It would take a stronger man than me to resist making fun of the SAC Capital white paper responding to the charges against Steve Cohen, as you can tell from the post I wrote before I read it. But now that that’s out of our system I suppose we ought to actually talk about it? Having read it now, I find it creepily compelling.
The first trick in reading it is to understand that neither the SEC’s complaint nor the white paper is really about what they say they’re about, which is “failure to supervise.” The SEC throws in a few “failed to reasonably supervise”‘s for show, but never talks one way or the other about SAC’s procedures and systems to stop insider trading – it’s all “Steve Cohen saw red flags and ignored them and then traded on that red-flag-draped inside information.” And the white paper has a rousing defense of SAC’s compliance procedures,1 but spends the bulk of its energy on second-by-second timelines to refute those supposed red flags. Nobody’s really that into the supervising or lack thereof. This is an insider-trading-lite case: the SEC is charging Cohen with insider-trading-but-we-can’t-prove-it, and SAC’s response is “you can’t prove it because it wasn’t insider trading.” Read more »
The thing is that when you run a hedge fund and “At least nine current or former … employees have been linked to insider trading while working at the firm, including four who have pleaded guilty to crimes,” the SEC really ought to charge you with “fail[ing] reasonably to supervise” your employees, no? At least? Whether or not you were insider trading yourself, you weren’t exactly “continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”
So my first reaction to the SEC’s case against Steve Cohen was “what took so long” but then I read the complaint and it is worth the wait, full of information that we haven’t seen before and that is … awkward. Here is the best of it, emphasis added for Steve’s own words: Read more »
Every publication today ran a story about how SAC investors are harrumphing around about pulling all their money out of SAC since the words “SAC” and “insider trading” seem to keep showing up in the same sentence and that sentence is sort of miscellaneously bad. Here is my favorite harrumph:
“Patience will be wearing thin among some investors after this latest accusation,” said Vidak Radonjic, managing partner at Beryl Consulting Group LLC in Jersey City, New Jersey, which advises clients on investing in hedge funds. “There is a pattern of potential compliance breaches and the money involved is getting bigger.”
I say unto you, the operative phrase there is “the money involved is getting bigger.”1 And I ask also unto you: if you were a passive investor in a hedge fund, and you found out and/or strongly suspected that your hedge fund was insider trading successfully, what would you do? I know what I’d do! You probably know what I’d do too.
Here is a hypothesis that may or may not be consistent with the facts: Read more »