SAC Case: Should Be About Racketeering, Not Insider-Trading

Previous Mind-Body Politic posts related to Steve Cohen, in reverse chronological order (incomplete):

Rajat Gupta Trial: The other Goldman insider ring, MBP, June 10, 2012

More on Einhorn’s rumour-mongering about Lehman, MBP, April 15, 2010

Third-point, Goldman trading chiefs exist together, Madoff programmers indicted, March 18, 2010

Hedge-funds: top ten earners in 2007-2008, MBP,  January 13, 2010

Steven Cohen: third-biggest owner of Sotheby’s in 2009, MBP, Dec. 30, 2009

Secretive Steve Cohen on talk-show, discussing relationship with ex, MBP,  Dec. 27, 2009

SAC spin-offs fail, even when they succeed, MBP,  Dec. 26,2009

SAC subpoenas former SAC trader Grodin, MBP,  Dec. 25, 2009

Den of Thieves: Hedge-hogs go into SAC remote mode, MBP, Dec. 23., 2009

Sad SAC: Reuters spikes hedge story on complaints from Steven Cohen, MBP.com, December 22, 2009

Ex-Sith lady uses RICO on Sith lord? Mindbodypolitic, December 17, 2009

ORIGINAL POST

In his piece at Deep Capture, “SAC Capital (and Steve Cohen too) should be convicted”, researcher Mark Mitchell is far more sanguine than I am that Preet Bharara really means to go after the chief of the mega-hedge fund SAC,  Steven Cohen, after he puts away  various underlings, like Michael Steinberg and Indian-born Matthew Martoma.

“By fixating on the insider-trading angle in all his cases, Bharara, in my opinion, undermined the whole credibility of his prosecution and opened himself up for charges that he is merely targeting politically-viable low-hanging fruit.

Lila: As I’ve documented thoroughly at this blog, Bharara hasn’t had much credibility in his Wall Street prosecutions for at least a year now, regardless of how successful his other prosecutions might have been in some people’s eyes. I’m glad to see some main-stream voices coming around to my view.

I think I know a little about the Steven Cohen investigation, from my conversations with some of the principals at Deep Capture, where the investigation of Cohen began

Here’s a piece I wrote which they picked up, back in 2009:

Steve Cohen, the anti-Midas (Judd Bagley at Deep Capture):

Here are Lila’s observations on the matter:

1. The high number of SAC traders who seem to have gone off into their own businesses.

You’d think with all that money and the fund’s record as the most consistently successful in the business (only one bad year on record), their traders would stay forever. Quite the opposite.  People seem to have been leaving all the time to form their own businesses.

But SAC was also said to be a very tough environment. You produced, or you left.

So maybe that’s why Lee and Far, Grodin and Goodman, all left to found their own firms?
Could be. But I’m not convinced.

2. None of the spin-off firms seems to have been very successful.

Why not? Why couldn’t these hot-shot traders make money on their own?

The Reuters piece suggests that perhaps the SAC experience didn’t foster business ability. And that perhaps SAC traders flounder without SAC’s huge supporting cast.

But those things are likely to be true of other firms as well, not solely SAC.

Still not convinced.

Furthermore, consider this.

3. A spin-off fund that didn’t get money from Cohen ended up quite successful:

“Healthcor, a healthcare industry focused fund, had raised $3.2 billion by June 2009 since launching four years ago. The fund returned 25 percent in 2006, 18 percent in 2007, and was up 4 percent last year, when the average hedge fund lost 19 percent. In the first 10 months of 2009, Healthcor was up 7 percent.

Healthcor, founded by Arthur Cohen and Joseph Healey, opened without any financial support from SAC. In fact, soon after Cohen and Healey struck out on their own, SAC sued the pair, accusing them of breaching their employment contracts. The matter ultimately was settled. (Healthcor’s Cohen is not related to SAC’s Cohen).”

