November 22, 2024

DealBook: Consultant for Expert Network Is Convicted in Insider Trading Case

A jury has found a former consultant at a so-called expert network firm guilty on insider trading charges, giving federal prosecutors a fresh win in its pursuit of illegal activity at hedge funds.

Winifred Jiau, the consultant, was convicted after one day of jury deliberations. The government had accused her of passing secret corporate information to her hedge fund clients. Ms. Jiau, 43, faces as long as 25 years in prison.

Joanna Hendon, a lawyer for Ms. Jiau, said her client would appeal the verdict. Ms. Jiau, who remains in custody, is scheduled to be sentenced on Sept. 21.

The trial was the first involving an expert network firm, a niche Wall Street business that serves as a middleman, matching money managers with industry experts, including employees of public companies.

Ms. Jiau worked for Primary Global Research, which is based in Mountain View, Calif. Federal prosecutors have charged at least seven people connected to the firm with crimes related to insider trading.

Federal prosecutors in Manhattan have now won all three insider trading trials that they have prosecuted over the last two months, including the conviction of the hedge fund manager Raj Rajaratnam.

Over the past two years, the United States attorney’s office has charged 49 individuals with crimes related to insider trading; of those, 44 have now either been convicted or pleaded guilty.

Several cooperating witnesses testified at Ms. Jiau’s trial. Sonny Nguyen, a former employee at Nvidia, admitted to leaking confidential financial data to Ms. Jiau. And Noah Freeman, a former hedge fund portfolio manager at SAC Capital Advisors, admitted to receiving illegal stock tips from Ms. Jiau.

Article source: http://feeds.nytimes.com/click.phdo?i=fe20986491c919099ba5e84ded90e216

DealBook: Bank Said No? Hedge Funds Fill a Void in Lending

D. Hunt Ramsbottom, head of Rentech, which turned to hedge funds for loans after a bank rejected it.J. Emilio Flores for The New York TimesD. Hunt Ramsbottom, head of Rentech, which turned to hedge funds for loans after a bank rejected it.

Hedge fund managers have been called plenty of names.

Now, they can add another: local banker.

When Rentech, a clean energy business in Los Angeles, was rejected by its long-time banker last year, it asked a hedge fund for money instead. “You have to take what’s available at the time,” said D. Hunt Ramsbottom, chief executive of Rentech, which has since borrowed $100 million in this unconventional way.

With traditional lenders still avoiding risky borrowers in the wake of the financial crisis, hedge funds and other opportunistic investors are stepping into the void. They are going after midsize businesses that cannot easily raise money in the bond markets like their bigger brethren.

The support is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.

But the lending force also poses a significant risk to the companies and the broader economy, given the unregulated nature of this shadow banking system.

These lenders of last resort typically charge interest rates that are several percentage points higher than banks. Loaded up with high-cost loans, borrowers could find themselves falling deeper into debt or worse, into bankruptcy. Over the last year, Rentech has borrowed from a group of funds, led by Highbridge Capital Management and Goldman Sachs, at an interest rate of 12.5 percent.

“On the one hand, the cost of money is more expensive than what some businesses might be used to,” Mr. Ramsbottom said. “On the other, if the money is not available, the cost is infinite.”

The lending activity is also stoking fears that speculative activities — like those that contributed to the crisis — are shifting from banks to loosely regulated firms that play by their own rules. While policy makers are moving to increase capital and other standards for banks to prevent another disaster, hedge funds and the like are not subject to the same oversight.

If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.

“These institutions are essentially servicing a part of the market where banks are not lending,” said Debarshi Nandy, a professor at York University’s business school in Toronto. “The million-dollar question is, Are we benefiting?”

Hedge funds offered a crucial lifeline for Rentech. The company is hoping to build a facility about 60 miles east of Los Angeles to transform yard clippings into fuel, enough for 75,000 cars. If it works, the project would represent Rentech’s first commercial success in its nearly 30-year history.

Unprofitable for decades, Rentech is a risky proposition for a traditional lender. While large corporations with healthy balance sheets can easily tap into the bond markets or borrow from banks, their smaller counterparts with shakier credit have fewer options.

