Segantii Insider Case Tied to $117M Esprit Trade

Key Takeaway

• Segantii Capital Management and founder Simon Sadler face insider trading charges related to a 2017 block trade in Esprit Holdings, with potential penalties including seven years' imprisonment.
• Following the charges, Segantii announced it would return all outside capital, ending its $4.77 billion hedge fund amid nearly $1 billion in redemption requests.
• The case hinges on proving that Sadler and former trader Daniel La Rocca traded on material non-public information ahead of Lone Pine Capital's $117 million sale of Esprit shares.

Insider Trading Allegations

Segantii Capital Management Ltd. and its founder Simon Sadler are set to return to court on Wednesday to face insider dealing charges related to a stock trade in Hong Kong seven years ago. The case revolves around Segantii’s actions ahead of a block trade in June 2017, where Lone Pine Capital LLC sold a 10% stake in Esprit Holdings Ltd. Esprit’s shares fell 29% over six consecutive trading days surrounding the $117 million block trade, according to Bloomberg data.

The Hong Kong Securities and Futures Commission (SFC) has accused Segantii, Sadler, and former trader Daniel La Rocca of acting on insider information prior to the deal. The SFC has not publicly detailed the specifics of Segantii’s actions or the profits made. Prosecutors are expected to request the case be transferred to the District Court, which can impose a maximum penalty of seven years’ imprisonment and financial penalties for insider dealing cases.

Sadler and La Rocca last appeared in court on May 2, when the charges were first unveiled. They did not enter a plea and were released on bail. A Segantii spokesperson stated that the firm intends to defend itself vigorously against the charges.

Impact on Segantii

Following the insider trading charges, Segantii announced it would return all outside capital, effectively ending the 16-year-old hedge fund. The multi-strategy fund had $4.77 billion in assets under management at the end of April and received nearly $1 billion in redemption requests, according to Bloomberg News.

The case against Segantii hinges on proving that Sadler and La Rocca knowingly traded on material non-public information ahead of the Lone Pine block trade. Lone Pine sold 195.64 million Esprit shares at an average price of HK$4.68 each on June 15, 2017. Esprit’s share price fell more than 3% in the two days before the block trade, plummeted 13% on the day of the transaction, and continued to drop afterward.

A former trader at Bank of America Corp.’s Merrill Lynch division, Tony Psarianos, was named in the case. Psarianos allegedly provided inside information about Esprit to Sadler and La Rocca but has not been charged. Bank of America traded some Esprit shares in June 2017 after the Lone Pine sale.

Legal Proceedings

The legal arguments will likely focus on what information was shared before the 2017 block trade, whether Segantii knew the size of the transaction, and if they traded improperly with material non-public information. Segantii’s CEO Kurt Ersoy did not respond to requests for comment, and representatives from the SFC, Lone Pine, and Bank of America declined to comment.

A court trial for insider dealing charges could last at least three weeks, according to Jimmy Chan, a former SFC enforcement director. In 2022, Hong Kong’s District Court resolved cases involving 1,162 defendants, with two-thirds pleading guilty after court mentions. Of those that went to trial, 79% were convicted.

Historical cases provide context for the potential outcomes. In 2008, Du Jun, a former Morgan Stanley managing director, was charged with insider dealing and sentenced to seven years in prison, later reduced to six years. He was also ordered to pay HK$24 million to compensate investors and received a lifetime industry ban. Similarly, Tiger Asia Management LLC faced a HK$45.3 million penalty and a four-year trading ban in Hong Kong for insider trading in 2009.