SAC’s Trading Mimics Insider Dealings Identified by Prosecutors

SAC Capital Advisors LP traded at least 11 stocks near the time of insider trading in the same shares that prosecutors have identified at other hedge funds, according to data compiled by Bloomberg.

Former SAC portfolio managers Noah Freeman and Donald Longueuil obtained material, nonpublic information on two of the 11, Advanced Micro Devices Inc. and Marvell Technology Group, in a conspiracy beginning before they joined the hedge fund in 2008, according to a lawsuit filed this week by the Securities and Exchange Commission. The SEC accuses Longueuil of trading Marvell shares in May 2008 based on an illegal tip from Freeman. SAC hired Freeman that June and Longueuil that July.

SAC securities filings from 2006 through 2009 show position changes in at least nine other stocks during periods when prosecutors have said Galleon Group LLC co-founder Raj Rajaratnam and others were trading based on insider tips. The companies are Akamai Technologies Inc., Atheros Communications Inc., ATI Technologies Inc., Clearwire Corp., EBay Inc., Google Inc., the former Hilton Hotels Corp., Intel Corp. and Polycom Inc.

The $12.8 billion hedge fund’s positions in the 11 stocks moved up or down consistent with buying and selling that federal prosecutors have described in criminal filings related to other insider trading cases, the data compiled by Bloomberg show. Rajaratnam is awaiting trial next month after pleading not guilty to a 19-count U.S. indictment alleging securities fraud.

Securities filings by SAC, based in Stamford, Connecticut, and run by billionaire Steven A. Cohen, are quarterly snapshots of the hedge fund’s positions that may change daily or hourly. They don’t show purchase or sale dates, or whether any trading was profitable.

Insider Trading Probe

More than three dozen people have been charged since October 2009 in three overlapping insider trading schemes involving Rajaratnam, former Galleon employees, and consultants who link investors with industry experts working at publicly traded companies.

Longueuil and Freemen, both 34, were among four people named in criminal complaints filed Feb. 7 by the Justice Department. Freeman’s lawyer, Benjamin Rosenberg, declined to comment. Longueuil’s attorney, Craig Carpenito of Alston & Bird LLP in New York, didn’t respond to a request for comment.

In a Feb. 8 statement, SAC said it was “outraged” by the alleged “egregious violations of our ethical standards” by Freeman and Longueuil, who left SAC in 2010 “due to poor performance.” The government alleged that their illegal conduct took place between 2006 and 2010.

Hilton Tip

Federal authorities haven’t accused SAC or any current employee of wrongdoing. Prosecutors subpoenaed SAC in November.

Jonathan Gasthalter, a spokesman for SAC, declined to discuss the firm’s stock positions and said SAC is cooperating with investigators.

SAC filings show the firm almost tripled its stake in Hilton to 1.2 million shares in the quarter ended June 30, 2007. Three days later, on July 3, Blackstone Group LP said it would buy Hilton. When trading resumed on July 5 following the Independence Day holiday, Hilton shares soared 26 percent. SAC reported liquidating 99 percent of its stake by that Sept. 30.

Pleading the Fifth

U.S. prosecutors accuse Rajaratnam of receiving an illegal tip on the deal “in or about late June early July 2007,” according to criminal case records. Federal authorities allege that Rajaratnam learned about the hotelier’s buyout and arranged for Galleon to purchase 400,000 Hilton shares on July 3. The Blackstone deal was announced at 5:58 p.m. that day, after the close of trading in New York.

At Bloomberg’s request, Houman Shadab, an associate professor at New York Law School, reviewed SAC’s holdings in stocks that federal prosecutors have identified as subjects of insider leaks. He also reviewed the government’s complaints against Longueuil and Freeman.

“While the trades by themselves don’t prove insider trading or fraud, they are consistent with patterns federal investigators are examining based on trading of nonpublic information,” Shadab said in an interview Feb. 8. He has testified before a congressional panel on the role of traders in the financial crisis and writes books on hedge-fund regulation.

In the same New York courtroom where Rajaratnam will go on trial, Cohen is being sued by his former wife, Patricia, in a civil lawsuit that alleges she is owed money from the couple’s 1990 divorce settlement. In that complaint, Patricia Cohen alleges that the SAC founder has profited in the past on insider information.

