December 5, 2022

Signs of a Turnaround as Sony Posts a $35 Million Profit

TOKYO — Sony said on Thursday that it was weighing “carefully” a shareholder’s proposal to spin off part of its entertainment arm, but executives said signs of a turnaround in the Japanese company’s long-suffering electronics business showed that their strategy was on track.

Sony posted net income of 3.5 billion yen ($35 million) in the quarter that ended June 30, after a loss of 24.6 billion yen in the period a year earlier. The results were helped by a weaker yen and increased sales of smartphones. Revenue increased 13 percent, to $17.3 billion.

Company executives did not comment on a report in the Nikkei business newspaper that Sony was “leaning toward” rejecting the breakup proposal from Daniel S. Loeb, a New York hedge fund manager whose firm, Third Point, holds a 7 percent stake in Sony. Mr. Loeb wants the company to separate the entertainment unit from the electronics and financial divisions by selling stock in the unit and giving it its own board.

“We are going to discuss this carefully and then come to a solid conclusion,” Masaru Kato, Sony’s chief financial officer, said in a conference call with analysts.

“Improving the profitability of electronics is the biggest priority of Mr. Hirai,” he added, referring to the chief executive, Kazuo Hirai. “At the same time, entertainment and financial services remain core parts of the business.”

Mr. Loeb stepped up his campaign for a breakup this week in a letter to Third Point investors in which he attacked Sony management over the weak performance of Sony’s Hollywood studio business. That unit has been hurt by poor box-office receipts for recent films like “After Earth” and “White House Down.”

In his letter, Mr. Loeb compared those films with the notorious Hollywood flops “Ishtar” and “Waterworld,” and added that the studio business was “characterized by a complete lack of accountability and poor financial controls.”

Sony confirmed the weak performance of the studio business in the quarter, saying sales had fallen 16 percent in constant currency terms.

In the electronics business, however, there were clear signs of a turnaround.

Although sales of video cameras and compact digital cameras have been caught up in an industrywide slide, Sony reported a “significant increase” in quarterly sales of smartphones, to 9.6 million from 7.4 million in the period a year earlier. Sony said average selling prices had risen as well, helping the mobile division post a profit of $60 million, after a loss of $28.1 million in the year-ago period.

Although analysts have questioned the value of retaining the broad array of product lines in which the company competes, they said the improved outlook had bolstered the position of Mr. Hirai as he tries to convince investors of the merits of keeping the company intact.

“It’s very clear that the company is focused on fixing electronics, and these results show that the strategy seems to be working,” said Damian Thong, an analyst at Macquarie Securities.

Even Mr. Loeb has acknowledged the improvement in the electronics operation. As he heaped scorn on Sony’s Hollywood management, he praised Mr. Hirai for “the green shoots increasingly visible in electronics.”

The strong performance of Sony smartphones like the Xperia Z has been complemented by a “perfectly executed” introduction of the company’s new game platform, the PlayStation 4, which is set to go on sale near the end of the year, Mr. Loeb wrote.

As a whole, Sony has benefited from a weaker yen, which makes revenue from products sold overseas worth more in Japan.

If not for the decline in the currency, Sony said, it would have reported a drop in revenue, largely because of falling sales of cameras and the sale of Sony’s chemical products business.

The results of other Japanese exporters reporting earnings this week, including Nissan and Panasonic, have also been bolstered by the weaker yen, a pillar of Prime Minister Shinzo Abe’s plan to stimulate growth in the Japanese economy.

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DealBook: S.E.C. Rejects Its Own Deal With Hedge Fund Manager

Philip Falcone, chief of Harbinger Capital Partners, at the SALT hedge fund conference last year.Steve Marcus/ReutersPhilip Falcone, chief of Harbinger Capital Partners, at the SALT hedge fund conference last year.

The Securities and Exchange Commission overruled its own enforcement division’s decision to settle a civil case with the high-flying money manager Philip A. Falcone and his flagship hedge fund, a rare reversal that signals a broader crackdown by the agency.

The S.E.C. recently notified Mr. Falcone and the fund, Harbinger Capital Partners, that the agency’s five commissioners had rejected “the previously disclosed agreement in principle,” according to a public filing his company made on Friday. The charges stemmed from allegations that Mr. Falcone manipulated the market, used hedge fund assets to pay his own taxes and secretly favored select customers at the expense of others.

The S.E.C.’s rejection of the settlement — a move that will prompt the agency to either enforce a tougher penalty or take Mr. Falcone to trial– suggested that its preliminary deal did not match the gravity of the crime. The deal, announced by Mr. Falcone in May, came with an $18 million penalty from the S.E.C., a rounding error to a hedge fund billionaire. Mr. Falcone was set to personally pay $4 million of the penalty, according to people briefed on the matter, while the fund’s management company would have paid the rest.

While the deal also included at least a two-year ban from raising new capital, a potential death knell to a hedge fund manager, that punishment came with a number of caveats. And in a a moral victory for Mr. Falcone, the deal also omitted a common provision that prohibits defendants from committing future violations with fraudulent intent.

When Mr. Falcone announced the deal, it raised concerns that the S.E.C.’s results fall short of its ambitions. It also reignited criticism of an agency that failed to thwart the financial crisis and Bernard L. Madoff’s Ponzi scheme.

But the rejection of Mr. Falcone’s deal could assuage such concerns and demonstrate a marked shift under its new chairwoman, Mary Jo White, a former federal prosecutor who has vowed to take a hard line against financial fraud.

Already, Ms. White has moved to address a central criticism of the agency: that it allows defendants to neither “admit nor deny” wrongdoing. In a departure from a longtime practice, Ms. White recently announced that the agency would in some cases force Wall Street firms to admit to their crimes.

