EinPunch: The Distinction Between Wall-Crossing and Material Non-public Information
Here’s KD’s very useful Cliffs Notes version for you to get up to speed. Yes, and then go read Matt Levine’s post on it (I wish he were as funny as Bess, but no one is as funny as Bess). For balance, have a gander at a representative negative view from Cassandra.
Right. I don’t have an independent take on this and being an Einhorn fan I’m far from an objective observer, but I think one thing we are learning from this debate is the standard required in insider trading. (in this post I discuss what I think the laws and regulations SHOULD be, not what they ARE. Because of this I don’t discuss whether Einhorn should have checked with compliance, or whether he did a cost-benefit.)
First off we all agree that it looks bad and Einhorn should have tried to stay away. What I think KD gets and Cassandra doesn’t is that Einhorn doesn’t have the freedom of a banker here to just turn away business or not invest his personal account. His fund is his personal account, he has money on the line, and leaving his investment in Punch as is while holding this valuable information and not trading on it if it was in fact legal to trade on it would violate not look very well on his fiduciary duty.
Next. There are really sort of kind of two standards here – trading on information received after wall-crossing and trading on material non-public information – and we switch back and forth a smidge too easily without thinking about the distinction. Let’s lay down the ground rules:
- Trading on information received after wall-crossing is universally agreed to be wrong and should be illegal.
- Trading on material non-public information is also usually wrong but should not be illegal in and of itself because of situations factually similar to the hypothetical that Matt outlined:
Under UK law, as it appears from this decision, Punch can call Greenlight, shout “hey we’re raising capital and now you know about it suckers!” into the phone, and hang up. Now Greenlight, through no fault of their own, have inside information and can’t legally trade. That would be kind of diabolical, no?
Yes, of course the example is ludicrous. For one thing, the whole reason why companies have to offer information under wall-crossing conditionality in the first place is because of reg FD (and whatever is the UK equivalent) laws that bar companies from selectively offering MNPI to folks.
But the point is that people come into contact with MNPI all the time. Like, without even wanting to. Like, even after explicitly stating they did not want to.
This is our grey area (again, here I am concerned with what the law should be, not what it is).
Here is the key difference – in a wall-crossing, there is consent. In a straight MNPI case, there doesn’t have to be. If our standard for insider trading rests solely on MNPI, then we take away the right of consent to being informed from everyone. This is obviously not something anyone wants. But if our standard for insider trading rests solely on wall-crossing, that’s not good either because that doesn’t cover Raj-Raj like cases where there was obviously intent instead of consent.
So in my world insider trading laws would run on two standards – insider trading based on info from wall-crossing, and insider trading based on actively obtained MNPI. The third standard – banning trading based on passively obtained MNPI – is much, much too loose to be a law and should be left in the realm of social and reputational judgement (i.e. the “if you have to ask, don’t do it” kind of self-regulation, not formal regulation and legislation with fines and jail terms). Remember that here we can safely ignore passively obtained MNPI that was selectively disclosed by the company, as that is covered under Reg FD.
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