No Smoke without Fire – A Denouement

FPM insiders are somewhat surprised at the impending final resolution or clarification of the 'SAC-saga'. A multi-year investigation led by the US Department of Justice which is imminently unfolding – with the next fixed date November 18, being the commencement of criminal trial against senior portfolio manager at SAC Capital Michael Steinberg. The climaxing of the largest investigation and prosecution into insider trading in the United States may tantamount to a mere null and void result! Are Steven Cohen and SAC Capital going to receive a ‘get-out-of-jail’ card? Really, we are always aghast at the masquerading theatrics without substance - and we’re not referring to Hollywood films! Read our full “No Smoke Without Fire” to see exactly how aghast.

The critical point from the recent financial press about SAC Capital, is that the web of securities fraud manager may evade criminal conviction. Simply by letting money talk, that is by entering negotiations for a settlement of the prosecution’s case. As was reported in the Reuters noise on September 25^th : “SAC Capital and prosecutors have since opened preliminary settlement talks in an attempt to resolve the criminal indictment...”. (Click below url link Cohen's SAC Capital up 13 pct for year for full Reuters story. A simple thinking individual with pursed lips may nod his head acceptingly and claim nothing tremendously new or interesting about an out-of-court financial settlements as regards financial moguls, especially in aftermath of the US housing-led financial crisis malfeasance. Malfeasance or misdemeanours, which FPM repeatedly likens to the proverbial tip-of-the-iceberg; mainstream reported financial wrongdoings are only the visible tiny portion and not reflecting the unseen gigantic portion submerged.

SAC which was charged with separate criminal and civil charges, at the 11^th-hour on 19^th July 2013 before the 5-year statute of limitation kicked-in, seems now to be offering one final ‘global’ settlement for insider-trading case related to SAC to end.

Presumably such a final settlement is intended for current outstanding cases and to prevent any future prosecution of Mr Cohen himself. Remember it was only on 15^th March this year that Mr Cohen personally forked out a record total $616 mn to settle two separate civil cases related to SAC sub-fund PMs.  Mathew Martoma of CR Intrinsic and Jon Horvath of Sigma Capital cases settled for $602 mn and $14 mn respectively. Mr Martoma’s criminal indictment case has been rescheduled from November to January 2014. In our restricted report ‘No Smoke Without Fire’, FPM speculate on the likelihood of this close associate of Mr Cohen squealing before the grand jury or proffering evidence in exchange for leniency in his sentencing. Alternatively, how much personal pay-off may be needed for Mr Martoma to accept prison time to fit the crime? Prison time may be sore point for ‘cute’ looking Mr Martoma! Of course while

While Mr Cohen himself has been implicated in past and pending US criminal cases of insider trading, he has not been directly named in criminal indictment documents or has ever been charged. FPM skews the old adage into “The bigger they are the harder they are to fell, especially where money is concerned.” In “No Smoke Without Fire” we mention other hedge fund luminaries and executives that have had the grace of political and financial clout and connections to avoid conviction and prison sentence. Among others we identify those potentially having engaged in insider trading. Such as hedge found founder billionaire Arthur Samberg of Pequot Capital Management and prominent Wall Street executive John Mack, who also chaired Morgan Stanley.

FPM’s restricted circulation of “No Smore Without Fire”, together with extracts and supplements published on this blog, have been successful in conveying the negative reputation risk of being invested with an asset manager in ongoing insider trading investigations. Via word-in-your-ear enquiries with Blackstone Group affiliates we believe we were indicatively influential in the private equity giant redeeming investor money from SAC Capital. Following our active resistance modus operandi, FPM associated Blackstone’s alpha-at-any-cost savvy and / or slack due diligence in being long-invested and vehemently committed to Mr Cohen, amidst multi-year investigation by prosecuting federal authorities. In most scenarios most investors faced with reputation risk would reasonably be expected redeem investments first then ask questions later. We think the fall-out from even a financial settlement without acknowledgement of culpability to the SACs saga will indelibly tarnish Blackstone’s reputation in hedge fund investments. Not to mention irrevocably damaged reputation to other less high profile partners of SAC, who have vocally and publicly allied themselves. We know that kowtowers and sycophants to the 117^th richest man in Forbes ranking lists inevitably exist, but FPM in naming and shaming propound our reputation risk thesis by highlighting one such specimen. Anthony Scaramucci, managing partner of SkyBridge Capital, a fund-of-funds manager, has been particularly unabashed in supporting the monied-class of Mr Cohen. On the day of SAC’s federal indictment on criminal charges of insider trading, Mr Scaramucci appeared on CNBC's "Halftime Report" to lend his smarmy affiliation to SAC – see this transcript:

"So I think right now I think we just have to feel bad for the employees there and for the families associated with this. I have said long ago that if they have a case and it's a substantial one, let's bring it. Obviously, the presumption is still on innocence both for the firm and for Steve. That's the way our criminal justice system works. But the government has that case. I hope Steve and his team will get the opportunity to say their side of the story as well. But as it relates to public policy and things like that, fraud is a terrible thing, and I hope to God that they will be innocent, but if they're not, obviously we'll do what's prudent for our investors as everyone else would."

And watch this video link to compare Mr Scaramucci’s - affectionately known as the "The Mooch" - excitement and enthusiasm about vehemently supporting SACs in November 2012 as CNBC discuss: Will SAC Face Redemptions?

Of course FPM filches the above assailant points buried in obfuscating headline stories. This time the misleading Reuters noise mentioned above had headline about SAC’s year-to-date performance, see Cohen's SAC Capital up 13 pct for year -source. The dumbly published story under mainstream financial media Reuters, with Matthew Goldstein as ‘jobsworth’ lead-writer, is the kind of pandering journalism that is tantamount to mere paid-for financial propaganda. Of course at the centre of such tripe is SAC’s PR-firm Sard Verbinnen & Co and lead-spokesman Jonathan Gasthalter. How many unofficial and official lunches have Reuters had at the PR-firm’s expense, we rhetorically ask! While cognisant of motto “No such thing as a free lunch!”. So the story is not just ‘dumbly’ edited but connivingly intended, one may reasonably suspect. This kind of concealed reporting of the key facts assuages financial herd that SAC’s multi-year case is proceeding and business as usual at the firm. Starkly, FPM point out that no criminal charge has been brought to the door of the man presiding over the web of fraud, Mr Steven Cohen. FPM is not alleging fraud at SAC or by Mr Cohen but merely explosively enunciating the July 19^th, 2013 criminal indictment against SAC Capital, which states “…insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry”. And if that’s thrown out in case closure as unsubstantiated libellous verbiage, then we corroborate with US Manhattan Attorney Preet Bharara’s , recital describing SAC as “a veritable magnet for market cheaters”. FPM network would not believe Mr Bharara’s personality and character is given to hyperbolic statements.

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)