4. Even spin-offs that were doing well were shut down.

When Stratix started in 2004, it had $60 million given to it by SAC. When it shut down, in 2007, it was up 17% and had $530 million under management. Yet it shut down. Why did it shut down? Those numbers sound pretty good.

Another spin-off, Fontana Capital, started out in 2005 with $50 million of SAC money. It grew to $325 million by 2006.  But sometime in 2007, Cohen pulled out all his money. And in 2009, Fontana was down to $16.1 million, despite being down only 7.69%, compared to the average S&P Financial index loss of 57%. Again, that sounds like it wasn’t doing all that bad.

Reuters quotes someone familiar with the record of ex-SAC traders:

“So many of the ex-SAC people seem to have this model where they attract you with fantastic returns in the first year but in year two or three or four you get annihilated,” said a person who is familiar with several former SAC employees’ records.

Shades of Bernie Madoff….

Someone need to look closely at what happened to the money at these firms…

Lila:

Unlike some, I don’t think the fact that Bharara has an agenda means that Martoma is necessarily innocent, either.

I just think that even guilty as charged, Martoma is small fry.

He’s Cohen’s employee and by every account I’ve read, Cohen kept notoriously tight control of his business and tolerated no dissent.

He was not the kind of hands-off employer who can plead ignorance after the fact, even though that’s just what he did.

So Martoma might be guilty as heck, but it’s beside the point.

Insider-trading, outside the  issue of racketeering, is an irrelevant and minor side-show.

Insider-trading as part of systemic racketeering is another thing.

But Bharara hasn’t shown that, nor does he even look like he’s trying to show that.

He looks like he’s polishing his resume for a move into politics.

Anyway, here’s Mark Mitchell at Deep Capture:

Deep Capture: SAC Capital (and Steve Cohen too) should be convicted….

“During the trial of Martoma, DOJ prosecutors confirmed that SAC Capital traded on inside information provided by a doctor at the University of Michigan, which was all well and good, but as I documented in my book, SAC Capital not only traded on inside information from another University of Michigan doctor, but also profited from short selling Dendreon’s stock after multiple doctors (some of whom had demonstrably corrupt relationships with Milken) conspired to undermine Dendreon’s treatment by convincing the FDA (also corrupted by Milken and his associates) to delay approval of the treatment (which had been proven effective).

Some journalists and their Wall Street sources have argued that insider trading is an essentially harmless offense and that SAC Capital deserves leniency, but their arguments obscure the fact that SAC Capital’s insider trading has involved the wholesale corruption of the FDA and some of the nation’s most prominent doctors, all of whom have (as my book documents in detail) shown themselves more than willing not only to provide Steve Cohen and his associates, including Milken, with inside information, but also to undermine pharmaceutical companies with effective treatments while promoting companies (i.e. companies that are financed by Milken and his associates) whose treatments are actually killing people.”

Lila: Exactly. But then, in that context, Matthew Martoma is actually the lesser offender.

He was after all a portfolio manager, a trader. His employment depended on his getting an edge.

When he stopped getting that edge (illegal, as it turned out), he was fired.  Since Martoma has been attested to be very knowledgeable in his field by the doctors with whom he interacted, it follows that his competitors in the field must also have been getting their “edge” in the same way.

Industry-wide corruption of that kind isn’t best addressed by throwing the book at some representative pawn/small fish in the game.  That only makes the prosecutors’ office look biased or politically motivated.

Which it usually is.

If the nation’s top doctors were engaged in corrupt activities, why aren’t some of them being prosecuted before Martoma?

And, if Steven (don’t call me Stevie) Cohen is a racketeer, prove that.

Then give yourself a gold medal. Not before.

Note: See John Cassidy’s piece at the New Yorker, “Has Steven A. Cohen bought off the US Government?” November, 4, 2013

Secretive Steve Cohen On Talk Show Discussing Relationship With Ex—

I’d been avoiding mentioning the by-now famous clip of Steve Cohen on a talk show back in 1992, because it seems like a low blow. I mean, hit the guy over the head on insider trading, but don’t worm around in the trash can for dirt on him. Of course, he did put himself on the show…

But, either way, there’s one angle that is relevant.

