Opinion

Felix Salmon

What did hedge funds know about the Picower negotiations?

By Felix Salmon
December 17, 2010

Is there such a thing as insider trading in things which aren’t remotely securities? On Monday, the NYT had a report headlined “Speculators Are Eager to Bet on Madoff Claims”, saying that hedge funds were bidding somewhere around 30 cents on the dollar. Meanwhile, Barbara Picower was coming to the end of months-long negotiations which culminated this morning in the announcement that she would return $7.2 billion for the benefit of those defrauded by Madoff.

The trustee has already recovered nearly $2 billion, and total investor losses are probably somewhere in the $20 billion range, which means we’re already up to 46 cents on the dollar, before any number of other suits are settled — $9 billion from HSBC, $6.5 billion from JP Morgan, $3.6 billion from Fairfield Greenwich, $2.5 billion from UBS, and so on. Those suits alone, if settled near par (as the Picower suit was), would bring recovery up to 154 cents on the dollar. Which would more than recover the money that investors put in to Madoff, even if it doesn’t come close to recovering the kind of money that they trusted they had.

But here’s the thing: what if Barbara Picower was talking to friends about the status of her negotiations with Irving Picard? There’s no reason why she shouldn’t do so — but if those conversations made their way to hedge funds interested in buying claims, that information could be very valuable. Given the new-found focus on prosecuting insider dealing, I wonder whether any trades made as a result of finding out that information might be suspect.

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The agreements by which the claims were transferred would have specifically included “big boy” provisions, i.e., that the buyer might have information regarding the claims that might not be readily available to the seller. While section 29(a) of the Exchange Act casts doubt on the enforceability of big boy letters, that shouldn’t be applicable here as bankruptcy claims are not (and shouldn’t be) securities. See Robert D. Drain & Elizabeth J. Schwartz, Are Bankruptcy Claims Subject to the Federal Securities Laws?, 10 AM. BANKR. INST. L. REV. 569, 576 (2002).

There would be relatively little basis for such trades to be rescinded, even if hedge funds had been talking to Picower.

Posted by bklawyer | Report as abusive
 

Why do you assume that Picower was free to talk about the status of her settlement? Either her lawyers could have told her to keep her mouth shut or Picard et al could have insisted on that. There’s no reason to assume that the settlement discussions are not confidential.

Posted by dfriedman | Report as abusive
 

Why wouldn’t Picower be able to talk about the status of her settlement? Her lawyers might have told her it would be a good idea to keep her mouth shut, but she wouldn’t be compelled to do so. There may have been confidentiality agreements regarding the settlement negotiations, but that would be likely only to restrict Picower’s ability to disclose information she might have received from Picard. It is pretty unlikely that a confidentiality agreement would contain, effectively, a complete gag provision barring Picower from speaking about anything related to Madoff. All Picower would need to say to anyone is that “I am only willing to settle for X.” That is entirely her information to do with as she pleases.

Posted by bklawyer | Report as abusive
 

Felix,
I’m not an expert in this area, but are you certain that these claims aren’t securities? My understanding is that the scope of “securities” is quite broad, and includes many instruments that one wouldn’t naturally think of as being similar to the securities traded on public markets.

Looking at my Loss & Seligman text, SEC v. W.J. Howey (1946) lays out the following test to determine whether a note is a security:
a note is a security only if it evidences “(1) an investment; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) to be derived from the entrepreneurial or managerial efforts of others”

This reads to me like the contingent Madoff claims could plausibly be viewed as securities.

Posted by Beer_numbers | Report as abusive
 

BKLawyer, thanks for the reference. As I read it, the Drain & Schwartz article seems to indicate that bankruptcy claims are not securities because there “is an existing regulatory alternative to the securities laws” (namely, the bankruptcy code. They also point to the (presumably inappropriate) transformation of non-securities into securities that could happen with bankruptcy claims treated as securities.

Assuming you buy either argument (and I’m not sure I do), would this extend to Madoff claims? Would it extend to claims on class action shareholder lawsuits?

Not an expert, but I lean towards these being securities, using the expansive definitions that I’ve seen.

Posted by Beer_numbers | Report as abusive
 

Put me down as betting that the HSBC and JPM settlements will be togeather be something below 1 billion.

Posted by y2kurtus | Report as abusive
 

Nazi`s and Fascist`s were overjoyed when they discovered that Bernie victimized thousands of Liberal`s and Zionist`s. They would have awarded him the Iron Cross but Bernie only accepts cash.

Posted by morristhewise | Report as abusive
 

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