What the SAC Is Going On? - Update

Stop The Press! On the 12^th November a 3-judges appeal hearing to extend Mathew Martoma’s bail release, pending an appeal for his near-record 9-years’ prison and US$7 mn confiscation, as a criminal law conviction for insider trading, was cursorily declined and belatedly he is set to start incarceration (see our earlier full research to this update). Watch This Space!

The contradictions in American judicial proceedings in the SAC-saga agitate FPM principal’s Industry Intelligence with numberless pangs! A multi-years court proceedings which reaffirms the farcical theatrical nature of American Justice – Read on. WARNING / ACHTUNG: A brand of justice and democracy not to be imitated. To free ourselves of these difficulties, we expound our anger at the injustice, as FPM enterprising public information and  active resistance.

At the above mentioned the appeal hearing, U.S. Judges persistently enquired of the State prosecutors (from U.S. Department of Justice - DoJ) as to why a deposition that Steven A Cohen “SAC” submitted at an S.E.C. inquiry in May 2012, was not permitted in Mr Martoma’s January 2014 defence trial, even though the same insider-traded stocks (Elan Corp. and Wyeth Ltd), were at legal issue. The prosecuting lawyers seem to become vague and stated: “Strategic decision…so as not to confuse the jury”. State prosecutor’s, if anyone need reminding, are paid for with public taxpayer money and supposedly representing the public interest, here demonstrate how the law can be technically perverted, i.e. used to convict one and exonerate another from the same legal issue.

To re-cap key elements of the legal case demonstrating this systemic corruption in capitalism the issue at stake in FPM’a ‘plain English’ attempt (read also Muppet Mainstream Media diversion too): Mr Martoma’s defence in effect stated in their main appeal:

“What’s the evidence that gets me harsh 9 years prison and a confiscation conviction while head-honcho multi-billionaire at the centre of the web-of-securities fraud Mr Cohen walks ‘scot free’ into the sunset at age 58 with US$10 bn after 20+ years insinuation in corporate criminality? ”

The documented video deposition in question was that of the head-honcho Mr Cohen which indicated that he relied on Wayne Holman’s consultancy expertise (a healthcare portfolio manager, former SAC employee and friend who left in 2006 to form Ridgeback Capital Management) to profitably netting $275 mn from exiting a US$700 mn loss-making trading position. It was loss-making ‘long’ position based on the imminent drug trials announcement that was to be negative (i.e. SAC portfolio positions in experimental Alzheimer’s drug makers Elan Corp and Wyeth Ltd). Mr Martoma’s main appeal which is still pending will we expect seek reduced sentencing. Mr Martoma’s failure to extend bail from this appeal while his main appeal is pending maybe a court ‘side-show’ manoeuvre to assert insider trading enforcement. Whereas, FPM principals have repeatedly highlighted the “Punch and Judy” theatrical nature of American Juctice in ‘NSWF:Reputation’. ALL of the eight convicted individuals in this SAC-saga are still out on bail, as was Mr Martoma until this 3-judges appeal hearing. Doh! 

FPM also note that we are updating the “FPM Reputation BlackList” to reflect that few if any from SAC-saga and litany of litigations has yet seen the inside of a prison despite eight convictions! Internally, FPM discussing if Ridgeback Capital Management founder Wayne Holman makes it on the reputation list.

Please feel free to correct us Mr Preet Bharara? Mr Bharara was the DoJ presiding State attorney in the insider trading sting (codenamed “xxxxx”), launched demonstratively and conveniently as an enforcement witch-hunt for the depression-like financial crisis. Another betting FPM principal also wagers that Mr Bharara, widely touted for the top job in U.S. Justice, was not nominated for the sham oversight of proceedings in the SAC-saga. Preet is the failed front-runner for Attorney General of USA to replace outgoing head Eric Holder. On 10^th November Barack Obama nominated Attorney General as Loretta Lynch. This investigative critique explores another angle why Mr Bharara was snubbed. Mr Holder, the incumbent highest judicial authority in USA, under whose watch we witnessed the perfunctory litigation for larceny of net billions dollars from the public purse into private corporate profits for billionaire “establishment class” via Wall Street and Main Street corruption of capitalism, is walking on an FPM reputation tightrope. Under Mr Holder’s oversight, DoJ has expediently allowed ‘money to talk’ in the numerous high profile billion dollars litigations of corporate criminality (an exhaustive countdown list FPM have compiled in exchange for gratuity fee), and allowed executive white collar criminals to walk. Mr Holder: The organ grinder's money talks and monkeys get paid peanuts still – right?

FPM have profoundly described social status-quo as “plutocracy” or as we note unbound capitalism! FPM found an indepth investigative commentary on U.S. Justice but unrelated to our focus in financial and corporate matters: To Fight for Justice is to Fight the Law. If any genius out there believes in democracy please email us to shock us. As part of our active resistance against endemic corruption in capitalism, our story put yet another FPM big-picture way:

IF CAPITALISM IS IRREFUTABLY CORRUPT, AND THE MYOPIC ADHERENTS SUCH AS MEDIA, PUBLIC RELATIONS, FIDICICUARY ADMINSITRATORS ONLY PANDER, WITH POLITICIANS DISTRACTED FROM SERVING PEOPLE’S INTERESTS, THEN JUDICIARY IS ALSO A TOOL TO PROVIDE EXPEDIANT JUSTICE. THE RESULT IS ECONOMIC WEALTH INEQUALITY ABOUND. NOW FOR SOCIAL MOVEMENTS TO ESCALATE TO PEOPLE REVOLUTION.

Stop the Press! On 17^th November in a U.S. Manhattan court hearing Patricia Cohen, former wife of Steven A Cohen pursuing equitable divorce settlement since 1991, has managed to get Mr Cohen to be questioned in civil deposition hearing on 10^th December. This is another side-show which the “Artful Dodger” will presumably settle out of court eventually. FPM congratulate Ms Cohen’s tenacious pursuit in her warranted bid. If American Justice showed as much tenacity as Patricia, the U.S. taxpayer could have reaped multiple billions for its public pursue, instead they are facing austerity!   

What the "SAC" Is Going On?

For FPM's enterprise entitled “No Smoke Without Fire: of Reputation Risk” we were reminded yet again that criminality is a servant of corporate enterprise. FPM joined-up thinking draws parallels from the widespread vogue of United States of America government enforcement prosecutions against financial and corporate crimes in capitalism.

