SEC

One hopes “black edge” wasn’t on the list. Anyway today’s indictment against SAC, for wire fraud and securities fraud, is a hoot:

For example, on or about July 29, 2009, a recently hired SAC PM (the “New PM”) sent an instant message to [Steve Cohen] and relayed that, due to some “recent research,” the New PM planned to short Nokia when he started work 10 days later. The New PM apologized for being “cryptic” but noted that the head of SAC compliance “was giving me Rules 101 yesterday – so I won’t be saying much[.] [T]oo scary.”

Possibly the weirdest part here is that new hires got compliance lectures two weeks before they showed up at the firm? But maybe not; the DOJ takes a pretty dim view of SAC’s hiring process generally, and if you believe the DOJ that SAC’s main hiring criterion was “is good at insider trading” then you could imagine the need for a little pre-start-date warning about email etiquette: Read more »

  • 24 Jul 2013 at 10:53 AM

Fab Tourre’s CDO Deal Wasn’t Complicated Enough

If you wanted to short the housing market in 2007 you could just buy protection on mortgage-backed securities via a synthetic CDO, and that’s what John Paulson did in the Abacus deal, for which Goldman Sachs and Fab Tourre got in trouble. But the problem with that is that buying protection costs money; just for instance the super-senior protection in Abacus would run you about 50bps, or around $4.5 million a year on the $909mm notional that ACA Capital wrapped.1 And who wants to throw away millions of dollars a year waiting for the housing market to crash?

So another way to short the market is to buy a lot of protection on senior tranches of CDOs (cheap because: what are the odds that the housing market will crash?) while also selling a little protection on junior tranches (expensive because the odds that there’ll be some defaults are higher). If you do this, you can have a positive carry (you get paid as more each year on the protection you sold than you pay on the protection you bought), but you can make just about as much money if the housing market craters and there are massive defaults. (The tradeoff is that if performance is mediocre, with some defaults, then you lose money on the junior protection you sold and don’t make it back on the senior protection you bought.)

This second trade is a very stylized description of what Magnetar did,2 in another CDO deal for which JPMorgan got in a bit of trouble. Less than Goldman, though! Read more »

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 »

Surely the most hilarious possible defense to charges that Steve Cohen “failed to supervise” his traders is that he couldn’t have failed to supervise his traders because he was too busy ignoring everything they said and did. So what a delight to learn that SAC has chosen exactly that defense: Read more »

In case that was unclear. Read more »

The SEC’s tack angered the SAC chief, the people close to the firm said. The billionaire hedge-fund manager has been discussing plans to move forward with his business, even as the government has stepped up its scrutiny…Even so, Mr. Cohen has said privately that he believes he can raise new money from wealthy individuals, the people said. While institutions have pulled money, some wealthy individual SAC clients have stuck by the firm, according to people with knowledge of the matter. [WSJ]

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 »