The leaders of the S.E.C. enforcement unit detailed the policy shift in a memo, saying there might be cases that “justify requiring the defendant’s admission of allegations in our complaint or other acknowledgment of the alleged misconduct as part of any settlement,” noting that such cases arise “particularly when the defendant engaged in egregious intentional misconduct.”

A spokesman for the S.E.C. did not respond to a request for comment. Mr. Falcone’s spokesman declined to discuss the case.

For Mr. Falcone, the agency’s shift will prolong a painful chapter in his long Wall Street career.

It was not long ago that Mr. Falcone, who rose from rural Minnesota to the Harvard hockey team, was seen as one of the shrewdest investors on Wall Street. His prophetic bet against the subprime mortgage market made Mr. Falcone a fortune, success that cemented Mr. Falcone status in Manhattan’s social elite.

Mr. Falcone and his wife, Lisa Maria, soon became fodder for New York tabloids drawn to his rising star power. Their flashy taste for fashion and real estate — to say nothing of a charitable streak that included a $10 million gift to the High Line in Manhattan — reinforced the fascination swirling around him.

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DealBook: Uninvited Guest Jolts Japan’s Business Culture

Sony's entertainment unit includes a film studio and one of the largest music labels in the world, featuring artists like Taylor Swift.Richard Perry/The New York TimesSony’s entertainment unit includes a film studio and one of the largest music labels in the world, featuring artists like Taylor Swift.

TOKYO — Devil. Vulture. Saboteur.

All these words have been used to greet Western investors who have agitated for change in Japan’s clubby and complacent corporate culture. As the hedge fund billionaire Daniel S. Loeb prepares to take on Sony, he may find the same hostility from the company that at one time single-handedly defined premium quality in entertainment and electronics.

How Sony, and Japan, react to the demands brought by Mr. Loeb on Tuesday could become a test of how far the country has come in making good on promises to open up to more foreign investment and, more important, change.

Prime Minister Shinzo Abe, who took office in December, has promised to shake up corporate Japan by removing onerous regulations, protections and inflexibilities that have sapped profitability and hampered serious revamping.

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Investors initially are cheering Mr. Loeb’s efforts. Sony’s shares rose nearly 10 percent in the United States to close at $20.76 on Tuesday. The reaction among those who matter — Sony’s managers — has been muted.

Almost no local media outlets carried the story of Mr. Loeb’s hand-delivered list of demands to Sony on Tuesday, hours after those demands had been made public. Sony itself issued only a curt statement, saying its entertainment businesses were “not for sale.”

“Sony is an icon. Until now, it hasn’t had a fellow like this coming in and making demands in public,” said Nicholas Benes, a former Wall Street banker who now advises Japanese companies on corporate governance. “But now he comes in with guns blazing. This hasn’t quite started off right, you might say.”

Activist investors like Mr. Loeb’s fund, Third Point, might seem like natural allies in that mission to prod Japan’s corporations toward change. Mr. Loeb’s demands for Sony’s management center on bringing more focus to its sprawling business, something analysts have long called for, partly by spinning off a part of its entertainment arm. And Mr. Loeb cites Mr. Abe’s promised economic reforms as a big reason behind his recent interest in Japan.

Nowhere has revamping been so painfully needed as in Japan’s electronics industry, where six major manufacturers, including Sony, still produce flat-panel televisions, mostly at a loss. Better labor mobility might make companies more reluctant to close or spin off money-losing operations and focus on profitable lines of business.

Kazuo Hirai, the chief of the entertainment and electronics colossus Sony.Justin Sullivan/Getty ImagesKazuo Hirai, the chief of the entertainment and electronics colossus Sony.

American activist investors have, however, met with frustration in the efforts to add value at other companies. T. Boone Pickens, who acquired a minority stake in the auto parts company Koito Manufacturing in 1989, pressed its management for better dividends and a seat on its board. But the little manufacturer dug in its heels. Shareholders heckled him with anti-American taunts at its annual shareholders meeting; the press branded him an opportunistic vulture. Koito’s president refused even to meet the Texan magnate.

“O.K., Koito; I give up,” Mr. Pickens declared in a statement two contentious years later, before selling his entire stake. “The heck with Japanese business.”

Mr. Loeb is unlikely to get such openly hostile treatment from Sony, now that he is a significant investor with a 6.5 percent stake in the company. After all, it is 2013, and Sony, unlike Koito, is a global, savvy firm.

Gerhard Fasol, president of the Tokyo technology consulting firm Eurotechnology Japan, said Mr. Loeb had probably studied past unsuccessful approaches to Japanese companies.

“My guess is that he learned from the mistakes those activist investors made and was advised to tone things down,” Mr. Fasol said. Mr. Loeb makes a point of starting the note with praise for Mr. Hirai and his commitment to change.

Mr. Loeb has suggested that Sony take 15 to 20 percent of the entertainment unit public by offering current Sony shareholders the opportunity to buy shares. The unit includes a leading film studio and one of the largest music labels in the world, featuring artists like Taylor Swift. A spinoff could lead to higher profit margins, while helping to revive the core electronics business, Mr. Loeb argues.

Yet even though many inside and outside Japan recognize that Sony’s divisions need some shaking up, a hedge fund manager like Mr. Loeb may not be the one who is ultimately successful.

Active investing has long been seen in Japan as a dangerous, alien practice led by foreigners, or cheeky locals who dare imitate them. And in past cases, lenders, bureaucrats, other shareholders and even rivals have swooped in to rescue companies from investors’ talons. Of the 23 hostile takeover bids in Japan since 2000, only 7 have been successful, according to Dealogic

The cross-shareholdings of Japanese companies — with close ties to their main bank and other companies, known as keiretsu — have helped foster an environment where hostile takeovers are rare and shareholders are docile supporters.

