The financial watchdog has fined a former Merrill Lynch managing director 350,000 pounds for market abuse, after the broker told hedge fund boss David Einhorn about an upcoming share sale by UK pubs company Punch Taverns
The Financial Services Authority (FSA) said on Thursday that Andrew Osborne, a managing director in Corporate Broking at Merrill, had improperly disclosed inside information to Einhorn ahead of a significant equity fundraising by Punch in June 2009.
That information prompted U.S.-based Einhorn to start selling down his Greenlight Capital firm's stake in Punch within minutes of a telephone call held between Osborne, the hedge fund and Punch's management.
Greenlight and Einhorn were fined 7.2 million pounds in January for acting on the information Osborne provided, which the FSA believes helped Einhorn avoid around 5.8 million pounds in losses.
On Thursday the FSA also released details of the telephone conference call that took place on June 9, 2009 between Einhorn, Osborne and the Punch Taverns Chief Executive.
On that call Osborne is heard telling Einhorn, a high-profile manager known for his public crusades against abuses by public companies, that Punch would need to raise around 350 million pounds in a future fundraising.
Wow, wow. That would be shockingly horrifying from my perspective. Can you sell half the company just at a buck and a half -- a Euro -- a pound and half? Oh, no, Einhorn responds.
Later on the call -- in which the Punch CEO also offers Einhorn a pub crawl around some English pubs -- the Greenlight boss says he would like to arrive at a full understanding of Punch's plans, without crossing any lines.
Osborne then tells Einhorn the timeframe for the cash call would be within less than a, kind of a week. The Punch CEO said no formal decision had been made for the fundraising.
Shares in Punch fell by almost a third six days later when the company announced its 375 million pound equity fundraising.
The FSA said that Osborne, an experienced corporate broker, failed in his duties not to disclose inside information and to consider the risk of market abuse. It accepts that Osborne's actions were not deliberate.
(Osborne) was trusted as the gatekeeper of inside information and should have been extremely cautious in proceeding with the call with Greenlight in light of the clear legal and regulatory risks involved, Tracey McDermott, acting director of enforcement and financial crime, said.
By disclosing inside information, Osborne engaged in serious market abuse. His actions undermined the orderliness and integrity of the market and the high penalty reflects the seriousness of his breach.
Osborne said he did not believe the FSA's decision was fair, and that he had followed proper procedures throughout the transaction. Einhorn and Greenlight Capital also disputed the FSA's sanctions but decided against a formal challenge.
None of the many advisers or others involved in this transaction believed that any inside information had been passed by me at the time or raised any issues regarding the sale of shares by Greenlight. The FSA is clear that not one single piece of information I disclosed constituted inside information, he said in a statement on Thursday.
I believe that the level of fine is disproportionate and bears no relation to previous cases of inadvertent disclosure and is even higher than many cases of deliberate disclosure.
The FSA acknowledges that Einhorn asked not to be wall crossed, or told of any inside information, but says Osborne still proceeded with the conference call on June 9.
In January, the FSA also handed out fines to Greenlight's trader and former compliance officer Alexander Ten Holter, and Casper Agnew, a trading desk director at JP Morgan Cazenove, who failed to identify the possibility the trade was made on the basis of inside information.
(Reporting by Tommy Wilkes and Sudip Kar-Gupta; Editing by Jon Loades-Carter and Mark Potter)