Ex-SAC Capital Traders Implicated in Widening U.S. Insider Trading Probe

Tap for Slideshow
Photographer: Jin Lee/Bloomberg

Former traders of SAC Capital Advisors LP have been implicated in a U.S. crackdown on insider trading on Wall Street.

Close
Photographer: Jin Lee/Bloomberg

Former traders of SAC Capital Advisors LP have been implicated in a U.S. crackdown on insider trading on Wall Street. Close

Former traders of SAC Capital Advisors LP have been implicated in a U.S. crackdown on insider trading on Wall Street.

Photographer: Douglas Healey/Bloomberg

The offices of Diamondback Capital Management LLC stand during a raid by the Federal Bureau of Investigation in Stamford, Connecticut. Close

The offices of Diamondback Capital Management LLC stand during a raid by the Federal Bureau of Investigation in Stamford, Connecticut.

Photographer: Douglas Healey/Bloomberg

Federal Bureau of Investigation agents return to their cars at Diamondback Capital Management LLC following a raid in Stamford, Connecticut. Close

Federal Bureau of Investigation agents return to their cars at Diamondback Capital Management LLC following a raid in... Read More

Photographer: Rick Maiman/Bloomberg

Galleon’s founder, Raj Rajaratnam, is scheduled to go on trial next year for insider trading, which he denies. Close

Galleon’s founder, Raj Rajaratnam, is scheduled to go on trial next year for insider trading, which he denies.

Former traders of Steven A. Cohen’s SAC Capital Advisors LP have been implicated in a U.S. crackdown on insider trading on Wall Street. SAC received a request for documents from U.S. officials, according to a person familiar with the matter.

Federal Bureau of Investigation agents yesterday searched the offices of Level Global Investors LP and Diamondback Capital Management LLC in probing illegal trading by hedge funds. Both firms were founded by former SAC employees. Wellington Management Co., the Boston-based money manager that oversees $598 billion, also got a request for documents from U.S. investigators, according to a person familiar with the firm.

“They appear to have an interest in some of the traders who used to work at SAC Capital,” John Coffee, a securities law professor at Columbia University in New York, said in an interview. “Those traders that the government seems to be pursuing have to make a quick decision about whether they’re going to cooperate or whether they’re going to fight. They will get greater leniency if they give the government bigger fish.”

No allegation of wrongdoing has been made against Stamford, Connecticut-based SAC, which manages $12 billion. Jonathan Gasthalter, a spokesman for the firm, declined to comment.

As of February, the firm hadn’t received a government subpoena for documents. Gasthalter declined to comment on whether SAC has been subpoenaed since then.

Janus Capital

Janus Capital Group Inc. said today in an e-mailed statement that it got a request for general information and intends to cooperate with the inquiry. The Denver-based firm didn’t say who had made the inquiry and declined to make any comment beyond the contents of the statement.

Wellington said on an internal conference call yesterday that it is reviewing its records and that it didn’t engage in illegal trading, according to the person, who asked not to be named because the firm is private.

In a call today, Wellington officials disclosed the document request, without specifying what kind of data investigators are seeking, the person said. Sara Lou Sherman, a spokeswoman for Wellington, declined to comment.

Level Global was founded in 2003 by SAC veteran David Ganek. Diamondback was started in 2005 by Rich Schimel, Lawrence Sapanski and Chad Loweth, all former SAC traders.

A third hedge fund, Boston-based Loch Capital Management, also was the subject of a search warrant yesterday, according to a person familiar with the matter.

Typical Cases

In typical insider trading cases, the Securities and Exchange Commission issues administrative subpoenas for trading records or the Justice Department seeks grand jury subpoenas, said John J. Carney, a former U.S. prosecutor and SEC attorney. The use of search warrants indicates a more aggressive approach by federal authorities, he said.

“The execution of a search warrant can have a tremendous shock-and-awe effect,” said Carney, now at Baker Hostetler LLP. “To use a search warrant, prosecutors have to convince a magistrate judge that they have probable cause that inside the place to be searched is evidence of a crime.”

The raids yesterday follow testimony by a former UBS AG investment banker at a criminal trial in September that he “provided confidential information” to a friend who worked as an analyst at SAC. Separately, Richard Choo-Beng Lee, the co- founder of Spherix Capital LLC and another SAC alumnus, has pleaded guilty and is cooperating with prosecutors in its probe of the Galleon Group hedge fund.

More Subpoenas

Portfolio manager Richard Grodin, who left SAC to start Stratix Asset Management LLC in 2004, also has received a subpoena, according to a person familiar with the investigation.

“It is fair to connect the dots between ongoing insider- trading investigations where a number of individuals have pleaded guilty, and tie them to hedge funds, corporations and other entities,” said Mauro Wolfe, a former federal prosecutor who is now at Dickstein Shapiro LLP.

At least one FBI agent, B.J. Kang, has been inquiring about SAC’s trading for several years, according to a person who has been interviewed by him, Bloomberg Markets reported in February. Jessie Erwin, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment for this story.

