A former equity analyst made more than €34,000 ($48,000) in an hour investing in oil and energy industry tube maker Vallourec a day before he published a recommendation raising the French company to “outperform.” Now, he faces a €750,000 insider-trading fine.
Former Kepler Cheuvreux analyst Geoffroy Stern made 28 trades based on draft recommendations, including his own, the brokerage was set to publish hours later, officials at France’s Autorité des Marchés Financiers said at a hearing last week.
For each of the 28 trades linked to Kepler ratings “the share price always moved in the direction of the broker’s recommendation.” Photo: Tamara Voninski
In total, Stern made about €289,000 on the transactions over a period of two years, according to Benjamin Mauduit, a member of the regulator’s board.Stern wasn’t “exposed to the same risk as other market participants,” said Lucien Millou, another AMF official.
For each of the 28 trades linked to Kepler ratings “the share price always moved in the direction of the broker’s recommendation.”
Authorities globally have cracked down on insider trading in the last decade, using the crime that’s seen everyone from hedge-fund magnates to US businesswoman Martha Stewart go to prison to send a message to the financial industry in the wake of the 2008 credit crunch.
Stern’s lawyer, Samuel Sauphanor, contended that the financial analysis was based on public data, even in draft form, and can’t be considered insider information under French law. Stern told the panel that he never thought he was doing anything wrong.
“I truly didn’t expect to land in front of the AMF with these operations. I really didn’t think I was breaching market-abuse rules,” Stern said. “I’m 36, I don’t want my life to be ground to a halt. I don’t know whether I’d be able to bounce back again.”
Stern was fired in 2014 in the wake of the AMF investigation and eventually found a job at a consulting firm specialising in satellite communications where his salary was cut in half, Sauphanor said. It would take him about 20 years to pay a €750,000-fine in light of his and his wife’s current resources, the lawyer said.
Mauduit said that in addition to the quick return on Vallourec, Stern made more than €16,000 in 37 minutes on Lagardere shares. For each of the 28 contentious trades, Stern used contracts for difference, derivatives that amplified wagers on share movements with a small down payment, investing on average €685,000, with a maximum investment of about €1.5 million, the AMF official said.
His knowledge of the analysts ratings and when they would be published gave him a clear advantage compared with the general public, which must be considered insider information, according to Mauduit.
“Stern knew the imminent event was likely to impact the share price,” Mauduit said. He recommended that the AMF’s enforcement committee fine Stern €750,000 and ban him from working as an analyst for 10 years.
Florence Fricaudet, another lawyer for Stern, said that AMF investigators acted “in an opportunistic way,” ignoring transactions where Stern lost money.
Sauphanor also said that while financial analyst’s memos can have an impact, the influence is indirect and can be “totally neutralised” by simultaneous notes from better known firms such as Goldman Sachs or Morgan Stanley.
Fricaudet said her client’s behaviour was “a far cry” from what is typically seen in insider-trading cases because Stern made no efforts to conceal the transactions and paid taxes on his gains.
She said that while Stern is no longer a financial analyst he has the same investment strategy and still uses contracts for difference to wager on share movements.
She said that it’s misleading to say Stern made €289,000 through the disputed trades as hedging costs, brokerage fees and taxes left him with a profit of about €105,000.
“If Stern thought he was using insider information why would he have bothered to systematically hedge his positions?” Sauphanor asked.