Legendary hedge fund manager Michael Steinhardt has been sanctioned by a Delaware judge for improper trading in a ruling that says Steinhardt wrongfully traded after receiving non-public information while serving as a plaintiff in a securities lawsuit.
Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued an opinion on Friday that directed Steinhardt to self-report his insider trading to the Securities & Exchange Commission and disgorge profits of $534,071 related to his shorting of shares of Calix., a Petaluma, Calif., provider of broadband communications access systems, after it had agreed to purchase Occam Networks in 2010.
“By serving as representative plaintiffs, Steinhardt and the Funds gained access to real-time insights informed by Confidential Discovery Material and counsel’s litigation assessments,” Vice Chancellor Laster wrote in his 29-page opinion issued January 6. “Based in part on this information, Steinhardt and the Funds decided to abandon their challenge to the Merger and exit their Occam position in a manner designed to capture the arbitrage spread between Occam and Calix.”
Steinhardt, chairman of WisdomTree, is a hedge fund pioneer who liquidated his hedge fund in 1995 and has been managing his own money through Steinhardt Overseas Management and Ilex Partners. He did not quickly respond to a request for comment, but in legal papers his lawyers have argued that none of the information he received while acting as a plaintiff was material, non-public information. Steinhardt in a legal filing denied any wrongdoing and said he received no information that would matter in trading Calix or Occam stock.
Steinhardt orginally got into this mess because of one of his former hedge fund partners, Herbert Chen, who has been running another fund firm, Lattanzio Chen Partners, since 2005 with John Lattanzio, another Steinhardt alumnus. Chen’s links to Steinhardt have remained strong—he has worked out of Steinhardt’s offices free of charge in an office that is roughly 20 feet away from Steinhardt’s office.
It was Chen who got Steinhardt interested in Occam. Chen had purchased 2.9% of Occam’s stock and was a big advocate of the company. His championing of Occam’s shares made sense since they represented at one point some 20% of his net worth, the Laster opinion says, but Chen used unorthodox ways to promote the company. Using pseudonyms, Chen frequently posted about Occam on Yahoo message boards and he also wrote research articles about Occam for SeekingAlpha.com under the alias “Mr. Bert.”
But by January 2009, the Lattanzio-Chen fund needed cash to meet a margin call, the legal opinion says, and Chen turned to Steinhardt, offering a block of Occam shares at a distressed price. Steinhardt ended up buying 2.8 million shares of Occam, or 13.5% of its shares outstanding. In September 2010, Calix announced that it had a deal to purchase Occam for $170 million of cash and stock.
Steinhardt and Chen did not like the deal, which implied a value of $7.75 per Occam share, because it represented little premium to the price range where Occam’s stock had been trading. In October 2010, Steinhardt and Chen filed a class action complaint in Delaware Chancery Court, alleging Occam’s directors breached their fiduciary duties in approving the deal at an unfair price. They later pursued an injunction against the merger. One month later, in November 2010, Vice Chancellor Laster approved a confidentiality order. It stated that information exchanged by the parties of the case could only be used for the purposes of the litigation and it restricted any trading in the securities of Occam and Calix. Occam’s investment banker, Jefferies & Company, in December 2010 started document production and Chen reviewed some 3,000 pages, many of which were designated confidential.
Read More: http://www.forbes.com/sites/nathanvardi/2012/01/09/hedge-fund-legend-michael-steinhardt-sanctioned-for-improper-trading/