Introduction: SAC Capital Advisors
SAC Capital Advisors, founded by Steven A. Cohen in 1992, is a $14 billion hedge fund based in Stamford, CT. The company favors investing in the technology, industrial, financial, and healthcare sectors, particularly biotech and pharmaceutical companies. With at least 20 million shares traded a day, trading accounts for as much as 3% of NYSE. While SAC Capital charges higher management fees than rival hedge funds (and thus pays brokers higher commissions), its net returns of 13% for investors have also been higher than other hedge funds in 2012.
Over the past several years, the Justice Department and the Securities & Exchange Commission have launched investigations into insider trading across the financial sector. Several SAC Capital employees (or former employees) have been indicted so far, including Mathew Martoma and Michael Steinberg.
Insider Trading at SAC Capital: Mathew Martoma
Martoma, who worked at SAC Capital’s SR Intrinsic Investors unit until 2010, was arrested in November 2012, and charged with conspiracy and securities fraud in a record-setting insider trading scandal. Allegedly, the former portfolio manager received secret information from a doctor about clinical trials for an Alzheimer’s drug being developed by two pharmaceuticals, Elan Corp and Wyeth. Upon learning of the positive results, he bought these shares for his portfolio. Worrisome results from the doctor (involving patients and their serious side effects) followed however, and prompted Martoma to sell the pharmaceutical shares and build a short position in the two stocks. As expected, these stocks dropped upon announcements of trial results, enabling Martoma to profit and avoid losses totaling $276 million.
Recent Development: Michael Steinberg
Steinberg, a portfolio manager at SAC’s Sigma Capital Management unit where he oversaw more than $1 billion, was arrested Friday, March 29, 2013 on 5 counts of securities fraud and conspiracy. His indictment makes him the most senior employee at SAC Capital to be involved in the insider trading probe, although he had been implicated earlier in 2012 and had been on paid leave at the company since September. The arrest and guilty plea of Jon Horvath, a former SAC Capital analyst who reported to Steinberg, brought to light the emails he sent to Steinberg (and another SAC Capital fund manager) that generated about $1.4 million in illegal profits. Steinberg shorted Dell securities in August 2008 based on the information from Horvath that Dell would miss earnings estimates in the second quarter. Stocks of a semiconductor company, Nvidia, were also traded based on inside information in May 2009.
Effect on SAC Capital Advisors and the Future of Steven Cohen
Last month, outside investors began redeeming up to $1.68 billion from SAC Capital Advisors. Client defections mean that about 70% of the hedge fund’s assets under management come from within the firm, mostly Cohen’s own capital. So far nine current or former employees have been charged (or at least implicated) with insider trading, and four have pleaded guilty. But the company is actually still doing well. Needless to say, however, insider trading probes could hurt SAC Capital’s reputation.
The US Government could use Steinberg and Martoma to get to Steven Cohen, who seems to be the ultimate person of interest in the SAC Capital probe. While Cohen has not been charged with anything thus far or directly implicated, he is referred to in court filings as the “owner”, and is alleged to have collaborated with Martoma. Most importantly, the SEC claims that Cohen took a large position in the pharmaceutical companies in his personal portfolio based on Martoma’s advice. Investigations are ongoing, and the company asserts that its owner is not guilty of any wrongdoing.
What could Cohen do? He could close down SAC Capital to outside investors, which would mean less public scrutiny. The government, of course, could still go after profits they believe were gained through illegal activity. But all of the investigations aside, Cohen is still running a successful hedge fund. And according to an attorney, shutting down SAC may be sending the wrong message.
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General Market Conditions
Recent successive climbing of the U.S stock market reflected in the major indexes such as DJIA and S&P 500 actually indicates the warm of the market and the increase of investors’ confidence. Last Friday, the US Department of Commerce revised and finalized the real GDP growth rate from 0.1 to 0.4 for the fourth quarter of 2012. Overall, the GDP growth rate increased from 1.8 in 2011 to 2.2 in 2012, forecasting up trend in the general economy. All combined together led to the record breaking both for DJIA and S&P 500 in terms of daily closing and intraday point. However, according to ADP National Employment Report for the past March issued this Wednesday, only 158,000 new jobs were created by private sector, falling short of previous expectations and behaving worse compared to previous months. After the issuing, the stock market went down a little bit. The official non-farm payroll report that is due this Friday will reveal more on recent employment situation, which might be reflected in near future market trend.
Tao Tang and Kevin Kivrak
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