If you’re billed as the most secretive guy in the hedge world, presumably because you’re a reclusive, crowd-shy financial genius, what does it say that you once got onto a TV show called Cristina of none-too-distinguished caliber to discuss intimate details of your personal life?

Hmm. That’d hardly what I call shrinking violet material.

Here, sans video (because we don’t drag people’s families in the mud on this blog) is the lowdown at New York Magazine:

“Shortly after they were married in 1992, Steve Cohen, the notoriously secretive hedge-fund manager at SAC Capital, and his second wife, Alex, went on the short-lived English-language version of the popular talk show Christina. The episode? “He Acts Like Her Husband!” The subject discussed? Steve’s too-close relationship with his ex-wife, Patricia Cohen, who recently filed a $300 million lawsuit against him.”

Think about that for a moment.

Psychologically, that doesn’t make any sense for a reclusive genius…

But, just suppose, what you have here is not a shy geeky genius (or maybe, I should qualify that – not solely a shy geeky genius) but a guy who was quite at home at a shady broker called Gruntal & Co. in the 1980s –  a broker that had ties to the Russian mob and to a whole set of players to whom ‘reclusive’ and ‘shy’ are the last words you’d apply. Just suppose what you have here is a guy who was a player in that crowd….making his way any way he could. And just suppose, that past is why he keeps a low profile…

Just suppose.

It’s at least a distinct possibility.

But what’s more like a high probability is that anyone who puts out an article on Steve Cohen like this one or this one by John Carney has lost quite a bit of his credibility on Steven Cohen and on a few things closely related like, say, insider trading…or naked shorting….

Carney’s explanation why Steven Cohen can have done no wrong? A SAC trader told him so. That’s why.

“The trader described the enormous, football field sized trading floor at SAC as “the cleanest in the biz.”

A SAC trader says SAC is 100 percent clean. Because?

Well, that part of it isn’t mentioned in the article, although a lot of other stuff which sure as heck sounds super close to insider trading is.

“When I was there, we put tons of pressure on our brokers to make sure they gave us any information they had fast and first,

And what was that John Carney was calling Matt Taibbi only a couple of months ago?

Naive?

Reverse Midas: SAC Spin-Offs Fail Even When They Succeed

Reading this report about SAC Capital by Reuters, I was struck by a few things.

But first, here’s the chronology (skip below for my argument):

  • 1980s: Steven Cohen allegedly involved in insider trading at Gruntal
  • 1999-2004, 2004-2007, 2007-2009: Insider trading at Spherix (ex-SAC trader Richard Lee’s own firm); and possibly at Stratix (founded by Goodman and Grodin in 2004, also ex-SAC traders, with SAC as a sizable investor); and (again, possibly) at SAC itself, by Richard Lee and Ali Far, also an alum of SAC.
  • 2006: SEC investigates SAC and two other firms for manipulation of Fairfax Financial stock. Investigation dropped in 2007
  • 2007-2009: Agent Kang investigates 20 hedge funds for insider trading
  • 2007: SEC investigates SAC over Andrew Tong’s sex charges. Case sealed in 2008. Reopened in Nov. 2009, this time focusing on insider trading. About this time, Richard Grodin’s and Ian Goodman’s firm Stratix (where Lee and Far worked) closes. Grodin then begins Quadrum, which also closes
  • Oct-Nov 2009: Galleon Group charged by Kang with insider trading and 14 traders arrested, including former SAC traders, Richard Lee and Ali Far
  • Nov-Dec 2009: Cohen’s ex-wife alleges insider trading when Cohen was at Gruntal & Co. in the 1980s
  • Dec. 2009: Ex-SAC trader and founder of Stratix Richard Grodin subpoenaed

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Now that you have that in mind, here are the things that struck me:

1. The high number of SAC traders who seem to have gone off into their own businesses.

You’d think with all that money and the fund’s record as the most consistently successful in the business (only one bad year on record), their traders would stay forever. Quite the opposite.  People seem to have been leaving all the time to form their own businesses.

