Mike Segar/Reuters
SAC Capital Advisors, one of the world’s biggest hedge funds run by zillionaire Steven Cohen, is finally under the gun for insider trading, according to the Wall Street Journal.
The issue is over trades made in an account Cohen oversees, which were suggested by former fund managers of his who’ve already pleaded guilty to insider trading. With more and more news circulating about fruitful government snooping on insider trading, it seems like Main Street’s dreams of bringing down Wall Street corruption could finally come true. A victory against Cohen would make the Feds’ nabbing of Galleon’s Raj Rajaratnam for insider trading last month look small fry.
But here’s the problem: The securities filings regulators and prosecutors have to draw on are only quarterly snapshots of a hedge fund’s positions. Those can change daily, hourly, by the minute. That’s especially true for SAC, which has returned an unbelievable 30% a year on average through the rapid-fire trading that made Cohen famous (and very, very rich).
Hedge funds’ filings also don’t offer purchase or sale dates, or whether the trading was profitable. A Wall Street Journal graphic shows SAC’s holdings in biotech company MedImmune went up six or seven-fold just before the company was acquired by AstraZeneca, which in the meantime nearly doubled its stock price. That looks plenty suspicious (about as suspicious as consistent 30% returns). But a lot happened in that window of time, and that’s what makes insider trading at a firm like SAC nearly impossible for the SEC or the Feds to nail down. It doesn’t help that hedge funds, including SAC, are shifting more assets into even faster computer-based trading strategies that can outcompete human traders, while leaving regulators even more in the dark.
Because hedge funds are made up of wealthy individuals and institutions, so far regulators have been fine to let them fend for themselves. Rather than demanding more intensive investor protection or monitoring hedge funds’ positions more closely, the under-staffed SEC has figured Wall Street’s elites can afford their own missteps, with no harm done to the average investor. Plus, using scare tactics to intimidate the business (by dragging hedge fund bosses into public criminal investigations) is a cheaper way to regulate.
But if these cases continue to fall flat on too little evidence, there won’t be much scaring left to do. Right now, the Feds are high on the idea that wiretapping is a sure-fire way to fix that. After all, that’s how Raj got nabbed. But a wiretapping strategy can’t last long. Insider traders will learn soon enough to just stay off the phone (ever seen HBO’s The Wire?).
More on the mark is Senator Chuck Grassley’s probe into why the SEC didn’t follow up on 20 reports of potential insider trading at SAC over the past decade. But the same questions were launched at the SEC post-Madoff. It’s a long shot to think this time they won’t fall through.