Middle-market companies, with revenue of $25 million to $1 billion, do not typically sell bonds. And their main financing sources, specialty lenders like CIT Group and regional banks, have not fully recovered. Last year, debt securities focused on this segment stood at $12 billion, down from $35 billion in 2005, according Standard Poor’s Leveraged Commentary and Data.

Hedge funds and other investors are flush with capital. Last year, Highbridge, which is owned by JPMorgan Chase, started a $1.6 billion fund that lends money to midsize companies. The private equity firm Blackstone Group started a $3 billion fund. Even FrontPoint, the firm hobbled by an insider trading investigation, has raised $1 billion for a lending fund and plans to double the size, according to a person with knowledge of the matter.

The concern is that hedge funds are looking for quick payoffs rather than long-term opportunities — and will bolt if there is trouble. A previous wave of money managers that jumped into lending after the collapse of Lehman Brothers in 2008 saw their loans sour. The firms, mainly smaller, fringe players, have since disappeared.

“The new funds rushing into direct lending now will learn the hard way that it is easy to make what appear to be sound loans as the economy is improving, but it becomes brutal to either collect the loans or foreclose when the downturn comes,” said Max Holmes, the founder of Plainfield Asset Management, whose lending-focused fund, once as large as $5 billion, is winding down.

Unlike their predecessors, players today say they are operating like community bankers, focusing on multiyear deals backed by significant collateral and capital. They are also locking up investors’ money for years rather than quarters. This can alleviate some short-term pressures.

“The people who last are those with a relationship-oriented business, not those who view it as a trade,” said Rob Ladd of D. E. Shaw, which manages $1.7 billion in lending strategies.

Stephen J. Czech of FrontPoint spent weeks researching Emerald Performance Materials. He scoured the chemical manufacturer’s financials, visited several facilities, and met with executives — all of which gave him the confidence to lend the company money.

Emerald used the loan to buy a European rival. “All types of financing were considered,” said Candace Wagner, Emerald’s president, but the company preferred the “flexibility and certainty” of FrontPoint.

Some who borrowed from hedge funds have not been so satisfied. Hedge funds have been lumped with payday lenders that charge usury rates. Plainfield has been accused of predatory lending in civil suits, and local and federal authorities have looked into the firm’s practices. Plainfield said it won or settled all of the suits and investigators closed their inquiries without taking action.

The creditors of Radnor Holdings, a disposable-cup company that defaulted on a roughly $100 million loan, claimed Tennenbaum Capital Partners charged excessively high rates as a takeover tactic, a strategy referred to as “loan to own.” After a protracted legal battle, the fund took control of Radnor in 2006, renaming it WinCup.

Tennenbaum did not return calls for comment.

Another worry is that funds will trade on nonpublic information they receive as lenders. A March study in The Journal of Financial Economics found a spike in investors betting against the shares of companies that took hedge fund loans. Businesses that borrow from banks did not experience the same activity, according to the authors, including Professor Nandy.

For Mr. Huntsbottom of Rentech, the benefits outweighed the risks. While the company could end up losing the profitable fertilizer plant it put up as collateral on the loan, Rentech can continue to pursue the clean energy venture.

“An entrepreneur will pay whatever,” he said, “ to keep his business alive.”

Article source: http://feeds.nytimes.com/click.phdo?i=d2c315adb8b7cd2287c5068539e04c50

S.E.C. Case Stands Out Because It Stands Alone

Hundreds of employees worked closely in teams, devising mortgage-based securities — billions of dollars’ worth — that were examined by lawyers, approved by management, then sold to investors like hedge funds, commercial banks and insurance companies.

At one trading desk sat Fabrice Tourre, a midlevel 28-year-old Frenchman who was little known not just outside Goldman but even inside the firm. That changed three years later, in 2010, when he achieved the dubious distinction of becoming the only individual at Goldman and across Wall Street sued by the Securities and Exchange Commission for helping to sell a mortgage-securities investment, in one of the hundreds of mortgage deals created during the bubble years.

How Mr. Tourre alone came to be the face of mortgage-securities fraud has raised questions among former prosecutors and Congressional officials about how aggressive and thorough the government’s investigations have been into Wall Street’s role in the mortgage crisis.

Across the industry, “it’s impossible that only one person was involved with fraudulent activities in connection to the sales of these mortgage securities,” said G. Oliver Koppell, a New York attorney general in the 1990s and now a New York City councilman.