The case involving Switzerland-based global bank UBS AG (UBSN.VX) (UBS.N) and its wealth management division head Raoul Weil resulted in an acquittal verdict from a legal technicality about burden of proof. Detrimental global bank tax-avoidance roguery was at issue with yet another case of combined American government authorities, this time Department of Justice (DoJ) and the Internal Revenue Service (IRS), seemingly taking retributive action against intrinsic corruption in capital markets, or indeed against capitalism itself. The DoJ spent six years trying prosecute Mr Weil, including extraditing him from Italy last year. Also, this particular case highlights increasingly onerous burden of proof towards incriminating senior executives with financial clout, while lower ranking corporate figures plead guilty and co-operate as witnesses for lighter plea agreement sentencing.

FPM will further follow closely this and similar tax-fraud cases as part of widening the FPM's “NSWF:Reputation” template; which was initially honed on SAC Capital insider trading amid their litany of legal proceedings, as understated in the financial media yet aggregated by FPM to display the sheer "iceberg theory" extent of insider trading that remains concealed. And we only focused on one solitary hedge fund founded by Steven A Cohen with his initials SAC Capital ("SAC")..  

Remarkable that the FPM Reputation Blacklist or “Rogues Gallery” (shown above) is comprehensive with 20 plus insider-trading associated individuals. Compared to the pandering mainstream media (msm) accounts of only 8-10 criminally charged and convicted as one  time SAC employee. With intention to deceive public opinion and interest, downplaying illegality and criminality at SAC is an artifice of Mr Cohen's external public relations firm Sard Verbinnen & Co.  FPM list appropriately includes former or current SAC staff pleading guilty and co-operating with enforcement authorities, and those uncharged but implicated as co-conspirators in the “criminal club” cases. The mitigating factor is that staff turnover at SAC Capital, in line with other financial firms tend to be high, so association or links to a firm is exponential and inevitable, but their insider trading being synonymous with notorious ringmasters / hubs is unavoidable. For example, consider an FPM Reputation Blacklist for one time Goldman Sachs employees associated in insider trading and other securities fraud the list would be tediously exhaustive probably!

Bear in mind that DoJ and the SEC are boasting 85+ convictions or guilty pleas to-date since the crackdown began in October 2009. Also, as of October 23^rd last month, SEC stated “…Galleon-related enforcement actions against 35 defendants.” And news typically report for a firm of “..Fourteen people pleaded guilty in the Galleon case, and at least nine others are charged”. Clearly, the numbers stack-up in validating FPM enumeration of SAC-connected criminality rather than msm financial press data.

Further, FPM list ONLY includes insider trading violations by one-time SAC Capital employees investigated, by the deliberately stymied and poorly resourced enforcement of the SEC. Remember that the SEC were set up as the police equivalent of the securities and investment industries. Their job is to enforce securities regulations and legislation – seemingly especially at lower ranking company men! To validate Steven A. Cohen as only ‘allegedly’ presiding over a “web-of-securities-fraud” and receiving an administrative “slap-on-the-wrist” by the securities regulator, despite the numerous foot-soldiers and lieutenants ensnared in multi-years insider-trading prosecutions, is utterly shambolic oversight and law court proceedings by the DoJ. We charge Eric Holder as the attorney general of USA. Our SAC-associated blacklist aimed at spreading historical knowledge or simply reputation is obviously even more exhaustive when including other types of securities fraud. An extended “Reputation Blacklist” of SAC-tainted individuals and firms, which FPM have compiled internally to assist external manager due diligence (available for a consultancy fee), for example includes publically disgraced Forrest Fontana in stock-shorting violation (more in “NSWF: Of Reputation”, a chargeable document).

Outstanding Issues Regarding Steven A. Cohen et al (“SAC”):

1. A potential legal precedent from a landmark second circuit court appeal against Anthony Chiasson’s insider trading conviction may make insider trading prosecutions even more difficult to convict; and indirectly mocking and besmirching the legality of definition, interpretation and application of what constitutes insider trading after its 80 years of existence.
2. The second circuit appeal court decision may be elitist by setting a new stringent burden of proof for “downstream tipee” cases; as affecting the legal conviction of Michael Steinberg and Mr Chiasson, as well as his co-defendant Todd Newman. FPM’s “elitist” accusation is based on higher-up corporate executives can deny knowledge of shenanigans lower down. That’s a corruption of capitalism  - “where does the buck stop?”. Our long-memory or historical knowledge suggests most SEC cases in the past were based on circumstantial evidence. Also, FPM are not certain if this technical appeal is not a court ruse for the convicted perpetrators to delay starting their jail sentences (Mr Steinberg was convicted in December 2013 and still out on bail are Mr Chiasson and co-defendant Mr Newman after conviction December 2012), or other time extension ploys, or indeed a technical fudge in applying Rule 10b-5 of the Securities Exchange Act of 1934 relating to insider trading.
3. Pending this second circuit court appeal decision the SEC is currently reviewing the industry ban imposed on Mr Steinberg and suspending other insider-trading administrative enforcement actions, including Mr Cohen’s. The DoJ “asked to stay the SEC's failure-to-supervise proceeding against the head of SAC Capital, Steven A. Cohen, 'until at least the Second Circuit issues a decision in the Newman/Chiasson Appeal.”.
4. Incredibly, The Artful Dodger (another FPM nickname in “NSWF: Reputation”), Mr Cohen has not only evaded court prosecution but seems to be slipping out of SEC administrative admonishment: a) for failing to supervise convicted Mathew Martoma and Mr Steinberg and b) to ultimately ban him from the investment industry have been postponed in April and again in August this year. FPM wonders if this is a mock persecution to appease the public’s outraged indignation of a scandalous securities fraud ringmaster avoiding not just criminal justice, but also escaping exemplary industry defamation – by banishment from operating in it.
5. Fresh new cases of insider trading allegations involving research / consultant group or “expert network” Height Securities, and its prior communication with senior politician on a government policy decision and announcement in April 2013; affecting the share price of health insurance companies. Yep, you guessed it, SAC Capital included in a list of hedge funds receiving “heads-up” information.
6. Of the Government convictions and pleas gained in the insider trading cases FPM monitoring how many convicted cases will be given class-action litigation status by courts. This could open a flood of litigation benefitting class-action firms and harmed investment management firms and ultimately their investors in the litigated securities.
7. Stop The Press! Preet Bharara, lead attorney at the important South District Court of New York and protagonist in NSWF was a front-runner to be elected for the top job of Attorney General at the DoJ. On 10 October yesterday, President Obama choice for the most powerful legal position of USA was given to another to replace running-for-the-hills incumbent of the post Eric Holder. Though we may never know the actual reasons for the choice of top judicial job, one reporter has intrepidly already suggested that his aggressive pursuit of corruption is not good politics for career progression: “…he has been relentless in his prosecution of Wall Street tycoons, domestic/ international terrorists, corrupt public officials, and even foreign diplomats as in the case of Devyani Khobragade”; remember Eliot Spitzer’s corruption crusade and  subsequent downward spiralling career. FPM relationships resources suggest that headline top-jobs are not for those of Indian-American origin, as it may unsettlingly remind the American people of their non-nativity in North America, especially to follow on from the first Afro-American Attorney General, and no need to mention the first Afro-American president.
8. As FPM have intimated before, that there is still a sting in the tail for this SAC-saga, and that rests on the shoulder Mathew Martoma and family. Or less possibly, Mr Cohen’s inner circle of Mr Steinberg, Richard Grodin and David Ganek may flip to give State evidence. Mr Martoma squealing to authorities for the chance to avoid 10 years jail and confiscation of his millionaire trappings may yet force him turn evidence to incriminate SAC. We think Mr Martoma or undeniably any others with evidence against Mr Cohen can be hero of humanity but they need divine courage to upset the applecart.
9. The case of Patricia Cohen against Mr Cohen for fraud and breach of fiduciary claims is still pending; she stated in lawsuit filed in 2009 “he [Mr Cohen] had received inside information in advance of the purchase of RCA Corp. by General Electric Co.”. The case is scheduled for a hearing on Nov. 13, 2014. Watch this space! The case is Cohen v. Cohen, U.S. District Court for the Southern District of New York, No. 09-10230.  

