September 22, 2023

Common Sense: At SAC, Rules Compliance With an ‘Edge’

The firm said it spends “tens of millions of dollars,” on compliance, “deploys some of the most aggressive communications and trading surveillance in the hedge fund industry,” has hired big-name lawyers like Peter Nussbaum and Steven Kessler to oversee compliance, and has a staff of “no fewer than 38 full-time compliance personnel.”

Which sets up the question: What were they doing?

On Thursday, the federal government charged SAC with running an insider trading scheme that flourished from 1999 to 2010, the result of an “institutional indifference” to unlawful conduct. On the face of it, it’s impossible to reconcile SAC’s avowed devotion to both legal and ethical behavior and the government’s allegations.

It may be true, as SAC concedes, that even the best compliance programs “may not detect individuals determined to evade firm policies or break the law.” But that doesn’t explain the insider trading “on a scale without known precedent in the hedge fund industry,” as the government put it, which already includes guilty pleas by five employees, insider trading indictments of two more, and SAC’s own settlement of Securities and Exchange Commission charges for $616 million, the largest insider trading penalty ever.

Whether the elaborate compliance system at SAC was little more than a Potemkin village will be at the center of both the S.E.C.’s civil enforcement against Steven A. Cohen, SAC’s eponymous billionaire founder, for failure to supervise his employees, and this week’s criminal indictment against the firm. (Mr. Cohen hasn’t been charged with any crime.) As Harvey Pitt, the former S.E.C. chairman, told me this week: “When it comes to compliance, you have to live, eat, breathe and drink it. It has to be embedded in a firm’s DNA.” And that process, he emphasized, had to start at the top, with Mr. Cohen.

SAC maintains that’s exactly what both the firm and Mr. Cohen have strived for, and that “Mr. Cohen himself exemplified” that “compliance is the responsibility of all of its employees.”

Such an effort, SAC said, began with its hiring process. The “firm does not take lightly its decision to employ someone,” it said in a document responding to an S.E.C. action last week contending that Mr. Cohen failed to supervise SAC’s employees. The firm said it refused to hire candidates because of concerns about compliance issues. When I asked for an example, the firm declined to identify any.

But the government cited multiple examples of SAC employees who were hired precisely because of their purported “contacts,” including one who “has a share house in the Hamptons with the C.F.O.,” or chief financial officer, of a publicly traded company and is “tight with management” at the company, as one internal SAC e-mail enthused. Another prospect was praised for “mining his industry contact network for datapoints.” The government said SAC rarely, if ever, showed any interest in ethics, integrity or compliance in vetting candidates.

On the contrary, when SAC’s legal department raised objections to hiring Richard Lee after another hedge fund warned that he was part of an “insider trading group,” Mr. Cohen “decided to hire Mr. Lee anyway,” and overruled the legal department, the indictment contends. Mr. Lee began insider trading almost as soon as he was hired. (Mr. Lee pleaded guilty this week to conspiracy and securities fraud charges and is cooperating with the government’s investigation.)

SAC has also stressed its continuing training programs, which include requiring employees to certify their adherence to a compliance manual and attend sessions with “prominent outside speakers.” These included Mr. Pitt, who is now chief executive of Kalorama Partners, a consulting firm that advises clients on compliance issues; and Stephen Cutler, a former chief of enforcement at the S.E.C. who is now general counsel at JPMorgan Chase, who spoke to the employees while in private practice. Mr. Cohen himself was “an active participant in this process,” SAC said.

But not all that active, apparently. Mr. Cohen didn’t bother to attend all the lectures, according to participants, although he did meet with the speakers individually.

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DealBook: Trader’s Day in Court May Lack Some Details

Fabrice Tourre testified before a Senate panel in 2010. The subcommittee was investigating investment banks.Doug Mills/The New York TimesFabrice Tourre testified before a Senate panel in 2010. The subcommittee was investigating investment banks.

Next Monday, in a courtroom in downtown Manhattan, the Securities and Exchange Commission will begin what is likely to be its most prominent case stemming from the financial crisis: its case against Fabrice Tourre, a former Goldman Sachs trader who is accused of misleading clients by selling a mortgage securities investment that the government said was designed to fail.

Mr. Tourre, as you might remember, was a 28-year-old French banker who wrote this gem of an e-mail to his girlfriend in 2007, which was widely quoted several years ago: “The whole building is about to collapse anytime now,” he explained to her about the markets. “Only potential survivor, the fabulous Fab,” he continued, not so humbly referring to himself, “standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications.”

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Goldman Sachs paid $550 million to settle the case in 2010 without admitting or denying guilt. Mr. Tourre, however, turned down an offer to settle. He wanted his day in court. And now that day has come. The trial is seen within the S.E.C. and on Wall Street as a referendum on Goldman Sachs and the government’s case, which was never argued in front of a jury.

But the jury may never hear the full account if the S.E.C. gets its way.

The heart of the S.E.C.’s case contends that Mr. Tourre and Goldman created a mortgage security known as Abacus with the help of the hedge fund run by the billionaire John A. Paulson. Mr. Paulson’s firm helped choose the assets in that security and then bet against it. The S.E.C. contends Mr. Tourre deliberately hid the intentions of the Paulson fund so that Goldman could more easily sell Abacus to investors who would unknowingly bet that its value would go up, including ACA Management, which both invested in Abacus and helped approve its components.

The entire case rests on whether Mr. Tourre deprived investors of information that the S.E.C. says they needed to make an informed investment decision.

And so it is a little awkward, in a case that hinges on appropriate disclosure, that the S.E.C., in a bevy of pretrial briefs, appears to be fighting vociferously to exclude troves of evidence from the trial that the defense says is material for the jury to make an informed decision about Mr. Toure’s innocence or guilt.

