Hedge Fund manager Mr. Unicorn loves to call Tesla a fraud, since he is betting against the company’s share price. But ten years ago, he allegedly committed fraud himself:
According to the City watchdog, Einhorn was told by a corporate broker acting on behalf of Punch Taverns that the company was preparing a significant equity fundraising. Moments after the telephone conversation ended, Einhorn gave instructions to sell all of Greenlight’s holding in Punch.The Guardian
This might seem like a small thing, but it’s a classic example of insider trading.
Why is insider trading wrong?
By law, everyone must have equal access to information about the companies they are trading. If I sell 5% of a company to you, we can only agree on a fair price if both of us have all the same information needed to form a proper valuation of the company. That’s why public companies must disclose material information in a way that anyone can access, all at the same time. If you do encounter material non-public information about a public company, you must not trade on it until that information becomes public. Executives will typically buy and sell shares based on a fixed plan well in advance to avoid these issues.
Let’s say that I own 10% of Pepsi and I know they’re going to go bankrupt tomorrow. I sell you the shares for $18 billion, neglecting to tell you that I know the shares are likely worthless.
I just ripped you off big time, and committed securities fraud in the process –– whether it’s $18 billion or $18,000.
If I had told you that I knew the company was about to go bankrupt, you likely would have asked for a much lower price than what you paid. In effect I lied to you, telling you that you were getting a great strong company worth $18 billion (or more) when I knew that was not the case. I lied to steal money from you that you would not have paid me if you knew the truth about the deal we were making.
Einhorn dumped shares on the public knowing they were worth a lot less than people thought. Then shares tanked 30% after he sold. Luckily, the UK Financial Services Authority was able to recoup the money he obtained by insider trading through a $12 million fine.
The fine is a major blow for Einhorn’s reputation. His career has been built on a talent for spotting wrongdoing in other firms. In a statement the hedge fund boss called the decision “unjust and inconsistent” and said the company had paid the fine rather than continue the “arduous fight”.The Guardian
Why does it matter?
This is a great example of the pot calling the kettle black. Here is a guy who will do anything to avoid losses –– even lie, or break the law. He may find it advantageous to call Tesla a complete fraud, given that he loses money if Tesla’s share price goes up and makes money if it goes down.
But Einhorn’s record (and his investing returns) suggesting that perhaps he may be a fraud.