Last month the FSA handed out fines in excess of £7.75m relating to certain trading by US hedge fund, Greenlight Capital Inc. ("Greenlight") in Punch Taverns PLC ("Punch") shares after receiving inside information.

The fines imposed included:

• £3,650,795 and £3,368,000 on Greenlight and its CEO, David Einhorn, for engaging in market abuse
• £130,000 on Alexander Ten-Holter, trader and former compliance officer at Greenlight, for failing to question and make reasonable enquiries before selling Greenlight's shareholding in Punch
• £65,000 on Caspar Agnew, trading desk director at JP Morgan Cazenove, for failing to identify and act on a suspicious order from Greenlight to sell Punch shares
• £350,000 on Andrew Osborne, former corporate broker to Punch, for disclosing inside information outside the proper course of employment, profession or duties

The FSA has also prohibited Mr Ten-Holt from performing Compliance Oversight and Money Laundering reporting functions.

Background

Mr Einhorn was the owner and sole portfolio manager of Greenlight, which held a 13.3% stake in Punch. In June 2009, Punch was considering an equity fund raising and Mr Osborne was instructed to contact Greenlight and other shareholders to gauge investor appetite for this.

Mr Osborne invited Greenlight to be "wall-crossed" in relation to the proposed transaction. Wall-crossing is a process whereby an investor is made an insider, usually for the purpose of discussing a potential transaction that a quoted company is considering. The process usually involves the investor entering into a non-disclosure agreement ("NDA"), with the quoted company under which it agrees not to deal in the company's securities for a specified period.

Greenlight declined to be wall crossed and instead a call was set up between Greenlight, Mr Osborne and Punch management on an "open" basis. During this call Mr Osborne disclosed the following information to Greenlight:

• that the amount of any possible issuance would need to be about £350 million in order to repay certain convertible debt
• that any NDA would be likely to last for less than a week
• that Punch was consulting with all of its major shareholders, and that there was broad support for an equity issuance

The FSA commented that, in isolation, none of the above points would be likely to amount to inside information. However, taken together they did constitute inside information, particularly because they disclosed the purpose, anticipated size and timing of the transaction.

Immediately following the call, Mr Einhorn directed Greenlight traders to sell Punch shares and over the next three days Greenlight reduced its stake in Punch to 8.98%.

Punch announced a rights issue six days after the conversation with Greenlight. Following the announcement, its share price fell by 29.9%.

The shareholder and its CEO

The FSA found that the market abuse by Greenlight arose by the attribution of Mr Einhorn's behaviour to Greenlight. Mr Einhorn's behaviour amounted to market abuse by way of insider dealing in breach of section 118(2) of the Financial Services and Markets Act 2000 (the "Act") on the basis that Mr Einhorn:

• was an insider
• dealt in the investment
• had insider information
• dealt on the basis of that inside information

The information met the statutory requirements of inside information, namely:

• it related to Punch and to Punch shares
• it was precise because: 
• it indicated an event (i.e. the issue of new shares) that may reasonably have been expected to occur
• it was specific enough to enable a conclusion to be drawn as to the possible effect of the share issuance on the price of Punch shares
• it was not generally available
• it was likely to have a significant effect on the price of Punch shares as it was information which a reasonable investor would be likely to use as part of the basis of his investment decisions
  
  

The Greenlight trader and compliance officer

The FSA found that Mr Ten-Holter had breached Principle 6 of the Statements of Principle and Code of Practice for Approved Persons (the "APER") in that he failed to exercise due skill, care and diligence in managing the business of Greenlight UK. Mr Ten-Holter effected the order in Punch, despite being aware that:

• Greenlight had made the decision to sell all of its shares in Punch having just spoken to Punch management
• the Greenlight analyst who participated in the call with Punch management had stated at the time of giving the sell order to Mr Ten-Holter that: 
• Punch management would have told them "secret bad things" had Greenlight been prepared to sign a NDA
• other shareholders had signed the NDA and in his opinion would want to sell
• Greenlight potentially had a window of a week to sell before the stock "plummets", although that "might be a lie"

Mr Ten-Holter did not make any enquiries as to the details received from Punch management and did not conduct any further investigation as to the reasons for the sale.

The trader

The FSA found that Mr Agnew had breached Statement of Principle 2 of the APER in that he failed to act with due skill, care and diligence. Specifically, in respect of certain transactions carried out by Mr Agnew on behalf of Greenlight:

• he failed to recognise that there were reasonable grounds to suspect that the transactions constituted insider dealing or market abuse
• as a consequence, he failed to alert the Compliance Department of the Bank to the possibility that the transactions were suspicious

The FSA found that the following factors should have led Mr Agnew to report the transactions executed to his Compliance Department or senior management:

• the fact that Greenlight was a major shareholder in Punch was likely to have obtained inside information through pre-marketing at some stage prior to the announcement
• the timing of the sales immediately prior to the announcement by Punch

The FSA commented that, whilst it may have been reasonable for Mr Agnew not to have identified Greenlight's trading as significant or unusual at the time he was carrying out the relevant transactions, his suspicions should have been raised following the Punch announcement on 15 June.

The corporate broker

The FSA found that Mr Osborne's behaviour amounted to market abuse by way of improper disclosure in breach of section 118(3) of the Act on the basis that:

• Mr Osborne was an insider
• Mr Osborne disclosed inside information
• the disclosure was not in the proper course of his employment, profession or duties.
  
  

Implications

Market participants in receipt of information about potential transactions will need to consider carefully whether they may be committing market abuse. Merely refusing to sign a NDA will be no defence and participants will need to consider whether they hold inside information.

Compliance professionals and staff on trading desks have particular responsibilities to assist the FSA in detecting and preventing market abuse. The FSA will take tough action where it feels that approved persons have fallen down in this area.

Further reading

Click here for Greenlight final notice.

Click here for Mr Einhorn final notice.

Click here for Mr Ten-Holter final notice.

Click here for Mr Agnew final notice.

Click here for Mr Osborne final notice.

Contact us

For further information, please contact:

Darius Lewington
Partner
020 7634 8818
darius.lewington@mms.co.uk

Danielle Harris
Professional Support Lawyer
020 7002 8542
danielle.harris@mms.co.uk

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