David Einhorn has filed a lawsuit seeking to unmask the identity of an anonymous financial blogger who, he says, disclosed that Mr. Einhorn’s hedge fund was buying shares in a technology company. The legal maneuver illustrates the tension between a money manager’s ability to safeguard his trading strategies and the rights of others to report on them.
The lawsuit, filed on Friday in New York State Supreme Court by Mr. Einhorn’s Greenlight Capital hedge fund, seeks to force the popular investment website Seeking Alpha to disclose the identity of the anonymous blogger known as Valuable Insights.
On Tuesday, Judge Carol Edmead, of Manhattan Supreme Court, said that representatives for Seeking Alpha must appear in court on March 18 to explain why she should not grant Greenlight’s motion that would force the website to disclose the blogger’s name.
Colin Lokey, an official with Seeking Alpha, declined to comment on the lawsuit and would not say whether the website has retained a lawyer.
Mr. Einhorn contends a Nov. 14 blog post on Seeking Alpha that mentioned that Greenlight was buying big blocks of shares in Micron Technology had interfered with his $10 billion fund’s investment strategy. The fund claims that the disclosure by the blogger Valuable Insights caused Micron’s share price to rise, as Greenlight was continuing to make purchases and cost Greenlight’s investors’ money in the process.
Greenlight had wanted to keep the investment in Micron confidential until least Nov. 21, when Mr. Einhorn publicly discussed it at a charitable event, where prominent money managers were invited to present their “best investment ideas.”
The lawsuit said that the anonymous blogger either misused confidential information about Greenlight’s trading strategy or got the information about Micron from someone who had an obligation to the hedge fund not to discuss the matter.
The suit poses a thorny dilemma for Seeking Alpha, which relies on contributors, some of them anonymous, to post investment ideas for its more than 2 million registered users — many of them retail investors. If the judge orders Seeking Alpha to disclose the identity of Valuable Insights, it could discourage other anonymous bloggers on the website from continuing to write posts.
Floyd Abrams, a First Amendment lawyer with Cahill Gordon & Reindel, said there might be reasons for a judge to compel an anonymous blogger to be identified in a libel case. But he said there weren’t many good reasons for doing so in what would appear to be a largely commercial dispute.
“There is a serious First Amendment issue here,” Mr. Abrams said. “He will have a pretty tough job persuading a judge.”
The litigation also raises questions about a Securities and Exchange Commission rule that permits money managers to keep investments hidden from the public by simply making a request for “confidential treatment.”
Greenlight filed a letter with the S.E.C. on Nov. 14 requesting confidential treatment for its Micron investment until at least Nov. 21, a move that gave the hedge fund the leeway to avoid having to disclose how many shares it had acquired during the third quarter of 2013.
The S.E.C. rarely grants confidential treatment requests for investment activities, but money managers are aware that by making the request they can buy themselves some time to avoid having to disclose an investment in a stock. That’s because it can take several weeks before the S.E.C. gets around to reviewing a request for confidential treatment for an investment that would otherwise be disclosed on a regulatory filing.
A copy of Greenlight’s letter seeking confidential treatment was not included as an exhibit in the lawsuit. It is not unusual for hedge funds seeking confidential treatment for an investment to also request that the letter making the request be deemed confidential by the S.E.C. An S.E.C. spokesman, John Nester, declined to comment on the lawsuit.
Greenlight wants Seeking Alpha to divulge the blogger’s name so it can pursue a lawsuit against the blogger.
Jonathan Gasthalter, a Greenlight spokesman, declined to comment on the litigation.
It’s not clear just how much the Nov. 14 disclosure of Greenlight’s position in Micron cost the fund. On Nov. 14, shares of Micron rose less than 2 percent.
Shares of Micron rose much more on Nov. 21, after Mr. Einhorn gave his presentation at the Robin Hood Conference in New York and later went on CNBC to discuss the reasons for being bullish on the tech company’s fortunes. On that day, the stock jumped 6 percent, to $19.99 a share.
Micron’s stock has continued to rally since. On Tuesday, the stock closed at $25.42 a share.
On Nov. 25, Greenlight disclosed in a filing with the Securities and Exchange Commission that it had acquired roughly 23 million shares of Micron. In its lawsuit, the hedge fund said it first began acquiring shares last July.
In fact, Greenlight has continued to acquire shares of Micron since that Nov. 25 filing. In a regulatory filing on Friday, Greenlight disclosed that as of the end of last year, it owned about 47 million shares of Micron, or 4.5 percent of the company’s shares, making it one of the hedge fund’s biggest stock holdings.
Some legal experts said Mr. Einhorn may have a fighting chance to prevail.
Charles Stillman, a white-collar defense lawyer, said the lawsuit does raise First Amendment issues but those clash with the rights of a money manager to keep his trading strategies confidential. He said a money manager like Mr. Einhorn might be able to argue that he has legitimate right to know whether the blogger got his information from someone who wasn’t supposed to share it.
“It may have a potential chilling effect but doesn’t mean you get to (blog) with impunity,” said Mr. Stillman. “There has to be some sense of fairness.”