The appalling journey of a 10 years’ probe into insider trading without catching few ringleaders is strong evidence that enterprise of a billionaire over-rides legal justice concerns in the modus operandi of capitalism. More alarmingly, as “FPM Reputation Blacklist” amendment proves, the public interest is only given propaganda lip-service by contrived and trite public relations communications and msm financial press. Such systemic imbalances and corruption leads to social disaffection and discord, perhaps explaining the strong raison d’etre of freedom and popular revolt movements gaining momentum globally, even heralding “Destroy Capitalism!” FPM’s shout is less radical but with similar aims: “Destroy Corruption of Capitalism”.

At the climax of US district court attorney Preet Bharara’s insider trading enforcement, if the “Unconscionable Mr Cohen” himself IS NOT criminally charged, while the firm bearing his name pleads guilty to criminality and settles for multi-billion dollars (US$1.8 bn plus legal expenses), then the attorney’s biggest scapegoats are Raj Rajaratnam of the Galleon Group and Messrs. Martoma and Steinberg of  SAC Capital. Now compare the 1980s insider trading triple scalp of Ivan Boesky, Michael Milken and Dennis Levine. Whatever the merits and demerits of the American Politico-judiciary system, and clever technical litigation by Mr Cohen’s defence, it is clear that political expedience and multi-billion dollars remuneration for the capitalists’ infrastructure of DoJ and SEC, won the day. Pity the Poor Man’s Pocket Aye! Mr Bah

For Mr Bharara efforts at recouping money largely for the USA Government and an incommensurately smaller portion to reimburse other disadvantaged investors and ultimately pensioners and other long-term savers, validates incestuous politics and capitalism. “Democracy” or the rule of society by the people is ultimately defunct and only a pseudo notion. Where are the developments in laws enforcement in the securities industry to expand enforcement in the wider public interest? In 1972 John Wells a New York lawyer, led a panel on enforcement issues, which resulted in the Wells Notice many corporate America and portfolio manufacturers know only too well. FPM has an “enterprising execution” from its 3-pronged process).

Whereas “Plutocracy”, an organisation of society by wealth, is clearly alive and kicking. Witness Mr Rajaratnam penalty fine of under US$100 mn and jail sentence exceeding 10 years, a near record prison term for insider trading; versus Mr Cohen’s record US$1.8 bn global plea agreement / “payoff” and NO jail time and perhaps a slap on the wrist and told not to do it again. Proof that criminality is a servant of plutocrats. In astonishment, FPM echo “What the SAC is going?”

Somethings got to give: Mr Martoma’s Family Cannot Bear Burden Alone

In all sense of U.S. Justice Mathew Martoma CANNOT BE SERIOUSLY given nine years prison sentence for his insider trading securities fraud when the man Steven A. Cohen and his eponymous firm S.A.C. Capital that he committed these crimes for walks free after grease-palming the justice system of the Americas! “Something surely gotta give!”, seems an appropriate declaration to suggest that this is NOT THE END of the SAC-saga. A saga very much degraded as much as it was chronicled by institutionally pandering mainstream financial press; but veritably recorded and actively disseminated by Fund Portfolio Management –FPM. Principals at FPM have focused on insider trading protagonists at SAC Capital, and its reputationally smeared investor Blackstone Group under our “No Smoke Without Fire: Of Reputation Risk”. See our first blog post “No Smoke Without Fire!”. 

Mr Martoma must be utterly devastated and wholly indignant with the penultimate outcome (he is naturally appealing the sentence!), after multi-years judicial proceedings. And it is that bitter emotion and pervasive discontent feeling that should consume him inside-out through the sentence appeal and ultimately towards righteous and natural justice prevailing in the end. No! FPM are not evangelical preachers, but as an aspiring and integral high priest class of financial investments.

For integral justice to prevail and for restoration of real ‘animal spirits’ i.e. confidence (as opposed to smokescreen and mirror tricks of pump-&-priming from QE et al) in the crooked financial and judicial systems are vivid evidence of enforcement and punishment for wrongdoing. Mr Martoma should cut a deal with prosecutors towards humbling beyond-everyday-justice billionaire Mr Cohen. FPM are heeded from our previous announcement in early June via a post entitled “The Calm Before The Storm: SAC Takeaways – Part 1”:

“…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…

…FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental…

…additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect...

