March 28, 2024

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.

Article source: http://dealbook.nytimes.com/2013/07/08/traders-day-in-court-may-lack-some-details/?partner=rss&emc=rss

DealBook: Deutsche Telekom Walks Back Prior Statement on Sweetening MetroPCS Bid

It appears Deutsche Telekom has finally settled on its response to queries about whether it will raise a bid by its T-Mobile USA subsidiary for MetroPCS.

And that answer is, “No comment.”

Here’s what the German telecom company said on Thursday afternoon:

“In response to a variety of published rumors and reports, Deutsche Telekom clarifies that it has no comment as to possible changes to the terms of its agreement with MetroPCS Communications. Deutsche Telekom continues to believe that its existing agreement with MetroPCS provides compelling value and is in the best interests of MetroPCS stockholders, especially in light of the accelerating turnaround at T-Mobile USA.”

But earlier in the day, a Deutsche Telekom spokesman gave a slightly different answer to Reuters, which had reported that the company’s board was working on sweetening the MetroPCS offer, citing unnamed sources.

“No, we can flatly deny that,” the representative told Reuters.

The German company and its advisers are weighing whether to make a better bid, as the current offer faces enormous opposition from MetroPCS shareholders. Two of the American telecom’s biggest investors have argued that the offer should be improved or scrapped, and recently won the backing of the two major proxy advisory firms.

Under the current terms of the offer, MetroPCS shareholders would be paid about $4.09 a share and receive a 26 percent stake in the combined company.

The hedge funds leading the campaign against the deal, P. Schoenfeld Asset Management and Paulson Company, have argued that MetroPCS investors should receive a bigger stake in the merged telecom. They have also contended that the proposed terms of the debt that the combined company would assume are too onerous.

Article source: http://dealbook.nytimes.com/2013/04/04/deutsche-telekom-walks-back-prior-statement-on-sweetening-metropcs-bid/?partner=rss&emc=rss

DealBook: Starting Up, Funds Turn to ‘Seeders’

Far from Wall Street, few have ever heard of Robert T. Discolo. But in the world of hedge funds, Mr. Discolo is one popular guy.

He oversees a seeding fund at PineBridge Investments, which means he provides cash for hedge fund start-ups whose managers harbor dreams of becoming the next Steven A. Cohen or John A. Paulson.

While seeding funds have been around for the better part of two decades, they are staging a recovery as more prospective fund managers spill into the market but struggle to attract investors.

Executives at seeding funds say it has never been easier to find talented hedge fund managers eager for cash.

“This is probably the best environment I’ve seen since I started in the business back in 1988,” said Mark Jurish of Larch Lane Advisors, which is PineBridge’s seeding partner.

DESCRIPTIONChester Higgins Jr./The New York Times Robert T. Discolo, right, of PineBridge Investments, with Mark Jurish of Larch Lane Advisors. Together, the two firms are now creating a $1 billion seeding vehicle.

The hard part, however, is finding great investment strategies and backing funds that will not wilt and die.

Just a few years ago, analysts, traders and others on Wall Street who wanted to open up their own hedge fund shops practically had money raining from the skies. The joke inside Goldman Sachs was that if you couldn’t raise more than $1 billion to open up your hedge fund, don’t even bother.

What has changed is that many investors, including pension funds and university endowments, now are more inclined to put money into established hedge funds with proven track records rather than bet on start-up managers.

Also, the start-ups are turning to seeders with back-office resources as costs rise to comply with new hedge fund regulations that require compliance officers, audits and more disclosures.

As a result, a number of firms — including the Blackstone Group, Goldman Sachs, Reservoir Capital and upstart seeder firms like NewAlpha Asset Management — have been raising money from investors to place with new managers.

An investment in a hedge fund that becomes a sensation can be lucrative for the seeders, who typically take equity stakes in the hedge funds or a portion of the fees the hedge funds generate, typically 2 percent of total assets and 20 percent of any profits.

Industry titans David E. Shaw of D.E. Shaw and Daniel S. Och of Och-Ziff Capital Management, whose firms oversee a combined $50 billion, both started with money from seeding funds in the late 1980s and early 1990s.

Of course, for every Shaw or Och there are dozens or even hundreds of hedge fund managers who flamed out or simply never attracted enough cash from outside investors.

Despite lackluster returns in recent years, the hedge fund industry has rebounded sharply. Its assets have surpassed the 2008 peak and now stand at more than $2 trillion, according to Hedge Fund Research, based in Chicago.

Seeders are raising more cash too. The amount of capital expected to be invested with emerging managers in the first half of this year is expected to total around $2.5 billion, according to the results of a survey of about 40 global hedge fund seeders conducted by the Acceleration Capital Group, a New York-based firm. While that amount is double what a similar survey showed in 2009, it is well off the $7.5 billion that emerging managers expected in the industry’s heyday in late 2008, according to data from the firm.

Even with the revival, it can be tough to get the attention of a top seeding executive.

“You call them, you call them again and then you call them again,” said Steven R. Gerbel, the founder of one hedge fund firm, Chicago Capital Management. “Finally you get through and you’re told 12 bogus reasons why you’re not getting a seed. It is incredibly frustrating and horrifically painful.”

Mr. Gerbel says he has spent years searching for someone to provide capital to increase the size of his fund, which manages about $36 million and says in its marketing materials that it averages yearly returns of around 19 percent.

Recently, Mr. Gerbel said, one potential seeder told him his firm had too much infrastructure — investor support and regulatory compliance — while another said he didn’t have enough.

“I’ve come to the conclusion that my infrastructure is properly sized,” he grumbled.

While Mr. Gerbel would welcome the money, he is less than thrilled with the onerous terms of the seeding deal itself.

“The seed capital providers own it all: the stadium, the bats, the balls, the bases, your uniform, your cleats, the field and the concessions,” said Mr. Gerbel. “And if you want to play you just have to live with it.”

More managers are in the market in part because Wall Street shed certain businesses like proprietary trading in the wake of the financial crisis. Not all of them have a compelling investment strategy.

“In today’s world, you have a more attractive world of partnering with the talent and less attractive world of strategies,” said Daniel H. Stern, the chief executive of Reservoir, who has seeded a number of successful hedge funds, including Och-Ziff, across Wall Street over the years.

Mr. Discolo at PineBridge said that recently managers had been knocking on doors with funds looking to invest overseas, particularly in Asia. And then there are the truly unusual strategies, Mr. Discolo said, noting that he had seen funds that were planning to invest in leveraged life insurance settlements, receipts for televisions stored in warehouses and Pakistani equities.

The Larch Lane-PineBridge partnership is in the midst of raising a $1 billion seeding vehicle that will invest in about a dozen hedge funds. The seeder fund has already backed an equity fund managed by Stonerise Capital of San Francisco and a United States bank-loan fund managed by the Boston-based Feingold O’Keeffe Capital, according to a report on Hedge Fund Alert.

PineBridge is the renamed former asset-management arm of the American International Group, which sold it to the Asia-based Pacific Century Group in 2010.

PineBridge’s press relations firm declined to comment on the fund, citing Securities and Exchange Commission restrictions on hedge fund marketing activities.

In general terms, however, Mr. Discolo said a selective seed manager might invest in about one out of every 100 hedge fund managers.

“Everybody thinks they’re going to be the next Marc Lasry,” Mr. Discolo said, referring to the manager of Avenue Capital, which oversees $13.7 billion. “He’s a great manager, but there are not that many Marc Lasrys out there.”

Article source: http://feeds.nytimes.com/click.phdo?i=f622bff7c4054e9a096dd0adf42a597a