But in the mid-2000s, when Japan seemed to stage a nascent recovery, the country attracted a wave of what company executives came to call “investors who say things.”

In 2006, when Steel Partners, an American fund, took out a stake in the noodle maker Myojo Foods, the company flatly refused to entertain a proposal for a management buyout, accusing the fund of trying to sabotage the company’s future for short-term gain. When Steel Partners instead started a takeover bid, Myojo ran into the arms of its noodle archrival, Nissin Foods, which bought it out.

Undeterred, Steel Partners aimed at another food company, this time a condiment maker called Bull-Dog Sauce, and accumulated a 10 percent stake in 2007. Not satisfied with the management’s reluctance to expand overseas to make up for a waning domestic market, the fund started a tender bid for the rest of the company. This time, it was thwarted by a landmark ruling by Japan’s Supreme Court supporting the use of “poison pill” defenses in Japan.

The media followed the food companies’ tribulations with much gusto, berating the brash manners of Warren Lichtenstein, chief of Steel Partners. The public broadcaster, NHK, showed a drama series, “Vulture,” about an American investment firm that snaps up troubled companies.

“Is he a devil, or a savior?” the narrator asked in a booming voice.

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Common Sense: How Cooper Union’s Endowment Failed in Its Mission

Since Peter Cooper’s heirs gave the Cooper Union for the Advancement of Science and Art the land under the Chrysler Building in 1902, the school’s endowment has enabled it to offer students a high-quality, tuition-free education through two world wars, the Great Depression and multiple stock market crashes and financial crises.

So why does Cooper Union now find itself forced to charge tuition of an estimated $20,000 a year, abandoning what many consider its most important legacy?

This week, angry students were occupying the president’s office in protest. They might be even angrier to learn that some of their future tuition dollars will be going to support wealthy hedge fund managers who oversee some of the school’s $666.7 million endowment.

Cooper Union may be an extreme example, but it’s hardly the only college suffering from a combination of decades of bad decisions and recent treacherous markets. Its endowment was typical of the many endowments and pension funds that took the plunge into so-called alternative investments like hedge funds, which have lured investors with the promise of generous and steady returns in both good times and bad. And compared with many universities, Cooper Union did a good job managing its endowment through the recent financial crisis. As recently as 2009, the school maintains, it ranked first among all American universities for endowment performance.

Even so, hedge funds couldn’t solve the college’s dire financial problems, and many hedge funds have been far more successful at lining the pockets of their managers than beating market averages. (The typical hedge fund manager charges a fee of 2 percent of assets plus 20 percent of any gains.) In fiscal year 2009, which ended June 30, 2009, Cooper Union’s hedge funds and other managed assets lost 14 percent, and the returns since then have lagged the stock market’s recovery. Today, Cooper Union’s endowment is lower than it was at the end of fiscal year 2008, even as the Standard Poor’s 500-stock index has hit new highs. From 2009 to 2012, a simple, low-fee mix of 60 percent stocks and 40 percent bonds far outperformed hedge fund indexes.

Weak hedge fund performance is hardly Cooper Union’s only financial problem. Today’s crisis has been brewing for decades if not longer, and comes after years of what looks like bad management decisions with little accountability or supervision by New York’s attorney general, who oversees nonprofit institutions. Over the decades, Cooper Union has sold off assets piecemeal, failed to diversify its endowment, taken on debt and built a lavish new building. After the 2000-1 stock market plunge, the managed endowment, excluding the Chrysler Building, lost half its value. The school never cultivated its potential donor base, leaving most graduates with the impression that it was wealthy and didn’t need alumni contributions.

In some ways, it’s surprising that the school’s trustees managed to stave off charging tuition as long as they did. “We’ve only been one step ahead of the bailiff for decades,” said John C. Michaelson, a trustee who runs an investment firm and has been chairman of the investment committee since 2012, as well as from 2005 to 2008. “We were pulling rabbits out of hats.”

The simplest rule of asset management, one familiar to even novice investors, is diversification. Yet Cooper Union’s endowment is highly unusual in that it’s concentrated in a single asset — the land under the Chrysler Building — which accounts for nearly 84 percent of its assets, according to its most recent financial statement.

By contrast, Emory University in Atlanta, which as recently as 2001 had 60 percent of its main endowment in Coca-Cola stock, has since sold all of it and diversified into other assets.

Having so much of the endowment in a single asset “is against everything I stand for,” Mr. Michaelson said. He and other trustees said they considered selling it in 2006, when the college was facing mounting financial deficits, but concluded that would be impractical. Cooper Union receives annual lease payments of $9 million from the owner of the Chrysler Building, Tishman Speyer Properties, and $18.2 million in so-called tax equivalency payments that would otherwise go to New York City. The right to the tax revenue couldn’t be transferred to a buyer.

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DealBook: It’s Pensioners on the Side of Hedge Funds Making Their Case Against Argentina

From left to right, Maria Teresa Muñoz, Horacio Vazquez and Eva Geller are all Argentine pensioners who hope that the government will one day repay them in full.Don Emmert/Agence France-Presse — Getty ImagesFrom left to right, Maria Teresa Muñoz, Horacio Vazquez and Eva Geller are all Argentine pensioners who hope that the government will one day repay them in full.

Maria Teresa Muñoz, a retired secretary from Buenos Aires, has something in common with Paul Singer, the billionaire hedge fund manager who is suing Argentina’s government.

They are both “holdouts” — the term given to owners of defaulted Argentine sovereign debt who refused to swap their debt for restructured government bonds that had a much lower value. Instead, they have chosen to hold out, in the hope that the government will one day repay them in full. Argentina’s government, led by President Cristina Fernández de Kirchner, vigorously rejects these claims.

