FSA's Fine Of David Einhorn And Greenlight Capital For Insider Trading Violation

On January 12, 2012, the United Kingdom's Financial Services Authority levied a fine on David Einhorn and his hedge fund, Greenlight Capital, Inc., in the total amount of £7,288,795 (approximately $11.6 million) in civil penalties for trading on inside information.1 The FSA determined that the actions of Einhorn and Greenlight amounted to "a serious case of market abuse." This matter does not involve novel issues of law, but it does highlight a common fact pattern that multijurisdictional market participants must consider in the context of inside information.2 In addition, it highlights certain differences between the laws of insider trading in the United Kingdom and the United States.

U.K. Theory of Insider Trading

In the United Kingdom, insider dealing occurs where an insider engages or attempts to engage in an investment on the basis of inside information relating to that investment.3 Inside information is information of a precise nature that is generally not available, relates to the investment, and "would, if generally available, be likely to have a significant effect on the price" of the investment. For example, information for purposes of insider trading is considered precise if:

it indicates circumstances or events that exist or may reasonably be expected to exist; and it is specific enough to "enable a conclusion to be drawn as to the possible effect" of those circumstances or events. U.S. Theories of Insider Trading

The U.S. federal securities laws prohibit the use of material, nonpublic information in connection with the purchase or sale of any security. In the context of insider trading, the U.S. Supreme Court has developed the "classical" and "misappropriation" theories of insider trading.4 Under the classical theory, trading on material, nonpublic information does not give rise to an insider trading claim unless a duty to disclose arises from the existence of a fiduciary relationship. This duty exists, for example, when a director, officer, or other insider trades in the securities of his or her corporation on the basis of material, nonpublic information because the fiduciary relationship between corporate insider and the shareholders of a company creates the duty to disclose or abstain from trading.5 Under the misappropriation theory, a person violates the U.S. federal securities laws if he or she "misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information." The misappropriation theory protects against...