The SEC settled a little crisis-era CDO fraud case with UBS today and the fraud is pretty entertainingly shitty. Basically UBS provided the warehouse for a synthetic CDO where the notorious ACA was the collateral manager, and the disclosed deal was that, when the CDO closed, it would enter into (as protection seller) any CDS contracts that UBS had entered as part of the warehouse at (1) the market price of those CDS or (2) the price UBS had received for them as initial counterparty, whichever was more favorable to UBS.1 Now right there you’ve got some optionality and room for fuzziness, and you could imagine various unpleasant schemes where, for instance, UBS cherry-picks some contracts to transfer at market and some at historic price, or where UBS mis-marks some contracts to get a better deal when it transfers them.
But the actual scheme was simpler and dumber: Read more »
Fabrice Tourre testified in his SEC trial late last week and many perplexing things came out, with the most perplexing being a tie between:
Fab’s claims that the key disputed email, in which he maybe-defrauded maybe-victim ACA, was “not accurate” but not “false,” an epistemologico-semiotic dispute that probably sounds better in French, and
Perhaps less perplexing is that Fab’s feelings about Abacus seem to have been less about bamboozling one client on behalf of another and more about just printing a trade, whichever direction it went in. John Carney reports that Goldman was taking too long getting ABN Amro to intermediate ACA’s guarantee of the super senior tranche of the deal, Paulson was getting antsy, and Fab, ever servicey, was trying to assuage their antsiness by just getting Goldman to do the deal naked: Read more »
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 »
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 »
I haven’t been following Fabrice Tourre’s trial all that closely but I gather that the main evidence against him is that a Goldman saleswoman, Gail Kreitman, told her client ACA Capital Management that Paulson & Co. was going to be a long investor in a CDO called Abacus. That turned out to be false, and arguably in a material and fraudy way. So: why isn’t the SEC suing Gail Kreitman? Well, because someone told her that that it was true, and there’s at least, like, a 60/40 chance that that someone was Fab. Because he was pretty competent: Read more »