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.”

That Judge Paul G. Gardephe exceeded sentencing guidelines of the U.S. Government’s probation department DOES INDEED send a signal to would-be corrupters of the capital market integrity. However, the message is largely diluted because the head of “web-of-securities-fraud” Mr Cohen has evaded ANY sort of punishment. Americans used to say the “The Buck stops here!”; if blame is not laid at the helm of S.A.C. Capital then the message of the severe sentence, full confiscation and its exemplification suggests “don’t get caught if you cheat” or worse still, “don’t cheat unless you can afford it”. The old English adage that has gotten corrupted by revisionist colonists reacting to “chip-on-shoulder” syndrome, with incorrigible migration from developing nations, is “If you can’t do the time don’t do the crime!”

The risk of getting caught is increasingly seen as “cost of doing business”, yet hedge funds and banks do not set aside capital for ‘risqué practices’, though executive heads knowingly and publically take “the three-wise-monkeys” attitude. In FPM’s “NSWF: Of Reputation Risk” enterprise this is one of the hedge fund due diligence aspects of operational affairs. Judge Gardephe aptly sensing that any financial confiscation from Mr Martoma via forfeitures would be reimbursed by Mr Cohen, has accordingly set a high watermark in sentencing. Philosophically speaking, can Mr Cohen compensate Mr Martoma, his beautiful wife Rosemary (one for Mr Martoma's wall!), and their three children for a father and his 9 years’ absence from family?   

Mathew's Martoma Beautiful Wife

This above article is FPM integral views on capital market for the new millennia. Please contact kks@fundportfoliomanagement.com for advisory services on our “NSWF: Of Reputation Risk” enterprise.

The Soft-Landing ‘Global Resolution’ for Steven Cohen’s Avatars

Recent Smokescreen Stories by Main Stream Media ‘MSM Muppets’ in the SAC Capital insider trading saga:

Bloomberg June 9^th: Cohen’s Point72 Bans Instant Messaging for Some Managers
Bloomberg June 5^th: SAC’s Martoma Sentence Delayed as Defense Seeks More Time 
Bloomberg June 5^th: Story: SAC's Steven Cohen Is Still Defiant, Possibly Humbler
Bloomberg June 4^th: Steve Cohen Misses His Chats With Corporate Insiders

FPM reveals the artifice in the current episode of the SAC-saga, as contrived by Steven A Cohen's defence attorneys at SAC Capital and peddled by his spokesman Jonathan Gasthalter at Sard Verbinnen and Co. Oh, and with the pandering financial mainstream media in tow!

In cyclical convergence of hedge funds with mutual funds, Mr Cohen should know that employing a public relations company in non-transparent world should bring about new alternative media explosion. And not all reputation or hype is good - right or wrong! "Garsthalter Gas" has managed to sound the reputation clarion about "Stevie" and his  "insider trading buddies" - so SAC-Saga is not quietly going away.
 
SAC is now renamed to 72Point Asset Management and with new makeover into a "hedge fund family office", and its principal Mr Cohen is awaiting debarment from securities industry for running an insider trading racquet and pleading guilty on on 4 counts of securities fraud.  Rather than being informatively to the point, the above listed smokescreen stories are primarily designed to distract and detract from the main embedded and often hidden agenda. FPM is incensed enough to aim to set the record straight. 

A Soft-Landing Pay-off for  Steven Cohen’s Avatars Steinberg and Martoma is the obfuscated real story and our alternative headline. If court proceedings is indeed a soft landing we expect Mr Cohen won't be barred from the securities industry. Without the good old fashioned ‘U.S. Justice For Sale to Billionaires’ plutocracy, the court case should now be culminating into a proverbial spectacular car-crash scene for the ‘perps’– i.e. Mr Martoma and Mr Steinberg finally co-operating towards criminally indicting kingpin Mr Cohen.  Testimony or co-operating witness plea against Mr Cohen in exchange for a reduced sentence especially in Mr Martoma's case should still be possible, as he is still awaits sentencing according to legal professionals. A car crash scene for the insider trading perpetrators and web-of-securities-fraud Mr Cohen was anticipated. An epic car crash serving to appease higher social values of financial integrity, securities enforcement justice and the wider public interest benefits. These virtuous values should still matter even for appearance sake! 

The pending criminal court proceedings against former SAC portfolio managers  Mr Steinberg (appealing his conviction and sentencing) and Mr Martoma (awaiting his postponed sentence hearing) are simply playing out the ‘global resolution’ of the July announced criminal indictment against SAC Capital (United States v. S.A.C. Capital Advisors, L.P., et al., 13 Cr. 541 (LTS)).

 A guilty plea and a record dollar settlement of US$ 1.8 bn, including the US$ 616 mn civil forfeiture in earlier settlements related to the two parallel insider trading cases at SAC’s sub-funds Sigma and CR Intrinsic.  The respective criminal cases against SAC are in fact the current pending appeal cases involving Mr Steinberg when at Sigma and Mr Martoma when at CR Intrinsic.

A plea bargain by the convicted ‘perps’ in exchange for a lighter prison sentence of 5-6 years instead of the guideline 10-20 years that’s been threateningly touted as media distraction in both cases, was anticipated. As reported in FPM’s coverage “TheCalm Before The Storm: SAC Takeaways – Part 1”, not many expected a mere 3 ½ years sentence for Mr Steinberg, having being found guilty on all 5 charges. Mr Martoma's sentence hearing is postponed. We don’t believe it is a prosecution tactic to make him sweat, but rather to dramatise the judicial masquerade.

As early as September 2013, during the mentioned settlement negotiations, there must have been strong possibility of prosecution evidence leading directly toward incriminating Mr Cohen. Which we believe will become apparent in the SEC censure against Steven Cohen when it is commenced as scheduled in August.  Whether enforcement authorities are successful in banning him permanently from practicing the industry or a lap-wrist limited ban. Those civil administrative proceeding has now been re-scheduled for August this year. Watch this space!

To avert guilt and reputation damage from such a disgraceful banishment from securities investments Mr Cohen has reportedly hired the legal heavyweight David Boies, towards end of last year. What the myopic muppet reporters didn’t point out, in any certain way, the numerous class actions unfolding from the 4 counts of securities fraud guilty plea that SAC Capital has submitted to the courts. FPM are canvassing litigated stock-holder's registrar firm. Watch this space!