But Ms. Muñoz has another connection with Mr. Singer.

She and 14 other holdouts were brought to New York this week by a lobbying group that is partly financed by Mr. Singer’s firm, Elliott Management. The group, American Task Force Argentina, paid for the holdouts’ flights and lodging, according to Robert Raben, its executive director.

He declined to say how much the trip was costing the group, which held a meeting for the 14 holdouts at the Warwick Hotel in Midtown Manhattan on Tuesday. He said his group met most of the holdouts through contacts with Argentine lawyers.

The timing of their trip to New York was no accident. It came just weeks before an appeals court is scheduled to make an important decision on a legal case that has pitted Mr. Singer against the government of Argentina.

Mr. Singer and other hedge fund holdouts have recently enjoyed a series of legal victories, including a ruling from a federal judge that demanded that they be paid when holders of restructured Argentine bonds are paid. The judge gave the ruling real teeth. He effectively said that the third-party banks that transfer payments from the Argentine government to holders of the restructured bonds also had to comply with this order. That means the restructured bonds would potentially be deprived of payments.

On Feb. 27, the United States Court of Appeals for the Second Circuit is scheduled to take up the judge’s ruling, which has been delayed by a stay. The appeals court will decide whether the tough ruling should take effect, or whether it should be softened in some way. This is where the hedge fund holdouts could lose. The appeals court may decide that the ruling has gone too far, and would be needlessly disruptive, especially the part that forces third-party banks to comply.

As a result, in the days leading up to that decision, it makes sense for American Task Force Argentina to show a human face, and present some middle-class losers. After all, the last big public action orchestrated by Elliott Management — the seizure of an Argentine naval ship by the government of Ghana — arguably lacked the human touch. (The ship was later released.)

The stories of those at the Warwick Hotel should generate sympathy.

Ms. Muñoz, 76, said she was holding $65,000 of Argentine government bonds at the time of the 2001 default. “From then on, it was a nightmare,” she said. Her mother was ill and Ms. Muñoz said she lacked the funds for proper medical care. Her mother died in 2009, and Ms. Muñoz, unmarried, said she was living on a pension of about $1,000 a month.

Another ordinary holdout was Eva Geller, 66, a Uruguayan who declined to disclose the amount of defaulted Argentine bonds she was holding. “For me, it was an enormous amount of money,” she said.

Ms. Geller said she had no government pension. Instead, she gets by on money left by her deceased husband, and on a German pension collected by her 90-year-old mother, who Ms. Geller said is a Holocaust survivor.

The ordinary holdouts said their fight was as much about principle as the money.

Ms. Geller said that if the government offered to fully repay the bonds of ordinary holdouts, but not those of big hedge funds, she’d refuse. “Equality is for all,” she said.

Some analysts argue that Argentina’s default, while a shock, at least cut the country’s debt load. In other words, the country might have been stuck in a protracted slump if it had kept trying to pay back all the debt it owed.

But Horacio Vazquez, a Buenos Aires native who was also at the Warwick, thinks that analysis too simplistic. He said the government had other ways to restructure its debt short of forcing such large losses on creditors. “The default was not necessary,” said Mr. Vazquez, who was holding $73,000 of bonds when the government reneged on them.

Elliott Management, through one of its hedge funds, owns over $1 billion of Argentine debt.

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Off the Shelf: In Two New Books, Strategic Advice Before You Invest

Instead of telling you what to buy and when, Ken Fisher, who runs Fisher Investments, a large money management firm, and Barton M. Biggs, the former Morgan Stanley partner and hedge fund manager who died before his book was published, mainly provide ideas to consider before you even think about placing your money.

Let’s begin with Mr. Fisher. He makes two very solid points in “Plan Your Prosperity” (Wiley, $26.95), which he wrote with Lara Hoffmans.

First, Mr. Fisher writes, “many investors and even some professionals distinguish between financial planning and retirement planning like they’re two distinct phases, or the two are inherently radically different.” That, he says, is wrong. Your approach — save as much as you can, invest wisely, and so on — should always be the same. It’s just that your time horizon, and therefore the investments you choose, will vary depending on whether you are saving for a long-term goal like retirement or a near-term goal like buying a house or paying for college.

Second, he argues that your investing should be “benchmark” driven.

Here is how this could work — and the example is ours, not his: You decide how much you want to make on your money — say, 8 percent — and what kind of investments you are comfortable with. We will assume that it’s a mix of 60 percent stocks and 40 percent bonds. Then you find an appropriate measuring stick. For this example, you would use a balanced index — 60 percent of which tracked a broad stock market index like the Wilshire 5000, and 40 percent of which mirrored a broad bond index like the Barclays Capital U.S. Aggregate.

Then you would either buy a mutual fund, like the Vanguard Balanced Index fund, designed to match the benchmark, or build a portfolio on your own that mimicked it.

The fact that we had to create an example underscores a flaw with the book: it is very short on specifics. And that is by design. Mr. Fisher says up front that he is not going to offer benchmark or asset-allocation recommendations. His reasoning is that he doesn’t want to make explicit suggestions without knowing your specific hopes and circumstances. One size, he says, does not fit all.

That’s fair enough. But detailed — if only hypothetical — examples of how to put his advice into practice would have been helpful. It makes sense that your investing approach should be all of one piece, but how exactly do you save for a house you want to buy within five years while still investing for your retirement, which could be decades away?

True, there is no single answer. But laying out a series of possible routes would allow readers to make an educated choice.

The lack of specifics is particularly frustrating for two reasons.

First, the subtitle says that this is “the only retirement guide you’ll ever need, starting now — whether you’re 22, 52 or 82.” It’s not, unless you’re an extremely experienced investor, in which case you don’t need the book anyway.

