January 20, 2022

Strategies: Tremors From the Fed’s Grand Experiment

Using traditional methods, as well as some that have never been tried on so large a scale, the Fed managed to nudge down a broad range of interest rates to extraordinarily low levels for a very long time. But earlier this month, Mr. Bernanke indicated that the time for winding down the grand experiment might be growing closer.

That has vexed the markets, and no wonder: the Fed’s adjustments have been affecting the wealth and the livelihood of millions of people.

Bond yields had begun rising at least partly in anticipation of Fed action, but they soared after Mr. Bernanke explained that if economic conditions kept improving, the central bank might begin to pare down its voracious bond-buying and eventually start to raise short-term rates. His words appeared to spill over into other asset classes: the stock market and gold prices fell sharply. Volatility returned to what had been quiet markets.

Last week, after several Fed officials said the markets had overreacted, some of the damage was undone, but not nearly all of it. “The reaction in the markets has been violent,” said Steven C. Huber, a portfolio manager at T. Rowe Price. “It’s caused a lot of people real pain.”

That interest rates have started to rise isn’t in itself surprising, he continued. “Many of us have been saying that would happen for a long time,” he said. “But the speed of the recent rise — that was startling, and the volatility has been rough. And it’s not clear how all of this will play out in the markets. In the short term, it’s meant real losses for many, many people.”

Bond mutual funds, which usually can be counted on for modest if unspectacular gains, have been dipping into negative territory for the year. Some investors have been selling their stakes. The probability that many fund investors will endure full-year losses “is probably as high as it’s been in a very long time,” said Francis M. Kinniry Jr., a principal in Vanguard’s Investment Strategy Group.

Through Thursday, the Vanguard Total Bond Market Index fund, which tracks the performance of the Barclays Aggregate Bond index, had a total return of minus 2.6 percent for the year, according to Morningstar. The T. Rowe Price Strategic Income fund, which Mr. Huber manages, was down 1.7 percent, and the Pimco Total Return fund was off 3 percent.

The markets have generally been reacting like addicts facing a possible cut-off of their favorite drug, said Michael Hartnett, chief global equity strategist at Bank of America Merrill Lynch Global Research. “The opiate of investors has been central bank liquidity,” he wrote in a note to clients last week, adding, “We believe liquidity withdrawal will not be painless and will create higher volatility.”

And in an e-mail, Mohamed A. El-Erian, the chief executive of Pimco, said that while there might be some pockets of value in the Treasury market, “investors should also note that markets remain vulnerable to technical overshoots and, thus, quite a bit of volatility.”

None of this looks very reassuring right now, yet in the long run, rising bond yields and an end to the Fed’s unconventional policies could be very good news. After all, yields have been so low mainly because the economy has been weak.

A continued climb in rates — either because of action by the Fed and other central banks or simply because of the markets’ internal dynamics — would presumably reflect market participants’ belief that the economy was strong enough to withstand higher rates. That could imply more jobs, rising productivity and, depending on how the larger economic pie is sliced, maybe even higher real incomes for working people.

What’s more, for several years, low rates have been extremely painful for people living on fixed incomes, making it harder for them to save enough for retirement, and increasing the risk of using up their nest eggs. I’ve written about that quandary in recent columns.

Eventually, higher rates could be a balm for many people. As James W. Paulsen, chief investment strategist at Wells Capital Management, put it: “We’ve got to remember that returning to some state of ‘normalcy’ is the goal of every economic recovery we’ve ever been through. That’s what’s beginning to take place. Getting from here to there will hurt, sure. But, frankly, the economic data has looked stronger, and the Fed has just been following the data. I think we can look at this as a celebratory milestone rather than as some kind of a scary event.”

Mr. Paulsen says that he expects the stock market to be stuck in a trading range for a while, but that he sees a good chance for the Standard Poor’s 500-stock index, now near 1,600, to close the year well above 1,700.

WHERE will bond rates end up? Virtually everyone agrees that the long-term trend is upward. But it’s not at all clear where rates will be going in the near future.

Mr. El-Erian says he believes that the Fed has been overly optimistic about the economy’s strength. “If the forecasts prove correct, which, unfortunately, we question given current economic realities, the Fed would have a positive reason to exit gradually from its prolonged highly experimental monetary policies, “ he said. “It is also apparent that the Fed is getting more concerned about the ‘costs and risks’ of its policy experimentation.”

Even discussing an eventual revision of its policy has been disruptive, he said. Managing an end to its grand experiment is likely to be even harder.

That’s why any effort to time the market — to truly anticipate the Fed’s moves, and the shifts in interest rates — is inherently dangerous. “Bonds are intended to be a buffer in a balanced portfolio, along with stocks,” Mr. Kinniry said. Holding on to bonds while yields rise and prices fall may be very painful, he said, but it’s still worthwhile. “Even at times like these,” he said, “it’s important to stay the course.”

Article source: http://www.nytimes.com/2013/06/30/your-money/tremors-from-the-feds-grand-experiment.html?partner=rss&emc=rss

Markets Rise, Overcoming Weak Economic Data

The Standard Poor’s 500-stock index rose for a fourth consecutive day on Wednesday, but gains eroded in afternoon trading.

The S.P. 500 was 0.3 percent higher — down from 0.7 percent at midday — the Dow Jones industrial average rose 0.2 percent and the Nasdaq composite was flat.

Equities have rallied in recent weeks, with both the Dow and S.P. hitting highs as investors expect central bank stimulus measures will keep supporting market gains.

