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Tuesday 10 June 2014

The Calm Before The Storm: SAC Takeaways – Part 1

In the long-running insider trading saga of billionaire hedge fund manager Steven A. Cohen and his eponymous firm SAC Capital - a firm nowadays with a face-lift as “Point72 Asset Management”- there are still a few twists in the tale.

Fund Portfolio Management (FPM) for its “No Smoke Without Fire” investment enterprise on reputation risk suggest that today’s expected announcement (June 10th) about Mathew Martoma’s sentencing could yet herald a fault line of tremors for Mr Cohen personally and set a precedent for the hedge fund industry. Especially in regards to the extent of criminal punitive sentencing in a caper that has been headlined as the “biggest insider trading scheme in history”, making the participants profits and/or avoiding losses to the princely tune of US$ 275 mn.

FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental. Seeing that Mr Martoma’s convicted crime exacted a record US$275 mn in ill-gotten gains, b) that he instigated connection and payments with the inside-information provider named Professor Sidney Gilman (a neurologist expert group witness who secretly provided non-public information on clinical trials of an Alzheimers-cure drug); and c) that his ‘offence level’ leads him right to the top of the conspiracy tree to Mr Cohen himself, via the 20-minutes conversation in July 2008 just before SAC Capital started unwinding it position in Alzheimer drug companies Elan and Wyeth.

FPM principle in his conscionable deliberation would expect the sentence to be harsh on a deterrent grounds basis, even though he was indicted and convicted on three counts, because of his central role in the conspiracy. And additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect today. Stop Press! At the request of Mr Martoma's defence attorneys the sentence hearing has been postponed and publically press-announced 5th June 2014! When the sentencing hearing, presided by Judge levies personal forfeitures and fines relating to the reported US$ 9 mn that Mr Martoma received as bonus for conspiring towards US$ 275 mn of illicit gains, could also be an inducement for Mr Martoma to squeal on Mr Cohen. Time in jail versus weighed up against hoarded assets / money hidden from prosecutors is the old trade off facing Mr Cohen's cronies in sentencing played out! How much is Mr Martoma’s silence worth to Mr Cohen? Mr Martoma has  3 children and a beautiful wife to sweat in hardened prison environment.  

Most of the pandering public press are speculating about 10 years sentence for Mr Martoma, our suggestion of 6-8 years analyses that in systematic-wide efforts to protect and earn the largesse of billionaire entrepreneur Mr Cohen, a maximum guideline sentence could not be applicable. Otherwise Mr Martoma would proffer the main cull for the baying public anger and show some moral rectitude rather than be the sacrificial lamb for Mr Cohen. We look at he another high profile case where the sentencing was also funninly leanient!!!

The 17-years veteran of SAC Capital and friend of Mr Cohen, Michel Steinberg, is the other most senior racketeer in the web of securities fraud seduced by illegal insider trading. Following his conviction in December on all five indictments, last month he received three and half years jail sentence. The prosecution had asked for a 5-6 years sentence. He got off lightly and the Judge even described him as "

a basically good man". Astonishing, the civility afforded to white collar criminals! That court case presiding Judge Sullivan also ordered Mr Steinberg to forfeit $365,000 and pay a fine of US$2 mn. Aggregate punitive redress by Mr Steinberg will include legal costs estimated by some legal experts as up to US$10 mn. Crime really does pay! at least on this occasion for Mr Steinberg’s attorney Barry Berke and his firm. He is currently free on bail awaiting the outcome of the US Court of Appeals for the Second Circuit in a related case-point in law. 

The case under Second Circuit appellate panel is expected to make imminent decision as to reversing or vacating the existing convictions. The convicted case involves the notorious ex-SAC Capital employees Anthony Chiassons (Co-founder of now defunct Level Global Investors) and Todd Newman (portfolio manager at also wound-down Diamondback Capital). They respectively received sentences of six and a half years and four and a half years, and are free on bail pending the appeal. Notice the central role of  Mr Chiasson and the severer sentence terms.  The argument that both men are presenting is that it is not illegal to trade on non-public, confidential information if they did not know that the person providing the information was receiving some benefit.

This SAC-saga still obviously has legs to run yet further!  

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