Unstructured Finance

SEC vs. SAC give rise to many legal theories

It seems everyone has their own pet theory about why the SEC chose now to move against hedge fund titan Steven A. Cohen after years of being part of the hunt along with the FBI and federal prosecutors.

Here are few of them that I got from talking to a number of legal eagles: including former prosecutors and regulators.

The most obvious one is that securities regulators, unlike federal prosecutors, are bumping up against  a pretty hard and fast five-year deadline for filing charges against Cohen and it was pretty much now or never. In pursuing a failure to supervise  charge against Cohen in an administrative proceeding, the Securities and Exchange Commission is gunning to put Cohen out of business without actually charging he has done any insider trading himself.

Yet if the SEC is successful in barring Cohen from managing other people’s money it may be enough of a victory after nearly 10 years of on-and-off investigation which has failed to produce sufficient evidence that Cohen knowingly engaged in insider trader,  encouraged others at his SAC Capital to do so, or was actually even aware improper trading was taking place.

In this view, the SEC is playing tough guy—something it is often accused of not doing—and trying to make the most out of what is a fairly weak hand.

This summer, it’s the John Paulson show

Hedge fund manager John Paulson has shunned the limelight in recent years but in recent weeks it’s a different story, with the 57-year-old manager not only giving his first ever TV interview, he’s also set to take the stand in one of the most closely-watched trials in the country – the civil case against former Goldman Sachs trader Fabrice Tourre.

Tourre’s lawyer Sean Coffey said in a Manhattan federal court on Friday morning they intended to call Paulson to testify in the trial. The U.S District Judge overseeing the trial estimated Paulson would probably take the stand August 1.

Tourre is accused of misleading investors on a 2007 subprime mortgage deal that Paulson’s hedge fund, Paulson & Co, was betting against. Paulson’s firm had actually helped to select the securities that were packaged into the deal. The SEC says Tourre told investors that Paulson’s firm was investing in Abacus, suggesting he expected the price of the securities to rise, when actually the hedge fund was shorting it.

For U.S. equities, the bull market still has years to go

I recently chatted with veteran technical analyst Ralph Acampora,  a director at  Geneva-based Altaira Ltd.,  about secular bull trends in the U.S. stock market. A real secular bull market can last decades, and he sees this equity market uptrend as similar to the long-term bull markets in the 1960′s and, more obviously on technical charts, the 1990′s.   He pointed out that bull-and-bear trend measures and other short-term sentiment readings can change week to week, confusing some participants about the market’s longer-term path.  Acampora laid out the psychology behind sentiment in a secular bull market, which has three long phases. It starts with fear of the bear market at the stock market’s bottom. At the March 2009 low,  everyone was worried about further declines and losing money. The mood was characterized by fear and disbelief.  In reaction, the first buyers in a classic bull market gravitate toward quality stocks. They lead equities higher, because no one wants to take risk.  Investors say, “I’ll never do that again,”  about buying junk. They only want high quality, high-yielding stocks. That’s Phase 1. It began in 2009 and lasted until now.

 

 

Phase 2  is characterized by trust and belief, and is led by secondary stocks.  Since June 24, the Russell 2000 launched an advance, climbing straight up.  Acampora said a lot of small- and mid-cap stocks are making new highs, whereas some Dow Jones blue chips  are beginning to move  sideways.

 

“People are now starting to believe  that the world’s not coming to an end. They feel a bit more comfortable. Instead of just Procter & Gamble, a Dow stock, they’ll maybe buy Colgate, which does the same thing, but it’s not as high a quality,” Acampora said. C0lgate, a secondary stock, is representative of the changing portfolio mixes that are happening  now. “It’s shifting right now.  I’m saying that between March of 2009 and July 2013 that was phase 1 and we’re now walking into phase 2.” The third and final bull market phase is marked by complacency and greed.  ”That’s predominantly speculative junk. That’s your bubble,”  and is years away.

Home sweet home, Blackstone

Kay Chapman and her boyfriend were saving up money to buy a home in the Las Vegas metro area while renting a home in a nearby town. But after months of plotting a strategy to buy a home at a foreclosure auction, they’ve given up for now and will soon move into another rental home–this one owned by private equity giant Blackstone Group.

Chapman and her boyfriend had to alter their strategy because the owner of the home they are currently renting from decided to sell after seeing how quickly home prices have surged in Sin City in the wake of all the institutional buying firms like Blackstone. Chapman’s current landlord wants far more for the house than she and her boyfriend are willing to pay.

So soon they’ll be moving into a Blackstone owned home, one of some 26,000 single-family homes the private equity giant has bought in US markets hard hit by the housing bust.