The S.E.C., for example, has sought to block any mention of news reports that Mr. Paulson was betting against the subprime mortgage market. The defense argues that the news reports are necessary to demonstrate that the institutional investors, who arguably read the news as part of their jobs, were not duped into thinking that Mr. Paulson was betting that the value of Abacus would rise, undercutting the S.E.C.’s contention that the investors were misled victims.

“News articles about Paulson’s purported macro investment strategy of shorting the subprime housing market are not relevant,” the S.E.C. wrote. “Such articles are irrelevant, prejudicial and confusing. With respect to most or all of them, there is no evidence that they were read by the employees of ACA Management.”

The S.E.C. has also tried to block references to public statements made by current and former regulators, including Ben S. Bernanke, Henry M. Paulson Jr. and Alan Greenspan, that suggested that the subprime lending problems were overblown. That would buttress the defense’s case that investors made the decision to invest in Abacus, and bet it would go up in value, based on their research and a prevailing view in the marketplace. “What government regulators believed about the subprime housing market in 2007 has nothing to do with the facts of consequence to the determination of this action,” the government wrote the court.

What else might the jury miss?

One of the biggest issues is this: ACA, which the S.E.C. has portrayed as a victim of Mr. Tourre’s fraud, was not considered a victim when the government divided the $550 million Goldman Sachs settlement that had been set up to repay victims. The government excluded ACA completely from the list of investors that were paid from the Goldman settlement. How can ACA be a victim for the purpose of Mr. Tourre’s case, but not be for the purpose of the recompense? The S.E.C. says the victim list from the fund is irrelevant. Payments are “entirely discretionary and involve policy judgments that do not necessarily reflect any decision about whether a particular entity or institution was actually victimized as a result of a defendant’s fraud,” the S.E.C. said in a legal brief. (If the S.E.C. is being honest about how it determines who is a victim, it raises a hornet’s nest of policy questions that are worth investigating.)

Then there is the issue of who else has been charged in the case — or rather, has not been charged. The government has argued that Mr. Tourre is part of a “scheme” to defraud investors, but the government has not charged anyone else. The S.E.C. insists that jurors not be told that.

Next is Lucas Westreich and his honeymoon. Mr. Westreich, a former employee of ACA who appears on a recorded phone call that prosecutors say is central to their case, has told the court that he will be unavailable to testify in person because he will be on his honeymoon outside the country. The government seems perfectly fine with Mr. Westreich’s skipping out on the case, saying that he is expected to claim he does not remember the call.

The defense has suggested that it wants to cross-examine him about other tape recordings that it says may undermine the claims made on the original call. The government has consented to Mr. Westreich being deposed on videotape. The defense, which subpoenaed him in December 2012, wants him to appear live.

It is unclear whether he will appear, but the judge hinted: “Somebody just sitting there on this highly relevant call saying ‘I don’t recall a thing about it,’ even if it is 10 minutes, is potentially useful for the jury to see, because they can see whether or not this guy looks like a guy who just doesn’t recall or a guy who is squirming around and doesn’t recall. Sometimes people squirm.”

Finally, there is the S.E.C.’s star witness, Laura Schwartz, a former ACA employee who is expected to testify that she was duped by Mr. Tourre into thinking that Mr. Paulson’s firm was investing in Abacus side by side with her. For the last several months, there had been a fierce battle between the government and the defense over whether the jury should hear that the S.E.C. had issued a Wells notice to her on an unrelated matter, indicating that the government was considering bringing a case against her.

The defense had argued in pretrial briefs that jurors needed to know about the Wells notice to measure her motive to testify on behalf of the government. But just last week, the S.E.C. ended its case against her, effectively trying to take the issue off the table ahead of the trial. Late Tuesday, however, the defense submitted a brief to the court saying that it believed jurors needed to know about the inquiry into Ms. Schwartz.

“Even if one were to accept that there was no quid pro quo here (and the court should not), the bias materials remain relevant to and necessary to fair cross-examination, for example, as to whether Ms. Schwartz cited her cooperation with the S.E.C. in this case as a basis on which it should not bring charges against her,” the brief said.

We will see next week how much the jury ultimately finds out.

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DealBook: Activist Investor Calls for Breakup of Smithfield Foods


An activist hedge fund took aim at Smithfield Foods on Monday, arguing that the pork producer should consider splitting itself up despite its proposed $4.7 billion sale to a major Chinese meat processor.

The fund, Starboard Value, wrote in a letter to Smithfield’s board that it believed the company was worth much more separately. Starboard says it owns a 5.7 percent stake, making it one of the largest shareholders in the company.

Shares of Smithfield were up more than 2 percent in premarket trading on Monday, although they remained below the offer price from Shuanghui International.

The letter signals a potential fight over Smithfield, one of the country’s biggest producers of hogs. Last month, it agreed to sell itself to Shuanghui for $34 a share, in a bid to increase sales of American pork in China.

But Starboard has picked up an argument advanced against Smithfield over the years: that its vertically integrated operations, from raising hogs to slaughtering and processing them into bacon and ham and then selling the products, are worth more separate than combined.

“We believe there are numerous interested parties for each of the company’s operating divisions, and that a piece-by-piece sale of the company’s businesses could result in greater value to the company’s shareholders than the proposed merger,” the hedge fund wrote.

Starboard may be in for a tough fight. Smithfield’s management team, led by C. Larry Pope, has defended the logic of keeping the company whole, as have Shuanghui executives. Before announcing the deal with Shuanghui, Smithfield had been in talks with two other buyers as well.

One of Smithfield’s former biggest investors, the Continental Grain Company, had also called for a breakup of the company, but instead sold off virtually its entire stake this month, taking advantage of the higher share price since the Shuanghui deal was announced.

