Reuters is reporting that Britain’s Financial Services Authority (FSA) said on Wednesday it had fined Einhorn 3.64 million pounds ($5.67 million) and his Greenlight Capital 3.65 million pounds for market abuse.

Greenlight rose to  prominence in credit crunch for shorting Lehman Brothers bank.

The story goes that Einhorn (a prolific poker player) learned from a telephone conversation, held with a broker in 2009, that British pub company Punch Taverns was on the verge of a significant equity fundraising, prompting Einhorn to sell down his holdings before an expected fall in the shares, the FSA said in a statement.

This decision allowed Einhorn (who wrote a book called Fooling Some of the People All of the Time, A Long Short Story) to avoid losses of around 5.8 million pounds, the FSA said. “The FSA accepted that Einhorn’s trading was not deliberate because he did not believe that it was inside information. However, this was not a reasonable belief,” the FSA said. “This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn’s prominent position as President of Greenlight and given his experience in the market.”

According to the Wall St. Journal, Mr. Einhorn stated, “We believe that this action is unjust and inconsistent with the law and with prior FSA enforcement precedent. However, rather than continue an arduous fight, we have decided to put this matter behind us and concentrate on managing our business.”

Mr. Einhorn continued, “We have always strived to set an example of good conduct and ethics, and we take compliance very seriously. We didn’t believe in 2009, and we don’t believe now, that there was anything wrong with our conduct and our actions. The fine is for trading in advance of a decision that had not been made, and the FSA concedes we did not believe we had any inside information. We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we do not believe we were given any such information. Further, all the witness testimony supports our view.”

Reportedly, ts he FSA said Einhorn gave instructions to sell all of Greenlight’s holdings in Punch a “matter of minutes” after the telephone call, on June 9 2009. At the time these instructions were given Greenlight held 13.3 percent of Punch’s issued equity, and over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch to 8.89 percent.

Punch announced a fundraising of 375 million pounds on June 15 2009. Following the announcement the price of Punch shares fell by 29.9 percent, the FSA said. While the regulator said the trading infraction was inadvertent and not deliberate, the fine may put some tarnish on 43-year-old Einhorn, a stalwart of the hedge fund community who is known for public crusades against abuses by public companies.  Einhorn has targeted Green Mountain Coffee Roasters, claiming the company’s accounting practices and long-term earnings power are questionable.

Here is a video calling his views about Green Mountain Coffee into question:

While the average U.S. hedge fund lost about 5 percent in 2011, last year Einhorn’s flagship fund rose 2.9 percent. However, the hedge fund manager lost out on a high-profile bet last year when his effort to buy a significant minority stake in the New York Mets broke down over the summer. He is a life-long fan of the baseball team.

Einhorn isn’t the first fund manager to be fined in the UK for insider trading. In 2006 the FSA fined former GLG fund manager Philippe Jabre a then-record 750,000 pounds after he was found guilty of insider trading on a convertible bond sale for Japan’s Sumitomo Mitsui Financial Group. ($1 = 0.6416 British pounds)

Here are some videos of Einhorn talking about his investing style and views:

Understanding a hedge fund’s compliance procedures and the way in which it deals with and may be exposed to material non-public information is an important part of the operational due diligence process.

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At the panel sessions, it is anticipated that Mr. Scharfman will focus the discussion on upcoming trends in operational risk in alternative investments including hedge funds and private equity funds. Other topics which are anticipated to be discussed include the role of operational due diligence consultants such as Corgentum in designing a comprehensive operational due diligence solution, and operational due diligence challenges institutional investors can expect in 2012.

The panel Mr. Scharfman will moderate will be entitled, “Investing in Alternatives” and will take place on Wednesday February 15, 2012 at the Astor Crowne Plaza in New Orleans, LA.

To register for the event here, please visit the conference website.

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The panel will be entitled, “Hedge Fund Opportunities” will take place on Friday March 2, 2012 at the Crowne Plaza Times Square in New York, NY.

It is anticipated that Mr. Scharfman will discuss evolving trends in hedge fund operational due diligence for 2012, the benefit to investors towards working with operational due diligence consultants such as Corgentum, and the benefits of incorporating risk considerations into the hedge fund portfolio construction process.

To register for the event here, please click here.

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It is also being reported that Madoff claims that many of the large banks and fund of hedge funds who invested with him were “wilfully blind” and “chose to ignore con.” Here is a video about it:

It also seems a secondary market has developed for betting on how successful Irving Picard will be in recovering Madoff claims…

Finally, the Financial Times is reporting that motivated by continued paranoia (is it paranoia if the government really is out to get hedge funds?…) surrounding government oversight of insider trading hedge funds have begun to hire security firms to perform sweeps their offices and homes for electronic bugs (aka: listening devices). Here’s a video about some of the technology used in these sweeps including hidden camera detectors, fiber optic cameras, spectrum analyzers, and non-linear junction detectors:

So what happens when they find one? Maybe it would be like when a man named Yasir Afifi found an FBI tracking device on his car and asked the Internet community to tell him if he was being spied upon. Perhaps hedge funds familiar with reverse engineering strategies could similarly reverse engineer the technology and begin spying on the government – or would that be considered insider trading….?

