Hedge fund pioneer Michael Steinhardt has been rapped for insider-trading, and ordered to report himself to the proper authorities.
A Delaware Chancery Court judge last week found that Steinhardt improperly shorted shares of broadband communications company Calix while he was privy to confidential information about the company stemming from a lawsuit the he filed with a former protégé. Vice Chancellor J. Travis Laster ordered him to disgorge $534,071 in ill-gotten gains—and to report himself to the Securities and Exchange Commission.
At issue is Steinhardt's Calix short sales in December 2010. Steinhardt and former Steinhardt Partners trader Herbert Chen had sued Occam Networks, which had agreed to sell itself to Calix. That December, Laster issued a confidentiality order restricting trading in Calix and Occam shares, and Chen received a cache of confidential documents, which he reviewed. According to Laster, Steinhardt was receiving weekly updates from Chen and knew "there was a very high probability of that merger occurring," despite his objections.
Steinhardt has denied that he received any material information from Chen.
"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," Laster wrote. "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."