The U.K.’s Financial Services Authority has just released the transcript (PDF) of the phone call between hedge fund hot-shot David Einhorn and Punch Taverns’ CEO. [via @samgadjones]Last month, Einhorn and his fund Greenlight Capital, which has about $8 billion AUM, were slapped with a $11.2 million penalty by the FSA for trading stock in Punch Taverns PLC on inside information back in 2009.
Shortly after receiving the fine, Einhorn held a conference call with investors and reporters. During that call, he said he disagreed with the FSA’s decision and gave his side of the story.
“I agree this is a serious matter, but not for the same reasons as the FSA. The FSA says this was an act of ‘insider dealing.’ This resembles insider dealing as much as soccer resembles football,” Einhorn said on January 25.
Einhorn said he was confident that he did not engage in insider dealing. He said he refused to sign an NDA, declined to receive inside formation, indicated that he might like to sell his stake and that there was no obvious statement on inside information.
But the saga continues today with the British regulatory authority fined former Merrill Lynch employee Andrew Osborne, the broker on the phone call, nearly $550,000 “for engaging in market abuse by improperly disclosing inside information ahead of a significant equity fundraising by Punch Taverns Plc (Punch) in June 2009.”
The phone call between Greenlight and Punch Taverns took place on June 9, 2009, according to the FSA.
During that conference call, the FSA claims Einhorn received information from Osborne that Punch Taverns was at an advanced stage of the process of equity fundraising.
Shortly after the phone call ended, Einhorn, whose fund at the time owned 13.3% of Punch’s equity, instructed one of his traders to sell all of Greenlight’s stock in Punch, according to the FSA.
Greenlight sold more than 11 million shares in Punch over the course of the four days following the call reducing its position in the pub and bar operator to 8.89% from 13.3%, the FSA said.
One June 15, 2009, Punch announced fundraising of £375 million causing the company’s shares to tumble 29.9%. The FSA said Greenlight was able to avoid an estimated £5.8 million in losses.
Here’s an except from the phone call where Osborne tells Greenlight about the amount of possible equity fundraising:
PUNCH CEO: Well, I — I think — I — I think the market sort of dictates this. I don’t think it’s a matter for the market to dictate that. We — our view is simple, that is, that, you know, we have to make sure that we can preserve a sensible headroom to the covenant from a securitisation and — and take out the convertible as the — the maximum and minimum requirement of any discussion. But there’s absolutely — if you go back over the history, and I know — I — and I — and I perfectly respect that you’ve not been involved from the beginning, but when we originally floated the company, we did an initial public offering of 116 million pounds. We have only done since that time –, that’s 161 million pounds. We have only done, since that time, 175 million pounds [inaudible]. So, to be absolutely clear, I don’t — I don’t look at the business from an equity perspective and if — you know, and it’s not my intention to over-equitise this business whatsoever. The transactions that we’ve done, for example, we’ve shown, pretty substantially dispassion in what we’ve sold to ensure that we maximise value on the debt and, so this — so it’s merely about making sure that — and we can turn around to the shareholders and say, “Actually, anything that we do is sufficient to give ourselves a – headroom for a considerable period of time into the future and also addresses the convertible”. That’s the maximum and that would be the minimum that would be worth considering.
DAVID EINHORN: Mm hmm. So, would you — as you pencil that out, what do those amounts turn out to be?
ANDREW OSBORNE: Something like 350 sterling.
DAVID EINHORN: 350 million sterling?
ANDREW OSBORNE: If you were — if you were to roughly sort of work on the basis that you kinda took out the — the converts, and that’s something that gives you, say, 10 per cent headroom in within both of the covenants, filed covenants.
DAVID EINHORN: 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.
ANDREW OSBORNE: So those proceeds are applied to buying back debt at say 60 in the pound and remember any —
DAVID EINHORN: Who cares — —
PUNCH CEO: [inaudible].
DAVID EINHORN: — who cares, who cares, after a year of going through this, now we’re going to dilute ourselves like this. Oh, no.
ANDREW OSBORNE: Why do you get diluted?
DAVID EINHORN: Because you doubled the share capital almost.
PUNCH CFO: Yeah, but [overspeaking].
ANDREW OSBORNE: And this is — You know, and on a pre-emptive basis.
DAVID EINHORN: We’ve done — we’ve done all of this. We get to double our investments and have basically still highly levered thing, subject to all the same operating risk, just so that you guys don’t have to follow through and, you know, deal with the converters. We’ve been discussing with you for the last year and a half, where, at worst, it was gonna get very close to some small amount.
PUNCH CEO: Dave — Dave — David, but we’re sorry, we’re — we are acting on the basis of the current plans so you — today, we announced the transaction to sell 11 sites to Greene King.