Thursday, July 19, 2012

Gasparino: Insider Trading Investigations Winding Down, SAC's Case Still Obsession For Authorities

On Fox Business today, Charlie Gasparino mentioned that insider trading investigations are winding down. So that might mean Steven A. Cohen, founder of the $14 billion hedge fund SAC Capital, is off the hook. But, he said that SAC's case still remains an "obsession" for government authorities. To read more about Steven Cohen and his hedge fund, read this Businessweek article from 2003 that I always thought was interesting: The Most Powerful Trader on Wall Street You've Never Heard Of.

It looks like SAC Capital has a bunch of $300-$500 million hedge funds under its umbrella that have independent teams trading on their own information (some via "expert networks", which have been involved in these cases). So when the line finally got crossed, a few former SAC traders pleaded guilty to insider trading. This activity wasn't connected to Steven Cohen himself.

  • Exclusive: U.S. Insider Trading Investigation Winding Down (FoxBusiness, 7/18/2012)
  • Consultant Admits Insider-Trading Role, Implicates Portfolio Manager at Sigma Capital (WSJ7/17/12)
  • FBI Sweep Targets Big Funds: "Arrests in Insider Case Allege That a 'Criminal Club' Trafficked in Information" (WSJ, 1/19/12)
  • Level Global Founder, SAC Trader Arrested In Insider-Trading Case (FinAlternative, 1/18/12)
  • Stevie Cohen Unplugged - sworn deposition transcript (Reuters, 12/13/11)->
"Cohen in sworn deposition testimony earlier this year, an extended excerpt of which was obtained by my prolific colleague and partner-in-crime Matthew Goldstein, said: "The way I understand the rules on trading on inside information, it’s very vague.""

  • Former SAC Capital Trader Noah Freeman Aided Insider Inquiry (DealBook, 6/3/11)
  • Madoff Says SAC Insider-Trading 'Worst-Kept Secret' (FinAlternatives)
  • Former SAC Manager Donald Longueuil Pleads Guilty to Insider Trading (DealBook, 4/28/11)

So, the Feds have been looking at Steven Cohen's trading activity in his $3 billion portfolio to see if he traded on insider information. Here is more on his "big book" at WSJ (Probe Eyes Trades by Fund Titan, 5/6/11):

"At issue is trading in a $3 billion stock portfolio personally overseen by Mr. Cohen at SAC Capital Advisors and referred to by the government in the filings as the "Cohen Account" and internally at SAC as "The Big Book."

SAC portfolio managers funnel their best trading ideas to Mr. Cohen for this account and are paid a bonus if they generate big returns for Mr. Cohen, according to people familiar with the matter."

Dealbook: (Insider Trading Cases Stain Hedge Fund Manager’s Reputation, 5/6/11):

"Unlike many hedge funds that are controlled by one portfolio manager who makes all the investment decisions, SAC is decentralized; 142 small teams are each given control over hundred of millions of dollars to invest. Mr. Cohen attracts talented, ambitious traders because he offers to pay each team as if they run their own fund — without having to raise money and run a business."

And Bloomberg (Steve Cohen's Trade Secrets, 2/26/10):

"Unlike many hedge funds, which tend to have a handful of executives making investment decisions, SAC runs what amounts to 100 small funds. SAC borrows as much as $4 for every $1 of its own from prime brokers, including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co., then distributes the hoard to various teams."

"Each team manages from $300 million to $500 million, on average, according to an SAC marketing document. The teams are paid based on their own performance, and SAC’s higher-than- normal fees ensure that each portfolio manager’s take is almost as high as if he or she were running an independent shop."

You can track most (?) of SAC Capital's end of quarter long exposure and 5% positions in equities, options, total return swaps, and convertible bonds tied to equities (there might be other exotic structured equity derivatives as well, but who knows anymore) at SEC.gov in 13G, 13D, 13F (1, 2, 34) and 13H (12) filings. Unfortunately, long exposure in public company bank loans, corporate bonds, and credit default swaps, and of course short sales (makes sense, total short interest is available at exchanges), aren't reported in these filings, so don't think all of this reported activity is directional in nature. Maybe for long only value funds. Back in 2011, I saw that someone at SAC made a decent trade in Domino's Pizza actually. So you can kind of track their trades yourself.

I think we are seeing the last days of insider trading allegations for human beings. Today there are probably billion dollar hedge funds being run by robots that trade on inside information from robot expert networks, and they probably use their own digital languages (10101010). So the SEC would probably need digital hackers to detect this activity. Yeah, good luck with that.



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