Starboard acknowledged that Smithfield’s deal with Shuanghui prevented it from seeking rival takeover bids. Instead, the hedge fund offered to look for and bring in potential bidders for Smithfield’s divisions.

In taking aim at Smithfield, Starboard is choosing one of its biggest targets yet. The activist hedge fund has made its name agitating against the likes of AOL.

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F.B.I. Arrests SAC Capital Portfolio Manager

FBI agents arrested Steinberg at his Park Avenue home in New York City at around 6 a.m. EDT (1000 GMT). Steinberg, wearing a blue sweater, pleaded “not guilty” to charges of securities fraud and conspiracy to commit securities when he appeared at a late morning arraignment.

The five-count indictment charges Steinberg, 40, with using inside information to trade shares of computer maker Dell Inc and chipmaker Nvidia Corp in 2008 and 2009 that generated about $1.4 million in illegal profits for Cohen’s $15 billion hedge fund.

In a related civil complaint against Steinberg, the U.S. Securities and Exchange Commission said the information allowed Steinberg to generate $6.4 million in profits and avoided losses for the hedge fund.

Barry Berke, Steinberg’s lawyer, said in a statement that his client had done “absolutely nothing wrong” and his “trading decisions were based on detailed analysis.”

The charges come after a tumultuous six months for Cohen, one of the most successful hedge fund traders. It began with last November’s arrest of former SAC portfolio manager Mathew Martoma in what prosecutors had described as the largest U.S. insider-trading case.

Martoma pleaded not guilty to charges of insider trading in Elan Corp and Wyeth that allegedly resulted in profits and avoided losses totaling $276 million.

SAC Capital agreed two weeks ago to pay a $616 million penalty to the SEC to settle allegations of improper trading by the firm arising out of the Martoma investigation and alleged improper trading in Dell and Nvidia. SAC neither admitted nor denied wrongdoing as part of that settlement.

But a federal judge on Thursday said he was reserving his decision on approving the deal.

Mounting concern over the insider trading probe prompted outside investors in SAC Capital to submit redemption notices last month to withdraw up to $1.68 billion from Cohen’s firm. Several outside investors, including Blackstone Group, declined to comment on Steinberg’s arrest.

Cohen, a multi-billionaire, has not been charged with any wrongdoing. A well-known art collector, he recently purchased Pablo Picasso’s “Le Reve” from casino owner Stephen Wynn for $155 million and, according to The New York Times, bought a $60 million oceanfront home in East Hampton, N.Y.


Steinberg is one of nine current or former employees of SAC Capital who have been charged or implicated with insider trading while working at Cohen’s two-decade-old hedge fund.

His arrest had been widely expected after Jon Horvath, a former SAC analyst who reported to Steinberg, pleaded guilty last year to using illegally obtained information to trade in Dell. Horvath has been cooperating with the government and had implicated Steinberg.

Steinberg was suspended last autumn from his post at SAC Capital’s Sigma Capital division and remains on paid leave.

SAC Capital spokesman Jonathan Gasthalter said: “Mike has conducted himself professionally and ethically during his long tenure at the firm. We believe him to be a man of integrity.”

Prosecutors have introduced emails that they said indicated Steinberg had access to inside information about potential weakness in Dell’s earnings, in advance of the personal computer maker’s August 2008 results announcement.

Federal authorities contend the improper trading by Steinberg largely involved short positions and derivative trades. The trades involving shares of Dell occurred in August 2008, while the trading in Nvidia took place in May 2009.

The SEC complaint said some of the trading in Dell was done by a SAC portfolio called SAC Select. People familiar with SAC Select said it used computer-driven trading strategies to mimic the trades of some of SAC Capital’s top portfolio managers.

The complaint against Steinberg made no reference to Cohen, unlike the criminal and civil cases filed by against Martoma, which was the first time authorities had alluded to him as the “owner” of the hedge fund.

Steinberg had been moving among several hotels in New York City in recent weeks, according to Reuters sources, as he wanted to avoid being arrested at his Upper East Side home where he lives with his wife and two children.

Following the arraignment before U.S. District Judge Richard Sullivan in lower Manhattan on Friday morning, Steinberg was released after agreeing to post $3 million in bond, which was secured by $1 million in property.

During the proceeding, a federal prosecutor said no search warrant was served on the hedge fund in connection with the charges against Steinberg.

In announcing the $616 million settlement with SAC Capital, lawyers with the SEC made clear the deal did not preclude further charges against individuals or from other trading at SAC Capital that is still be investigated. As part of that settlement, SAC Capital agreed to pay $14 million to settle charges of improper trading in Dell.

On Thursday, a federal district judge reviewing the part of the settlement involving trading in shares of Elan and Wyeth, now a part of Pfizer, said he was reserving decision for now.

The cases in U.S. District Court, Southern District of New York are: United States v. Steinberg, No. 12-cr-121, and Securities and Exchange Commission v. Steinberg, No. 13-2082.

(Additional reporting by Svea Herbst-Bayliss, Katya Wachtel and Sruthi Ramakrishnan; Editing by Tiffany Wu, Maureen Bavdek and Leslie Gevirtz)

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DealBook: Hess to Sell Gas Stations as Part of a Shift in Strategy

A Hess gas station in Brooklyn.Ángel Franco/The New York TimesA Hess gas station in Brooklyn. The company said Monday it would sell all its gas stations, but a big investor wanted more changes.

8:55 p.m. | Updated The Hess truck may be going in a yard sale.

Known for its white-and-green gas stations, the Hess Corporation announced on Monday a plan to sell off its retail and refining operations and focus primarily on oil production.

The streamlining comes as it seeks to fight off an activist investor, the hedge fund Elliott Management, although Hess presented the new strategy as the culmination of a multiyear campaign.