Steve Bruce, a spokesman for Diamondback, and Andy Merrill, a spokesman for Level Global, confirmed that the FBI had searched their offices and said their firms are cooperating.

Three Times Peers

Diamondback returned three times as much as peers since it was founded in 2005, according to an investor letter. It gained 73 percent from mid-2005 through this July, compared with 22 percent for funds with a similar approach, according to Chicago- based Hedge Fund Research Inc. It beat so-called multistrategy funds in 2006, 2007 and 2008, skirting losses from the credit crisis. It has lagged behind the strategy average since then.

Bharara has been leading a crackdown on what he said in a speech this month was “rampant” insider trading on Wall Street and is devoting “significant resources” to the investigations.

Fourteen people pleaded guilty in the Galleon case, and at least nine others are charged. Galleon founder Raj Rajaratnam is slated for trial next year for insider trading, which he denies.

“Everyone in the hedge-fund industry is now trembling, wondering whether anything they said over the phone could be seen as incriminating,” Coffee said.

The search warrants probably mean prosecutors are studying the marketplace more closely and are more “heavily invested in the process,” Carney said. To make insider-trading cases, prosecutors must show people bought or sold stock using material, non-public information and had the intent to defraud, he said.

‘Truly Unbelievable’

To attorney Ralph Ferrara of Dewey & LeBoeuf LLP, the search warrants were “truly unbelievable” because the government doesn’t have a clear standard for insider trading.

“It is outrageous that the U.S. government has decided to treat something that they can’t define as if it were a dope cartel,” Ferrara said. “The issue is to what extent do the people they’re sweeping up really think they’re violating the law, or are they using top investigative techniques to fill in pieces of a mosaic, which is not against the law.”

Cohen started SAC in 1992 after leaving Gruntal & Co., a New York brokerage firm. His track record at SAC -- a 30 percent average annual return for 18 years -- is one of the best in the hedge fund business. SAC has had one annual loss since it was founded in 1992: a 19 percent drop for the flagship SAC Capital International Ltd. in 2008.

Jumped 29%

The fund jumped 29 percent in 2009 and is up again this year, gaining 11 percent through Oct. 31, according to a person familiar with its performance. SAC delivers those returns in large part by trading stocks quickly, usually holding them for two to 30 days, according to a document sent to potential investors in early 2009.

Schimel, a co-founder of Stamford, Connecticut-based Diamondback, is Cohen’s brother-in-law and a former SAC portfolio manager. Sapanski joined SAC in 1998 and traded financial services, energy and retail stocks, according to Diamondback’s marketing documents.

“It would appear in this case that the government is most likely looking for cooperators who can give them information about the types of information that was passed on to people who profited from insider trading,” Joshua Hochberg, who ran the Justice Department’s criminal fraud section from 1998 to 2005, said in an interview. Hochberg is now a partner McKenna Long & Aldridge LLP.

Allegations that SAC or its former traders have used illegal stock tips have surfaced for the past year in several court cases.

Lee Guilty

In the Galleon Group case, Lee pleaded guilty last year and agreed to cooperate. He was an analyst at SAC from 1999 to 2004 before joining Grodin’s Stratix Asset Management. Lee unsuccessfully sought to return to SAC after Stratix closed. Grodin didn’t return a call seeking comment yesterday.

Separately, in the Manhattan federal court trial of Joseph Contorinis in September and October, the government’s star witness, Nicos Stephanou, a former associate director of mergers and acquisitions at UBS, listed six people to whom he leaked stock tips. Those people included his friend Jonathan Hollander, who was an analyst at SAC, Stephanou said.

Hollander hasn’t been accused of wrongdoing. His lawyer, Aitan Goelman, declined to comment.

Chip Skowron, a co-portfolio manager at FrontPoint Partners LLC who previously worked at SAC, was put on leave following the arrest this month of a Human Genome Sciences Inc. consultant, Yves Benhamou. Skowron was the recipient of Benhamou’s tips, according to a person familiar with the matter. Skowron didn’t immediately return a call seeking comment yesterday.

Ex-Wife

Patricia Cohen, who separated from Steven Cohen in 1988 and sued him last year for racketeering, said in her complaint that he told her “he had received inside information in advance of the purchase of RCA Corp. by General Electric Co.”

At the time, Gasthalter called the lawsuit by Cohen’s ex- wife “ludicrous.” A judge is considering Steven Cohen’s request that the suit be dismissed.

SAC was also at the center of a criminal trial of Milton Balkany, a Brooklyn rabbi who was convicted on Nov. 10 of charges that he tried to extort $4 million from the firm by claiming he could prevent a federal inmate from telling authorities about alleged insider trades.

According to court records, Balkany told an investigator with the U.S. Attorney’s office in New York in a conversation that prosecutors secretly taped that SAC had inside tips about medical device makers Cyberonics Inc. and Respironics Inc. and Myriad Genetics Inc., which makes molecular diagnostic products. An SAC lawyer alerted prosecutors to the extortion attempt, and a prosecutor said during the trial that Balkany “lied” and that there was no evidence of illegal trades.

To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net;

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.