"If you expect to lose a case, you settle when the situation becomes dire, you try to save face by claiming that you are a responsible person doing it to avoid anyone else having to suffer, along with the formulaic 'to avoid the cost and distraction of a trial.'" Erik Gordon, a law and business professor at the University of Michigan. " Reuters, Sept 25, 2013

The unexpectedly light sentence for Mr Cohen’s oldest colleague does mean that SAC Capital's US$1.8 bn 'payoff' in early November last year was ‘global’ plea settlement. A settlement which precluded further evidence being solicited to incriminate Mr Cohen himself despite admission of guilt for the firm bearing his name in the settlement. A done deal which was speculated in preliminary plea discussions in September and agreed by November. Remember SAC was only indicted at the 11^th hour due to 5-year statute of limitations about filing charges from the date of the original stock trading incident. SAC was indicted on July 25^th that same year. Below is one of the few indications that the ‘global resolution’ of the case in fact occurred:

“A criminal defense lawyer, who did not want to be identified because he has had some involvement in the SAC Capital litigation, said he would be surprised if the hedge fund's lawyers agree to any deal short of a global settlement. He also said he would not approve of any deal that did not rule out the possibility of prosecutors subsequently charging Cohen.” Reuters Sept 25, 2013 

Further systemic-hypocrisy in financial services is showcased when Federal enforcement’s prosecution and SAC’s defence parties got together with their highly-paid attorneys, the April sworn-in SEC chairman Mary Jo White was rhetorically warning of a change towards will hold individuals accountable to securities fraud and that financial settlements should not be seen as merely a cost of doing business. We applaud Mary Jo White in her stance but in our reputation risk thesis she could just be another regulatory “bag of wind”. She has also avowed to modify a decades-old SEC practice of letting defendants settle without addressing the alleged wrongdoing. Watch this space!

“I want to be sure we are looking first at the individual conduct and working out to the entity, rather than starting with the entity as a whole and working in. It is a subtle shift, but one that could bring more individuals into enforcement cases… Redress for wrongdoing must never be seen as a cost of doing business made good by cutting a corporate check” SEC Chairman Mary Jo White in a speech at the Council of Institutional Investors conference in Chicago, Sept 26, 2013

In FPM’s fair and diligent way of exposing the vital truths in the obfuscated SAC-saga there has been one legal explanation in the press as to why SAC Capital the firm can be convicted but yet the 100% owner is able to dodge criminal prosecution. Here are the explanations of New York Times via its Dealbook section.

“…As long as prosecutors can show that SAC traders acted “on behalf of and for the benefit of” the fund when trading illegally, then a jury is permitted to impute liability to SAC itself.”  Peter Lattman of New York Times, Sept 24, 2013

“…The law of corporate liability allows the government to attribute the bad acts of employees to a company as long as the employees acted “on behalf of and for the benefit of” the company”  By Ben Protess and Alexandra Stevenson, of New York Times, February 2, 2014

The Court proceeding has been portrayed by the main-stream-media and PR via "Gasthalter’s Gas" as judiciously weighed-up and hotly litigated cases leading to fair-verdict convictions and respective penalties. Make no mistake, the preservation of the status-quo of plutocratic hedge fund billionaires is a defeat for the securities enforcement authorities towards the public interest.  It is clearly not in the public interest if capital market integrity and judicial judgement becomes a mre public relations whitewash.  An expediently lenient sentencing of Steinberg and Martoma stinks of done deal and masquerading court justice. 

We know closed-door negotiations took place as regards the conditional guilty plea payoff asserted by SAC defence attorneys. The guilty plea, US$ 1.8 bn settlement involving makeover in to a family office with new name 72Point Asset Management was no small concession by Mr Cohen. Since the done deal payoff the reality about the court proceedings is a specious court drama. The most recent episode of this drab soap is with Judge Sullivan presented as having erred in his interpretation of what legal components constitute an illegal insider trade. Really! Suggesting those previous parallel trial judgements and that of Steinberg could be vacated or re-tried. This intended cliff-hanger in Steinberg case affects Anthony Chiasson and Todd Newman judgements, which are also now pending appeals. FPM understands this is a red-herring story, as FPM principles have all been examined on CFA Code of Conduct and Ethics and none remember that to commit insider trading there must be knowledge of payment to the tipster! Legally speaking we cannot confirm it may not be a ruse.

In any case, Judge Sullivan’s case pertaining to the shared material non-public information regarding Dell and Nvidia, has no parallels with Elan and Wyeth’s drug trails case in Judge Paul Gardephe’s oversight of Mr Martoma’s criminal trial. Really, what nonsensical farce is playing out since the global deal between authorities and Mr Cohen had been consummated by the multi-billion dollar global settlement in November 2013.

The minimally covered story by the MSM financial press is the announcement of defence’s request for postponement of Mr Martoma’s sentencing hearing, originally scheduled for 10^th June, a day before Mr Cohen 58^th birthday.

When FPM searched keywords “Martoma sentence” on his scheduled trial date, there was minimal coverage of the online news about the postponement. Is it possible that New York Times DealBook site and the Stateside pink sheets “Wall Street Journal” and others are concealing the important announcement of the sentence hearing being kicked into the proverbial long grass. Only Bloomberg and its sub-division BusinessWeek seemed to be reporting at all. A wide-circulation PR announcement about the sentence hearing delay would have raised too many questions. So Mr Cohen’s PR-agent Gasthalter’s Gas and SEC spokesman may strategically have disseminated news only to selective journalists.  A conspiracy and mere journalistic incompetence are also probable explanation to the omission. A delay in court proceedings which will allow Mr Martoma to still plea bargain with prosecution for a reduced sentence or accept facing severer sentence and financial penalty. In dramatic terms, the prosecution is haranguing Mr Martoma for an un-deliberated hurried decision, by seeking a postponement only till the month-end of June. If prosecutors are involved in the stage-managed theatrics, post global settlement, then shame on the profession. The Probation Department had reportedly (see excerpt below) sent Mr Martoma’s attorneys sentencing guidelines which must have had him and his beautiful wife and three children jumping out of their skins:

“…Martoma argues federal sentencing guidelines require a term of between 5 and 6 1/2 years. He claims he’s responsible only for the bonus he received, not the entire gain by SAC… Martoma’s lawyers requested in a letter to U.S. District Judge Paul Gardephe last week that the June 10 sentencing be postponed for more than a month, citing a late report by the court’s Probation Department. The department said sentencing guidelines call for Martoma to receive between 15.7 years and 19.6 years in prison, according to a court filing by Martoma. Federal prosecutors in the office of Manhattan U.S. Attorney Preet Bharara agreed to the delay, but want it rescheduled for later this month… ” Bloomberg BusinessWeek June5th, 2014

Talk about mosaic research! That’s what understanding the public relations announcements via the pandering muppets of the mainstream financial media is like. Alternatively, ask Sherlock Holmes to understand conclusions! The reporting is tantamount to information degradation of very little added value. That’s why we had the old maxim “Don’t believe everything you read in the papers!”