But SAC was also said to be a very tough environment. You produced, or you left.

So maybe that’s why Lee and Far, Grodin and Goodman, all left to found their own firms?
Could be. But I’m not convinced.

2. None of the spin-off firms seems to have been very successful.

Why not? Why couldn’t these hot-shot traders make money on their own?

The Reuters piece suggests that perhaps the SAC experience didn’t foster business ability. And that perhaps SAC traders flounder without SAC’s huge supporting cast.

But those things are likely to be true of other firms as well, not solely SAC.

Still not convinced.

Furthermore, consider this.

3. A spin-off fund that didn’t get money from Cohen ended up quite successful:

“Healthcor, a healthcare industry focused fund, had raised $3.2 billion by June 2009 since launching four years ago. The fund returned 25 percent in 2006, 18 percent in 2007, and was up 4 percent last year, when the average hedge fund lost 19 percent. In the first 10 months of 2009, Healthcor was up 7 percent.

Healthcor, founded by Arthur Cohen and Joseph Healey, opened without any financial support from SAC. In fact, soon after Cohen and Healey struck out on their own, SAC sued the pair, accusing them of breaching their employment contracts. The matter ultimately was settled. (Healthcor’s Cohen is not related to SAC’s Cohen).”

4. Even spin-offs that were doing well were shut down.

When Stratix started in 2004, it had $60 million given to it by SAC. When it shut down, in 2007, it was up 17% and had $530 million under management. Yet it shut down. Why did it shut down? Those numbers sound pretty good.

Another spin-off, Fontana Capital, started out in 2005 with $50 million of SAC money. It grew to $325 million by 2006.  But sometime in 2007, Cohen pulled out all his money. And in 2009, Fontana was down to $16.1 million, despite being down only 7.69%, compared to the average S&P Financial index loss of 57%. Again, that sounds like it wasn’t doing all that bad.

Reuters quotes someone familiar with the record of ex-SAC traders:

“So many of the ex-SAC people seem to have this model where they attract you with fantastic returns in the first year but in year two or three or four you get annihilated,” said a person who is familiar with several former SAC employees’ records.

Shades of Bernie Madoff….

Someone need to look closely at what happened to the money at these firms…

SEC Subpoenas Former SAC Trader Grodin

El Economista carries this Reuters report, dating from yesterday, Dec. 24, on the SEC´s subpoena of a former manager at Steven Cohen´s SAC Capital hedge-fund:

“Federal prosecutors in the Galleon Group case have sent a subpoena to a former employee of Steven A. Cohen’s SAC Capital Advisors, a sign that the scope of the problem into the largest hedge-fund insider trading case in history is expanding, the Wall Street Journal reported, citing people familiar with the matter.

The subpoena seeks trading records from a former SAC hedge fund manager, Richard Grodin, who employed a cooperating witness in the insider trading case announced last week, the Journal said.”

My Comment

It’s all getting pretty tangled, so first let me try to bring some order into the picture.

