Commentaries

Do Galleon’s tentacles reach to Chicago?

It appears Chicago-based Balyasny Asset Management may have been drawn into the Galleon insider trading scandal.

Hedge Fund Alert is reporting that a former Balyasny analyst is drawing scrutiny from securities regulators in connection with the fast-growing insider trading case that has led to the filing of either criminal or civil charges against 20 people. The $2 billion hedge fund reportedly notified some of its investors that the Securities and Exchange Commission has been investigating the unnamed analyst’s activities for several weeks.

Balyasny, according to Hedge Fund Alert, recently invited the SEC in to review its books and records. The hedge fund has told its investors that the SEC review is focused on the former analyst and not the firm itself. The former analyst worked in Balyasny’s New York office.

Barry Colvin, Balyasny’s vice chairman, wouldn’t say when the analyst left the hedge, nor would he discuss how the fund became aware that regulators were reviewing the analyst’s activities. 

“We did employ an outside investigative firm to review this issue and based on what we found so far, we have found no improprieties at BAM,” says Colvin, who added the fund hired the investigative firm during the summer.

That, of course, is several months before federal authorities made their big splash with the Oct. 16 arrest of Galleon co-founder Raj Rajaratnam.

The news about Balyasny could explain the reference to an unnamed Chicago hedge fund in the criminal complaint filed by federal prosecutors against former S2 Capital hedge fund manager Steven Fortuna. In the complaint, prosecutors charged Fortuna got top secrete insight about “an information technology company headquartered in Massachusetts” from an analyst with a with a Chicago-based hedge fund.

Galleon arrests

Federal authorities have arrested eight additional people in connection with the Galleon insider trading scandal. And later today prosecutors intend to announce the filing of charges against 14 new defendants–including the eight arrested today,  people familar with the case say.

In all, this means there will be 20 defendants in this fast-growing case.

On Wednesday, I wrote a column about how the Galleon insider trading case is like a jigsaw puzzle with several pieces left to be snapped into place by federal authorities. Will the latest developments reveal just how far the outer boundaries of the Galleon puzzle extend?

Stay tuned.

Galleon’s edge

The arrest of hedge fund millionaire Raj Rajaratnam on charges that he and his $7 billion Galleon Group hedge fund profited from illegal insider trading will no doubt feed suspicion in some corners about the way hedge funds generate fat profits.

But for anyone to assume that all hedge fund managers owe their success to getting information on the sly is unfair and wrong. The overwhelming majority of hedge funds are only as good as the quality of the research performed by their analysts and traders.

And the truth is the vast majority of hedge funds are rather ordinary. If the majority of hedge funds managers were so crafty, not so many funds would have gone bust last year–or lost bundles of money for their wealthy investors.

The true standouts in the industry are a real minority. Anyone can put together an offering statement, call themselves a hedge fund manager and go out and raise money. That’s one reason why wealthy people and pension funds who throw money blindly at hedge funds without doing adequate due diligence are being plain foolish.

Still, the charges against Rajaratnam and five co-defendants are disturbing. Hubris and greed are powerful motivators. And some hedge funds will stretch, even break the rules to get an edge–even if it’s to book just another $20 million for a fund with nearly $7 billion in assets.

Indeed, it’s worth noting that this isn’t the first time Galleon has been accused of skirting the rules to get an edge.

In 2005, Galleon paid an $800,000 fine to the SEC to settle a civil investigation into allegations it improperly profited from shorting 17 stocks. The SEC alleged the hedge fund violated securities rules by using shares obtained in a secondary offering to cover, or close out, a pre-existing short position on a stock. Regulators claimed that impermissible strategy called “collapsing the box” essentially was a risk-less one and generated $1 million in trading profits for Galleon.

The guessing game ahead of Dell-Perot deal

In retrospect, it’s easy to say we could have guessed it:

Why didn’t some investors put 2+2 together and figure out that Perot Systems might be a target for Dell — before that is, Dell announced its $3.9 billion cash deal to buy Perot.

Looking back at Perot’s share performance, the stock has been building up momentum since July, despite warning of weak earnings in its August 4 quarterly report. The stock, which traded under $15 throughout the first half of the year, had built to $18 by last week. Perhaps this was early optimism about 2010 prospects. But the other explanation is some timely speculation that Perot was a logical target for fellow Texan company Dell.

Dell had made little secret of its plans to acquire computer services and software companies for months. Executives had dribbled out hints about what kind of targets it was after in the weeks and months leading up to the September 21 news.

Belatedly, it’s interesting to go back and read the dialogue at the Citigroup conference presentation on September 9th between Dell computer services chief Steve Schuckenbrock and a Citi analyst. It reads like the parlor game “20 Questions.” The following is an unedited transcript from ThomsonReuters SteetEvents:

Citi host: On the one hand, I’ve heard Dell executives say that they want to acquire a services company that’s large enough that you could reverse integrate your existing services business into whatever you acquire. At the same time, I think you’ve said repeatedly that you don’t want to acquire a body shop. You want to go to where the puck is going which is more remote resolution and services and software if you will. So how do you reconcile those two statements?

Schuckenbrock responds by describing what Dell thinks is wrong with big computer services companies before he comes around to describing the sorts of assets his company is after.

UBS’ days of wine and CDOs

Expensive wines and toxic assets are rarely mentioned in the same breath.

But that was the talk at UBS during the summer of 2007, when the Swiss banking giant sold some $35 million in soon-to-be rotten collateralized debt obligations to Pursuit Partners, a Connecticut hedge fund, which is now suing the bank.

Last week, a Connecticut judge ruled that Pursuit had presented sufficient evidence that UBS sold the CDOs even though the bank had confidential information that Moody’s Investors Service was planning to slash its credit ratings on those subprime-backed securities.

The judge, in issuing a preliminary ruling against UBS, cited an internal UBS email that has received a fair amount of attention because a trader boasted: “Sold some more crap to Pursuit.”

But it’s the email exchange leading up to that trader’s comment, which wasn’t included in the judge’s decision but was obtained by Reuters, that may be just as revealing.

Much of the discussion between trader Evan Malik and a colleague concerns the amount of money they’d each spent on a 2000 vintage bottle of wine. The sale of the “crap” CDOs almost seems an afterthought in the email thread titled: “95pts Wine Spec. Best Tignanello since 1997.”

On the anniversary of the implosion of Lehman Brothers, it’s important to remember that the financial crisis really began a full year earlier — in July 2007 — with the collapse of two Bear Stearns hedge funds that had loaded up on CDOs.

Wall Street may find itself on the hook

Sometimes legal fishing expeditions pay off.

A year ago, a Connecticut hedge fund sued UBS, contending that it knowingly sold toxic mortgage-backed securities to institutional investors but never disclosed that information.

At the time, the accusation by the fund, Pursuit Partners, seemed intriguing. But because the complaint lacked any sign that it had the beef to back up its potentially explosive claim, the litigation all but fell off the radar screen.

Now, it appears the hedge fund managers were onto something, thanks to a Connecticut state judge’s decision to allow Pursuit’s lawyers to get limited access to some of UBS’ internal emails.

In some of the emails, the investment firm’s employees describe the $35 million in collateralized debt obligations sold to Pursuit in summer 2007 as “crap” and “vomit.”

At first glance, it might be easy to chalk this up as simply another case of Wall Street bankers peddling securities they privately thought were junk.

But the big revelation unearthed by Pursuit’s lawyers is the extent to which credit rating agency Moody’s Investors Service shared information with UBS about its impending decision to lower its ratings on some of the CDOs the firm was selling.