No Smoke Without Fire: What’s In a Name Change Mr Cohen?

Despite the firm bearing his name SAC Capital being indicted and submitting a billion dollars plus guilty plea settlement, the man himself Steven A. Cohen has not been charged! 

The nature of re-branding SAC Capital to Point72 Asset Management is curiously odd! Is it mere bluff and bluster about SAC’s business continuity in the face of prosecution by US Justice Department and SEC? For those investment professionals familiar with Mr Cohen and SAC-saga, apparently the new name of the embattled SAC hedge fund is inspired by the current address of its headquarters: 72 Cummings Point Road in Stamford, Connecticut. The name change becomes effective 3 days before the crucial 10^th April date, when Judge Laura Taylor Swain of Federal District Court of Lower Manhattan is scheduled to approve or reject SAC’s November 2013 guilty plea settlement.

We examine developments since our last blog instalment of the SAC-saga at end-September 2013 entitled “No smoke without Fire – A Denouement”.

Ø      Despite the very recent convictions of two senior SAC Capital portfolio managers (Mathew Martoma in February and Michael Steinberg in December) and a historical litany of guilty-pleas and litigation[1] involving former or then SAC employees, the man presiding over “the breeding ground” for illegal trading astonishingly has yet to be charged. Especially incredulous since Steven A. Cohen’s eponymous firm was itself finally charged in July and pleaded guilty in November 2013. SAC’s indictment alleged that employee insider trading activity was made possible by “institutional practices that encouraged the widespread solicitation and use of illegal inside information”. FPM is circumspect about the United States’ legislature and political morality in letting pass such abject historical professional deceit.

Our sarcasm is best conveyed by Thomas Carlyle:  “On the whole what a beautiful establishment here fitted-up for the accommodation of the scoundrel-world”[2]

Ø      As FPM updated in its actionable thesis “No Smoke Without Fire: of Reputation Risk”, SAC’s outcome sets dangerous precedents of blatant double standards in the US Justice system. This ‘double-standards’ conclusion is all too obvious when comparing SAC’s current outcomes with the not too distant or dissimilar previous mega-profile insider prosecution; that of billionaire Raj Rajaratnam of the Galleon Group, which resulted in 11-years prison sentence for the Group’s founder. Our contacts suggest that Mr Cohen has so far managed to avoid indictment by negotiating out-of-court settlement on behalf of SAC for a reported staggering record amount of US$1.2 bn (total SAC settlements to-date nearer US$2 bn); whereas Mr Rajaratnam’s personal penalty was a paltry US$62.8 mn. Sounds like Mr Rajaratnam preferred jail to parting with his ill gotten gains. Explains his lengthy jail sentence despite formulaic rules governing sentencing. This ‘money talks’ argument is irreconcilable to FPM’s relationships considering that Mr Rajaratnam’s was evidently investigated, prosecuted and convicted of 14 counts of securities fraud and conspiracy to commit securities fraud. On the other hand Mr Cohen paid handsome settlements and submitted a guilty plea for the firm bearing his name, despite himself not even being charged!

Ø      Punishment unjustly not fitting the crime! Especially if Mr Cohen having overseen a breeding ground for financial malfeasance over two decades merely receives a proverbial ‘slap on the wrist’ from the SEC administrative censure. We will be tracking the date set for the SEC hearing. In that hearing, Mr Cohen is expected in the least to be barred / banned from the securities industry clear – anything short of that will be a colossal conceit in the SAC-saga. The eponymous firm SAC, which was described by the US government as a “veritable magnet for market cheaters”, cannot reputably exist anymore! The announced rebranding is inadvertent realisation of that being put right. The combined authority of the US Justice and its enforcement would be reflected upon as morally and conspiratorially wanting for a) not bringing criminal charges and conviction after 10-years hot pursuit, but b) also for negotiating an expedient settlement at the cost of financial integrity and justice.

Ø      FPM believes the July 2013 issued SEC administrative civil proceedings charging Mr Cohen of failing to properly supervise insider trading at his firm and a ban from industry will be upheld. Especially after the convictions of close aides Mr Martoma and Mr Steinberg.  However as yet, the lack of criminal charges against Mr Cohen highlights only the cosy arrangements between political expediencies and financial clout. It would seem a great conspiracy of the participating US authorities in the SAC-saga that they pre-conceived the two high profile convictions mentioned. The guilty plea bargaining for reduced sentence of junior analysts like Jon Horvath alone could not alone implicate Mr Cohen in failure to supervise. In organisational hierarchies, more often than not, a firm’s analysts are permitted to speak only to their line manager not directly the group manager like Mr Cohen. So the failure to supervise censure in July 2013 preceded any real and actual failure to supervise at the time of SEC ostensibly issuing it! i.e. no direct contacts of Mr Cohen had been convicted by then! The mentioned two senior portfolio managers’ convictions came in December 2013 and January 2014, was clearly much expected, and as reported the Federal Bureau of Investigations’ target was always the head honcho Mr Cohen. So while Mr Steinberg and Mr Martoma cases were mere show-trials with foregone conclusions, the real-deal settlement talks scheming happened before between September and October 2013 where a global settlement was hatched. A deal which essentially involved a non-prosecution agreement for Mr Cohen. Implying that the two closest managers to Mr Cohen were expendable as a “grain of sand”. To verify this run of events, after Mr Steinberg’s earlier conviction, Mr Martoma’s defense was quoted:

In his closing remarks, Richard M. Strassberg, a lawyer for Mr. Martoma, pointedly appealed to the jury not to convict his client as “a means to make a case against Steve Cohen.” He reiterated that Mr. Cohen had decided how the trading was done, not his client. (New York Times, In the SAC Saga, It’s Hard to Chase a Shadow, February 2014)

           

Ø      In light of the stitch-up Mathew Martoma and Michael Steinberg were party to, for political and financial convenience they should revolt against Mr Cohen. If they have any sense of humanitarian self worth left, other than handsome financial payoffs probably hidden from authorities but due for confiscation, for that they should save-face and turn on Mr Cohen. Or they will always reputedly be “pimp daddy’s bitches!”, as the street slang goes. 