Despite the changes announced by Hess, including six new directors, Elliott said significant problems remained.

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The statements on Monday signal a possibly prolonged battle between Hess and Elliott, the latest in a flurry of campaigns by activist investors. The hedge fund, led by Paul Singer, disclosed last month that it owned a 4 percent stake in Hess and nominated five candidates for the company’s board in what it said was an attempt to impose discipline on a wayward oil producer that lagged its peers.

Elliott was later joined by Relational Investors, another activist investor with deep roots in the oil industry.

Hess described its plans, which will further center the company on finding and developing new sources of oil, as a natural evolution of a turnaround begun years ago. Other companies, including ConocoPhillips, have made similar moves in the last three years.

“It’s the logical endpoint of our five-year plan,” John B. Hess, the company’s chief executive and the son of its founder, said in an interview by phone on Monday.

Mr. Hess explicitly rejected any notion that Monday’s plan was spurred by outside pressure — “Elliott got on the train after it left the station,” he said. But the moves further narrow the company’s focus, as the hedge fund has demanded.

The retail operation, which includes more than 1,350 gas stations primarily in the Northeast, the Carolinas and Florida, accounts for just 4 percent of the company’s revenue. (While the fate of the toy Hess trucks remains in question, the company expects the 2013 models to be ready in time for Christmas, batteries included.)

In addition, Hess will sell holdings in Indonesia and Thailand.

At the same time, the company sought to demonstrate its responsiveness to shareholders, announcing a big jump in its dividend payments, to $1 from 40 cents a share, and a stock buyback of up to $4 billion.

And perhaps most prominent, Hess named six new directors to its board, most of whom are former oil industry executives. They include John Krenicki Jr., a former head of GE Energy; William Schrader, a former chief operating officer of TNK-BP; and James H. Quigley, a former chief executive of Deloitte.

In naming its director candidates last month, Elliott criticized the board’s ties to the Hess family. Mr. Hess defended the departing directors as having helped shape the current strategy, but acknowledged that the board needed some new blood.

The directors who are leaving include Thomas Kean, a former governor of New Jersey; Samuel A. Nunn, a former United States senator from Georgia; and Gregory P. Hill, Hess’s president of worldwide exploration and production.

“With the new company that we’re becoming, we feel that we have the right people for the board,” Mr. Hess said.

But Hess explicitly rejected Elliott’s biggest recommendation: dividing the company into a domestic driller with a big presence in the Bakken shale formation and an international oil producer.

For its part, Elliott said it was unswayed by the plans, noting that Hess had announced several end points in its turnaround campaign since 2010. The hedge fund also said that the company had understated its poor stock performance in the months before Elliott announced its intentions, and that Hess had minimized years of mismanagement.

“Hess’s announcement is incomplete and it lacks accountability,” Elliott said in its statement. “Substantial change needs to be delivered rather than partial change promised.”

Investors appeared to respond favorably to the new strategy. Shares of the company rose 3.5 percent on Monday, to $68.84. They have risen over 10 percent since Elliott formally began its proxy fight.

And analysts praised the moves as well.

“We applaud the changes,” analysts at Wells Fargo wrote in a research note on Monday. They added that it was clear “management clearly is accelerating the changes rather than digging in its heels and fighting with its newest shareholders.”

This post has been revised to reflect the following correction:

Correction: March 4, 2013

An earlier version of this article misspelled the name of a new Hess board member. He is William Schrader, not Scrader.

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DealBook Column: ‘Shareholder Democracy’ Can Mask Abuses

David Einhorn, founder of the hedge fund Greenlight Capital.Carlo Allegri/ReutersDavid Einhorn, founder of the hedge fund Greenlight Capital.

Martin Lipton, one of the nation’s top corporate lawyers, was dismayed.

Having watched David Einhorn, the activist investor, go to battle with Apple in the last two weeks to push it to distribute some of its $137 billion cash hoard to shareholders, Mr. Lipton had seen enough. Mr. Einhorn, he thought, had gone too far.

A longtime counselor to the Fortune 500 as one of the founding partners of Wachtell, Lipton, Rosen Katz, he sat down and wrote a scathing memo to his clients on his view that “shareholder democracy” has run amok.

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“The activist-hedge-fund attack on Apple — in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash — is a clarion call for effective action to deal with the misuse of shareholder power,” he wrote. The memo was entitled, “Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy.”

Martin Lipton, founding partner of Wachtell, Lipton, Rosen and Katz.Keith Bedford/ReutersMartin Lipton, founding partner of Wachtell, Lipton, Rosen and Katz.

Mr. Lipton said that long-term shareholders in public companies are being undermined “by a gaggle of activist hedge funds who troll through S.E.C. filings looking for opportunities to demand a change in a company’s strategy or portfolio that will create a short-term profit without regard to the impact on the company’s long-term prospects.”

While “shareholder democracy” may be a good sound bite, Mr. Lipton has a point worth considering.

It increasingly appears that the rise of “shareholder democracy” is leading, in some cases, to a perverse game in which so-called activist investors take to the media to pump or dump stocks in hopes of creating a fleeting rise or fall in a company’s stock price. The battle over Apple is just one minor example. Carl Icahn’s investment in Herbalife, betting against William Ackman’s accusation that the company is a “pyramid scheme,” is another.

That’s not to say that shareholder democracy is a bad thing. Shareholders have successfully and properly brought pressure to bear on underperforming companies, pushed out entrenched directors and, in some cases, pressed for operational changes to address health and the environment.

At a time when investors are calling for managements and directors to think more about the long term, this latest breed of activism is also multiplying. But are these activists interested in the long term?