Such policies have helped spur advances of about 15 percent in major indexes this year despite data showing signs of slowing growth. Activity in New York State’s manufacturing sector unexpectedly contracted in May, falling to minus 1.43 points from 3.05, below expectations for an increase to 4 points. Another report showed that industrial production in the United States fell 0.5 percent in April, more than expected.

“It’s disconcerting that the data was so much lower than what we were looking for, but there’s no reason for investors to sell,” said Michael Binger, senior portfolio manager at Gradient Investments in Minneapolis. “The main things driving the market — the Fed, earnings, consumer confidence — are holding up, and people put money in the market on any down day. I still see a lot of value.”

Agilent Technologies, up 4 percent, was one of the S.P.’s top percentage gainers a day after the company posted adjusted earnings that beat expectations and doubled its stock-buyback program to $1 billion. The company also said it would cut 2 percent of its global work force.

Tech shares also got a lift from Netflix, up 3.8 percent, and Yahoo Inc, up 2.3 percent.

On the downside, Deere Company gave a cautious outlook even as earnings topped forecasts. The stock fell 4.5 percent. Deere’s decline dragged on the S.P. industrial index, which was up only 0.1 percent.

In other data released on Wednesday, the United States Producer Price Index recorded its largest drop in three years in April, falling a seasonally adjusted 0.7 percent.

The N.A.H.B. Wells Fargo Housing Market index rose to 44 points from a downwardly revised 41 in April, according to data from the National Association of Home Builders. The May reading was above forecasts and closer to the 50 mark, which indicates builders see market conditions in a more favorable light.

Crude oil fell 1.8 percent after data showed the euro zone was in its longest recession ever, while a stronger dollar and rising American refined products stockpiles put additional pressure on prices.

The drop in crude pressured shares of energy companies, with Marathon Oil down 0.7 percent, and Cliffs Natural Resources, off 3.2 percent.

Macy’s shot up 2.6 percent after the retailer reported higher first-quarter profit and sales, and raised its quarterly dividend 25 percent.

Shares in SunPower, a maker of solar panels and solar power plants, surged 15.1 percent after the company said it expected to post an adjusted profit for the current quarter

The FTSEurofirst 300 index of European blue chip shares, which closed at a five-year high on Tuesday, paused after a report that the euro zone economy had contracted more than expected, but then resumed its climb, rising 0.7 percent at the end of the session.

China’s factory output growth was surprisingly feeble in April and fixed-asset investment slowed, rekindling fears that a nascent recovery was stalling.

Still, Asian markets closed mainly higher. The Nikkei in Japan rose 2.3 percent, the Hang Seng in Hong Kong gained 0.5 percent and the Shanghai composite was 0.4 percent higher.

Article source: http://www.nytimes.com/2013/05/16/business/daily-stock-market-activity.html?partner=rss&emc=rss

Stocks End Lower on Wall Street

Stocks on Wall Street fell on Monday, as weaker-than-expected manufacturing data apparently gave investors reason to book profits.

By the close of trading, the Standard Poor’s 500-stock index, which hit a closing high on Thursday, was down 0.5 percent. The Dow Jones industrial average lost about 6 points and the Nasdaq composite index ended 0.9 percent lower. European markets were closed for a holiday.

During the session, the biggest drag on both the S.P. 500 and Nasdaq 100 indexes was Apple, which fell 3 percent. Will Danoff, whose $92 billion Fidelity Contrafund is the largest active shareholder in Apple, cut the fund’s stake in the iPhone maker 10 percent during the first two months of 2013.

The Institute for Supply Management’s March manufacturing reading of 51.3 continued to show expansion, but activity slowed from the 54.2 reading in February. A separate report showed construction spending rose more than expected in February, gaining 1.2 percent, above forecasts of a 1 percent rise.

Other recent data has pointed to a strengthening American economy in general, however, and that has helped push both the Dow and the S.P. 500s to record highs and is likely to mean market pullbacks will be short-lived, analysts said.

“The economy is still improving ever so slowly, so I think there’s room for the market to go up,” said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management, in Champaign, Ill.

The benchmark S.P. index remained below its record intraday high of 1,576.09, but moves may be limited this week in the absence of major catalysts before the March payrolls report on Friday.

For the year, the S.P. is up 9.5 percent, the Dow is up 11.1 percent and the Nasdaq is up 7.4 percent. The Dow first surpassed its record highs in early March.

In company news, Tesla Motors surged 16 percent after forecasting full profitability in the first quarter, citing strong sales of its Model S sedan.

This article has been revised to reflect the following correction:

Correction: April 1, 2013

An earlier version of this article, and its capsule summary, misstated the day when the Standard Poor’s 500-share index reached a new closing high. The high was reached last Thursday, not Friday.

Article source: http://www.nytimes.com/2013/04/02/business/economy/daily-stock-market-activity.html?partner=rss&emc=rss

Fair Game: Willow Fund as a Cautionary Tale for Investors

With a portfolio that specialized in distressed debt instruments, the Willow Fund had suffered losses of almost 80 percent in the first three quarters of 2012 after its longtime manager switched gears: he had abandoned the corporate debt markets he was familiar with and piled into some colossally bad derivatives trades. The investors, some of whom hadn’t realized they were holding a portfolio filled with risky bets against the debt of European nations, were stunned.

