Unstructured Finance

Michael Steinberg, the SAC Capital Advisers portfolio manager who was arrested at the crack of dawn last Friday morning probably envies former Goldman Sachs trader Matthew Taylor’s rush-hour surrender to the Federal Bureau of Investigation on Wednesday.

While Steinberg was led away in handcuffs as a Wall Street Journal reporter took shaky video footage of the scene outside his door at 6am, Taylor sauntered into FBI headquarters in New York on his own, at 8:30am, having had plenty of time to collect his wits with a cup of hot coffee.

The difference between Steinberg’s dramatic arrest and Taylor’s quiet surrender highlights a theatrical strategy the FBI and prosecutors use for big cases. It does not bode well for the other potential targets in the high-profile insider trading investigation into Steven A. Cohen’s $15 billion hedge fund, which increasingly seems to be the primary focus of the government’s attempt to go after wrongful trading in the hedge fund industry.

And that, of course raises, the question of who might be next SAC Capital trader federal authorities will go after. No one except the FBI, prosecutors and the U.S. Securities and Exchange Commission knows for sure, but the case against Steinberg does raise some uncomfortable questions for Gabriel Plotkin, a portfolio manager at SAC’s unit Sigma Capital Management. Plotkin, while not named in the Steinberg case, is identified as “Portfolio Manager B,” according to sources familiar with the matter, in the SEC’s civil complaint.

According to the Steinberg SEC complaint, Steinberg “arranged to share Dell inside information with another portfolio manager at Sigma,” who is afterward referred to as “Portfolio Manager B.” The complaint goes on to say that as a result of trading by Steinberg and “Portfolio Manager B” SAC clocked $6.4 million in a combination of profits and loss avoidances.

Not everyone agrees that using high-speed machines to trade stocks in less time than it takes the average person to blink is a bad thing, but the people who do might be heartened by the letter a congressman sent the U.S. Securities and Exchange Commission on Friday.

Rep. Edward Markey, a Massachusetts Democrat who has waged a decades-long struggle against computerized trading sent the SEC a hint: The power to curb high-frequency trading has been within its grasp all along.

In his letter, Markey described a law he co-sponsored in 1989 to increase the agency’s power to regulate computerized trading, a precursor to HFT that employed computer programs to make trading decisions without the participation of conscious humans. The law lets the SEC “limit practices which result in extraordinary levels of volatility,” according to Markey’s citation.

By Matthew Goldstein

In some ways, the story of Green Mountain Coffee Roasters is one of those quirky only in Vermont business stories, with a founder who made a small fortune in the 1970s selling rolling papers to potheads and a board member who helped invent the sports bra. Yet at the same time, Green Mountain is very much a Wall Street saga, with all the requisite highs and lows for its stock and questions about where the fast-growing company is going.

And right now, with shares of Green Mountain trading around $20–down sharply from the all-time high of $115 reached last September–it’s the Wall Street story that matters most.

Critics of the company question whether Green Mountain can maintain a stranglehold on the market for single-cup coffee products with other competitors joining the fray and some patents expiring. And, of course, there’s questions about that ongoing SEC investigation into the company’s accounting practices and how it recognizes revenues.

By Matthew Goldstein

Leave it to Phil Falcone to find a glimmer of good news to relay to the beleaguered investors in his Harbinger Capital Partners. A day after U.S. securities regulators threatened to sanction the billionaire hedge fund manger for alleged trading irregularities, Falcone told investors in his roughly $4 billion firm that not all is lost.

In a note emailed to investors the day after Falcone officially learned the U.S. Securities and Exchange Commission is considering charging him with a number of securities law violations, the former Harvard hockey star told them that nothing the SEC is looking at involves his beloved LightSquared.

Additionally, it is important to note that neither Harbinger Group Inc. (“HRG”) nor LightSquared were the recipient of a Wells Notice, nor was either involved in any of the events being investigated.  Moreover, the Wells Notices received by HCP and certain affiliates are not related to any of the HCP funds’ investments in HRG, LightSquared or their predecessors.

By Matthew Goldstein

If we’ve learned nothing from the financial crisis, it’s that we need smart regulators to be minding the store. And we need someone to make sure the regulators are up to that job and not shirking their responsibilities.

So it was a breath of fresh air when David Kotz assumed the role of inspector general of the Securities and Exchange Commission in 2007.

Kotz attacked the job with a welcome aggressiveness and his exhaustive 477-report on the Madoff mess shed some much needed sunshine on the SEC’s fumbling and bumbling of the investigation into the world’s biggest Ponzi scheme. The report prodded regulators to speed up the creation of a new multi-million dollar database for handling tips and complaints from informants–a big failing of the SEC in Madoff.

By Matthew Goldstein

It’s been an eventful month for hip-hop promoter and commodities trader Tyrone Gilliams, the man federal authorities allege defrauded investors out of at least $5 million.

The self-styled Philadelphia philanthropist was indicted by federal prosecutors on securities fraud charges on Nov. 14 after being arrested on criminal complaint in October. The Securities and Exchange Commission this week also filed civil fraud charges against the 44-year-old former University of Pennsylvania graduate and college star basketball player.

The SEC complaint and the indictment closely mirror the allegations we first raised against Gilliams in a Special Report in May, which revealed how Gilliams worked with a network of associates across the country to raise at least $5 million from two investment funds and then diverted that money to support his extravagant lifestyle. The money was supposed to be used for trading in Treasury STRIPS and to generate sky-high returns. But federal authorities contend Gilliams and his TL Gilliam LLC trading firm never did any trading as advertised.

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.

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.