A Hedge Fund's Moves Mimic Insider Dealings

Three days before Blackstone Group (BX) announced its 2007 buyout of Hilton Hotels, billionaire Steven A. Cohen's hedge fund, SAC Capital Advisors, reported almost tripling its stake in the hotelier from the previous quarter. The stock soared 26 percent on the trading day following the July 3 announcement.

Federal prosecutors allege that a purchase of Hilton shares by another hedge fund manager, Galleon Group co-founder Raj Rajaratnam, on the day the deal became public was based on an illegal insider tip. SAC's investment in Hilton, disclosed by the firm in a routine Securities and Exchange Commission filing, is one of at least 11 instances from 2006 through 2009 in which the Stamford (Conn.) hedge fund traded stocks near the time of what prosecutors say was insider trading in the same shares by other hedge funds, according to data compiled by Bloomberg.

Rajaratnam is awaiting trial in March after pleading not guilty to a 19-count U.S. indictment alleging securities fraud. Since October 2009, more than three dozen people, including Rajaratnam and former SAC employees, have been charged in three overlapping insider-trading schemes. They involve Rajaratnam, former employees of Galleon, and consultants who link investors with industry experts working at publicly traded companies. About two dozen people have pleaded guilty.

Prosecutors subpoenaed SAC in November as part of the probe. Authorities haven't accused SAC or any current employee of wrongdoing. Jonathan Gasthalter, an SAC spokesman, declined to discuss the firm's stock positions. He says the firm is cooperating with investigators.

At Bloomberg's request, Houman Shadab, an associate professor at New York Law School, reviewed SEC filings detailing SAC's holdings in stocks that federal prosecutors have identified as subjects of insider leaks. The filings are quarterly snapshots of positions at the $12.8 billion hedge fund that may change daily or hourly. While the filings don't show purchase or sale dates or whether any trading was profitable, Shadab found that the hedge fund's positions in the stocks moved up or down in a manner consistent with buying and selling that federal prosecutors have described as based on leaks of material, nonpublic information in insider-trading cases.

"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 says. He has testified before a congressional panel on the role of traders in the financial crisis and writes books on hedge fund regulation.

The filings show that SAC held 1.2 million Hilton shares on June 30, 2007, nearly triple its holdings of 436,000 three months earlier. Blackstone said after the close of trading in New York on July 3 that it would buy Hilton, setting up the price jump on July 5 after the Independence Day holiday.

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 arranged for Galleon to purchase 400,000 Hilton shares on July 3, in the hours before the deal became public.

SAC securities filings from 2006 through 2009 also show position changes in at least 10 other stocks during periods when prosecutors have said Rajaratnam and others were trading based on insider tips. The stocks are Akamai Technologies (AKAM), Atheros Communications (ATHR), ATI Technologies, Clearwire (CLWR), eBay (EBAY), Google (GOOG), Intel (INTC), Advanced Micro Devices (AMD), Marvell Technology (MRVL), and Polycom (PLCM).

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.

Her former husband gained $10 million in early 1986 on a tip that General Electric (GE) would acquire RCA, 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 on the GE-RCA deal in June 1986, the lawsuit says. Patricia Cohen received a transcript of Steven Cohen's deposition in response to a request under the Freedom of Information Act, she says in the suit. SAC spokesman Gasthalter says Patricia Cohen's lawsuit is without merit. The SEC didn't sue Cohen.

In early February, the insider-trading investigation ensnared two former SAC portfolio managers. Noah Freeman and Donald Longueuil obtained material, nonpublic information on two of the 11 stocks, AMD and Marvell, in a conspiracy that began before they joined SAC in 2008, according to a lawsuit by the SEC. The agency 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.

The men, both 34, were among four people named in criminal complaints filed on Feb. 7 by the Justice Dept. Freeman's lawyer, Benjamin Rosenberg, declined to comment. Longueuil's attorney, Craig Carpenito of Alston & Bird, 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.

The bottom line: SEC filings show that SAC Capital moved in and out of some stocks near the time of alleged insider trading in the shares.

Before it's here, it's on the Bloomberg Terminal.