What happened to the Willow Fund is a cautionary tale for any investor who entrusts his or her money to an investment fund. Its demise highlights the dangers when a portfolio manager makes a big change in investment strategy. It also raises questions about how assiduously this fund’s independent directors watched over the manager as he ramped up his portfolio’s risk levels. Both are problems that investors cannot be complacent about.

Ken Boudreau, 70, of Farmington, Conn., is an aggrieved Willow Fund investor who has filed an arbitration case against UBS to recover his losses. Mr. Boudreau began putting money into the fund in mid-2009, investing a total of $350,000. His losses were $300,000.

In an interview, Mr. Boudreau said his UBS brokers had contended that the fund’s investment in distressed debt securities positioned it well for gains in 2009 as the economy recovered from the credit crisis. The experience and track record of Sam S. Kim, the portfolio manager overseeing Willow since it began operations in 2000, was another selling point. Mr. Kim was expert at analyzing distressed debt instruments, Mr. Boudreau said his brokers told him.

“I try to be a disciplined buyer and seller, buying in when markets are down,” Mr. Boudreau said in an interview. “In mid-2009, distressed debt seemed to me a home run.”

Which it might have been, had Mr. Kim, the money manager, not plunged headlong into credit default swaps on government debt of Germany, Sweden, France, Spain and other nations. In these trades, Mr. Kim was buying a type of insurance against the nations’ defaulting; his investors, therefore, would benefit if problems in these nations worsened.

According to regulatory filings, the Willow Fund had an impressive run through 2006. That year, the fund returned almost 25 percent on a portfolio of corporate bonds, bank loans and corporate repurchase agreements, a financing arrangement. Credit default swaps amounted to a minuscule 0.18 percent of the Willow Fund in 2006.

That portfolio was consistent with the fund’s description in regulatory filings. It would “maximize total return with low volatility by making investments in distressed investments,” the filings said, “primarily in debt securities and other obligations and to a lesser extent equity securities of U.S. companies that are experiencing significant financial or business difficulties.” The fund might also hedge its portfolio against risks, using credit default swaps, the filings said, or use those instruments “for non-hedging purposes.”

In 2007, the Willow Fund’s exposure to credit default swaps started rocketing. That year, Willow also began generating losses — 9.1 percent, and then 18 percent in 2008 when the credit crisis hit.

As Mr. Kim’s view soured on world economies, particularly in the euro zone, he began trading on these concerns, a letter from UBS to investors said. That meant more of the portfolio went into credit default swaps.

By the end of 2008, corporate bonds amounted to only 6 percent of the portfolio, down from 29 percent a year earlier. The value of the credit default swaps, meanwhile, had ballooned to 25 percent of the portfolio from 2.6 percent in 2007. By 2009, when Mr. Boudreau began investing, credit default swaps amounted to 43 percent of Willow’s portfolio, a fact that Mr. Boudreau said he did not know.

THE fund’s disclosures that it might invest in credit default swaps gave insufficient warning to investors of the risks in these strategies, said Jacob H. Zamansky, a lawyer who represents Mr. Boudreau and other investors in the Willow Fund.

Mr. Zamansky pointed to Securities and Exchange Commission guidance in 2010 telling mutual fund managers in general to be specific about strategies involving derivatives. The S.E.C. was concerned that some funds were making generic disclosures about derivatives that “may be of limited usefulness to investors in evaluating the anticipated investment operations of the fund, including how the investment adviser actually intends to manage the fund’s portfolio and the consequent risks.”

Article source: http://www.nytimes.com/2013/03/31/business/willow-fund-as-a-cautionary-tale-for-investors.html?partner=rss&emc=rss

DealBook: Latest Domino in SAC Trading Inquiry Is a Top Manager

11:59 a.m. | Updated

A SAC Capital Advisors portfolio manager was arrested by federal agents on Friday, becoming the most senior employee at the giant hedge fund ensnared in the government’s vast insider trading investigation.

Michael Steinberg, 40, was arrested at his Park Avenue apartment early Friday morning and taken out of his building in handcuffs. He has worked for SAC and its owner, the billionaire investor Steven A. Cohen, since 1997 and became one of the firm’s senior portfolio managers, focusing on technology stocks.

Mr. Steinberg entered a plea of not guilty in Federal District Court in Manhattan on Friday and was freed on $3 million bail.

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“Michael Steinberg did absolutely nothing wrong,” said Barry H. Berke, a lawyer for Mr. Steinberg. “Caught in the cross-fire of aggressive investigations of others, there is no basis for even the slightest blemish on his spotless reputation. Mr. Steinberg is thankful for all the people who have continued to stand by him and believe in his innocence.”

Mr. Steinberg had returned on Thursday from Florida, where he had been vacationing with his family on spring break. He was the only one in the apartment on Friday morning, as his wife and children stayed in Florida.

Though recently placed on leave, Mr. Steinberg is one of SAC’s longest-tenured employees. He joined SAC shortly after graduating from the University of Wisconsin when the firm was just Mr. Cohen and several dozen traders. For years, he sat near Mr. Cohen on the trading floor, and the two grew close.

When Mr. Steinberg was married in 1999 at the Plaza Hotel, Mr. Cohen attended the black-tie affair. The two share the same hometown, Great Neck, N.Y., on Long Island, where they both attended Great Neck North High School.