Second, when you read Mr. Fisher’s biography on the book jacket, which notes that he has written a Forbes column for 28 years and is ranked No. 764 on the Forbes World’s Billionaires list, you may be expecting more in the way of “how to’s” from what he has learned along the way.

The big ideas are fine, but you are left wanting more.

YOU probably won’t have that reaction to “Diary of a Hedgehog” (Wiley, $29.95), which is actually a diary from the last few years of Mr. Biggs’s life.

My diary, if I kept one, would include things like: “Jan. 5: Tuna fish salad for lunch. Too much celery.” Mr. Biggs’s contains entries like: “The investment process is only half the battle. The other weighty component is struggling with yourself and immunizing yourself from the psychological effects of the swings in the market, career risk” and the like. He also writes: “We are all vulnerable in varying proportions to the deliberating and destructive consequences of these malignancies, and there are no easy answers.”

You can skip over the day-to-day details of what was going on in the markets from mid-2010 to early 2012, the period covered by the diary. (On the other hand, it is interesting to see that despite his stellar record as a stock picker — Institutional Investor named Mr. Biggs to its All-America Research Team 10 times — he agonized when his picks were down for extended periods.)

The important parts are his comments, which often come as asides:

• “Warren Buffett has said he prefers to get his emerging-market exposure through companies like Coca-Cola, McDonald’s, etc. I prefer mine through more direct participation.”

• Commodities are “not an investment,” he says. “An investment by definition is either current income or a stream of future income. When you buy a commodity, you have to be assuming that you are going to be able to sell it at a higher price to someone else, because it has no income. Thus, it is not investing — it is speculating.”

• “Sometimes twiddling your thumbs is the least malignant activity.”

• “I can seldom remember such overwhelming bearishness by the great wise men, professors and stock market soothsayers. My experience has been that it is almost always right to bet against them when the consensus is the largest and the loudest.”

• And, he says sagely, as investors, we “always have to be aware of our innate and very human tendency to be fighting the last war.”

The combined take-away from these two books underscores one of the oldest pieces of financial advice, which is often ignored: Think before you move your money into stocks, bonds or any other investment.

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News Analysis: Case Casts a Shadow on a Hedge Fund Mogul

Evidence in a criminal case suggests that Steven A. Cohen of SAC Capital Advisors participated in trades that the government says illegally used insider trading information.Steve Marcus/ReutersEvidence in a criminal case suggests that Steven A. Cohen of SAC Capital Advisors participated in trades that the government says illegally used insider trading information.

In 2010, the billionaire hedge fund manager Steven A. Cohen gave a rare interview to Vanity Fair. He said that he wanted to combat persistent rumors that his firm, SAC Capital Advisors, routinely violated securities laws by trading on confidential information.

“In some respects I feel like Don Quixote fighting windmills,” Mr. Cohen said at the time. “There’s a perception, and I’m trying to fight that perception.”

Federal prosecutors only heightened that perception on Tuesday, bringing a criminal case against a former SAC employee in what Preet Bharara, the United States attorney in Manhattan, who brought the charges in Federal District Court in Manhattan, called the most lucrative insider trading scheme ever charged.

And for the first time, the evidence suggests that Mr. Cohen participated in trades that the government says illegally used insider information — though prosecutors have not said that Mr. Cohen himself knew the information was confidential, and he has not been charged.

Any prosecution of Mr. Cohen would most likely hinge on the cooperation of Mathew Martoma, the former SAC employee charged in the case. Mr. Bharara said in the charges that Mr. Martoma obtained secret data from a doctor about clinical trials for an Alzheimer’s drug being developed by the companies Elan and Wyeth. The information enabled SAC to avoid losses of almost $194 million on the stocks, which it sold and then bet against, reaping $83 million in profit — a total benefit to the firm of more than $276 million. SAC executed the trades shortly after Mr. Martoma e-mailed Mr. Cohen and said he needed to discuss something important.

As to Mr. Cohen’s potential culpability in the case, the crucial issue is what Mr. Martoma told Mr. Cohen that led SAC to quickly dump $700 million worth of stock. Did he provide his boss details on why he had turned sour on Wyeth and Elan? Specifically, did he share the leak about the drug trial’s negative results and identify the source of the secret information? Through a spokesman, he said he was confident he had acted appropriately.

It appears, for now, that Mr. Martoma will fight the charges. But the crucial question, as it relates to Mr. Cohen, is whether at some point Mr. Martoma will reverse course, admit to insider trading and agree to help the government build a case against his former boss. Without Mr. Martoma’s cooperation, it is unlikely that the prosecutors have enough evidence to charge Mr. Cohen.

“This has all the markings of a case where the government goes after the smaller fish and then pressures them to flip so they can get the whale,” said Bradley D. Simon, a criminal defense lawyer and former federal prosecutor in New York.

The government has several weapons for its effort to persuade Mr. Martoma to agree to a plea, including the stiff sentences for insider trading. Under the federal sentencing guidelines, Mr. Martoma could receive more than 15 years in prison, a term that could be reduced — or avoided altogether — if he agreed to testify against Mr. Cohen.

F.B.I. agents arrested Mr. Martoma, 38, early Tuesday morning at his home in Boca Raton, Fla., a nearly 8,000-square-foot Mediterranean-style mansion on the grounds of the elite Royal Palm Yacht and Country Club. He lives there with his wife, a pediatrician, and three children. A graduate of Duke University and Stanford University’s business school, Mr. Martoma is expected to make an appearance in Federal District Court in Manhattan Monday morning.

Described by a former colleague as low-key and cerebral, Mr. Martoma is one of scores of traders who have earned millions of dollars working under Mr. Cohen and feeding him their best investment ideas. He joined SAC in 2006. In 2008, the year he participated in the alleged illegal trade, the firm paid Mr. Martoma a $9.3 million bonus. But SAC fired him in 2010 after two years of subpar performance.