In the fall of 2009, when Mr. Tourre learned that he had become a target of investigators for helping to sell a mortgage security called Abacus, he protested that he had not acted alone.

That fall, his lawyers drafted private responses to the S.E.C., maintaining that Mr. Tourre was part of a “collaborative effort” at Goldman, according to documents obtained by The New York Times. The lawyer added that the commission’s view of his role “would have Mr. Tourre engaged in a grand deception of practically everyone” involved in the mortgage deal.

Indeed, numerous other colleagues also worked on that mortgage security. And that deal was just one of nearly two dozen similar deals totaling $10.9 billion that Goldman devised from 2004 to 2007 — which in turn were similar to more than $100 billion of such securities deals created by other Wall Street firms during that period.

While Goldman paid $550 million last year to settle accusations that it had misled investors who bought the Abacus mortgage security, no other individuals at the bank have been named. Now, however, as criticism has grown about the lack of cases brought by regulators, the scope of the inquiries appears to be widening. The United States attorney general, Eric H. Holder Jr., has said publicly that his lawyers were reviewing possible charges against other Goldman officials in the wake of a Senate investigation that produced reams of documents detailing other questionable decisions that were made in the firm’s mortgage unit.

The Senate inquiry was one of several in the past three years. These investigations by Congressional leaders and bankruptcy trustees — into the likes of Washington Mutual, Lehman Brothers and the ratings agencies — were undertaken largely to understand what had gone wrong in the crisis, rather than for law enforcement. Yet they uncovered evidence that could be a road map for federal officials as they decide whether to bring civil and criminal cases.

One person who already has come under investigation is Jonathan M. Egol. A senior trader at Goldman who worked closely with Mr. Tourre, he had a negative view on the housing market early on, and took a lead role in creating mortgage securities like Abacus that enabled Goldman and certain clients to place bets that proved profitable when the housing market collapsed.

Last year the S.E.C. examined Mr. Egol’s role in the Abacus deal in its lawsuit, according to a report by the commission’s inspector general. But Mr. Egol, now a managing director at the bank, was not named in the case, in part because he was more discreet in his e-mails than Mr. Tourre was, so there was less evidence against him, according to a person with knowledge of the S.E.C.’s case.

Though Mr. Tourre was a more junior member of the Goldman team, the S.E.C. case against him was bolstered by colorful e-mails he wrote, calling mortgage securities like those he created monstrosities and joking that he sold them to “widows and orphans.”

The S.E.C. declined to comment about its focus on Goldman and Mr. Tourre, beyond pointing to a section in its complaint that said that Mr. Tourre had been “principally responsible” for the Abacus deal in the case.

A spokesman for Goldman, Lucas van Praag, did not dispute that Mr. Tourre had worked on the Abacus deal as part of a collaborative team. But he said that the bank had disagreed with many of the conclusions about its mortgage unit contained in the recent Senate report. Mr. Egol and his lawyer did not respond to inquiries for comment.

As the government continues to investigate the activities of Goldman and other banks, it is uncertain whether other individuals will be named. Neil M. Barofsky, who as the first inspector general of the Troubled Asset Relief Program, the federal bank bailout program, investigated whether banks had properly obtained and handled the money they received, said prosecutors should look as high up as possible.

“Obviously in any investigation that results in charges against a company,” he said, “you’d like to see the highest-ranking person responsible for the conduct at the company to be held accountable.”

A Booming Market

A math whiz who got his undergraduate degree at the École Centrale in Paris, Fabrice Tourre joined Goldman in 2001 after getting a master’s degree at Stanford. As the housing market and the demand for mortgages boomed over the next few years, Goldman went from creating just $3 billion of mortgage securities called collateralized debt obligations in 2002 to at least $22 billion in 2006, according to Dealogic, a financial data firm.

Tom Torok contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=599005934e8e90d2277f8d1ebaee0d70

DealBook: FrontPoint to Shut Most Funds After Insider Trading Charges

Steve Eisman, a star manager at FrontPoint, considered leaving in the wake of the allegations of insider trading.Daniel Acker/Bloomberg NewsSteve Eisman, a star manager at FrontPoint, considered leaving the firm in the wake of the allegations of insider trading.