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

Hedge Fund Inquiry

Mr. Steinberg’s arrest had widely been expected, and is the latest in a swirl of activity surrounding the government’s investigation of SAC. Earlier this month, Mr. Cohen signed off on two settlements in which the firm agreed to pay federal securities regulators $616 million to resolve two insider trading cases against SAC. On Thursday morning, a federal judge refused to approve the larger of the two settlements, a $602 million pact, raising concerns over a provision that allows SAC to avoid admitting that it did anything wrong.

The smaller of the settlements, for about $14 million, related to trading by Mr. Steinberg and a fellow portfolio manager, Gabe Plotkin, according to people familiar with the case. Mr. Plotkin has not been charged with any wrongdoing.

Mr. Steinberg’s name first surfaced in the broader inquiry last September when a former SAC analyst who worked under him pleaded guilty to being part of an insider trading ring that illegally traded the technology stocks of Dell and Nvidia. As part of his guilty plea, the analyst, Jon Horvath, implicated his former boss, Mr. Steinberg, saying that he gave the confidential information to Mr. Steinberg and that they traded based on the secret financial data about those two companies.

In recent months, Mr. Horvath has met with authorities and provided them with information about his former boss.

“As alleged, Michael Steinberg was another Wall Street insider who fed off a corrupt grapevine of proprietary and confidential information cultivated by other professionals who made their own rules to make money,”  Preet Bharara, the United States attorney in Manhattan, said in a statement on Friday.

The Securities and Exchange Commission filed a parallel civil lawsuit against Mr. Steinberg on Thursday.

The government had previously identified Mr. Steinberg, a technology stock specialist in SAC’s Sigma Capital unit, as a co-conspirator in a case involving Mr. Horvath and two former hedge fund managers at other firms, Todd Newman and Anthony Chiasson. A jury convicted Mr. Newman and Mr. Chiasson in December on charges that they traded shares of Dell while in possession of secret information about the technology company.

E-mail from Mr. Steinberg that surfaced during testimony at the trial of Mr. Newman and Mr. Chiasson related to trading in Dell are likely to be part of the charges unveiled on Friday.

In an e-mail from August 2008, sent a few days before Dell’s quarterly earnings announcement, Mr. Horvath disclosed details about Dell’s financial data to Mr. Steinberg and Mr. Plotkin.

”I have a secondhand read from someone at the company,” Mr. Horvath wrote. ”Please keep to yourself as obviously not well known.”

Mr. Steinberg replied: ”Yes normally we would never divulge data like this, so please be discreet. Thanks.”

In another e-mail, Mr. Steinberg told Mr. Horvath and Mr. Plotkin about a conversation that he had with Mr. Cohen about conflicting views of Dell inside SAC. Mr. Plotkin owned a large Dell position, while Mr. Steinberg was short, meaning that he thought shares of Dell would drop in value.

”Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print” — meaning before the company’s earnings release — ”as we are on opposite sides of this one,” Mr. Steinberg wrote.

Mr. Berke, the lawyer for Mr. Steinberg, said in a statement Friday, “At all times, his trading decisions were based on detailed analysis as well as information that he understood had been properly obtained through the types of channels that institutional investors rely upon on a daily basis.”

Mr. Steinberg’s case will keep the spotlight on Mr. Cohen, 56, who has been a central focus of the government’s investigation. Mr. Cohen has not been charged with any wrongdoing, and has told his employees and investors that he believes that he acted appropriately at all times.

The pressure on Mr. Cohen escalated last November, when prosecutors charged Mathew Martoma, a former SAC portfolio manager, with trading in the drug stocks Elan and Wyeth based on secret information from a doctor related to drug trials. Mr. Cohen was involved in the trades at the center of the Martoma case, but the government has not claimed that Mr. Cohen possessed any secret information. Those trades were the subject of the S.E.C. civil action that SAC settled for $602 million.

Amid his legal woes, Mr. Cohen, who is said to be worth nearly $10 billion, has indulged in a little retail therapy in recent days, purchasing a Picasso painting for $155 million and buying a oceanfront estate in East Hampton for $60 million.

Michael Steinberg entered a plea of not guilty in Federal District Court in Manhattan on Friday and was freed on $3 million bail.John Marshall Mantel for The New York TimesMichael Steinberg entered a plea of not guilty in Federal District Court in Manhattan on Friday and was freed on $3 million bail.


This post has been revised to reflect the following correction:

Correction: March 29, 2013

Because of incorrect information supplied by prosecutors, an earlier version of this article gave the wrong age for Michael Steinberg, the SAC Capital Advisors portfolio manager who was arrested on Friday. He is 40, not 41.

Article source: http://dealbook.nytimes.com/2013/03/29/sac-capital-manager-arrested-on-insider-trading-charges/?partner=rss&emc=rss

DealBook: SAC Capital Manager Arrested in Insider Trading Case

Federal agents have arrested a SAC Capital Advisors portfolio manager, the most senior employee at the giant hedge fund ensnared in the government’s vast insider trading investigation.

Michael Steinberg, 40, was arrested at his Park Avenue apartment early Friday morning and taken out of his building in handcuffs. He has worked for SAC and its owner, the billionaire investor Steven A. Cohen, since 1997 and became one of the firm’s senior portfolio managers, focusing on technology stocks.

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He is expected to make an appearance in Federal District Court in Manhattan on Friday before Judge Richard Sullivan.

“Michael Steinberg did absolutely nothing wrong,” said Barry H. Berke, a lawyer for Mr. Steinberg. “Caught in the crossfire of aggressive investigations of others, there is no basis for even the slightest blemish on his spotless reputation. Mr. Steinberg is thankful for all the people who have continued to stand by him and believe in his innocence.”