 Rosemary and Mathew Martoma 2013. Keith Bedford/Reuters

Ø     In NSWF we suggest Mr Martoma as having more providential moral righteousness and therefore more likely to become whistle-blower against his former boss. Other than the opined personal values, it is only circumstantially rational that Mr Martoma being only 40 years old and in the prime of life with a beautiful young wife Rosemary (see picture), should  seek to reduce his prison sentence from the anticipated 10 plus years. Logical considerations for giving testimony evidence against Mr Cohen are that "it is not personal but merely professional!" 

Ø      Already the simple analysis of SAC’s case suggests racial prejudice, in how an Indian sub-continent descended hedge fund kingpin Mr Rajaratnam was treated in Department of Justice (DoJ) prosecution and how Semitic-descendent American Mr Cohen is in comparison being mollycoddled. The double standards are even starker when considering outcomes of the previous high-profile case to Galleon’s. This was the multi-year on-and-off investigation involving hedge fund founder billionaire Arthur Samberg and his Pequot Capital Management Inc. SEC charged Pequot and its Chairman and CEO Mr Samberg with insider trading in Microsoft Corporation securities. Pequot and Samberg paid nearly US$28 mn to settle the SEC's charges at end-May 2010. No prison sentence was awarded and circumstantial evidence linking a senior Wall Street executive John Mack was suppressed. For FPM’s reputation risk thesis ‘NSWF’, former Morgan Stanley Chief Executive Officer Mr Mack’s associations is of continued interest. Since the Morgans Stanley he taken on many directorships including being on the advisory board of giants like KKR & Co and China Investment Corporation.

Ø      The legal proceedings in Galleon’s case seems to have set unusual legal precedents which have insulated Mr Cohen from charges. Prior to Mr Rajaratnam’s conviction in October 2011 many insider trading cases were based on circumstantial evidence.  “…But the case against Rajaratnam was based in large part on direct evidence – recordings of over 2,200 of Rajaratnam’s telephone conversations with more than 130 individuals.  As Rajaratnam’s defence team found, it is often difficult or impossible to rebut the validity of wiretap evidence.”[3] The issue of wiretaps (taped telephone calls) being permissible in SACs case and the lack of such direct evidence seems to have exonerated Mr Cohen from prosecution. Or was it likely that his heavily guarded security ring-fenced house and office were wary of such snooping and hence outwitted listening devices? FPM kindly asks case-linked individuals to contact us and clarify permitted use of wiretaps in Galleon but not mentioned or used in SAC’s prosecution.

Ø      Circumstantial evidence corroborated by email was not used or accepted as evidence against Mr Cohen, despite the authourities alleging him as co-conspirator in indictments against Mr Steinberg in the Dell insider trading case, and in Mr Martoma’s securities frauds related to the Elan and Wyeth. These are two particular circumstances in the both cases in which Mr Cohen, presiding over a firm with so much history in insider trading, could have been indicted:

“Mr Horvath’s email [containing an inside tip-off] was forwarded to Mr Cohen, who was working from his office at his holiday home on Long Island, according to SEC filings. Within 10 minutes Mr Cohen had sold his $11m Dell position. Lawyers for Mr Cohen said he never read the email.” (Financial Times, Decade-long quest ends at SAC front door, 25 July 2013)

“Prosecutors introduced evidence that a day before Mr. Cohen gave the instruction to begin dumping Elan shares, he was on the telephone for 20 minutes on a Sunday with Mr. Martoma. The call took place three days after Dr. Gilman first said he told Mr. Martoma about the problems with the clinical trial.

It is not known what the two men discussed during that Sunday call, but prosecutors inferred that they talked about Mr. Martoma’s change of heart about Elan. As Mr. Villhauer’s testimony made clear, Mr. Cohen’s fingerprints were all over the trade”. (New York Times, In the SAC Saga, It’s Hard to Chase a Shadow, February 2014)

Ø      The bare-face effrontery to the authorities, intended or otherwise, of naming the new family office with the address of where "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry"[4] took place is certainly odd if not perverse! As articulated extensively in ‘NSWF: of Reputation Risk’ we think the strategising from SAC’s spokesman Jonathan Gasthalter and his public relations’ firm Sard Verbinnen & Co is askew. FPM insiders discussed whether Mr Cohen knew too much about insider-trading rings and other high profile participants. Such speculation could have brought unwanted disrepute upon the hedge fund industry if he was put on the stand in a court trial. Individually he may have been "too big to fail". Instead Mr Cohen’s wherewithal about insider trading may have served in the closed-door plea settlements. For Mr Cohen’s silence or simply for the billion-dollar doled out SEC and DoJ would have entered a non-prosecution agreement.We mentioned above a similar, the cover-up involving Pequot Capital and John Mack. Below excerpt from “NSWF: Of Reputation Risk”:

“The agency paid $755,000 in 2010 to Gary Aguirre, a former enforcement lawyer who said he was unjustly fired for trying to investigate insider-trading allegations involving former Morgan Stanley (MS) Chief Executive Officer John Mack. The SEC closed its probe of Mack in 2006 without allegations of wrongdoing...” (BusinessWeek, June 2013)

Ø      Positively interpreting the steadfast nature of renaming SAC Capital with the inspiration of the current maligned headquarters’ address: FPM thinks the rebranding is intended to serve as reminder to Judge Laura Taylor Swain of what’s at stake from upsetting proceedings by rejecting the guilty plea settlement. If DoJ wanted to exact a higher price than the settlement doled out by the multi-billionaire Mr Cohen,  the enterprise-value of the diminishing SAC empire would be on the block, including real estate like 72 Cummings Point, causing only temporal shock in market valuations. Additionally, if SEC’s administrative censure against Mr Cohen is implemented it would prevent him practising in the investment industry. Resulting in material loss of business for brokers et al whom he has rewarded generously while in practice.

