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.

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.

The burden of being SAC Capital’s “Portfolio Manager B”

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.

from MacroScope:

SEC has power to ban high-frequency trading, congressman says

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.

The Green Mountain saga: a cup of joe to go

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.

Phil Falcone’s ray of sunshine

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.

The curious Mr. Kotz and the SEC

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.

Tyrone Gilliams keeps going and going despite charges

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.

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.

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