The arrest of Mr. Steinberg had widely been expected, and is the latest in a swirl of activity surrounding the investigation of SAC. Earlier this month, Mr. Cohen signed off on two settlements in which the fund agreed to pay federal securities regulators $616 million to resolve two insider trading cases against SAC. On Thursday morning, a federal judge refused to approve the larger of the two settlements, a $602 million pact, raising concerns over a provision that allows SAC to avoid admitting that it did anything wrong.

The smaller of the settlements, for about $14 million, related to trading by Mr. Steinberg and a fellow portfolio manager, Gabe Plotkin, according to people familiar with the case. Mr. Plotkin has not been charged with any wrondoing.

Mr. Steinberg’s name first surfaced in the broader probe last September when a former SAC analyst who worked under him pleaded guilty to being part of an insider trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, the analyst, Jon Horvath, implicated Mr. Steinberg, saying that he gave the confidential information to his SAC boss and that they traded based on the secret financial data about those two companies.

In recent months, Mr. Horvath has met with authorities and provided them with information about his former boss.

The government has previously identified Mr. Steinberg, a technology stock specialist in SAC’s Sigma Capital unit, as a co-conspirator in a case involving Mr. Horvath and two former hedge fund managers at other firms, Todd Newman and Anthony Chiasson. A jury convicted Mr. Newman and Mr. Chiasson in December on charges that they traded shares of Dell while in possession of secret information about the technology company.

Mr. Steinberg has been named in a superseding indictment in Mr. Newman’s and Mr. Chiasson’s case, according to person familiar with Mr. Steinberg’s case.

Including Mr. Steinberg, at least nine current or former SAC employees have been tied to allegations of insider trading while working there. Four have pleaded guilty to federal charges.

Mr. Steinberg’s case will keep the spotlight on Mr. Cohen, 56, who has been a central target of the government’s investigation. Mr. Cohen has not been charged with any wrondoing, and has told his employees and investors that he believes that he at all times acted appropriately.

Article source: http://dealbook.nytimes.com/2013/03/29/sac-capital-manager-arrested-on-insider-trading-charges/?partner=rss&emc=rss

DealBook: ‘Historic Penalties’ in Trading Cases Against Hedge Fund

One of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.Spencer Platt/Getty ImagesOne of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.

10:58 p.m. | Updated

The government’s multiyear campaign to ferret out insider trading on Wall Street has yielded multiple prosecutions of former employees of SAC Capital Advisors, the giant hedge fund owned by the billionaire investor Steven A. Cohen.

On Friday, federal authorities took aim at the fund itself.

In what officials called the largest settlement of an insider trading action, SAC agreed to pay securities regulators about $616 million to resolve two civil lawsuits related to improper trading at the fund.

The landmark penalty exceeds, at least before adjustment for inflation, the fines meted out in the 1980s-era scandals involving Ivan F. Boesky and Michael R. Milken, records at the time. It also underscores SAC’s central role in the government’s recent push to prosecute illegal conduct on trading desks and in executive suites, an effort that has yielded about 180 civil actions and more than 75 criminal prosecutions.

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“These settlements call for the imposition of historic penalties,” said George S. Canellos, the Securities and Exchange Commission’s acting enforcement director.

Mr. Canellos said the resolutions did not prevent the future filing of additional charges against any person, specifically citing Mr. Cohen, who was not named as a defendant in the civil actions on Friday. Mr. Cohen has not been charged with any wrongdoing and has told his clients that he believes he has behaved properly.

In one case, the agency said a SAC unit would forfeit $600 million to settle claims that it sold nearly $1 billion in shares of two pharmaceutical companies after a former portfolio manager at the fund received secret information from a doctor about problems with a new drug for Alzheimer’s disease. Separately, another SAC affiliate agreed to pay $14 million to resolve its role in an insider trading ring that illegally traded technology stocks, including Dell.

For SAC, which is based in Stamford, Conn., manages $15 billion and holds one of the best investment records on Wall Street, the settlements, while a humbling blow to its reputation, resolve a matter that caused some of its investors to withdraw their money. Investors became skittish last fall after regulators warned SAC that they planned to sue the fund.

“These settlements are a substantial step toward resolving all outstanding regulatory matters and allow the firm to move forward with confidence,” said Jonathan Gasthalter, a spokesman for SAC.

The settlements still need to be approved by Judge Victor Marrero of Federal District Court in Manhattan, the presiding judge in the case. As part of its agreement with regulators, SAC neither admitted nor denied wrongdoing. That entrenched S.E.C. practice — permitting defendants to settle federal regulatory charges without acknowledging that they actually did anything wrong — has come under increased scrutiny by the courts.

The cases brought on Friday echo earlier prosecutions of former SAC employees. In December, prosecutors indicted Mathew Martoma, a former SAC portfolio manager at the center of the questionable drug-stock trades tied to a new Alzheimer’s drug. And Jon Horvath, a former SAC analyst, pleaded guilty last year to participating in the Dell insider trading ring. In its legal filing on Friday, the S.E.C. said that Mr. Horvath had leaked secret information to two colleagues; previously, the commission said that only one former SAC employee had received tips.

A lawyer for Mr. Martoma said SAC’s resolution of the two lawsuits had no bearing on his client, who has denied the charges.

“SAC’s business decision to settle with the S.E.C. in no way changes the fact that Mathew Martoma is an innocent man,” said Charles A. Stillman, the lawyer. “We will never give up our fight for his vindication.”