  • I blogged, via Terri Buhl, that hedge-funds are going SAC-remote, deleting their email records and changing their trading positions so they don´t look too similar to Cohen´s, in anticipation of a probe. And now here come the subpoenas.
  • The subpoena to Grodin arises out of the two-year FBI investigation of twenty hedge-funds that became public in October 2009 with the Galleon arrests.
  • The investigation is headed by FBI agent B. J. Kang.
  • Kang also led the probe into the alleged stock manipulation of Fairfax Financial in 2006, in which SAC was one of three hedge-funds involved.
  • The two traders, Richard Choo-Beng Lee, and Ali Far, have admitted that they were involved in insider trading not only at their own fund Spherix, but  going back to 1994. This makes it highly probable that they were also trading illegally at SAC, where Lee worked for about five years.
  • Specifically, the agreement Far and Lee signed with the US Attorney’s Office charges conspiracies to commit insider trading from 2007-2009, from 2004-2007, and from 1999-2004.
  • Galleon chief Raj Rajaratnam’s brother Rengan, who was investigated for insider trading at his firm Sedna, also worked for SAC in 2003.
  • Lee is also going to be testifying about any insider trading he might have done at another firm, Stratix, which was founded by former SAC trader Richard Grodin, and yet another SAC alumnus, Ian Goodman.
  • Stratix, whose investors include SAC (is your head whirling?), shut down in 2007.
  • Then Grodin began another firm, Quadrum, which also shut down (“abruptly”, says Reuters).
  • Also, in November, we had the bizarre revelations of Andrew Tong, who claims he was sodomized and forced into oral sex, cross-dressing, and the ingestion of female hormones (to make him the perfect androgynous trader) by his boss, SAC trader Ping Jiang. Investigated in 2007, the case was dismissed as lacking in substance. The records were sealed, leaving many people feeling that the SEC, as a Harvard paper recently confirmed, tends to go after smaller rather than bigger fish.
  • But in November ’09, the Tong case was opened again and given wide attention on the internet, this time with more attention to Tong’s claims that Ping Jiang forced him to into illegal trading that led to a $3 million loss. The loss was the reason SAC gave for Tong’s firing. But Tong himself claims that that was just an excuse and that the sexual harassment was the real reason. He also claims that Cohen knew what was going on and didn’t care, as long as money was being made. In keeping with the firm’s reputation for secrecy, Cohen made everyone sign confidentiality agreements and kept even top officers in the company out of the loop.
  • These revelations have been followed by new charges made by Cohen´s ex-wife Patricia that her husband had cheated her out of money in their divorce settlement. Some of that money, she now claims, was hidden from the government and came from illegal insider-trading by  Cohen was he was a young trader in the 1980s at Gruntal & Co., a shady brokerage with a history of embezzlement and scandal.

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NOTE:

**If you want to understand the modus operandi of one of these insider trading deals, read Deep Capture´s latest analysis. It displays some of the emails sent by certain hedge-funds that colluded with SAC in the manipulation of the stocks of Fairfax Financial, Jim Chanos´Kynikos and Third Point among them.

The Fairfax investigation (opened in 2006) petered out, but Deep Capture’s email collection nixes any chance that the record can be wiped clean by any of the funds involved (you can also see Bagley´s piece posted at Seeking Alpha).

Den Of Thieves: Hedge-Hogs Go Into SAC-Remote Mode

Update: Deep Capture indicates that they have some emails proving insider trading, so any attempts to delete files/emails by SAC and other firms might not be any good, since  the files just happen to implicate said firms in…insider trading.

Ah, the web we weave…etc. etc.

Terry Buhl at Hedge Fund-Implode.com reports that residents of hedgefund land are going into SAC-remote mode:

“Funds like Blue Ridge, Greenlight, Third Point, Glenview, and Maverick are cutting back on any contact with King Stevie. When we asked major players such as Jim Chanos and others if they’ve been pinging Stevie about a trade lately, you’ll get a very defensive `no.’ Why? Because word on the street is they all think FBI special agent BJ Kang, who is now dogging Stevie, has the goods to deliver the hammer soon in the form of  an indictment or arrest for insider trading.

Extra measures are being taken to hire data-miners to comb through any and all emails firms and their trading consultants ever sent to anyone at SAC in an attempt to erase them from internet memory. According to traders we talked with, they are even going as far as getting out of trades that might look similar to any of Stevie’s. So it looks like running due diligence on your `SAC risk’ to prove to your investors that you’re clean – like Larry Robbins of Glenview capital just did – is the new `killing it’.”

My Comment:

Just to recap.

*Steven Cohen is the multibillionaire chief of legendary hedge-fund SAC, which sits at the top of the heap among funds. Cohen, famously reclusive, is said to have had only one bad year of trading.

