Unstructured Finance

Deutsche’s he said/she said derivatives mystery

By Matthew Goldstein

Valuing derivatives–especially complex ones tied to esoteric assets–is always a tough proposition. And maybe that’s what a previously unknown whistleblower action involving Deutsche Bank is all about.

The other day I wrote about a big settlement Deutsche reached in that matter with a former trader, who claims some of the bank’s most esoteric derivatives were improperly valued to hide trading losses. Deutsche denies the allegation and says an internal investigation found no substance to the trader’s charge.

Then again, the bank did find some substance to Matt Simpson’s allegation that another former top trader based in London, Alex Bernand, may have done some improper trading in one of his personal accounts. As I reported, the bank in October 2009 quickly dismissed Bernand–its former global head of credit correlation–after a quick internal investigation substantiated much of what Simpson alleged on that point.

In end, this simply may be a case of Simpson being right about some of the facts but not all of them. It’s possible Simpson simply wasn’t in a position to have all the facts and came to an erroneous conclusion–albeit a conclusion made in good faith.

The SEC, which opened an investigation into Simpson’s allegations last summer, hasn’t offered much clarity on the matter. As is its policy, the agency doesn’t comment on investigations. In fact, it won’t even confirm an investigation exists–even when the settlement agreement between Deutsche and Simpson clearly says the agency opened an inquiry into the matter. (And yes, I pointed that out to the SEC).

John Paulson and his god-like status

By Matthew Goldstein

By most objective measures, hedge fund magnate John Paulson isn’t having a particularly good year.

His Paulson Advantage Plus fund lost nearly 6 percent in May. His Paulson & Co. fund empire is believed to have absorbed a $300 million paper loss when shares of Sino-Forest got hammered in the wake of a critical report from a noted short-seller, who claims the company has overstated the value of its lumber holdings. And the bullish bet he’s made on a rebound in the housing market appears to be several years too early.

Then again, this is John Paulson–the mastermind of the mega subprime housing bet, which bolted him to fame and riches and certified his rock star status in the $2 trillion hedge fund industry. Today, his New York firm controls about $37 billion in assets and seems to keep taking in new investor money every day.

Falcone really loves LightSquared

By Matthew Goldstein

Phil Falcone’s love for all things wireless and his upstart telecom company called LightSquared is well-known. Indeed, he’s gambled the future of his Harbinger Capital Partners hedge fund on LightSquared being a commercial success.

Earlier this week, we reported that Falcone was planning to deal with the high-level of redemptions at his hedge fund by giving withdrawing investors “shares” in LightSquared as an alternative to outright cash. Here’s Falcone telling investors why he is so bullish on bringing 4G high-speed wireless technology to the masses:

LightSquared’s success over the past year underscores my view of the inherent value of this asset to our investors. Moreover, the tangible progress LightSquared is making in its commercial and strategic relationships further reinforces my belief that LightSquared is an investment capable of generating enhanced returns over time. While we have had opportunities to monetize a portion of our LightSquared position in recent months, I feel strongly that any sale by our funds of an interest in LightSquared would have been premature and would not only have jeopardized the ability to join forces with a strategic partner, but also would have limited the substantial upside that I am convinced will come to all of our investors as our plan is executed.

Dan Loeb looks to the east

By Matthew Goldstein

Is hedge fund manager Dan Loeb considering planting his Third Point flag somewhere in Asia?

A person close to the New York-based fund says Loeb has no plans to open an outpost in Asia. But investors familiar with Third Point are fueling speculation that Loeb may be considering doing that at some future time.

The speculation about Loeb’s interest in Asia may be the result of a two-week tour Loeb took of China and Hong Kong earlier this spring. The visit was part vacation/part educational for Loeb.

David Einhorn’s nothing month

By Matthew Goldstein

If numbers told the entire story, one might conclude that hedge fund manager David Einhorn took the month of May off.

That’s because Einhorn flagship fund at his Greenlight Capital registered a big nothing for the month. In other words, Greenlight’s flagship fund registered a zero percent gain/loss, according to my colleague Svea Herbst-Bayliss.