According to Leo E. Strine Jr., the chief judge of the Delaware Court of Chancery, the answer is usually obvious: no.

“Many activist investors hold their stock for a very short period of time and may have the potential to reap profits based on short-term trading strategies that arbitrage corporate policies,” he wrote in a widely circulated essay for the American Bar Association. Near the beginning of his essay he asked: “Why should we expect corporations to chart a sound long-term course of economic growth, if the so-called investors who determine the fate of their managers do not themselves act or think with the long term in mind?”

The academic literature provides a mixed and inconclusive assessment of the true effect of activism on shareholder value over the long-term.

In fairness, it must be said that not all activist investors are created equal and not all of their investments should be considered in the same way. Nelson Peltz, once called a corporate raider, fought his way onto the board of Heinz in 2006. He is still on the board and approved the sale of the company to Berkshire Hathaway and 3G Capital just weeks ago.

Daniel Loeb, the founder of Third Point Management, similarly fought his way onto the board of Yahoo after exposing its former chief executive, Scott Thomson, for lying on his résumé. He is now a board member and helped recruit Marissa Mayer to be chief executive. Whether he likes it or not, Mr. Loeb is a long-term shareholder in Yahoo. Just weeks ago, however, he announced that he had made an investment in Herbalife that his peer, Mr. Ackman, is betting against. Part of Mr. Loeb’s bet was simply a short-term gamble; he has since sold some of his investment, taking profits off the table.

Similarly, Mr. Ackman has made some long-term bets — he held his short position in MBIA for years and is now a long-term investor and director of J. C. Penney — but he has also made a series of short-term investments as well.

As for Mr. Einhorn’s fight with Apple, it is hard to argue he is a short-term investor in the company; his firm, Greenlight Capital, has held a stake for the past three years. But the measures he is pressing the company to pursue — creating a “iPref” or preferred share that pays a dividend to shareholders in perpetuity — feel a lot like financial engineering to create some quick value for investors.

In a news release announcing his proposal, which would have Apple create $50 billion in perpetual preferred stock, Mr. Einhorn said that amount of the new shares “would unlock about $30 billion, or $32 per share in value. Greenlight believes that Apple has the capacity to ultimately distribute several hundred billion dollars of preferred, which would unlock hundreds of dollars of value per share.” He continued, “Greenlight believes additional value may be realized when Apple’s price-to-earnings multiple expands, as the market appreciates a more shareholder-friendly capital allocation policy.”

In truth, Mr. Einhorn’s proposal is a lot more long-term thinking than just pressing Apple to distribute a special one-time dividend or pursue a series of stock buybacks; his proposal requires shareholders to remain so as to reap the dividends the special “iPrefs” would throw off. But make no mistake, Mr. Einhorn is also hoping that Apple’s common shares will jump in price if Apple takes up his proposal.

Mr. Einhorn declined to comment for this column.

I’ve had my own run-ins with Mr. Lipton. In 2008, before the financial crisis, I wrote a column questioning Mr. Lipton’s various efforts “to stiff-arm the people who actually own the company.” At the time, he wrote a memo arguing that the “limits on executive compensation, splitting the role of chairman and C.E.O. and efforts to impose shareholder referendums on matters that have been the province of boards should be resisted.”

As the inventor of the anti-takeover maneuver called the “poison pill” and as one who has made a career trying to protect boards from agitators, Mr. Lipton was talking his own book. I wrote, “Mr. Lipton’s advice isn’t just wrongheaded. It’s dangerous.”

But nearly five years later, with the perspective of the financial crisis, Mr. Lipton’s underlying worry that certain shareholders will abuse the powers of democracy is not unfounded. The question, as is often the case, is whether the influence of a few interested in the short term overwhelms the best interests of the many in the long term.

A version of this article appeared in print on 02/26/2013, on page B1 of the NewYork edition with the headline: ‘Shareholder Democracy’
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Terms of Greek Bond Buyback Top Expectations

While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 euro cents and a maximum of 40 cents, for a discount of 60 percent to 70 percent.

Analysts said they expected that the average price would ultimately be 32 to 34 euro cents, a premium of about 4 cents above where the bonds traded at the end of last week.

Pierre Moscovici, the French finance minister, played down concerns that the Greek debt buyback might not go as planned.

“I have no particular anxiety about this,” Mr. Moscovici said Monday at the European Parliament ahead of the meeting in Brussels of euro zone finance ministers to discuss Greece. “It just has to be very quick.”

A successful buyback is critical for Greece. The International Monetary Fund has said that it will lend more money to Greece only if it is reasonably able to show that it is on target to achieve a ratio of debt to annual gross domestic product of less than 110 percent by 2022.

Greece will have at its disposal 10 billion euros, or $13 billion, in borrowed money from Europe. Investors who agree to trade in their Greek bonds will receive six-month treasury bills issued by Europe’s rescue vehicle, the European Financial Stability Facility. The offer will close Friday.

If successful, the exchange will retire about half of Greece’s 62 billion euros in debt owed to the private sector. The country still owes about 200 billion euros to European governments and the I.M.F.

Analysts said that Greek, Cypriot and other government-controlled European banks, which have as much as 20 billion euros worth of bonds, were expected to agree to the deal at a price in the low 30s. That would mean that to complete the transaction, hedge-fund holdings of 8 billion to 10 billion euros in bonds would have to be tendered at a price below 35 cents. Any higher price would mean that Greece would have to ask its European creditors for extra money — an unlikely outcome at this stage.

Even though Greece is so close to bankruptcy, its bonds have become one of the hot investments in Europe. Large hedge funds, like Third Point and Brevan Howard, have accumulated significant stakes, starting this summer when the bonds were trading in the low teens. Shorter-term traders have been snapping up bonds at around 29 cents to make a quick profit by participating in the buyback.

