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Monday 22 April 2013

No Smoke Without Fire!

FPM's Bells and Whistles!

No Smoke Without Fire: Of Reputation Risk

Q. How can an investment firm be really worried about reputation risk and at the same time cavorting with a web of securities fraud affiliate?

A. Because ‘institutionalisation’ has created ‘big fish’ with manageable concern about the fall-out from ‘smaller fish’ troubles...

Fund Portfolio Management (“FPM”) have been observing the financial news about the vehemently committed affiliation of publicly listed Blackstone Group (“BlackStone”) and the web of securities fraud surrounding hedge fund heavyweight SAC Capital Advisors (“SAC”) and its billionaire eponymous founder Steven A. Cohen. Forbes recently ranked Mr Cohen as the 117th richest man in the world with net worth of some $9 bn.

Blackstone formed in 1985 specializing in private equity, with current asset under management (“AuM”) of $218 bn, as at end-March 2013. “Blackstone is sensitive to reputation”, was recited like a mantra to the author of this research during a due diligence meeting in 2007. With any sense of responsibility to its investors, the market reputation of SAC or related headline risks should have sent Blackstone scuttling for the exit doors and severing links long ago. At time of writing, with extended SAC redemption date approaching on June 3, Blackstone is astonishingly still invested with its client’s capital in SAC.

SAC Capital Advisors started out as opportunistic long / short equity and is now multi-strategy hedge fund formed in 1992 and with current AuM of approximately $15 bn. More than half of the assets belong to Mr Cohen and SAC employees. For investors who’ve had their head in the sand, SAC has been on the back-foot about insider trading other securities fraud cases for six years. The recent arrest of SAC’s most senior fund manager Michael Steinberg by FBI agents, has escalated the court proceedings with trial date set for November. To date nine current or former SAC employees have been charged by the US investments regulator the Securities and Exchange Commission (“SEC”), with convictions, jail sentences, fines, forfeitures and in one case the largest insider trading settlement of $602 mn. Mr Cohen has been portrayed as at the centre of this web of securities fraud but as yet only implicated and still uncharged.

As hedge funds are a people business, with ‘key man’ concerns, the character and moral compass of the principal at SAC is the categorical imperative to reputation. Even far back as 1986 Mr Cohen was investigated but not charged for insider trading. See the exclusive ‘Litany of Litigation’ compiled in the full research.  More than a quarter of a century later the US investment services regulator, the SEC and other government agencies are still targeting him in securities fraud. For this FPM alternative independent restricted research entitled ‘No Smoke without Fire’, we draw affirmative conclusions about Mr Cohen’s part in a long history in a web of securities fraud.

By Blackstone publicly allying itself to controversial capital-outsourcing vehicles such as SAC and other convicted insider-trading funds in the past, such as Diamondback Capital and Harbinger Capital – the inflicted reputation or headline risk could conceivably be more than a minor due diligence embarrassment. In fact FPM have recommended a downward stock price target for Blackstone (BX). Blackstone, via its Hedge Fund Solutions group / BAAM (founded 1990, AuM $48 bn as of 31 March 2013) is reportedly the largest or one of the largest ‘outside-money’ investor in SAC with $550 mn allocated.

Reputation damage, like forest wildfires, once started can quickly spread, given the right conditions.  Adverse reputation can indeed cause material damage to the hedge fund and its investors, litigated-stock investors (class action law suites from insider-traded stockholders) and the AI industry reputation again tarnished. In the end, FPM foresees SAC forced to close doors to external money. For SAC’s last mid-February redemption window, notices were submitted for $1.7 bn of asset withdrawals. FPM doubts SAC offset those ‘guilt by association’ redemptions through inward subscriptions, while ensnared in battle with federal regulators of the US.

In March, US District Judge Victor Marrero had ethically questioned the record $602 mn settlement being a satisfactory verdict in the long-running litigation of Matthew Martoma and CR Intrinsic of SAC by stating:

"There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million—that might cost $1 million to defend and litigate—if it truly did nothing wrong…" Judge Marrero, April 2013

Given that majority of securities fraud proceedings have not delivered a culpability or innocent verdict in ridiculously numerous lawsuit complaints related to financial services, Judge Marrero broadly raises question of standards in US legislature

For the full 25-page research FPM covers a multiplicity of aspects: FPM articulates the long relationship between Blackstone and SAC in ‘reputation risk’ terms and securities fraud within a wider paradoxical context of institutionalization of alternative investments (“AI”). The implications drawn from our research are for immediate action concerning Blackstone and SAC, but also for consideration of long-term AI issues; not just issues of securities fraud and its regulation but asset class performance from convergence of alpha and long-only beta strategies. 

The full FPM research incorporating urgent action recommendations regarding Blackstone Group and SAC Capital Advisors is available on sponsor request.

“No Smoke Without Fire!” substantiates the likelihood of Steven Cohen evading the authorities in an orderly fashion and the negative implication on investor confidence 

To ignore FPM findings is to be dismissive of the numerous independent consultancy warnings about Madoff and his now infamous ponzi scheme.

FPM predicts an imminent hedge fund scandal and fallout from SAC Capital’s trading irregularities and 5-year regulatory investigations.

FPM’s research is an importunate reminder that Galleon Group founder’s 11-year incarceration for securities fraud is merely a ‘scapegoat’ and only the tip of the iceberg.

FPM seeks to liaise with Blackstone and SAC Capital as a matter of confidential courtesy before disseminating the timely research to investors and media.

 ‘You are failing to understand the facts of the case,’ the priest said. ‘The verdict does not come all at once, the proceedings gradually merge into the verdict.
(“The Trial” Franz Kafka)