Ø      While the recent spate financial settlements related to ‘bulge-bracket banking’ malpractices have tended to be approved it technically need not be the case – see next bullet point. In this SAC’s case, rejecting the guilty plea settlement with the opportunity to recoup greater financial forfeitures from indicting Mr Cohen himself and his enterprise, would serve the public interest vastly more. Also practically serving as a deterrent exemplar case in insider trading enforcement to would-be cheats in the burgeoning hedge funds or other shadow banking operations. While Mr Cohen is worth some US$8-9 bn and public debt is ballooning to unsustainable levels; there’s the public interest solution! Instead of the US government tinkering with social welfare and essential ‘Obma-care’ budgets to reduce national debt, why not morally go after the ‘big fish’ financial class that put the country in this precarious financial mess! Anyway, it’s logical commercial sense to pursue the big deals given a choice.

Ø      SAC’s obliteration or demise has not or will not cause widespread market panic. Mr Cohen and his firm’s irregularities imn the news so much will more likely shock or ripple in capital markets. It’s not like if similar sounding Goldman Sachs were to be capitulated by DoJ and authorities. The distinction of the two is that one is a bulge-bracket global institution and the other is relatively inconsequential after the 10-years plus scandal!  The widespread global banking wrongdoings brought to Justice since the financial crisis which ballooned national debts and caused austerity to ordinary citizens, could actually mollify public interests if at least scape-goats were properly punished. Why are multi-million dollar white-collar crimes and their perpetrators not synonymous with appropriate punishment and jail sentences?

Ø      A crucial point of law, not too often mentioned by the pandering financial press, is that SAC’s guilty plea settlement may not be rubber-stamped or approved if the Judge decides that this would not be in the public interest. FPM asks: How in all conscience is an expedient and relatively small financial settlement (total circa US$2 bn) by a multi-billionaire (worth US$8-9 bn), after a decade-long investigation and prosecution in the public interest? Especially in light of SAC being indicted for potentially committing 20-years of systematic fraud, pleading guilty after “being on the run” from authorities so to speak, accepting punitive financial liability, and yet ringmaster avoids criminal jail-sentence and his firm continues to practice. To put a finer point to this, be mindful that the ‘monied-class’ in this instance is a professional from the higher echelons of financial services. The public cannot seriously be expected to believe in the integrity of financial capital markets, if a token billionaire banker amid the wrought financial crisis can walk away from professional malpractices. Now that’s scandalous!

Ø      With the media-speculated prospect of SAC becoming a smaller hedge fund operation do they need office space of some 98,900 square-foot? Less office space would be commensurate with the anticipated diminishing assets under management (AuM) at SAC. Seeing that its insider trading reputation has forced Mr Cohen to close its doors to the unlimited pool of external investment capital; through essentially investor capital-flight redemptions. And left SAC managing only internal proprietor’s and employee’s money as a family office. After the carefully managed winding-down of operations, as ‘orderly’ as prescribed for future bankruptcies, and after the many years of the outrageous SAC-saga, Sard Verbinnen  have to be credited for managing the financial announcements and public interest news without causing populist or corporate saver’s backlash. So this is how Sard Verbinnen’s orchestrated news mitigates, pacifies and spins the fall from grace of SAC and its founder:   

“The move comes as SAC begins a process of winding down and rebranding itself after pleading guilty to criminal insider trading charges late last year. As part of the plea, Mr. Cohen agreed to close his hedge fund to outside investors. He has set in motion plans to start a new so-called family office that will manage employee money and his personal $9 billion.” (The New York Times: Chief Compliance Officer at SAC Capital Is Stepping Down, February 14, 2014)

Ø      The implication of the name change suggests falsely or perhaps intended as a self-fulfilling prophecy, some degree of business continuity. Current dwindling staff of around 850, and near 1000 at SAC’s zenith has led some resourceful speculators to suggest Point72 and HQ-site may become an alternative investment manager sponsor. Following in the footsteps of other hedge fund luminaries who have also voluntarily or otherwise taken a step back from trading, such as Julian Robertson when he invested in his ‘Tiger Cubs’ or protégée asset managers. In this respect FPM expects that “pigs will also fly!”

FPM does not believe the SAC-saga has ended: every good story has some sort of twist in the tale. Ask Hollywood! Despite the legal-point about five-year statute of limitations on insider trading charges or non-prosecution agreement, new evidence may be revealed or uncovered to haunt Mr Cohen from the unlikeliest sources when least expected! Mr Cohen’s reputation as King of Information Arbitrage precedes him. The likelihood of Mr Martoma or Mr Steinberg turning into prosecution witness against their former boss for reduced jail time is still a probability.

We know he was lauded as a trader who could sleep at nights without worrying about book positions. Can he sleep at night now that his reputational association in insider trading racquets is broadly published, tarnished and forevermore lingering? While Mr Cohen may have made his fortunes and kept most of it while playing his keep-out-of-jail card, he will also be expected to retire with ban from industry. The aggressive management of the multi-year insider tipping case should have resulted in a prison sentence for the ‘big man’. Preet Bahraa, the regional US attorney for DoJ and Sanjay Wadhwa, the Associate Director of SEC's regional office, who oversaw the agency’s investigation into SAC, may have been politically stymied from their ultimate goal. Despite the rhetoric quoted below from April 2013 installed SEC Chairman Mary Jo White, FPM understand that investors pays their “2/20” hedge fund fees for the added reputation-risk on the line:

“Redress for wrongdoing must never be seen as a cost of doing business made good by cutting a corporate check” Mary Jo White at the Council of Institutional Investors conference in 2013

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[1] FPM list of SAC-related litigation: " SAC Capital's Litany of Litigation & Proceedings”

[2] Source: Thomas Carlyle description circa 1850 writing about prisons “Latter-Day Pamphlets”

[3] Source: Hedge Fund Law Report Vol. 5 No.42 (Nov. 9, 2012)

[4] Description used in the indictment against SAC Capital Advisors LP filed by the U.S. Department of Justice