In a research note published Monday, analysts at Nomura in London said it was “reasonable and likely” that enough hedge funds — especially those that might be more risk-averse and or have a shorter perspective — would agree to the deal at a price below 35 cents.

But there are also foreign investors looking to the longer term who may decide to hold onto most of their holdings in the hope that the bonds rally even more after a successful buyback.

“I think the bonds could go to as high as 40 cents in a nonexit scenario,” said Gabriel Sterne, an analyst at Exotix in London, referring to the consensus view that Greece will not leave the euro zone anytime soon.

Bondholders were encouraged by comments from Chancellor Angela Merkel of Germany, reported in the German news media over the weekend, that raised the possibility that European governments might offer Greece debt relief in the future. A number of bondholders expect Greek bond yields to trade more in line with those of Portugal in the coming years, but without the prospect of a future buyback to push up the prices of Greek government bonds, the risk to such an approach is substantial.

Jean-Claude Juncker, the president of the group of finance ministers whose countries use the euro, told a news conference late Monday in Brussels that ministers would meet again on the morning of Dec. 13 to make a final decision on aid disbursement to Greece.

Mr. Juncker said he was confident that Greece would receive its money on that date, but he declined to comment on the prospects for success of the buyback program because it was a sensitive matter for the financial markets.

Mr. Juncker has been the president of the group of ministers since 2005, and the post gives him significant power over what is discussed at the group’s meetings.

Mr. Juncker reiterated at the news conference that he would step down at the end of this year or at the beginning of next year. But he declined to signal his preference for any particular successor.

“I don’t have to endorse anyone,” Mr. Juncker said. “I was asking my colleagues to provide for my succession,” he said, referring to discussions held with ministers earlier in the evening.

Separately, Spain, which is also seeking to overcome crippling debt problems, began the process Monday of formally requesting 39.5 billion euros in emergency aid to recapitalize its banks. It also announced that a tax amnesty had yielded only 1.2 billion euros, less than half what the government had expected.

The request for emergency aid was being sent to authorities managing the euro zone bailout funds, according to Spanish officials, who added that no further approval would be needed from ministers meeting in Brussels.

The request follows the European Commission’s approval last week of a plan to make the granting of the aid conditional on thousands of layoffs and office closings at four Spanish banks: Bankia, Catalunya Banc, NCG Banco and Banco de Valencia.

James Kanter contributed reporting from Brussels.

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DealBook: String of Insider Trading Cases Shows Prosecutors Casting a Wider Net

Doug DeCinces of the Callifornia Angels in 1987. The all-star third baseman was indicted on insider trading charges.Jeff Robbins/Associated PressDoug DeCinces of the Callifornia Angels in 1987. The all-star third baseman was indicted on insider trading charges.

The end of November included a veritable rush of insider trading prosecutions, belying the notion that the government goes on hiatus at the end of the year.

Three cases filed by prosecutors in Manhattan, Los Angeles and New Jersey involve defendants from a variety of backgrounds. The cases illustrate that insider trading can involve those in all walks of life, and not just savvy traders. They include:

  • A former portfolio manager at a leading hedge fund firm in the most lucrative insider trading case ever charged;
  • A former major league baseball player accused of insider trading as well as tipping off three friends to make up for poor investment advice he had given them earlier;
  • A web of six defendants that includes a group of high school buddies who are accused of passing along information while playing basketball.

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Interestingly, none of the cases involved the use of wiretaps to capture how the information was disclosed, evidence that was a central feature of other high-profile insider trading prosecutions in the last two years.

The case that has grabbed the most attention is the prosecution of Mathew Martoma, who worked as a portfolio manager at SAC Capital Advisors, the $14 billion hedge fund firm controlled by Steven A. Cohen. Mr. Martoma is accused of receiving information about problems in a clinical drug trial conducted by Elan and Wyeth that led the hedge fund to sell out its $700 million position in the companies and then take a bearish position, all in the matter of a few days.

According to prosecutors, that led SAC Capital to make gains and avoid losses totaling $276 million, dwarfing the $63 million reaped by Raj Rajaratnam, who is serving an 11-year prison term following his convictions in 2011 for insider trading.

Mr. Cohen and SAC Capital have denied any involvement in trading on confidential information. In a recent conference call with investors, Mr. Cohen said, “We take these matters very seriously, and I am confident that I acted appropriately.”

The firm also disclosed that the Securities and Exchange Commission had sent it a so-called Wells notice that its staff is considering filing civil charges based on the illegal trading by Mr. Martoma and perhaps others. This would not directly accuse the firm of engaging in insider trading, but instead claim that SAC Capital failed to properly oversee its employees.

An obscure provision of a federal statute adopted in 1988 allows the S.E.C. to seek a triple penalty for any profits or losses avoided when a “controlling person” knowingly or recklessly fails “to establish, maintain, or enforce any policy or procedure” against insider trading. Under this provision, even if Mr. Cohen and other SAC Capital executives were not personally aware of insider trading by portfolio managers, turning a blind eye to it could be enough to expose the firm to substantial liability.

In another case, federal prosecutors in Los Angeles filed charges late last month against a former major league baseball player, Douglas V. DeCinces, and three men that he is accused of tipping about the impending acquisition of Advanced Medical Optics. The government claims he received the inside information from the company’s chief executive and passed it on to make up for “prior bad investment recommendations” while also earning approximately $1.3 million himself.

This is a case in which it is — pardon the cliché — a little hard to follow the players without a scorecard. Mr. DeCinces and two of his co-defendants settled similar S.E.C. civil charges in August 2011, which indicated that the case was likely to be over for them. In August 2012, the S.E.C. charged Advanced Medical Optics’ chief executive, James V. Mazzo, and the third person who is said to have received information from Mr. DeCinces. Another defendant in that case was a baseball Hall of Fame member, Eddie C. Murray, a former teammate of Mr. DeCinces’s on the Baltimore Orioles, who settled the charges.

