George Soros is one of the most successful hedge fund managers ever. While at the helm of the Quantum Fund (founded by Soros and Jim Rogers in the 70s), he generated an average annual return for investors of 30%.

George soros
Photo by Irekia

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements.  In the first three parts of this series, which can be found at the links below, I covered the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992.

Part five: George Soros in court

As well as being the greatest hedge fund manager of all time, George Soros is also the most controversial figure in the world of finance. If you search for the billionaire trader online, you are bombarded with conspiracy theories and speculation about Soros’ political influence. Many theories speculate that Soros’ greatest trades paid off because of his political influence. There’s never been any proof to back up this speculation.

But Soros has been found guilty of insider trading although the penalty was insignificant compared to his enormous wealth.

The insider-trading case goes back to 1988 when the Quantum Fund was purchasing shares in French companies. At first glance, this appears to be a traditional Soros trade. The Socialist party had lost its majority of seats in the French Assembly two years before, and the new government under Jacques Chirac had instigated an aggressive privatization program. As he had done many times before, Soros was using a mix of his market knowledge, political insight and understanding of human emotion to guide his trading patterns.

As part of the privatization program, public bank Société Générale was sold off during 1987. However, the following year lawmakers were demanding the bank be brought back under state control. A group of investors connected to the French financier Georges Pébereau hatched a plan to take control of the bank before the government made its move.

As Bloomberg reports:

“The French government sold Societe Generale in June 1987 at 407 French francs (then $63) a share. After a stock market crash a year later, the shares had fallen to 260 francs. In September 1988, French financier Georges Pebereau sounded out investors including an adviser to Soros about joining him in building a stake in Societe Generale.

While Soros declined to take part in that operation, that month his Quantum Endowment Fund spent $50 million to buy 160,000 shares of Societe Generale as well as shares in three other companies the French government had sold and whose stock had tumbled.”

After the private buyer had been announced, shares in Société Générale surged, although the raid was ultimately unsuccessful.

According to court documents, an associate of Mr. Pébereau informed Soros of the plans for the bid in a telephone conversation. Soros then moved to build a stake in the bank ahead of the takeover offer, violating insider trading rules. France’s stock market regulator opened an investigation into the case in 1989 but determined that Soros had not violated French insider rules (at the time insider-trading rules only applied to employees of the companies concerned trading on privileged information).

During 1990 France’s insider-trading rules were revised to apply to third parties, Soros claims these amendments were specifically put in place to bring him to court. In 2002 a French appeals court convicted the billionaire of insider trading and fined him €2.2 million, the equivalent of what he was accused of making from the trade. Soros was the first in France to be prosecuted for insider trading.

Unsatisfied with the actions of the French government and regulators, Soros took his case to the European Court of Human Rights. He claimed that France had violated his rights by punishing him criminally for trading on inside information after changing insider-trading laws. Soros believed France was set on punishing him directly, which is why the country went to great efforts to change its legal framework.

In 2011 the European Court of Human rights finally published its ruling on the Soros case. The court found that France’s insider trading laws were sufficiently clear at the time to hold Soros criminally responsible and ruled that it did not support Soros’ view that France had amended its insider trading laws because of his conduct. In a statement the court proclaimed:

“Mr. Soros was a famous institutional investor, well-known to the business community and a participant in major financial…As a result of his status and experience, he could not have been unaware that his decision to invest…there had been no comparable precedent, he should have been particularly prudent.”

“In view of the subject matter, well-informed professionals had a duty to be prudent in their work and to take special care in assessing the risks of their actions,” it added.

While Soros’ 2002 insider-trading conviction was a relatively benign event on the Soros timeline, the event is relatively informative as it showcases not only the billionaire’s trading habits but also his personality. Soros could have chosen to pay the fine and forget about the situation but instead, he stretched the case out over a decade in an attempt to clear his name and overturn the conviction.