On a conference call with reporters, government officials bragged that the $616 million amount dwarfed other prominent insider trading settlements. Raj Rajaratnam, the former hedge fund manager convicted in 2011, paid $156 million in combined criminal and civil penalties. Mr. Boesky, a central figure in the 1980s trading scandals, paid $100 million then.

The sum also exceeds the amounts of older enforcement actions, including a $550 million settlement with Goldman Sachs in 2010 related to fraud accusations tied to the sale of mortgage investments, and a $400 million settlement with Mr. Milken, the junk bond financier, in 1990.

The larger of the two cases settled on Friday was based on powerful evidence against Mr. Martoma, the former SAC portfolio manager. The government said Mr. Martoma had caused SAC to sell nearly $1 billion in shares of Elan and Wyeth because he obtained secret information from a doctor about clinical trials for a drug being developed by the companies. Prosecutors have secured the testimony of the doctor who reportedly leaked Mr. Martoma the drug trial data.

In bringing the criminal charge against Mr. Martoma, prosecutors appeared to be moving closer to building a case against Mr. Cohen. The complaint noted that Mr. Cohen had a 20-minute telephone call with Mr. Martoma the night before SAC began dumping its holdings. Prosecutors, though, have not contended that Mr. Cohen knew that Mr. Martoma had confidential data about the drug’s prospects.

The F.B.I. has tried unsuccessfully several times to persuade Mr. Martoma to plead guilty and cooperate against Mr. Cohen.

While a prodigious sum, the settlement is less than the maximum amount the S.E.C. could have extracted from the hedge fund. The agreement required SAC to pay about $275 million in disgorged illegal gains and $52 million in interest. In addition, SAC agreed to pay a $275 million penalty, an amount equal to the illicit gains. Under law, however, the S.E.C. could have secured a penalty of three times that amount, or $825 million.

The forfeited money will come from SAC, meaning that the firm will write the government a check. SAC’s investors will not pay anything or absorb any losses. The $616 million will go into a general revenue fund of the United States Treasury.

Representing SAC in its talks with the S.E.C. were Martin Klotz of Willkie Farr Gallagher and Daniel J. Kramer of Paul Weiss Rifkind Wharton Garrison.

While the resolution of these two cases provides a measure of relief to SAC and its clients, the hedge fund’s legal problems have already damaged its business. Though SAC has returned about 30 percent annually to its investors over the last two decades — a virtually peerless track record — many of its clients have parted ways with the fund.

Last month, SAC investors asked to withdraw $1.7 billion, more than a quarter of the $6 billion that the fund manages for outside clients. The balance of SAC’s $15 billion belongs to Mr. Cohen and his employees. The next regularly scheduled deadline for SAC clients to ask for their money back is mid-May.

SAC’s performance has been solid in the opening months of 2013, with its fund up 3.4 percent through the end of February. In calls with concerned clients, SAC has highlighted its stepped-up efforts in building its legal staff and compliance procedures — an initiative that Mr. Gasthalter, the spokesman, reiterated on Friday.

“We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm,” he said.

On a conference call discussing the case, Mr. Canellos, the S.E.C. enforcement director, was asked whether the commission felt that SAC was committed to keeping a strong culture of compliance.

“I sure hope they are,” Mr. Canellos said.


This post has been revised to reflect the following correction:

Correction: March 16, 2013

An earlier version of this article incorrectly reported the amount of the settlement because rounded numbers were added. Adding the exact numbers and then rounding, the total is $616 million, not $614 million.

Article source: http://dealbook.nytimes.com/2013/03/15/sac-settles-insider-trading-cases-for-616-million/?partner=rss&emc=rss

Markets Falter as Worry Rises in Greek Crisis

Thousands took to the streets in Athens to protest austerity measures, and Prime Minister George Papandreou said he would reshuffle his cabinet and request a vote of confidence in Parliament. At stake is the prospect of a new bailout plan for the debt-ridden country.

Anxious investors feared the situation could spin out of control, igniting a series of crises in other heavily indebted euro zone countries, like Portugal, Ireland and Spain. That, in turn, could threaten Europe’s banks and even reach into the United States financial system.

“We are pretty much giving back everything we got yesterday and more,” said Lawrence R. Creatura, a portfolio manager at Federated Investors, noting the rise in the main American indexes of more than 1 percent Tuesday. “Today the market just can’t escape the undertow of deteriorating economic data and political events.”

After having lost more than 200 points earlier Wednesday, the Dow Jones industrial average closed down 178.84 points, or 1.5 percent, to 11,897.27. The markets rallied earlier this year on confidence about the economic recovery, and at one point the Dow was poised to break through the 13,000 mark. But stocks have been falling week after week on a drumbeat of dismal economic news from soft job creation to falling housing prices.

The market has surrendered almost all of its gains for this year, falling 7 percent since its peak at the end of April. It may be nearing what is known as a market correction, a sort of miniature bear market characterized by a 10 percent decline in a short period of time.

Greece needs to pass a new round of austerity measures by the end of the month in return for new loans from the International Monetary Fund and the European Union.

In Athens, thousands joined a nationwide strike as Parliament prepared to debate a second round of sharp cuts in government spending. The measures are unpopular with Greeks, who have already suffered deep salary and pension cuts.

Although many analysts expect that a default by Greece on its debts will eventually be averted, the political uncertainty in Greece is providing an unsettling backdrop for investors. In addition, they are fretting because the United States this summer faces its own fractious negotiations over raising the federal debt ceiling.