The indictment does not contain allegations different from the S.E.C.’s civil case, and it is unclear why prosecutors waited more than a year to pursue criminal charges against Mr. DeCinces and others. But Mr. Mazzo is not named as a defendant in the criminal case, only identified in the indictment as the “source.” And while three recipients of the tips are charged in the latest indictment, Mr. Murray is not one of them.

An interesting question is whether Mr. Mazzo is cooperating with the government in exchange for a reduced sentence. The typical insider trading case involves charges against the tipper because that is the person responsible for the violation (though there have been exceptions, like in case involving Mr. Martoma of SAC Capital).

Proving a case against a recipient is difficult without the cooperation of the tipper, unless there are wiretaps or other evidence to show how the information was passed. Prosecutors could add Mr. Mazzo as a defendant later, but not including him now is puzzling because the S.E.C. civil complaints have virtually all the information recited in the indictment.

One possibility is that prosecutors hope to use Mr. Mazzo against Mr. DeCinces and the others if a plea agreement can be worked out. Another possibility is a different cooperating witness can provide evidence of how the inside information was passed around, and prosecutors are waiting to see whether Mr. Mazzo will cut a deal before moving against him.

Another case of note involves six defendants who are accused of creating a web of inside information about pharmaceutical companies. They are accused of obtaining information from three who worked for firms in the industry. Unlike the other two insider trading prosecutions, this was not a one-time event but a scheme to break the law over nearly four years by using secret code names and passing along cash payments to the sources to avoid detection.

The defendants sought to hide their actions by saying things like “how’s the Fat Man doing?” to refer to the inside information and setting up meetings to make cash payments with “I have some vacation pictures for you.” One defendant is accused of putting together a research file to try to cover the group’s actions. In testimony in an S.E.C. investigation about some of the trading, he denied knowing anyone at one of the pharmaceutical companies.

A conspiracy like this is dependent on each participant keeping a wall of silence. Unfortunately, the criminal complaint describes a conversation in September with a cooperating witness in which one defendant boasted that investigators would not be able to be able “to link everybody up” because they were careful.

Given the number of defendants and unindicted co-conspirators who traded and how long the scheme lasted, the gains were surprisingly low, totaling less than $1.5 million. The defendants may have hoped to avoid detection by keeping the trades small, but in the end someone turned on them.

All three cases involve very disparate means of obtaining information and vastly different sums at stake. But they all indicate that the government is not letting up on its aggressive stance in pursuing both criminal and civil insider trading cases, even when they don’t have wiretap evidence.

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DealBook: Former SAC Analyst Freed on Bail in Insider Case

Mathew Martoma, center, a former trader at SAC Capital Advisors, appeared in federal court in Manhattan on Monday.John Marshall Mantel for The New York TimesMathew Martoma, center, a former trader at SAC Capital Advisors, appeared in Federal District Court in Manhattan on Monday.

Mathew Martoma, the former SAC Capital Advisors employee at the center of what the government calls the most lucrative insider trading case ever brought, appeared in Federal District Court in Manhattan on Monday to face the charges against him.

Federal prosecutors have accused Mr. Martoma, 38, of using secret information about a drug trial to help SAC gain profits and avoid losses totaling $276 million. Three former SAC employees have already pleaded guilty to unrelated illegal trading at the firm, but Mr. Martoma’s case is the first time that the government has aimed to connect questionable trades to Steven A. Cohen, the billionaire founder of SAC, one of the world’s most powerful hedge funds.

Mr. Cohen has not been accused of any wrongdoing and, through his spokesman, has said that he acted appropriately at all times. Prosecutors have not said that Mr. Cohen was in possession of any inside information related to Mr. Martoma’s trades.

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Mr. Martoma appeared before a United States magistrate judge, James L. Cott. Lean and square-jawed with close-cropped hair, Mr. Martoma sat at a table flanked by his lawyers, with his wife, Rosemary, seated in the spectators’ gallery. Judge Cott informed Mr. Martoma of his rights as a criminal defendant and freed him on $5 million bail. His next court appearance is scheduled for Dec. 26.

F.B.I. agents arrested Mr. Martoma at his home in Boca Raton, Fla., on Nov. 20 at 6:30 a.m. The government charged him via a criminal complaint instead of using a grand jury indictment, a tactic that suggests prosecutors are trying to secure Mr. Martoma’s cooperation in its investigation of Mr. Cohen and SAC.

Charles A. Stillman, Mr. Martoma’s lawyer, declined to comment after the hearing. Last week, he said that he expected his client to be fully exonerated.

The government says that Mr. Martoma was fed confidential data about clinical trials for an Alzheimer’s drug being jointly developed by Elan and Wyeth. His tipster, according to prosecutors, was Dr. Sidney Gilman, a neurology professor at the University of Michigan Medical School. Elan and Wyeth hired Dr. Gilman, 80, to oversee the trial and present the results at a medical conference.

Dr. Gilman has secured a nonprosecution agreement with the government, meaning he will not be charged in the case. He has also agreed to testify, said a person familiar with the case, giving the government another pressure point in its bid to gain Mr. Martoma’s cooperation.

Steven A. Cohen, founder of SAC Capital Advisors. Several former SAC workers have been accused of breaking the law.Steve Marcus/ReutersSteven A. Cohen, founder of SAC Capital Advisors. Several former SAC workers have been accused of breaking the law.

Mr. Martoma joined SAC, which is based in Stamford, Conn., in 2006. A summa cum laude graduate of Duke University with a degree in biomedicine, ethics and public policy, Mr. Martoma graduated from business school at Stanford University before pursuing a career as a health care analyst on Wall Street.