FrontPoint Partners, once a multibillion-dollar hedge fund before it was battered by allegations of insider trading, will shut down most of its funds by the end of the month.

The decision to wind down and restructure its business is a surprising reversal of fortune for the hedge fund. Earlier this year, FrontPoint had appeared to have weathered the scandal when it raised $1 billion for a new fund. And in March, its co-chief executives, Dan Waters and Mike Kelly, announced that the firm had bought back majority ownership of itself from Morgan Stanley, concluding a long-delayed spinoff.

But the good news was short-lived as investors continued to flee the fund when the window for withdrawals opened earlier this month.

“We have received capital redemption requests from some of our clients and as always we will honor those requests,” FrontPoint said in a statement to The New York Times in response to questions. “These actions are affecting strategies differently at FrontPoint Partners and as a result we will be winding down select strategies.”

The firm declined to state how much money investors wanted back. But people who spoke to the fund’s executives say that FrontPoint was winding down most of its business.

Earlier on Thursday, a spokesman for the firm, Steve Bruce, had denied that the firm was shutting down.

FrontPoint is just one of several funds brought low by a widespread government crackdown on insider trading at hedge funds. Two funds, Level Global Investors and Loch Capital, shut down after raids by federal agents late last year linked to the broader investigation.

More broadly, FrontPoint’s move comes at a difficult time for the hedge fund industry, amid increased regulation and difficult markets. Some prominent managers like Stanley Druckenmiller, Chris Shumway and most recently Carl C. Icahn have left the field and manage their own money.

In many ways, the rise and fall of FrontPoint mirrors that of the industry itself. In late 2006, when owning a hedge fund was considered a smart way for banks to deploy capital, the firm was bought by Morgan Stanley for about $400 million.

Then, during the financial crisis, the hedge fund was lauded for the insight of one of its most colorful managers, Steve Eisman, who had placed a bet against the subprime mortgage market that earned him hundreds of millions and a major role in “The Big Short,” the best seller by Michael Lewis. Several other hedge fund managers, including John A. Paulson and the Harbinger Group founder Philip Falcone, also minted fortunes from their bets against the housing market.

But trouble began at FrontPoint in November last year when a French doctor was arrested by federal authorities and accused of leaking secret information about a clinical drug trial to an unnamed portfolio manager. It quickly became public that the portfolio manager was Joseph F. Skowron, a doctor who ran a health care portfolio at FrontPoint.

The firm, which managed about $7 billion at the time, placed Mr. Skowron on leave and terminated the entire health care team. Effort to reassure investors that Mr. Skowron’s fund was separate from the many others it ran failed. Clients withdrew $3.5 billion as they raced to the exits.

A long planned spinoff from Morgan Stanley — prompted by the Dodd-Frank financial overhaul — was delayed as result of the huge withdrawals and legal complications.

The tide seemed to turn in January, when the firm announced that a new fund that would lend money to midsize companies had raised $1 billion. At the time, Mr. Waters, one of the firm’s chief executives, indicated the firm’s transparency had paid off.

But weeks later, Mr. Eisman, FrontPoint’s star manager, told those close to him that he was considering leaving the firm, frustrated with the collateral damage his funds had suffered from the insider trading incident. Clients had withdrawn nearly $500 million from funds he managed, according to a person close to Mr. Eisman.

Last month, Mr. Skowron was formally charged by federal authorities, accused of conspiring to hide his role in a trading scheme that netted FrontPoint Partners more than $30 million. Mr. Skowron was leaked confidential tips about a drug trial by Yves M. Benhamou, a French doctor, who accepted envelopes stuffed with cash for the information.

Mr. Benhamou has pleaded guilty to insider trading and obstruction of justice.

FrontPoint declined to say which funds would be closed after the shakeout. The only fund they did indicate would remain open was the midsize lending fund, which has money committed for several years.

Article source: http://feeds.nytimes.com/click.phdo?i=d1377718695c741f2ce34385bc05263e

Regulators Seek Ways to Determine Which Financial Firms Are Crucial

A panel of officials from the Federal Reserve Board, the Treasury Department and the agencies overseeing banking and securities markets told members of the Senate Banking Committee that they would seek public comment on additional guidelines and gauges they are considering in deciding which companies will be included.

