Saturday, December 8, 2012

The Ripple Effects of Insider Trading

The Ripple Effects of Insider Trading

The Justice Department and the SEC having been conducting investigations and prosecutions against a group of hedge fund managers and analysts who either work for or previously worked for SAC, the hedge fund owned by Steven A. Cohen.  As I wrote a few weeks ago (The Temptation of Insider Trading), these activities appear to be closing in on Mr. Cohen.  So far, he has not been charged, although SAC has received a Wells Notice, which is a notification from the SEC that it is looking into matters that might lead to civil charges.  The knock-on effects of this inquiry provide us with a peak at the baronial world of big-time money management that resides along the shores of Long Island Sound.

Consultant Prep (1995)

While the investment world waits to see what will happen, the art world is already feeling the impact.  According to the New York Times, Mr. Cohen went missing at a major art show in Miami  He has been a major buyer for several galleries featured at the art show.

Mr. Cohen’s sister is married to Richard Schimel, a former SAC employee and the founder of Diamondback Capital Management.  Yesterday, Diamond announced that it was shutting down its fund because it was facing $520 million in redemptions.  At its peak, Diamond back had $6 billion in assets, and the latest withdrawals would have left the firm with about $1.5 billion.  Once investors start heading for the exits in a hedge fund, it is hard to stop the outflow.

Apparently, Diamondback cooperated with the SEC, so it was only hit with a $9 million fine. However, the SEC investigation coupled with charges against several employees was more than enough to spook investors.  One of Diamondback’s portfolio managers, Jesse Tortora, is on trial for insider trading, and a couple of other employees have pleaded guilty and are cooperating with the government.

Mr. Tortora and Anthony Chiasson, the founder of Level Global Investors, are being tried at the same time. According to the criminal complaint, Mr. Chiasson made $57 million shorting the stock of Dell Computer using inside information he got from one of his analysts.  Level Global, which has closed, was a $4 billion hedge fund that Mr. Chiasson and David Ganek founded when they left SAC in 2003.

Apparently, there was a ring of investors and analysts from Diamondback, Level Global, and SAC, who passed along inside information on technology stocks.  Michael Steinberg, a portfolio manager, at SAC and Mr. Ganek may have been unindicted co-conspirators in this plot.  SAC placed Mr. Steinberg on paid leave several months ago.

While the Tortora-Chiasson trial proceeds, Matthew Martoma faces trial for allegedly making $270 million on the stocks of Elan and Wyeth.  As you may recall from my previous post, Mr. Martoma was a portfolio manager at SAC who allegedly received inside information from a doctor on a failed clinical trial.  According to the indictment, Mr. Martoma discussed the trade with Mr. Cohen. SAC fired Mr. Martoma.  He was dismissed because his investment performance was poor and not because of the insider trading allegations.  He’s pleaded not guilty and has been unwilling, thus far, to cooperate with the government.

I suspect that the holiday parties in Greenwich are going to be a tad uncomfortable this year, and the invite list may have to be shortened by a co-conspirator or two.

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