Methinks Greenlight Doth Protest Too Much – Einhorn and Punch Taverns

The pattern is always the same. Bright young star, brilliant career, and then the edges begin to fray a bit. David Einhorn, the head of hedge fund, Greenlight Capital, got his first whiff of fraying last week. Mixed metaphors aside, the Barometer senses hubris overtaking reason.

Mr. Einhorn held a one-hour conference call with investors, media, etc. to explain how the British regulators, with whom he had just settled an insider trading case for £7.2 million (about $11 million), were out to lunch. The fine was settlement for civil charges related to Greenlight’s sale of shares in Punch Taverns immediately following an Einhorn conference call with management in which the executive team indicated that it was considering issuing new shares. British authorities said that Greenlight’s prompt sale in advance of Punch’s announcement of a new issue saved Greenlight millions in loss of value of the shares which was likely following such dilution. Mr. Einhorn, who famously shorted Lehman and is a favorite person to track on short sales, insists that he settled because “we would face an uphill battle as a high-profile hedge fund challenging a British regulator in a British court.”

His other comments strain credibility because of their blowhard tone. Mr. Einhorn insisted during the call that his actions were inadvertent and unintentional because he did not believe he had been given any inside information. The guy who figured out the subprime mortgage instrument collapse did not notice that he was the only one selling off Punch Tavern shares? He didn’t notice the news did not show up in the papers? The Brits were having none of it and concluded simply that his belief that he had not been given inside information was “not a reasonable belief.” You can read more about the conference call at Juli Werdifier and Peter Lattman, “Hedge Fund to Pay $11 Million Fine in Insider Trading Case,” New York Times, January 26, 2012, p. B2.

Mr. Einhorn offered colorful denunciations of the regulators to whom he had just paid penance. Said he, “This resembles insider trading the way that soccer resembles football.” And he labeled the case as “something more akin to a traffic cop with a quota at the end of the month an a miscalibrated radar gun.”

However, following the call, Britain’s Financial Services Authority (FSA) also extracted a fine of £130,000 from Greenlight’s trader on the Punch transaction because, “Greenlight made the decision to sell all of its shares having just spoken to Punch management. The Greenlight analyst who participated in the call…had stated at the time of giving the sell order to Mr [Alexander]Ten-Holter that…Greenlight potentially had a window of a week to sell before the stock ‘plummets’.” See Megan Murphy and Brooke Masters, “Fallout Spreads From Einhorn’s Improper Trading,” Financial Times, January 27, 2012,http://www.ft.com/cms/s/0/1c701aa0-48d3-11e1-974a-00144feabdc0.html#ixzz1l2qYF1TU Greenlight released a statement calling the fine against Mr. Ten-Holter “unjust.”

Mr. Einhorn has reached his fork in the road. The Barometer hopes that he walks away from the settlement with the reality of the close call that it was, with the humility that should accompany his good fortune. If he does, the world is his oyster and he can continue his brilliant financial career. However, the language of the odd phone call is not the stuff of repentance and reform. That’s the stuff of too many fallen giants, akin to those smart guys who always belittle the regulators. Sometimes the regulators are right, and in this case, they were also merciful.