Was Jon Corzine insane?

In the complaint against former MF Global CEO Jon Corzine filed in federal court on Thursday, the U.S. Commodity Futures Trading Commission depicted the former New Jersey Governor as a negligent leader who should never be allowed back into the financial industry because he did not try hard enough to stop his employees from raiding the brokerage’s customer accounts to cover its own trading losses.

The suit stops short of an important accusation, however: intent. Though Corzine and MF Global’s former assistant treasurer Edith O’Brien should have known better, according to the CFTC, they did not mean to make the inappropriate money transfers or to lie about them or try to cover them up.

“Mr. Corzine did nothing wrong, and we look forward to vindicating him in court,” said Corzine’s lawyer, Andrew Levander, in a statement emailed to reporters shortly after the CFTC unveiled the suit.

Ray Dalio’s all seeing reputation takes a hit

There are storm clouds on the horizon at Ray Dalio’s $150 billion Bridgewater Associates.

Yeah, excuse the weather imagery but it’s hard to resist given the sudden sharp reversal of fortunes with Bridgewater’s $70 billon All Weather portfolio. As Jenn Ablan and Katya Wachtel first reported, the portfolio that Dalio has long marketed to pension funds as an innovative investment strategy for navigating storm markets, isn’t doing so well in this stormy market.

The fund, as of last Friday, was down 6% for the month and down 8% for the year.

The housing proposal that won’t die

One of the biggest economic stories this year has been the recovery in U.S. home prices. But for the more than 11 million homeowners stuck with a mortgage that’s worth more than the value of their home, it has felt more like being Bill Murray in the movie Groundhog Day.

The housing crisis may be over for Blackstone, Colony, American Homes 4 Rent and other deep-pocketed investment firms snapping up foreclosed homes with cheap money courtesy of the Federal Reserve, but for many Americans they are still living with it some five years later.

So maybe that’s why  a controversial idea of using the government’s power of condemnation to seize and restructure distressed mortgages in order to provide debt relief to struggling homeowners  just won’t go away, even though many think it’s unconstitutional and bond investors have rallied to savage the proposal.

Goldman fund haggles with REIT investors over 10-cent printing fee

A Goldman fund’s REIT charges investors 10 cents per page for financial statements.

Of all the accusations made by an aggrieved group of REIT investors against Goldman Sachs, perhaps the most surprising is how stingy the bank can be.

A Goldman fund that manages the REIT, formerly known as Equity Inns Inc, requires investors to pay 10 cents per page for print copies of its financial reports. Those reports are not available online, nor are they released publicly — a fact that has led this long-running feud to spill into public view in comment letters to the SEC.

Wall Street goes to war with hackers in Quantum Dawn 2 simulation

Wall Street will have a simulated cyber war called Quantum Dawn 2 this month.

 

Quantum Dawn 2 is coming to Wall Street.

No, it’s not a video game or a bad zombie movie; it’s a simulated cyber attack to prepare banks, brokerages and exchanges for what has become an ever-bigger risk to their earnings and operations.

Organized by the trade group SIFMA, Quantum Dawn 2  will take place on July 18 – a summer Thursday that, with any luck, will be a relatively quiet day in the real markets.The drill involves not just big Wall Street firms like Citigroup and Bank of America, but the Department of Homeland Security, the Treasury Department, the Federal Reserve, the Securities and Exchange Commission, according to SIFMA officials.

“We go through a pretty rigorous scenario where we look at multiple threats being thrown out at the U.S. equity markets,” said Karl Schimmeck, vice president of financial services operations at SIFMA.

Stevie Cohen: the pop star edition

Hard to believe, there was a time when Steven A. Cohen was not all that well-known on Wall Street outside of the hedge fund industry. Some even used to confuse the then-paunchy hedge fund trader with a popular magician with the same name.

But it’s true. In fact, a decade ago,  BusinessWeek (pre-Bloomberg takeover) did a cover story about Cohen and his then-$4 billion SAC Capital Advisors, calling  the once super secretive investor, “The most powerful trader on Wall Street you’ve never heard of.”

Today, however, it’s almost a rarity when a major business publication or website (that’s you Dealbreaker) doesn’t have a story about Cohen and his currently $15 billion hedge fund (subject to change depending on how much in outside investor money gets returned at the end of this month). Whether it be the long-running inside trading investigation, his failed attempt to buy the Los Angeles Dodgers, his impressive growing art collection or his sizeable charitable donations, Cohen and his firm are always making news. A few years back, we even did a story on SAC Capital’s resident golf pro and how he would line up golf outings for SAC traders with corporate executives.

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