Now he´s having a bad time from the  FBI investigation of the insider-trading case against New York-based hedge-fund Galleon Group, which is proving to have teeth in it.

SAC has a history of elbows-and-knees-style trading practices, according to this 2003 Business Week article.

*The head of Galleon (which once managed $7 billion in assets), Sri Lanka-born Raj Rajaratnam was arrested, along with five others, on October 16  in a $17 million dollar insider-trading case brought by federal prosecutors and the FBI.

(The numbers vary: it´s $20.8 million, according to a later WSJ report, and $25 million in a NY Daily report)

*The case was unusual in that FBI agent B. J. Kang used wire-tapping for the investigation (normally used only in drug-related cases).

*The Galleon arrests were quickly followed by other arrests of  traders, lawyers and hedge-fund managers on November 5, including one Zvi Goffer, who, as the brains of the insider network, was referred to as “the octopussy.” This brought the total number of arrests in the case to 14 (Correction on 12/29: I read 20 elsewhere) and added another $20 million to the fraud, already the biggest in Wall Street history since the days of Ivan Boeksy in the 1980s.

*On December 16, Steven Cohen´s ex-wife Patricia accused him of hiding millions from her and of insider trading in a 1986 merger when Cohen was a young trader at now-defunct broker, Gruntal.

*Indicted on December 17 (December 15, according to one source) by a Federal grand jury  on multiple criminal counts of insider trading and securities fraud,  Rajaratnam  pleaded not guilty. Many of the charges against him carry upto 20 year prison sentences. The trial is expected to take place in the summer of 2010.

*The broker Gruntal has an interesting history, in that it seems to be the place where several of the biggest names on Wall Street (aka some of the most crooked players) crossed paths:

Bernie Madoff, Ezra Merkel (Madoff fund associate), Ivan Boesky (infamous 1980s trader), Michael Milken (junk bond innovator), Carl Icahn (famed and feared corporate raider), Steven Feinberg, ,…and yes, Steven Cohen:

From Deep Capture:

“Another of Madoff’s most important “feeders” was J. Ezra Merkin, who managed the Ariel Fund, which seems to have been designed specifically to raise money for Madoff’s fraudulent investment business. In this regard, the New York attorney general has described “Merkin’s deceit, recklessness, and breaches of fiduciary duty…”

While Merkin was “deceitfully” feeding the Madoff Ponzi, he was also a co-owner, along with Steve Feinberg, of Cerberus Capital Management, a fund named after the mythological three-headed dog that guards the gates of Hell.

Previously, Feinberg was a top trader for Michael Milken at Drexel Burnham Lambert. After Drexel, Mr. Feinberg moved (on Milken’s recommendation) to a brokerage called Gruntal & Company.”

Gruntal owed its existence to the generous junk bond finance that its parent company, the Home Group, received from Michael Milken. Its options department was founded by Carl Icahn, who later became a “prominent” billionaire owing to the junk bond finance that he received from Michael Milken.

When Icahn left Gruntal, he was replaced by a Milken crony named Ron Aizer, who proceeded, on the recommendation of Milken, to hire two traders.

The first trader hired by Aizer was, according to a reliable source, investigated by the SEC for trading on inside information that he received from Milken’s operation at Drexel Burnham Lambert. This trader is now a “prominent” billionaire and the manager of a well-known hedge fund. The second trader hired by Aizer is now also a “prominent” hedge fund manager, though he is not quite a billionaire. Both of these traders play important roles in the story of Dendreon. Carl Icahn, the founder of Gruntal’s options department, has a cameo role, too.”

There is more, of course, much more to the story, and many more names, including Michael Steinhardt, Marc Rich who was pardoned by Clinton for tax evasion and dealing with Iran against US law, and many others, but that would make this post far too long, so I will send you instead  to this page.…and this...for now.

(Of course, we could ask why hedge-funds with an edge get to be prosecuted, while governments with the biggest edge of all don´t  – but there, we won´t spoil the fun).