Regulators on both sides of the Atlantic continue to punish financial wrongdoing with heavy fines, with yet another case concluding this week.

Yesterday, the UK’s Financial Services Authority fined David Einhorn, owner of the prominent US hedge fund Greenlight Capital, and his fund £7.2 million (around $11.28 million) for engaging in market abuse in relation to an anticipated significant equity fundraising by the bar-owning firm Punch Taverns in June 2009.

“Einhorn is an experienced professional with a high profile in the industry. We expect someone in his position to be able to identify inside information when he receives it and to act appropriately. His failure to do so is a serious breach of the expected standards of market conduct,” Tracey McDermott, acting director of enforcement and financial crime at the FSA, said in a statement.

There have been a number of large fines and jail terms meted out to investment firms, some of whose offenses have been unearthed by the turmoil since 2008, most notably the Bernard Madoff Ponzi scam, and the insider dealing at Galleon, a US-based hedge fund firm run by Raj Rajaratnam. Madoff’s $65 billion frauds, which hit wealth management firms among its victims, led to a jail term of 150 years. Rajaratnam was jailed for 11 years.

Earlier this week, this publication reported that Diamondback Capital Management, a Stamford, CT-based hedge fund, had agreed to pay over $9 million to settle insider-trading charges brought by the Securities and Exchange Commission on 18 January. As part of the agreement, Diamondback has submitted a statement of facts to the SEC and signed a non-prosecution agreement with the US Attorney’s Office for the Southern District of New York.

The Einhorn affair

Outlining the Einhorn case, the FSA said that on 9 June 2009, he was a party to a telephone conference in which it was disclosed to him by a corporate broker acting on behalf of Punch Taverns that Punch was at an advanced stage of the process towards a significant equity fundraising. “This was inside information and Einhorn should have appreciated this,” the FSA said.

A matter of minutes after the telephone conversation had concluded and on the basis of that inside information Einhorn gave instructions to sell all of Greenlight’s holding in Punch. At the time these instructions were given Greenlight held 13.3 per cent of Punch’s issued equity. Over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch from 13.3 per cent to 8.89 per cent, the FSA continued.

On 15 June 2009, Punch announced a fundraising of £375 million. Following the announcement the price of Punch shares fell by 29.9 per cent. Greenlight’s trading had thereby avoided losses of approximately £5.8 million for the funds under Greenlight’s management, it said.

The FSA said it accepted that Einhorn’s trading was “not deliberate” because he did not believe that it was inside information.

“However, this was not a reasonable belief. Investment professionals are expected to handle inside information carefully regardless of whether they have been formally wall-crossed. This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn’s prominent position as President of Greenlight and given his experience in the market,” the FSA said.

David Einhorn’s fine is £3,638,000 including disgorgement of financial benefit and Greenlight’s fine is £3,650,795 including disgorgement of financial benefit. The Punch securities were held in underlying funds managed by Greenlight.