Patricia Cohen Suit

Her former husband gained $10 million in early 1986 on a tip that General Electric Co. would acquire RCA Corp., according to the complaint. Steven Cohen invoked his Fifth Amendment right under the U.S. Constitution not to incriminate himself during sworn testimony to the SEC in June 1986, the lawsuit says. Patricia Cohen received a transcript in response to a request under the Freedom of Information Act, she says in the suit.

Gasthalter said Patricia Cohen’s lawsuit is without merit. The SEC didn’t sue Cohen.

The government’s insider trading cases have multiple allegations related to microchip maker AMD, from July 2006 through November 2009. SAC filings with the SEC show the hedge fund actively traded the company’s shares during the period.

AMD-ATI Deal

Just before AMD announced a deal to buy ATI Technologies Inc. on July 24, 2006, the hedge fund’s filings show that it raised its stake in the graphics chip supplier, by 89 percent, to 479,261 shares in the quarter ended June 30, 2006.

From July 1 until the transaction became public on July 24, Markham, Ontario-based ATI climbed 35 percent, including a 19 percent jump the day of the disclosure. SAC sold off its holding by Sept. 30, the filings show.

Rajaratnam allegedly received the tip that AMD would acquire ATI in March 2006. His firm, Galleon, bought an undisclosed number of ATI shares before the July 24 announcement, according to a criminal complaint filed in January 2010 against Anil Kumar, a partner in the consulting firm McKinsey & Co., who pleaded guilty to conspiracy and securities fraud.

Two years later, Rajaratnam got advance word that Sunnyvale, California-based AMD was spinning off its semiconductor manufacturing and would receive a capital injection from Abu Dhabi-based investors, prosecutors allege.

AMD Spinoff

Just before the restructuring announcement on Oct. 7, 2008, Rajaratnam invested tens of millions of dollars in AMD, according to the criminal case against him. SAC filings show it reported a 380-fold increase in its AMD holdings to 614,416 shares in the third quarter ended Sept. 30.

After AMD disclosed the transaction, the company’s stock fell and kept falling in the midst of a market meltdown, losing 59 percent of its value in the 2008 fourth quarter. SAC’s next filing showed it liquidated 98 percent of its stake by year end.

About the same time, on Oct. 3, 2008, Rajaratnam learned of pending job cuts at EBay, prosecutors say, and sold the stock short. In short selling, investors borrow shares and sell them expecting that the price will fall and the stock can be replaced at a lower cost.

Cohen’s hedge fund reported slashing its position in EBay by 68 percent, to 288,300 shares, as of three days earlier, its filings with the SEC show.

EBay Job Cuts

On Oct. 6, the San Jose, California-based Internet auction site said it was eliminating 10 percent of its workforce and the stock fell. EBay shares dropped 5.5 percent between the date Rajaratnam allegedly obtained the inside information and when the job cuts became public. By the end of the year, the stock lost 26 percent of its value. Galleon netted “illegal profits” of $50,000, investigators say.

Earlier that year, in March 2008, Rajaratnam received a tip that Intel planned to invest in Clearwire, a broadband service provider, according to government lawyers. Galleon bought 260,800 Clearwire shares just before the stock jumped on news reports of talks with Intel, prosecutors said.

SAC added 1.1 million shares of Clearwire to its holdings in the same quarter, which ended about a week after Galleon’s purchases on March 24 and 25. It then sold two-thirds of its position by the end of the next quarter, the hedge fund’s SEC filings show.

The SEC suit against Longueuil says he generated a $2.5 million trading profit in Marvell Technology in May 2008 based on the illegal tip from Freeman. SAC owned 309,636 shares of Marvell on June 30, 2008, according to its SEC filings, and also held options to buy and sell more shares.

Later, in January 2009, an employee of Marvell told a Galleon portfolio manager of a reduced internal revenue forecast at the Santa Clara, California-based maker of computer chips, according to government correspondence with Rajaratnam’s defense attorneys. During that same quarter, SAC liquidated its 203,498 shares of Marvell, the hedge fund’s filing shows.

To contact the reporter on this story: Elliot Blair Smith in Washington at esmith29@bloomberg.net

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net

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