Unstructured Finance

By Matthew Goldstein

Every time the insider trading investigation thrusts Stevie Cohen back into the spotlight, there’s always speculation about whether the billionaire trader will simply give back money to his outside investors and convert his $14 billion SAC Capital into a family office in order to avoid the unwanted headlines. But as tempting as that might be to the publicity-averse Cohen, the well-known trader has a big financial incentivel to keep managing money for his outside investors.

SAC Capital’s fee structure–one of the highest in the $2 trillion hedge fund industry–probably pays for a good chunk of Cohen’s overhead, say people in the hedge fund industry. These sources say that by charging a 3 percent asset management fee and skimming off as much as 50 percent of the firm’s trading profits, SAC Capital’s outside investors provide Cohen with a rich source of cash to pay his 900 or so employees.

Now sure, if Cohen were to return the roughly $6.3 billion in outside money that SAC Capital manages, he could reduce his workforce dramatically and move his operation out of its spacious offices at 72 Cummings Point Road in Stamford, Conn. But with billions of his own money invested in SAC Capital, Cohen would still need to employ a healthy crew of analysts and traders to manage his personal wealth in order to get the kind of double-digit returns he’s accustomed to. Last year, SAC Capital was up a little over 10 percent after accounting for fees–compared to the industry average of about 5 percent.

And returning all that outside money would also limit Cohen’s ability to make big trades. When you factor in leverage — or borrowed money — SAC Capital effectively manages $43.8 billion in assets — roughly 2.7 times the firm’s $14 billion in invested dollars from customers, Cohen and his employees. Strip away the outside money, it would severely restrict Cohen’s ability to make large trades in many different sectors and markets.

That’s why when an big outside investor like Blackstone gives the signal that it has no plans to redeem its $550 million, its more than just symbolism to Cohen and SAC Capital. For a fund like SAC Capital that operates at nearly 3 times leverage, that $550 million investment is really worth more than $1.5 billion in investible assets.

By Matthew Goldstein and Jennifer Ablan

It’s not every day a public service announcement, much less one for the FBI, makes national headlines. Then again, it’s not every day that Michael Douglas reprises his Gordon Gekko role to make a pitch for informants to come forward and help law enforcement smoke out insider traders.

The ad, which has been featured on network newscasts and was heavily touted on the front-page of The Wall Street Journal, highlights the task at hand for the likes of David Chaves, a senior agent with the Federal Bureau of Investigation.

“It’s gone viral,” says Chaves, who is one of the masterminds behind “Perfect Hedge,” the long-running undercover operation that has helped federal prosecutors secure the convictions of more than 50 people on insider trading charges.

By Matthew Goldstein and Jennifer Ablan

The thing about deposition excerpts—even lengthy ones—is that some of the tantalizing material gets left on the cutting room floor. And that’s certainly the case with hedge fund billionaire Steve Cohen’s two-days worth of  testimony in the long-running Fairfax Financial litigation.

Now don’t get us wrong—there is plenty of great and illuminating stuff in the 242 pages of deposition testimony Reuters obtained through a court motion to unseal documents in the civil lawsuit. As we noted in our story, Cohen is pressed at great length for his views on insider trading—he thinks the laws are “vague”. And as we highlighted in our blog, there’s even an amusing little feud between the lawyers over how the SAC Capital founder should addressed.

Still, it makes you wonder what was said by Cohen in the more than 400 pages of deposition transcript that wasn’t unsealed. And we’d love to see Cohen on videotape as sometimes body language can be revealing.

By Jennifer Ablan

Steven A. Cohen, one of the world’s most successful and secretive billionaire hedge fund managers, shared some of his thinking on insider trading, something his worst critics have alleged SAC Capital knows a thing or two about.

Cohen in sworn deposition testimony earlier this year, an extended excerpt of which was obtained by my prolific colleague and partner-in-crime Matthew Goldstein, said: ”The way I understand the rules on trading on inside information, it’s very vague.”

Cohen added: “It’s my belief that the idea of material nonpublic informing could be interpreted differently, depending on which side of the transaction you’re on.” At one point, the 55-old-trader loses his cool a bit with Fairfax’s lawyer, Michael Bowe, commenting: “Well, you know, we’re having this conversation for about three hours about what’s material and whatnot. It’s pretty clear that you and I have a different view on it.” 

By Matthew Goldstein

There was plenty of theatrics Thursday when Jon Corzine returned to his old stomping ground–Capitol Hill–to offer an apology and a mild defense for the events that led to the collapse of MF Global. But in the end little light was shed on just what happened during those final days of October, as Corzine’s firm spiraled towards bankruptcy and hundreds of millions dollars of supposedly protected customer money went missing.

Corzine said many times he didn’t know what happened to the money and was shocked as anyone to find out the money was gone. But there is one thing Corzine said that will prove to be the most critical part of his testimony and that’s his assertion that he never intended to do anything wrong. Or more precisely, he never intended to have customer money maintained in segregated accounts transferred to the firm’s own bank accounts.

As anyone who has been following the MF Global saga now knows, the one inviolate rule of the futures industry is that a firm cannot commingle its money with its customers, or take customer money in a segregated account to pay the firm’s bills or debts.

By Matthew Goldstein

It’s been about a month since MF Global began spiraling towards bankruptcy and still there’s no clarity about what happened to the missing customer money that was supposed to be kept in untouchable, segregated accounts. It’s not even clear how much money is missing.

When the Jon Corzine-led firm filed for bankruptcy on Halloween, it was believed some $900 million in customer money couldn’t be accounted for in MF Global’s segregated accounts maintained at Harris Banks and other institutions. That sum was quickly revised downward to about $600 million. And the number remained at $600 million until the court-appointed liquidation trustee surprised everyone last week by saying more than $1.2 billion in customer money might be missing.

But now even that $1.2 billion figure is in doubt. Officials with the CME quickly questioned the much higher figure and so did other regulators. A law enforcement source tells me federal investigators also doubt the $1.2 billion figure and believe the missing money is still about $600 million.

Sen. Chuck Grassley wants to know what the Securities and Exchange Commission did with complaints it received about potential improper trading by Steve Cohen’s SAC Capital.

But Grassley’s request that the SEC provide an official accounting for its actions seems a bit odd, given that securities regulators recently settled an insider trading case with former SAC Capital analyst Jonathan Hollander.

With federal prosecutors continuing to look into allegations of improper trading at Cohen’s fund, it’s hard to make the argument that SAC Capital hasn’t been investigated. Indeed, Reuters first reported in December 2009, that as far back as 2007 FBI agents have been looking into allegations of improper trading at SAC Capital.