Charles A. Stillman, a lawyer for Mr. Martoma, said on the day of his arrest, “What happened today is only the beginning of a process that we are confident will lead to Mr. Martoma’s full exoneration.”

It is no secret that the government has been circling Mr. Cohen since the middle of last decade, when it began its crackdown on insider trading, an investigation that has resulted in more than 70 criminal charges. Prosecutors have already linked five former SAC employees to insider trading while at the fund — securing three convictions — though none of those cases connected Mr. Cohen to any illicit activity. But the complaint filed on Tuesday puts Mr. Cohen at the center of the supposed improper conduct.

Mr. Cohen, 56, is a legend on Wall Street, having amassed a multibillion-dollar fortune by posting phenomenal investment returns averaging about 30 percent over the last two decades. Starting with a $25 million grubstake, SAC now manages about $13 billion and has 900 employees across the globe. Mr. Cohen has also emerged as a major force in the art world, owning an eclectic collection that includes works by Picasso, Warhol and Cézanne.

Prosecutors have constructed their case against Mr. Martoma, and increased the pressure on him, by securing the cooperation of Dr. Sidney Gilman, the doctor who supposedly leaked to him the Alzheimer’s drug’s trial data. The case against Mr. Martoma will depend largely on Dr. Gilman’s credibility as a witness.

Dr. Gilman, 80, a neurologist at the University of Michigan medical school, was hired by Elan and Wyeth to monitor the trial’s safety, which gave him access to secret information about the results. SAC retained Dr. Gilman as a consultant and paid him about $108,000.

At first, Dr. Gilman’s reports on the trial’s progress were positive, and SAC built a position in the two drug makers worth approximately $700 million, according to prosecutors. But then, on July 17, 2008, Dr. Gilman told Mr. Martoma that there were problems with the drug, the government said.

A few days later, Mr. Martoma e-mailed Mr. Cohen that he needed to discuss something “important,” and the two then spoke for 20 minutes, according to court filings. Over the next four days, at Mr. Cohen’s direction, SAC Capital jettisoned its entire position in the two stocks and then placed a big negative bet on the drug makers, the government said.

On July 30, after disclosure of the poor trial results, shares of Elan and Wyeth sank. According to the prosecutors’ calculations, SAC would have lost about $194 million had it kept the stock; taking a short position instead generated profits of about $83 million.

Dr. Gilman and the Justice Department have entered into a nonprosecution agreement under which he will cooperate in exchange for not being criminally charged.

Thus far, any potential evidence against Mr. Cohen is entirely circumstantial. The government’s complaint includes e-mails about secretly selling the Elan and Wyeth shares through esoteric methods like algorithms and dark pools. But that is common practice among large, sophisticated funds that do not want to alert competitors or move the stock too much. Moreover, while SAC dumped its large positions in the two stocks quickly — raising the question of what prompted it to do so — Mr. Cohen is known for a rapid-fire trading style. He frequently moves aggressively in and out of stocks while processing gobs of information fed to him by his underlings.

It would be difficult for a jury to infer anything incriminating just from the way these trades were executed.

The government in this case also lacks the powerful wiretap evidence that it has used to convict dozens others, including Raj Rajaratnam, the head of the Galleon Group. Federal agents did wiretap Mr. Cohen’s home telephone for a short period in 2008, according to a person with direct knowledge of the investigation who spoke only on the condition of anonymity. But it is unclear whether the eavesdropping, which was first reported by The Wall Street Journal, yielded any fruit.

Even without incriminating wiretap evidence, the government has brought cases that rely almost entirely on witnesses testifying against their bosses.

One of those cases is now under way in federal court in Manhattan. Prosecutors are currently trying the former hedge fund portfolio managers Anthony Chiasson of Level Global Investors and Todd Newman of Diamondback Capital Management. Prosecutors say that the two were part of a conspiracy that made about $68 million illegally trading technology stocks.

The outcome of that trial is expected to depend largely on whether the jury believes the testimony of two cooperating witnesses who admitted to the conspiracy — Spyridon Adondakis and Jesse Tortora, former junior analysts at Level Global and Diamondback. The two say they shared secret information with the defendants. Defense lawyers have attacked the witnesses’ credibility, accusing them of lying to avoid prison.

That case, too, has strong ties to SAC. Mr. Chiasson and his co-founder were star traders under Mr. Cohen before starting the now-defunct Level Global. And the owners of Diamondback are both former SAC employees; one is Mr. Cohen’s brother-in-law, Richard Schimel. Diamondback, which continues to operate, has not been accused of wrongdoing.

“SAC’s extraordinary profits have always been something of a market mystery,” said Sebastian Mallaby, the author of “More Money Than God,” a book on the history of hedge funds. “As more and more lawsuits implicate former SAC traders, we may at last understand where SAC’s profits came from.”

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DealBook: Milken’s Past Invoked in Gupta Sentencing

Michael Milken at a health conference in 2009.Fred Prouser/ReutersMichael Milken, who was a symbol of Wall Street greed in the 1980s, has become a prominent philanthropist.

More than two decades after pleading guilty to securities fraud, the financier Michael Milken still looms large. The demand for junk bonds, a market that he helped create, have touched record levels this year. A number of his disciples, like Leon Black of Apollo Global Management, are among the most powerful players on Wall Street.

And though it was a generation ago that Mr. Milken – who earned a $550 million bonus in 1986 – became a symbol of Wall Street greed, he remains a presence in the world of white-collar crime. Mr. Milken’s continued influence became clear during the sentencing of Rajat K. Gupta.