The European Central Bank said on Wednesday in a report on financial risk that it would be a big mistake for Greece to be allowed to miss its debt payments, either by delaying payments to a later date, or by paying back less than the full amount. Germany, the biggest economy in the 17-member euro zone, is proposing that private sector bondholders accept some form of a loss on their Greek bonds.

This could prove damaging to Greek banks, requiring them to mark down the value of their holdings of government debt at a time when they are struggling with bad loans in their home market. And it could have similar dire repercussions for other European banks that hold Greek debt.

“The concern is that a default by Greece would not only hurt European banks but could also spread to U.S. banks,” said Bernard Baumohl, an economist at the Economic Outlook Group in Princeton, N.J. “Should there be a default, it can only have a delaying effect on the recovery, hurting American exports and the banks’ ability to lend.”

Pointing to a slowing United States economy, a Federal Reserve regional report for New York State showed a decline in both manufacturing activity and optimism for June. Also Wednesday, a government report showed consumer prices crept up again, though they were held in check by a decline in energy prices.

The recent economic data has prompted economists to steadily downgrade their forecasts for economic growth in the second quarter of this year. Macroeconomic Advisors, a prominent forecasting firm, on Wednesday lowered its annualized second-quarter gross domestic product forecast to 1.9 percent, compared with the 3.5 percent growth it was expecting when the quarter began.

Contributing reporting were Christine Hauser, Rachel Donadio, Niki Kitsantonis, Matthew Saltmarsh and Jack Ewing.

Article source: http://www.nytimes.com/2011/06/16/business/16markets.html?partner=rss&emc=rss

DealBook: Galleon Chief Put Millions Into Fund of Ex-Employee

Richard Schutte, former president and chief of research at the Galleon Group, arriving at federal court.Louis Lanzano/Bloomberg News Richard Schutte, former president and chief of research at the Galleon Group, arriving at federal court.

9:09 p.m. | Updated

Eight weeks before the start of his trial on insider-trading charges, Raj Rajaratnam’s family invested $15 million in a hedge fund started by a former employee who has been testifying this week on Mr. Rajaratnam’s behalf.

The investment, which came on top of an initial $10 million made months earlier, was disclosed on Thursday as prosecutors cross-examined Richard Schutte, a former president of Mr. Rajaratnam’s Galleon Group.

Mr. Schutte started his own hedge fund, SpotTail Capital Advisers, as he was unwinding Galleon after Mr. Rajaratnam’s arrest in October 2009. Mr. Rajaratnam is by far the largest investor in SpotTail, which manages about $35 million.

Reed Brodsky, a federal prosecutor, finished his cross-examination of Mr. Schutte with this detail, raising the question of whether the investment was in some way compensation for his testimony on Mr. Rajaratnam’s behalf.

It was the first time jurors had heard of the investment. On direct examination, the defense had never even mentioned the existence of SpotTail.

The defense quickly sought to defuse the notion that Mr. Rajaratnam’s SpotTail investment was meant to encourage Mr. Schutte’s testimony. Mr. Rajaratnam respected Mr. Schutte, a former Goldman Sachs analyst, as a money manager, the defense said. After all, he had hired Mr. Schutte to work for him back in 2004 as a portfolio manager.

The moment interrupted what had been an otherwise routine day in Federal District Court in Manhattan. Since taking the stand on Monday, Mr. Schutte has been inundated with exhibits from both defense lawyers and prosecutors in an effort to show whether the information Mr. Rajaratnam used to make his trades was already public.

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

The defense has tried to show that details about the deals and earnings reports at the center of the insider-trading charges against Mr. Rajaratnam were public and could have been derived from research and analysis.

Over the last few days, with Mr. Schutte on the stand, Mr. Rajaratnam’s lawyers have presented hundreds of exhibits to support that thesis, drawing from Galleon e-mails and dozens of articles from research firms and the news media.

But prosecutors have argued that the issue is not whether the information was publicly available as rumor or speculation, but whether Galleon had actually used that information to inform its trades, instead of using confidential information to do so.

While Mr. Schutte’s testimony was meant to offer an inside view of Galleon, the next witness on Thursday was meant to provide an outside opinion.

Gregg A. Jarrell, a professor at the business school of the University of Rochester and a former top economist at the Securities and Exchange Commission, was retained by the defense in early 2010 to analyze the trades Mr. Rajaratnam is accused of making with inside information.

So far, he, and the research firm with which he is working to gather the data, are nearing $1 million in billed work, he said.

One thing became abundantly clear in his testimony Thursday: Galleon and its founder, Mr. Rajaratnam, traded a lot.

Mr. Jarrell examined more than a million trades at Galleon from 2005 to 2009, 30,000 of which were completed by Mr. Rajaratnam. That amounts to 7,287 trades a year or about 30 trades a day. In 2009 alone, Mr. Rajaratnam traded shares of more than 600 companies before his arrest.

The dollar amount of Mr. Rajaratnam’s trades is staggering. Through the entire five-year period, Mr. Rajaratnam racked up exactly $172,104,508,398 in trades, according to a presentation by the defense. Averaged out, his daily trading volume was $141,533,313.

“It’s mind-boggling,” Mr. Jarrell. “That’s a lot of trading.”

Of all the trades Mr. Rajaratnam conducted in that period, only 126 are suspected to have been based on inside information, or about 0.3 percent, Mr. Jarrell said.

