Einhorn Mixes His Football and Soccer

There is a grey line when it comes to insider trading. Much of what I do as a job is trying to collate information that other investors don’t yet have. If you sit on the side of a newly opened toll road and count the cars going past, you might be able to collect information that the owner of the toll road hasn’t yet released. Is that insider trading? We haven't done it, but if you were to spend the time and money to fly to New York, drive to Long Island and investigate which of RNY’s previously unoccupied commercial properties now have tenants, would that be insider trading?

Not in my books. The information is publicly available, it’s just that most investors couldn’t be bothered looking for it.

Then there’s the ‘mosaic theory’, a CFA guideline which stipulates that you aren’t (obviously) allowed to trade on any material information that hasn’t been made public, but you are allowed to use lots of individually immaterial pieces of non-public information to make a case. For example, you might ring ING Real Estate Community Living Group (ILF) to speak to the CEO, Simon Owen, and the secretary tells you he’s in New York. You’ve already noted that the board had written up the value of the New York assets in its 31 December accounts. You also remember your meeting with the asset managers of these particular retirement homes on a recent trip and finding out that they are logical buyers and owners of the assets. There’s nothing wrong, according to the CFA at least, with concluding that a sale of ILF’s New York assets is imminent and that the price will likely be at or close to the 31 December book values (I have actually reached such a conclusion, by the way).

In that particular case, I agree. It’s a grey area, though, and there is enough leeway under this mosaic approach to allow Martha Stewart to justify her actions (Stewart was indicted for insider trading following revelations her broker’s assistant to her the CEO of ImClone has been dumping his stock ahead of an adverse FDA ruling).

Some things, though, seem fairly clear cut to me. Last week, David Einhorn, US hedge fund manager, high profile value investor and friend of Whitney Tilson, was fined £7.2m for market abuse.

Einhorn admits he sold millions of shares in Punch Taverns after learning in a management and broker meeting that the company was about to launch a discounted capital raising. The information wasn’t public but Einhorn specifically told the broker, Merrill Lynch, that he didn’t want to be told any information that would prevent him from trading (‘wall crossed’, in the lingo).

So that makes it ok then?

‘This is as much like insider trading as football is like soccer’ Einhorn told the press after agreeing to pay the fine. Perhaps an apt cultural slip up, David? It does seem about as similar as football and soccer. The English version.

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