Last Wednesday in Federal District Court in Manhattan, Mr. Gupta, a former Goldman Sachs director, received a two-year prison term for leaking boardroom secrets about the bank to the hedge fund manager Raj Rajaratnam.

Judge Jed S. Rakoff, the presiding judge in Mr. Gupta’s case, made a surprising reference to Mr. Milken during the hearing. It came after Mr. Gupta’s lawyer, Gary P. Naftalis, made a plea for a lenient sentence. Mr. Naftalis cited the hundreds of letters of support for Mr. Gupta, who in addition to his business accomplishments has played a leading role in fighting global disease. He read a letter from Barry Bloom, the former dean of the Harvard School of Public Health.

“Dr. Bloom stated, ‘To my knowledge, as someone who has worked in global health for 40 years, with the sole exception of Bill Gates, no leader of the private sector or corporate world has invested so much of his time, energy, and personal credit to do so much for the poorest people of the poorest countries than Rajat Gupta,” Mr. Naftalis said.

“I’m glad he didn’t say except for Michael Milken,” Judge Rakoff responded.

The comment by the judge caught the courtroom by surprise. Over the last several decades, Mr. Milken has been a prominent philanthropist. Still, while his family foundation has been a significant contributor to education initiatives and medical research causes, it has not been involved in global public health matters.

“Michael Milken wasn’t there on this issue,” Mr. Naftalis said.

Judge Jed. S. Rakoff of Federal District Court in Manhattan.Fred R. Conrad/The New York TimesJudge Jed. S. Rakoff of Federal District Court in Manhattan.

Later in the hearing, Judge Rakoff referenced his earlier comment about Mr. Milken. The judge rejected the recommendation by Mr. Gupta’s lawyer that his client receive a probationary sentence and perform community service in Rwanda, saying that said this would amount to insufficient punishment because Mr. Gupta had already devoted himself to such activities. He called the Rwanda idea “innovative” but at the same time mocked it, noting that it sounded like a “Peace Corps for insider traders.”

“Moreover, someone who has suffered a reputational loss has a strong motive to do those kinds of things,” Judge Rakoff said. “I somewhat unfairly made a joke at the expense of Mr. Milken previously, but he is a good example of a person who has attempted to recapture his reputation by doing good works.”

Both Judge Rakoff and Mr. Naftalis, the lawyer for Mr. Gupta, have more than just a passing interest in Mr. Milken. Both men have deep connections to the late 1980s insider trading scandal that featured Mr. Milken’s former firm, Drexel Burnham Lambert. As a criminal defense lawyer, Mr. Rakoff represented Martin A. Siegel, a former Kidder Peabody investment banker who admitted to leaking inside information to the financier Ivan Boesky. And Mr. Naftalis represented Kidder Peabody in the case, working closely with Mr. Rakoff.

A spokesman for Mr. Milken, Geoffrey Moore, took umbrage at Judge Rakoff’s comments. He bristled at the idea that Mr. Milken’s philanthropic efforts were solely a function trying to restore his reputation.

In a statement to DealBook, Mr. Moore listed Mr. Milken’s numerous charitable efforts and emphasized that Mr. Milken endowed his family foundation with several hundred million dollars in 1982, long before his legal troubles.

“Mike’s efforts today are no more than a continuation of the same efforts that began long before his reputation was damaged,” Mr. Moore said. “He is far too busy trying to advance medical science to worry about what others think of him.”

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DealBook Column: Paul Ryan and What Wall Street Should Know

Paul Ryan dislikes the Dodd-Frank Act's ability to safely dismantle failing banks, a provision Wall Street strongly favors.Ben Garvin for The New York TimesPaul Ryan dislikes the Dodd-Frank Act’s ability to safely dismantle failing banks, a provision Wall Street strongly favors.

He could be mistaken for a Wall Street banker. Or perhaps a hedge fund manager. Or even a managing director at a private equity firm, like Bain Capital.

Paul Ryan, with his clean-cut Brooks Brothers looks and wonky obsession with spreadsheets, could be just the archetype of a Wall Streeter.

Mitt Romney’s new running mate even trades stocks in his spare time. He’s a fan of the nation’s blue chips: among the stocks he owns are Apple, Exxon Mobil, General Electric, I.B.M., Procter Gamble, Wells Fargo, Google, McDonald’s, Nike and Berkshire Hathaway, according to his latest disclosure filing.

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Mr. Ryan is a disciple of Ayn Rand and Milton Friedman, two figures long associated with free markets.

And he has the support of some powerful backers in finance: his top donors include employees of Wells Fargo, UBS, Goldman Sachs and Bank of America. For his 2012 Congressional race, he raised about $179,000 from securities professionals (not a large sum, but certainly the single largest sector that donated money to his campaign).

One of the biggest contributors to his political action committee is from Paul Singer’s hedge fund, Elliott Management. And Dan Senor, recently an investment adviser to Elliott Management, was just named Mr. Romney’s new adviser. But what does Mr. Ryan think about Wall Street? His views may surprise you.

Mr. Ryan, who voted in 1999 to repeal parts of the Glass-Steagall Act, allowing commercial and investment banks to merge, now appears to be in the same change-of-heart camp as Sandy Weill, the former chief executive of Citigroup, who recently declared that the banks should be broken up.

“We should make sure you can’t get too big where you’re going to become too big to fail and trigger a bailout,” Mr. Ryan said during a meeting with constituents in May in Wisconsin. “If you’re a bank and you want to operate like some nonbank entity like a hedge fund, then don’t be a bank. Don’t let banks use their customers’ money to do anything other than traditional banking.”

With a view like that, Mr. Ryan faces a challenge winning the support of the likes of Jamie Dimon, the chairman of JPMorgan Chase and a vocal supporter of the big bank model. (Mr. Dimon, a onetime supporter of President Obama, had recently been hinting he could vote for Mr. Romney, regularly calling himself “barely a Democrat.”)