Mr. Jarrell was contracted to conduct so-called event studies, complex statistical models that measure the difference between how a given stock ordinarily reacts to market conditions and how it reacts to a specific related event.

The idea is to determine the significance of material information — like a merger announcement or an earnings release — on the company’s share price. The defense spent the rest of Thursday focusing on one stock: Advanced Micro Devices.

Near the end of its case, the government produced an exhibit that tallied all the illicit gains it says Mr. Rajaratnam made. The total was about $63 million, a figure that did not include a transaction in A.M.D. that has been a focus of the trial.

That transaction related to the spinoff of a division of the company, a tip prosecutors have said Mr. Rajaratnam received from a former executive at McKinsey Company in August 2008, almost two months before the official announcement.

Ultimately, Mr. Jarrell said, Mr. Rajaratnam’s bet on A.M.D. turned out to be a major loss. Using the same methodology as the F.B.I., Mr. Jarrell said that Mr. Rajaratnam’s trades in A.M.D. had led to more than $67 million in losses. That is almost $4 million more than the $63 million Mr. Rajaratnam is accused of making in illicit profits, he said.

Article source: http://feeds.nytimes.com/click.phdo?i=f7f169522e1752c1bc2eca7872c7b8ea

DealBook: For a Galleon Ex-Manager, Questions of Motivation

Twice last year, Adam Smith, a former portfolio manager at the Galleon Group hedge fund, met with lawyers for its co-founder, Raj Rajaratnam, who had been charged with netting tens of millions through insider trading.

On Thursday, Mr. Smith’s interviews with the defense lawyers were the focus of Mr. Rajaratnam’s trial.

Earlier this week, Mr. Smith, a cooperating witness who faces up to 25 years in prison after pleading guilty to insider trading, told jurors he routinely traded shares of technology companies based on inside data. In most cases, he said, “I shared it with Raj.”


The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

But in a heated exchange on Thursday, defense attorney Terence J. Lynam confronted Mr. Smith, claiming he did not tell Mr. Rajaratnam’s defense team, when they had interviewed him in February and July of 2010, anything about the insider trading offenses that Mr. Smith later said he had committed.

“I was only answering the specific questions,” Mr. Smith said. “I wasn’t volunteering any information.”

“You said you didn’t know of any insider information, right?” Mr. Lynam said, raising his voice.

“I wasn’t asked about any insider information,” Mr. Smith responded.

The implication, according to the defense, was that Mr. Smith divulged to the federal government that he had participated in an insider trading scheme only to try lessen his sentence.

During his testimony earlier this week, Mr. Smith walked the jury through a number of times when, he said, he obtained nonpublic information for himself and his boss, Mr. Rajaratnam.

Andrew Michaelson, a prosecutor, reminded jurors of e-mails sent from Mr. Smith to Mr. Rajaratnam about Integrated Device Technology’s planned acquisition of Integrated Circuit Systems in 2005. The tips came from a Morgan Stanley investment banker, Kamal Ahmed.

The subject line in those e-mails was “The two eyes,” a code that used the first initials of both companies. In each, he relayed tips about the deal’s progress. One read: “I had a chance to update and we are still on track.” A later e-mail had the subject line “Eyes” and said, “Game on.”

Mr. Lynam tried to show that the information Mr. Smith said he shared with Mr. Rajaratnam was already the subject of market speculation and therefore already public — for instance, the 2006 acquisition of A.T.I. by Advanced Micro Devices.

The defense showed an e-mail alert sent to Mr. Smith from a technology news service called ChinaByte. Citing a source, the e-mail said a deal had been reached for A.M.D. to acquire A.T.I.

“It’s true, there were a number of rumors, yes,” Mr. Smith said.

But Mr. Lynam also tried to establish the point that Mr. Smith’s own analysis gave him reason enough to trade in the company.

He pointed to e-mails from Mr. Smith to others in the Galleon Group, including Mr. Rajaratnam, in which he talked about A.T.I.’s fundamental value, often forwarding an analyst’s research.

Mr. Lynam said that with the research and Mr. Smith’s own glowing reviews, there was ample reason to buy A.T.I. without any insider information.

“Yes, but they also don’t mean I didn’t have insider information,” Mr. Smith replied.

The defense tried to distance Mr. Smith’s trades from Mr. Rajaratnam’s, focusing in part on the company Intersil. Mr. Smith testified earlier this week that he had a source in Taiwan who had leaked him the company’s quarterly earnings before they were publicly announced.

In early 2009, for instance, just before the company reported earnings, Mr. Rajaratnam did not trade any shares in the company for more than a month.

“You claimed that you told Mr. Rajaratnam inside information about Intersil’s earnings, but he’s not even trading in the period up to this?” Mr. Lynam asked.

“That’s true, in this case,” Mr. Smith replied.

Prosecutors, however, offered their own trading examples.

Twice in 2004, during a particularly rough patch for the Intersil, the company said that their earnings would fall below expectations. Mr. Smith’s said in testimony earlier in the week that a source at the company, Jason Lin, tipped him to the bad news. Mr. Smith, in turn, shared that information with Mr. Rajaratnam.

In the days before the second announcement on Oct. 6, 2004, Mr. Rajaratnam placed a negative bet on the company, shorting 125,000 shares, according to the slides presented by prosecutors.

Article source: http://feeds.nytimes.com/click.phdo?i=584d2776decb1570ee7a3b48323b70e6