Regulators face a January 2012 deadline to put the heightened regulatory standards in place, but there has been some hope in the financial industry and Congress that decisions about what firms fall under the designation will come sooner. That would eliminate uncertainty over the breadth of the new rule’s embrace. Officials indicated that they hoped to release a package of proposed rules this summer.

The designation of systemically important financial institutions was included in the Dodd-Frank Act as a way of addressing the problem of companies being considered too big to fail. Companies deemed crucial to the stability of the broad financial system will be overseen by the Federal Reserve Board in addition to their usual regulators.

Bank holding companies with more than $50 billion in assets automatically fall under the designation. But it is expected that some insurance companies, hedge funds and other companies involved in financial and money markets might require an additional level of scrutiny to guard against threats to the banking system and financial markets.

“I think more details are necessary,” said Ben S. Bernanke, chairman of the Federal Reserve. “I support providing more information to the public and getting public comment.”

Mr. Bernanke said that while he doubted regulators could “provide an exact mechanical formula that can be applied without judgment,” they could lay out objective criteria that they consider most important in making the designation.

But the decision also requires some subjective judgment, Mr. Bernanke added, indicating that the decisions would not be so cut and dried as to eliminate questions over why one company fit the bill and another did not.

Senator Patrick J. Toomey, a Republican from Pennsylvania, urged the regulators to leave their proposals on the subject open for public comment for at least 60 days, roughly double the comment period that regulators have been using for many of the rules being drawn up to carry out aspects of the Dodd-Frank Act.

While none of the regulators would commit to that, several said they supported the idea. Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, said a “robust comment period” would help to clear up much of the uncertainty around the “systemically important” designation.

The Banking Committee also voted 12-10, along party lines, to send to the full Senate the nomination of Peter A. Diamond to the board of governors of the Federal Reserve System.

It was the third time Mr. Diamond had been approved by the Senate panel, but the nomination has yet to come to a vote in the Senate. The Senate adjourned last year without acting on the second nomination, and the first nomination was returned to the White House on a procedural objection.

Republicans on the Senate committee universally opposed Mr. Diamond, an M.I.T. professor and Nobel Prize winner, raising doubts about whether Democrats could gather the 60 votes necessary to bring the nomination to a vote on the floor of the Senate.

Senator Richard C. Shelby, a Republican from Alabama, said he still viewed Mr. Diamond as “an old-fashioned big government Keynesian” who was not a good person to join the Fed “at this point in our financial history.”

The Senate Banking Committee also approved several other nominations. David S. Cohen was approved as under secretary for terrorism and financial crimes in the Treasury Department on a 18-4 vote. A few senators of both parties objected to the nomination because, they said, they did not believe Mr. Cohen adequately indicated that he would support enforcement of economic sanctions against Iran.

Several other nominations were approved by the committee on a unanimous voice vote. They were: Daniel L. Glaser to be assistant secretary for terrorist financing at Treasury; Wanda Felton to be first vice president of the Export-Import Bank of the United States; and Sean Robert Mulvaney to be a director of the Export-Import Bank.

This article has been revised to reflect the following correction:

Correction: May 12, 2011

An earlier version of this article incorrectly included one name among the nominees approved by the Senate Banking Committee. The committee did not vote on Timothy G. Massad’s appointment to the post of assistant secretary for financial stability at Treasury.

Article source: http://feeds.nytimes.com/click.phdo?i=5e01ca789ec8659e58d77d97e3febc97

Room For Debate: Is This Tech Boom Different?

Introduction

tech bubbleEd Nacional

With Wall Street banks, venture capitalists, hedge funds and private equities all wanting a piece of the latest technology funds or Internet start-ups, the tech industry is enjoying a flood of money. In the last two years, valuations for Facebook but also for the game maker Zynga have more than quintupled. Groupon, the social shopping site, saw its estimated value soar from $1.4 billion to $25 billion.

Some financial analysts fear there is a new bubble, like the dot-com boom and bust in the late 90’s. What are the lessons from that era? What are the similarities and differences?

 Read the Discussion »

<!–

Topics: Facebook, Internet, Technology

–>

Article source: http://feeds.nytimes.com/click.phdo?i=a2b5bceecce44d3b891da7d91d03d256