Ever wonder how some of the country’s richest hedge fund managers succeed in making such huge fortunes on their stock market bets? How guys like Steven A. Cohen, founder of the wildly successful SAC Capital Advisors Fund, has managed to acquire a fortune of over $8.4 billion, becoming in the process the 38thwealthiest man in America?
Well, some would say that the best in the $2 trillion hedge fund industry are often the smartest guys in the room — those with an almost uncanny intelligence concerning the movement of markets. Some might also further characterize the major winners as those with a preternatural sense of timing wedded to a gambler’s gut instincts and a willingness to bet big when necessary.
The most successful hedge fund managers themselves would more than likely report that their great gains are the result of doing their homework well — utilizing the most reliable and up-to-date data regarding a particular company’s stock’s position and how it is likely to move, either up or down. In their view, information is always the most precious commodity of all and the key to their prodigious prosperity.
Is the Information Lawful?
But what if the information they obtain — the facts, figures and potential market gyrations on which they place their bets — is outside the realm of what the government considers legal? What if they are receiving “inside” information from traders, corporate executives, consultants, or lawyers, that is either nonpublic or otherwise secret or proprietary?
Well in that case, they are involved in the unlawful behavior known as insider trading, and they are subject to indictment, prosecution and conviction under federal statutes. And in fact, in regard to this particular brand of white-collar crime, government authorities have been very busy of late.
Over the past three years, the FBI and U.S. prosecutors have indicted 75 people on various insider trading and conspiracy charges and have secured almost as many convictions or guilty pleas in what continues to be the government’s most intensive and broad-ranging crackdown on this shady form of financial misconduct.
Insider Traders Get Caught
The first big fish to be hooked was Raj Rajaratnam, the founder of the Galleon Group hedge fund. In October 2011, he was sentenced to 11 years in prison and ordered to repay the $63.8 million the government said he gained illegally during the course of a seven-year conspiracy to trade on insider information. Rajaratnam was brought down by his own words — prosecutors introduced into evidence 45 wiretap recordings of over 2,200 telephone conversations he had with more than 130 individuals.
In October 2012, Rajat Gupta, a former Goldman Sachs director, was sentenced to two years in prison and ordered to pay a $5 million fine for giving an insider tip to the aforementioned Raj Rajaratman about an undisclosed offer from financier Warren Buffet, to help bail out the Wall St. investment firm during the 2008 financial crisis with an infusion of $5 billion. Rajaratnam bought up some Goldman stock after a phone call from Gupta, turning a profit of more than $1 million after Buffett’s investment became public knowledge.
On Dec. 17, two former hedge fund managers, Anthony Chiasson and Todd Newman, were found guilty of fraud and conspiracy on charges that they made more than $70 million illegally trading technology stocks based on insider information.
Four days later, on Dec. 21, Mathew Martoma, a former portfolio manager for CR Intrinsic Investors, a subsidiary of Steven Cohen’s SAC fund, was indicted on several counts of securities fraud relating to trades of two drug companies’ stocks, the Elan Corporation and Wyeth Pharmaceuticals, after receiving inside information from Dr. Sidney Gilman, a neurologist with knowledge of the companies’ disappointing clinical trials of a new Alzheimer’s medication.
Martoma allegedly called his boss with the secret data he had obtained, and the next day SAC sold $700 million in Elan and Wyeth stock and made a large negative bet against the two firms. After the announcement of the unsatisfactory test results, the companies’ worth plummeted, and SAC avoided losses and/or reaped profits of $276 million. Martoma himself received a bonus of $9.8 million in 2008, largely based on the successful drug company trades, but was subsequently fired by Cohen a year later.
Closing in on Cohen
So far, Martoma, who is scheduled to be formally arraigned this week, has not “flipped.” He has denied any wrongdoing, and refused to turn on Cohen. Federal prosecutors are hoping that his imminent arraignment will help focus his mind on a potential plea bargain, which will necessarily force him to implicate his former boss in the illegal insider trading scheme.
What do Chiasson, Newman, along with Choo Beng Lee, Noah Freeman, Donald Longueil, Jon Horvath, Michael Steinberg and Jonathan Hollander, all have in common with Martoma, in addition to either having been charged with, or convicted of, insider trading?
They all have worked at Steven Cohen’s SAC or one of its subsidiaries at one time or another. And so now the noose is tightening around Cohen’s neck, and although the hedge fund genius has not yet been charged with a crime, he has recently received what is known as a “Wells notice” from the Securities and Exchange Commission (SEC) – an informal “heads up” that some serious heat is soon coming his way.
So if you’re still wondering how some hedge fund managers manage to reap their huge fortunes, it may not be because they are the smartest guys in the room who did the best homework. It could simply be that they are the most crooked guys around who just know how to cheat better than most.
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Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].