Mr. Ryan is also an ardent critic of the Dodd-Frank Act, the postcrisis Wall Street legislation. But, oddly enough, the provision he dislikes the most is the one that has the greatest support of the industry: a tool known as resolution authority, which gives the government the authority to dismantle a failing bank without wreaking havoc on the rest of the system. It was a provision that was supported by the former Republican Treasury Secretary Henry M. Paulson Jr. “We would have loved to have something like this for Lehman Brothers. There’s no doubt about it,” Mr. Paulson told me two years ago. The provision was also supported almost universally by Wall Street as a way to end the “too big to fail” problem.

Mr. Ryan’s 2013 budget proposal sought to remove the resolution authority provision saying, “While the authors of the Dodd-Frank Act went to great lengths to denounce bailouts, this law only sustains them.”

It is worth noting that Mr. Ryan voted in favor of the bank bailout in 2008, known as TARP or Troubled Asset Relief Program. Ahead of the vote, he encouraged his colleagues in the House to vote in favor of it to avoid “this Wall Street problem infecting Main Street.”

He added: “This bill offends my principles, but I’m going to vote for this bill in order to preserve my principles, in order to preserve this free enterprise system. We’re in this moment and if we fail to do the right thing, heaven help us.”

While Mr. Ryan may appear to be a friend of business, he doesn’t agree with the industry’s biggest talking point these days, the Simpson-Bowles deficit reduction plan. He was a member of the commission and voted it down, arguing that it did not go far enough in overhauling health care entitlements.

He later criticized President Obama for not supporting it. That prompted Gene Sperling, director of the National Economic Council under President Obama, to retort on CNN:

Paul Ryan, talking about walking away from a balanced plan like Bowles-Simpson is, I don’t know, somewhere between laughable and a new definition for chutzpah.”

Oddly enough, Erskine Bowles, a Democrat, praised Mr. Ryan’s proposed budget in a speech in 2011, saying, “I always thought that I was O.K. with arithmetic, but this guy can run circles around me.”

Mr. Ryan also bucked the conventional Wall Street wisdom on how to deal with the debt ceiling. Many investment managers are wringing their hands about the uncertainty that the debate over the “fiscal cliff” is creating for markets. Last year, three months before the debt ceiling debate reached a peak, Mr. Ryan said that he was prepared to let the government default on its debt for at least several days if it would force Democrats to accept deeper cuts.

“They all say, ‘Whatever you do, make sure you get real spending cuts,’ ” Mr. Ryan told CNBC about the way investors, including the hedge fund manager Stanley Druckenmiller, wanted him to vote. “Because you want to make sure that the bondholder has the confidence that the government’s going to be able to pay them. You’re putting the government in a better position to pay them.”

James Pethokoukis, a columnist for the American Enterprise Institute, which has traditionally supported Mr. Ryan, sent this Twitter message in April. “I hear what G.O.P. support there was for Obama/Bowles/Simpson debt panel plan is collapsing thanks to Ryan Plan.”

So while financiers may cheer Mr. Ryan’s pro-market policies, they may want to reassess just what those policies mean for their businesses.

A version of this article appeared in print on 08/14/2012, on page B1 of the NewYork edition with the headline: Everything Wall St. Should Know About Ryan.

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DealBook: Bristol-Myers Executive Is Accused of Insider Trading

Federal prosecutors have charged a Bristol-Myers Squibb executive with insider trading, saying he had profited from confidential information about pending deals by the pharmaceutical company.

Robert D. Ramnarine, the executive, was accused of buying call options in ZymoGenetics, Pharmasset and Amylin Pharmaceuticals before the companies were acquired by Bristol-Myers Squibb. Call options give their buyer the right to buy a stock from their seller at a specific price and time. Mr. Ramnarine sold the options and made more than $300,000 on the illegal trades, according to the complaint filed in Federal District Court in Newark.

Mr. Ramnarine, who lives in East Brunswick, N.J., was arrested on Thursday morning and appeared in court in the afternoon. He did not enter a plea and was released on bail into his wife’s custody.

His lawyer, Peter Carter, a court-appointed federal public defender, could not immediately be reached for comment.

The case comes amid a broader crackdown by the federal government on insider trading. The United States attorney’s office in Manhattan has won a number of major cases against big investors, corporate executives and others. Those include recent victories against Raj Rajaratnam, the billionaire hedge fund manager who founded the Galleon Group, and Rajat K.Gupta, the retired head of the consulting firm McKinsey Company and a former director at Goldman Sachs.

In the case of the Bristol-Myers executive, investigators identified a pattern to the trades, which took place from 2010 to 2012, according to a complaint. Mr. Ramnarine, an assistant director of capital markets at Bristol-Myers, bought call options through personal brokerage accounts, it said. After the deals were announced, he collected the profit on those positions, the complaint said.

Mr. Ramnarie apparently had some apprehensions. According to the complaint, he searched the Internet last year for the terms “can stock option be traced to purchase inside trading,” and “insider trading options trace illegal.” The court document also says he viewed an article on the blog Zero Hedge about insider trading in options of Ann Taylor.

The Securities and Exchange Commission has filed a civil action against Mr. Ramnarine. The agency is seeking a court order to freeze the executive’s brokerage account assets.

“Ramnarine tried to educate himself about how the S.E.C. investigates insider trading so he could avoid detection, but apparently he ignored countless successful S.E.C. enforcement actions against similarly ill-motivated individuals who paid a heavy price for their illegal trading,” said Daniel M. Hawke, the chief of the enforcement division’s market abuse unit.

United States v. Robert Ramnarine

Securities and Exchange Commission v. Robert Ramnarine

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