Prosecutors say that Mr. Martoma and Mr. Cohen worked closely together in accumulating large blocks of Elan and Wyeth shares for SAC. But the fund did an about-face, selling its entire position in both stocks — and made a large negative bet against the companies — after Dr. Gilman told Mr. Martoma about problems with the drug trial, according to the complaint.

In 2008, the year of the Elan and Wyeth trades, SAC paid Mr. Martoma a $9.4 million bonus. But in early 2010, the firm fired Mr. Martoma for poor performance. In an internal e-mail discussing his abilities, an SAC executive called Mr. Martoma a “one trick pony.”

Before Monday morning’s hearing, Mr. Martoma and his wife, who have three young children, appeared relaxed, smiling and chatting over breakfast in the courthouse cafeteria with Mr. Stillman and his law partner, James A. Mitchell. As they left the building a few hours later, throngs of photographers surrounded them as they fought their way into a town car and drove off.

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Deal Professor: A Hedge Fund’s Complex Scheme May Cost It Millions

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Harry Campbell

Hedge funds are supposed to be the smart money, but sometimes even they can be outsmarted.

Take the case of Mason Capital Management and the Telus Corporation, a large Canadian telecommunications company. Mason Capital, a New York and London hedge fund with about $8 billion in assets under management, has made a complex bet in Telus stock that looked shrewd at first, but that may now lose tens of millions of dollars.

Telus has two classes of shares, one that is voting and trades only in Canada and another that is nonvoting and trades in Canada and the United States. The nonvoting shares traditionally trade at a discount to the voting shares, but Telus is proposing to convert the shares on a one-for-one basis, giving a windfall to the holders of nonvoting shares.

Mason has taken a complex trading position in opposition to the proposal. In April, the hedge fund announced that it had acquired 19 percent of Telus’s voting stock, worth 1.9 billion Canadian dollars, or $1.8 billion.

Mason was able to finance this position by setting up a roughly equivalent short position in Telus’s nonvoting common stock, betting that those shares would fall. Basically, for every dollar that Mason earned on the voting shares, it would lose a dollar on the nonvoting shares. Since Mason is almost perfectly hedged, this was a bet that Telus’s proposal would fail, causing the nonvoting stock to lose value and the voting stock to gain.

Pretty clever, right?

Mason has no real economic interest in the future of the company because of its offsetting positions, but it can still vote its 19 percent against the share conversion proposal. This anomaly has led Telus to claim that Mason is an “empty voter” — voting shares in which it has no economic interest “at the expense of other shareholders.”

The hedge fund has argued that Telus is seeking to hand the nonvoting shareholders free money by collapsing the shares at a 1-to-1 ratio instead of at the traditional discount.

According to Mason, “over the past 13 years, Telus voting shares have traded at an average premium of 4.83 percent relative to the nonvoting shares; the premium has been as high as 15.23 percent.” The hedge fund also argues that the Telus directors who approved this transaction are conflicted because 89 percent of their total holdings are in the nonvoting shares.

In response, Telus claims that the lack of a discount is justified because the voting shares would get additional liquidity.

Mason won Round 1 of this argument in May, when Telus withdrew its proposal.

At the same time, Telus also planted the seeds to thwart Mason’s trade. The company announced that it would try again to collapse the shares at some future time. This gave price support to the nonvoting shares and prevented Mason from cashing out its position.

Mason reportedly hired the Blackstone Group to look at strategic alternatives for its Telus stake, but was unable to sell it.

In August, the fund sought to press the issue by calling a shareholder meeting to amend Telus’s charter to prevent the nonvoting shares from being converted into voting shares without a discount.

This started Round 2.

Telus again proposed that the shares be collapsed. But in a twist, the company has structured the transaction so that only a majority of the voting shares are needed to approve it, instead of the 66 2/3 vote initially required. The reduction in the number of necessary votes gives the proposal a much better chance of passing despite Mason’s 19 percent holding.

Telus also refused to hold a special meeting. The battle came before the Supreme Court of British Columbia, and on Sept. 11, the court rejected on technical grounds Mason’s effort to force Telus to hold the meeting. But in an aside, the court heavily criticized the hedge fund for its voting strategy, calling it “empty voting.” The court stated that “the practice of empty voting presents a challenge to shareholder democracy … when a party has a vote in a company but no economic interest in that company, that party’s interests may not lie in the well-being of the company itself.” Mason has appealed the ruling.

Unless a higher court intervenes, the share collapse is heading to a shareholder vote on Oct. 17. Given that only a majority vote is needed, Telus may have the votes necessary to push the measure through.

And with the decision of the Canadian court, other hedge funds appear to have closed out their positions in Telus, further narrowing the spread between the share classes.

On paper, Mason’s trade was a deliciously clever scheme that made perfect sense. But once the trade went public, its position in Telus raised eyebrows. Mason has argued that it is not an empty voter because its interests are aligned with the voting shareholders; the conversion will be at their expense. That message may make sense, but the messenger has been viewed with suspicion. As a result, Mason has had a hard time persuading Canadian shareholders to support it.

And with the nonvoting shares still holding on to their earlier gains, Mason finds itself boxed in. Telus’s total market value has increased by $2 billion since February. Mason would have made much more money — hundreds of millions, in fact — had it simply taken a long position.

Lost in all of this maneuvering are the economic merits of Telus’s share collapse and the fact that nonvoting shares do appear to be getting a significant benefit that may be inappropriate.

According to sources close to Mason, the trade is currently profitable. But Mason is finding that its ingenious trade may lose it millions, thanks to the equally adroit maneuvering of Telus. Who said Canadians were too nice?

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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