Bloomberg News

Einhorn’s Swaps Boosting Marvell Bet Exposed by Buyback

April 19, 2013

Hedge Fund Manager David Einhorn

David Einhorn has generated average annual returns of 19 percent since founding Greenlight in 1996, more than double the Standard & Poor’s 500 Index’s 7.5 percent. Photographer: Scott Eells/Bloomberg

David Einhorn, the hedge-fund manager who oversees $8.8 billion, relied on derivatives earlier this year to raise his bet on Marvell (MRVL:US) Technology Group Ltd. without falling under regulations designed for corporate insiders.

Einhorn’s Greenlight Capital Inc. increased its economic stake in Marvell to 12.4 percent from 9.7 percent by entering into total return swaps in January on about 12 million company shares, according to a regulatory filing last week. Einhorn was required to disclose the swaps because Marvell accelerated its stock repurchase program in December and January, reducing its shares outstanding and briefly pushing New York-based Greenlight’s ownership above 10 percent.

Marvell was trading at less than $8 a share in late December after sliding 48 percent last year, in part because a jury awarded plaintiffs in a patent lawsuit against the company more than $1 billion. The swaps enabled Greenlight to buy on the cheap and wring extra benefit from the stock’s 32 percent rebound in 2013 without becoming a 10 percent shareholder, a status that would have required the hedge-fund firm to divulge any subsequent trades at Marvell and surrender short-term profits to the semiconductor company.

Marvell was “hit by a lawsuit at the time that was influencing the share price,” said Aalok Shah, a D.A. Davidson & Co. technology analyst in Lake Oswego, Oregon. “Subsequently people figured the lawsuit may not be as big a deal as originally assumed.”

‘Modernizing Reporting’

Some corporations say the use of derivatives to bypass disclosure requirements threatens the transparency and integrity of securities markets, potentially hampering their ability to raise capital. Derivatives, including those encompassing short positions, permit aggressive investors to secretly affect a stock and potentially influence the company behind it, New York- based law firm Wachtell, Lipton, Rosen & Katz said in a 2011 petition urging the U.S. Securities and Exchange Commission to require the contracts be counted toward beneficial ownership.

The agency will seek comments this year on “approaches to modernizing reporting by large holders,” it said in an annual report published in December. Last month, the Canadian Securities Administrators proposed that equity derivatives be included when investors calculate holdings under laws requiring next-day disclosure of stakes in public companies. It also proposed that the threshold for such filings be lowered to 5 percent from 10 percent.

“When all these rules were made up” beginning in the 1930s, “there weren’t any derivatives in the world,” said Adam Emmerich, an attorney at Wachtell. “The SEC has talked about this and recognizes there is change afoot.”

Einhorn’s Returns

Jonathan Gasthalter, a Greenlight spokesman who works at Sard Verbinnen & Co., declined to comment on the Marvell trades. Sukhi Nagesh, a spokesman for Marvell, declined to comment on Greenlight’s filing other than to say the firm “has been a very supportive and helpful investor for us.”

Einhorn, 44, has generated average annual returns of 19 percent since founding Greenlight in 1996, more than double the Standard & Poor’s 500 Index’s 7.5 percent. A high-stakes tournament poker player who primarily invests in companies he deems undervalued, Einhorn gained attention earlier this year by suing Apple Inc. to help pressure the company to distribute more of its $137 billion in cash and investments to shareholders.

Marvell shares (MRVL:US) slumped in 2012 as profit declined and a jury ordered the company to pay at least $1.17 billion in damages for infringing patents on integrated circuit technology held by Carnegie Mellon University. Einhorn called Marvell “our biggest loser” of the year in a January letter to clients, while also citing reasons he believed the award would be reduced or eliminated.

Buying ‘Opportunity’

Greenlight had “decided to buy even more MRVL” because he continued to “like the opportunity” the company presented, Einhorn wrote in the letter, a copy of which was obtained by Bloomberg News. Marvell, a maker of chips for mobile phones and computers, is based in Hamilton, Bermuda, and has offices in Santa Clara, California.

If Greenlight were to raise its stake above 10 percent, its hedge funds would become subject to Section 16 of the Securities Exchange Act of 1934, and thus required to follow the same rules as executives who buy and sell their own company’s stock. In addition to greater disclosure, the firm would face limits on its ability to sell short Marvell shares and would have to give up any “short-swing” profits, or those realized in less than six months.

‘Keenly Aware’

Some of the largest U.S. investors seek to keep their stakes below 10 percent until the six-month period requiring the return of short-swing profits elapses.

Children’s Investment Fund Management (UK) LLP and 3G Capital Partners Ltd. agreed to pay $11 million in 2008 to settle a shareholder lawsuit claiming that the funds were required to return $138 million in short-swing profits to CSX Corp. (CSX:US) after they had entered into cash-settled total return swaps equaling 11 percent of the rail transportation company’s shares. Children’s Investment Fund and 3G had waged a proxy contest at CSX, whereas Greenlight’s stake in Marvell is a passive one.

Investors are “keenly aware of the ramifications of going across 10 percent,” said Robert Leonard, a hedge-fund attorney at Bingham McCutchen LLP’s New York offices. “You definitely don’t want to go across unless you know you are going to be a long-term holder.”

Sacrificing Influence

Instead of buying more stock, Greenlight entered into the total return swaps on Jan. 2 tied to 11.9 million Marvell shares, according to a Form 3 filed April 8 with the SEC. The swaps are private contracts that investors enter into with a counter-party such as a bank.

The terms of the swaps don’t permit Greenlight funds to vote or control the disposition of any Marvell common stock, the investment firm said in the filing. As a result, Greenlight’s “beneficial” ownership of Marvell shares, the criteria used for SEC reporting thresholds, stayed below 10 percent while its economic exposure was higher.

“If somebody wants to increase their exposure to a company without reporting, they can do it with total return swaps,” said Matthew Pieniazek, president of Darling Consulting Group Inc., a Newburyport, Massachusetts-based firm that advises banks. “What they give up is the influence from that additional exposure.”

Under Greenlight’s swaps, its funds are entitled to a cash payment equaling any appreciation on the 11.9 million shares above $7.93 each, according to the filing. Should Marvell’s stock trade at less than $7.93 when the swaps mature in February, Greenlight would have to make payments to the counter- party equaling the lost value on the shares. The swaps yielded a $19.2 million paper profit for Greenlight as of yesterday.

Stock Repurchases

Greenlight owned 51.8 million Marvell shares outright at the end of last year, the fund company reported in a February filing. That equaled a 9.7 percent stake based on the 535 million shares Marvell said were outstanding as of Nov. 21.

Marvell increased its stock buybacks in the quarter ended Feb. 2, repurchasing 33.7 million shares at an average cost of $8.39 each, according to an annual report filed March 29. That reduced the number of Marvell shares outstanding to 501.7 million as of March 21, meaning Greenlight’s 51.8 million shares now equaled a 10.3 percent stake, and the firm had an 12.7 percent economic stake including the swaps.

The firm sold 1.7 million Marvell shares from April 3 to April 5, lowering its beneficial ownership to 9.99 percent, according to Form 4 ownership filings by the firm last week. The sales cut its economic interest to 12.4 percent.

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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Companies Mentioned

  • MRVL
    (Marvell Technology Group Ltd)
    • $13.87 USD
    • 0.23
    • 1.66%
  • CSX
    (CSX Corp)
    • $30.71 USD
    • 0.08
    • 0.26%
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