Prominent hedge fund manager David Einhorn has savaged US financial regulators for allowing “quasi-anarchy” to break out in markets due to their inaction over a range of controversial issues.
The president of Greenlight Capital waded into the GameStop controversy in his latest letter to investors, arguing that the market mayhem surrounding the struggling video game retailer in late January was exacerbated at “a critical moment” by venture capitalist Chamath Palihapitiya and Tesla’s Elon Musk.
However, his most incendiary comments were aimed at US regulators and the lawmakers who fund them, highlighting several examples of what he saw as absent or supine enforcement of the rules and laws that govern markets.
“For the most part, there is no cop on the beat,” Einhorn wrote. “It’s as if there are no financial fraud prosecutors; companies and managements that are emboldened enough to engage in malfeasance have little to fear.”
The hedge fund manager said it was healthy that ordinary investors discussed stock bets online — and lauded Keith Gill, the retail trader who sparked the GameStop frenzy, for a “great call”. But Einhorn argued that Congress should be holding hearings on feeble enforcement more broadly, rather than just on the GameStop situation.
“From a traditional perspective, the market is fractured and possibly in the process of breaking completely,” he wrote in the letter. “Many who would never support defunding the police have supported — and for all intents and purposes have succeeded — in almost completely defanging, if not defunding, the regulators. For the most part, quasi-anarchy appears to rule in markets.”
As an example of how regulators are allowing small investors to be harmed, Einhorn highlighted Hometown International, a microstock that he said owned a single shop in rural New Jersey, but was valued at $113m as of February 8 — despite sales of only $13,976 last year. “The pastrami must be amazing,” he joked.
He also highlighted the case of Bitfinex and Tether, a cryptocurrency venture that the New York’s attorney-general earlier this year accused of “recklessly and unlawfully” covering up “massive financial losses to keep their scheme going and protect their bottom lines”.
Despite this, Tether and Bitfinex were fined only $18.5m and prohibited from doing business with New Yorkers. “It was as if Bernie Madoff had been told to pay a small fine and stop ripping off New Yorkers, but to go ahead and have fun with the Palm Beach crowd,” Einhorn observed. Tether and Bitfinex have accepted the fine without admitting wrongdoing.
Others have criticised how the Securities and Exchange Commission has been slow to fully implement parts of the post-crisis Dodd-Frank Act, which was passed more than a decade ago. That was a factor behind how the opaque investment group Archegos was able to quietly build up enormous, leveraged stock market bets, which collapsed and inflicted multibillion-dollar losses on banks in late March.
The poker-playing Einhorn first rose to prominence for a big, prescient bet against the stock of Lehman Brothers in the financial crisis, and at its peak in 2012, Greenlight Capital managed about $12bn.
However, Einhorn’s value-oriented investment approach has struggled since then, and some of its prominent short positions have bombed — most notably its bet against the stock of electric carmaker Tesla.
In his quarterly letter, Einhorn once again hit out at Tesla’s founder Musk, this time for pouring “jet fuel” on the flames of the GameStop saga. He argued that comments at critical juncture from Musk and Palihapitiya — the latter an investor in a rival of the Robinhood brokerage at the centre of the saga — “further destabilised the situation”.
Nonetheless, Einhorn doubted that any regulators would take action over the affair. “If regulators wanted Elon Musk to stop manipulating stocks, they should have done so with more than a light slap on the wrist when they accused him of manipulating Tesla’s shares in 2018,” he said. “The laws don’t apply to him and he can do whatever he wants.”
Musk and Palihapitiya were not immediately available for comment.
In 2012, Einhorn was himself fined £7.2m by the UK’s then-Financial Services Authority, over insider trading in Punch Taverns back in 2009. Although Einhorn had explicitly told a broker in Punch shares that he did not want to be given privileged information — and the FSA accepted that the insider trading was not deliberate – the watchdog said it still considered Einhorn’s “error of judgment to be a serious failure to act in accordance with the standards reasonably expected of market participants”.