Of course, May was a very big busy month for Einhorn. At the annual Ira Sohn charitable event, Einhorn unleashed a blistering attack on Steve Ballmer, in which the 42-year-old hedgie called for the ouster of the Microsoft chief executive officer. Then, the very next day, Einhorn announced he had reached a deal with New York Mets owner Fred Wilpon to buy a minority stake in the Major League Baseball team for $200 million.

Tyrone Gilliams now tries his hand at the law

By Matthew Goldstein

Tyrone Gilliams, the self-styled online preacher, hip-hop promoter and commodities trader, who an investor claims misappropriated his $4 million, is now trying to be a lawyer.

For now, at least, the Philadelphia-based trader is representing himself in a civil lawsuit filed earlier this year in New York federal court by Cincinnati businessman David Parlin. In a court proceeding last week, Gilliams said he can’t hire a lawyer because a judge in a related lawsuit filed in New York state court has put a temporary freeze on some of his bank accounts.

A person familiar with last Thursday’s hearing before U.S. District Judge Jed Rakoff said Gilliams called-in to the proceeding by phone, even though he was expected to appear in court in person. The judge gave Gilliams another month to file an official response to Parlin’s complaint, which claims Gilliams misappropriated his $4 million investment and spent it largely on personal expenses.

Jobs and housing

By Matthew Goldstein

The jobs picture in the U.S. just got markedly worse based on the May unemployment report. And as long as job growth remains sluggish, anemic, pathetic–insert your own adjective–the housing market will remain in the dumps as well.

The only glimmer of good news is the nation isn’t shedding jobs–at least for now. But with the economy adding just 54,000 new jobs in May, that’s not nearly enough to work for all those recent college graduates hitting the labor market and the long-term unemployed who were early casualties of the financial crisis.

And the ugly truth is that until the jobs picture seriously improves the foreclosure crisis will show no signs of easing and may very well get worse.

The ties that bind Dan Loeb and Jim Chanos

By Matthew Goldstein

Dan Loeb and Jim Chanos may not be the best of friends, but a five-year-old stock manipulation lawsuit filed by a Canadian insurer has revealed a one-time alliance of sorts between the hedge fund managers.

It appears Loeb followed Chanos’ lead in shorting–or betting against–shares of Fairfax Financial in 2002 after exchanging a series of emails about the Canadian insurer that summer.

Litigation papers in the lawsuit reveal that Chanos initiated the email exchange with Loeb, asking the Third Point hedge fund manager if he was shorting shares of Fairfax. Loeb responded to Chanos’ email by asking whether he should be. Chanos wrote back that in his opinion Fairfax’s  shares were “going to zero.”

The search for Einhorn’s gold


By Matthew Goldstein

These days, all anyone wants to talk about with David Einhorn is his tentative $200 million investment in the New York Mets. But baseball may not be the hedge fund manager’s only interest in Queens–the New York City borough where the Mets play their home games.

A person familiar with the hedge fund industry says a secured facility in Queens is where Einhorn’s Greenlight Capital stores some of the gold bullion it has invested in. An Einhorn spokesman declined to comment on the speculation about the location of the hedge fund’s so-called physical gold.

Greenlight began investing in gold bars in its main flagship fund in 2009. Last year, Einhorn launched a dedicated gold-only fund for investors wanting a more concentrated exposure to the precious metal. As of March 30, this dedicated gold fund had raised about $556 million from 130 investors. In all, Greenlight now manages about $7.8 billion.

No comfort for hedgies

By Matthew Goldstein

The news that federal investigators had been gathering evidence of potentially improper trading against one of the founders of Loch Capital Management since early 2009 should make some hedge fund managers nervous–especially ones whose funds were big users of expert network firms like Primary Global Research.

Ever since the FBI raided three hedge funds last November, people in the hedge industry have been grumbling that the high-profile raids–which ultimately forced Loch and Level Global Investors to shut down–may have been an indication that U.S. authorities rushed to judgment. That’s especially since no one at Loch, Level Global or Diamondback Capital has been charged with any improper trading based on stock tips gleaned from a consultant with an expert network firm.

As I reported, a court filing shows that some 18 months before the FBI raided Loch, Diamondback and Level Global, authorities already had some evidence from an informant that Loch co-founder Todd McSweeney may have gotten “inside information” from  Primary Global information. So far, neither McSweeney nor his twin brother Tim, the fund’s other co-founder, has been charged with any wrongdoing.