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The recent comments of Jason Scharfman, Corgentum Consulting Managing Partner regarding the enhanced focus being placed by investors on hedge fund operational risk were outlined in Risk.net’s Operational Risk & Regulation Journal in an article entitled, Operational infrastructure at hedge funds comes under closer scrutiny .

Topics outlined by Mr. Scharfman in the article include:

• Continued failures of many hedge fund with in regards to documenting operational policies
• Benefits of hedge funds emphasizing their operational strengths and openly discussing operational weaknesses
• The false artifical operational floor of Dodd-Frank legislation
• Inherent benefits of investors develop dialogues concerning operational risks with their hedge fund managers

The full article can be read on the Risk.net’s Operational Risk & Regulation website (subscription required).

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It is expected that Mr. Scharfman will discuss the developing role of operational due diligence, considerations for integrating operational risk into the asset allocation process, and techniques for family offices to integrate operational due diligence into their investment process.

The event will take place on December 2, 2010 at the W Hotel Lakeshore, Chicago, IL. To register for the event here, please click here.

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The topics covered during the presentation are expected to include:

a) The impact of recent crises on how managers conduct operational due diligence

b) What aspects of a hedge fund’s operations are most important to investors today?

c) Best practices for meeting increased due diligence scrutiny

The event will take place on November 10, 2010 at the Hilton New York.

To register for the event here, please click here.

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It has been announced that Corgentum Consulting Managing Partner, Jason Scharfman will moderate a fund of hedge funds panel at Endowment & Foundation Forum at the Opal Endowment & Foundation Forum at the Hyatt Regency Boston, Boston, MA on November 2, 2010. Topics anticipated to be discussed in the panel discussion include:

• What makes funds of funds useful?
• The role of operational due diligence, post Madoff?
• The evolving role of funds of funds, post 2008

Rather than focusing on a particular investment style, this endowment and foundation conference will tackle the issues that are most germane to the nation’s endowments and charitable foundations by examining critical investment topics, as well as the need to align fiscal strategy with the goals of a particular organization.

More information about the conference can be found here .

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A new paper has been released by Corgentum Consulting, the preeminent provider of the industry’s most comprehensive hedge fund operational due diligence reviews for investors, entitled Hedge Fund Audits: Scope, Materiality, Audit Opinions and Operational Risk.

This paper provides an introduction to audit opinions, the concept of audit materiality and audit scope in the context of assessing operational risk in hedge funds. Also discussed in this paper are several commonly held misconceptions regarding the work of hedge fund auditors.

The paper can be found in the Research section of the www.Corgentum.com website, or via direct link here.

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Stanley Chais was a Beverly Hills, California investment advisor who operated feeder funds which allocated capital to Madoff funds. He passed away on September 26, 2010 from a rare blood disease at the age of 84.

The Chais death is the third major death surrounding the Madoff scandal. The first was investor’s Rene-Thierry Magon de la Villehuchet’s suicide and the second being the death of Jeffry Picower (see previous post regarding Picower).

Chais was accused in a pending Securities and Exchange Commission lawsuit of feeding about $1 billion — virtually all the funds he collected from investors — into Madoff’s multibillion Ponzi scheme. Specifically Chais managed three funds which invested with Madoff: 1) the Lambeth Company, 2) the Brighton Company and the 3) Popham Company. Although he withdrew $500 million before the collapse of the Madoff funds, Chais maintained that he was also a victim and was not complicit. Here is the SEC complaint against Chais.

Chais also facing a lawsuit from the Madoff trustee, Irving Picard which was filed on May 1, 2009 Irving Picard, bankruptcy trustee for Madoff Securities, filed a lawsuit against Stanley Chais.  The complaint alleges he “knew or should have known” he was deep in a Ponzi scheme when his family investments with Madoff averaged 40% and
sometimes soared as high as 300%. It also claims Chais was a primary beneficiary of the scheme for at least 30 years, allowing his family to withdraw more than $1 billion from their accounts since 1995 – money that belonged to Madoff victims. The Picard complaint is here.

Chais was also facing a lawsuit from filed on September 23, 2009, California Attorney General Jerry Brown seeking $25 million in penalties and restitution for victims.

Chais was a large philanthropist and his philanthrophy, the Chais Family Foundation, closed in December 2008 as a result of losses associated with Madoff.

Here is a video from CNBC about the Chais death:

In other Madoff news, Bernard Madoff’s wife Ruth Madoff has been spotted in New York City at Midtown’s Le Pain Quotidien. Here’s the video:

Ruth Madoff had a new red harido (previously her hair was blond). Ms. Madoff was so dedicated to her previous blond hairstyle that she visited her salon, Pierre Michel, every six weeks for the last 10 years. After the Madoff scandal broker she was told that she could no longer enjoy her routine of sitting with a glass of Poland Spring water while Giselle, a colorist often cited in Vogue and Allure, wielded the foils. “Oh my g-d,” Madoff uttered, as ABC News advanced towards her. This video also features Madoff victims advocate Ronnie Sue Ambrosino. By the way the a website for the Madoff victim’s network is: http://bernardmadoffvictims.org.   When Ruth Madoff was asked if she had any words regarding her husband’s victims, she said nothing. Perhaps it makes sense she’s keeping mum, since no one knows what federal prosecutors may or may not be up to….

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