an auto parts factory in Queens? Would that influence your stock recommendations / money allocations? Someone should do a study.