Coatue Management, Philippe Laffont‘s ~$3.5 billion tech-focused hedge fund is being investigated related to possible insider trading violations, a source tells Business Insider.Coatue has disclosed to at least one of the expert networks that they are a client of that they are being investigated, but we have not confirmed whether or not the fund has informed their investors of the insider trading investigation. No one from Coatue has been charged with wrongdoing, to the best of our knowledge.
Coatue’s General Counsel did not return a request for comment.
Coatue’s founder, Philippe Laffont, is a ’89 MIT grad (MS in Computer Science) who has summered on Nantucket for 30 years. He named the fund for the vacation spot; Coatue is a long barrier beach on Nantucket.
Laffont worked at Julian Robertson’s Tiger Management until it closed and founded Coatue in 1999. These winter days, you’ll probably find him in his Patagonia and corduroys, walking around the upper east side, where Coatue is located.
Suspicion first arose that Coatue would face a fate similar to Level Global and the others involved in the investigation when word got out that Laffont received John Kinnucan’s infamous email warning his clients that the FBI had asked him to wear a wire.
Another reason to be suspicious that the fund will be similarly ensnared in the investigation is that Coatue uses or used Primary Global, the expert network firm that is in the centre of the insider trading bust.
“A majority of the Tiger Cubs use Primary Global,” says our source (a Tiger Cub is a term used to describe hedge funds whose managers were seeded by Tiger Management, Julian Robertson’s behemoth). That alone doesn’t mean much, he says, because most hedge funds use two or more expert networks (here’s a list of the big ones), and Primary Global is probably one of them.
But in addition to Primary Global, Coatue is a client of the expert network firms Coleman Research Group, and Gerson Lehrman Group.
Our source used to work at an expert network much like Primary Global.
“Coatue will talk to anyone who seems like they have information that will prove their investment thesises and support their fundamental research,” he says. The conversations they have with experts provide them with information that is not readily available to the retail investor.
Again, no one from Coatue has been charged with anything, as far as we know.
It may be helpful to read some of the helpful background information about why investment management firms use the networks that our source provided.
He says it’s because if you don’t, someone else will get the information before you, and you’ll lose the opportunity to earn your investors coveted returns over 10%. But because the information received is not available to the retail investor, it might be considered insider information by a court.
One Tiger Cub, Tiger Asia Management, is already being investigated by regulators. More Tiger Cubs will be investigated, says our source, and he’s not surprised that Coatue is one that authorities are looking at.
He explains that expert networks often use consultants that have access to information about, for example, Apple’s inventory data for a specific product or component. He provided the following example.
Say an expert network was in contact with Apple’s warehouse inventory manager. Say the inventory manager was on a call with a hedge fund analyst, and the inventory manager told the analyst about a memo he received. The memo might have said to clear out the warehouse for a new product. And the new product, it could have turned out, was the iPhone 4. Information about the iPhone 4’s new camera, obviously, is worth millions to someone who is investing in the company that makes the camera.
Even though the intent of the conversation was not to trade on Apple stock, the hedge fund analyst became privy to information that is not available to the average retail investor. This is just one of the ways that hedge fund analysts can attempt to gain an edge in understanding the demand in products and services in a company that they’re interested in investing in, without talking to someone at the target company.
It’s a stealth way to bend the rules, basically. In the coming months or years, regulators are going to have to decide whether or not this is legal.
One issue is that often these employees are unaware that the information that they have is inappropriate. And yet these are the employees that are, in exchange for several hundred dollars of their time, being asked for their expert knowledge and it is typically understood that they will have materially important information. And though it may not have been the initial intention of the call to obtain that exact information, it would be very easy for the material information to slip out to a hedge fund. So initially, they agree that they won’t disclose nonpublic information, but the average Joe Schmo doesn’t know what that means. Ultimately, it could spill out anyway, and the hedge fund might trade on it.
He didn’t elaborate on which expert network or which funds might have received information like this. But it’s now public that Primary Global consultant Walter Shimoon (now arrested) was paid just thousands of dollars to pass on to hedge fund managers potentially priceless information about the iPhone 4 camera that his employer, Flextronics, was helping Apple build.
He just said, “it’s far from over.”
The funds that have been implicated so far have been severely damaged by the scandal, For example:
- Investors in Diamondback, a fund raided in December by the FBI, want to pull at least $534 million from the fund.
- Redemptions at Level Global, another raided fund, are up to $750 million.
- Both Barai Capital and STG Capital closed because of the scandal.
- FrontPoint investors pulled $3 billion from the fund after news that its healthcare manager,Chip Skowron, was being investigated.
Here’s what Coatue was holding as of Q4 2010 (dollar value x$1,000), according to the latest 13F:
ACME PACKET INC: $57,945 (1,527,278 SH)
AMAZON COM INC: $41,469 (264,032 SH)
AMERICAN SUPERCONDUCTOR CORP: $35,686 (1,147,464 SH)
AMERICAN TOWER CORP: $115,407 (2,251,404 SH)
APPLE INC: $431,061 (1,519,159 SH)
ARUBA NETWORKS INC: $37,144 (1,740,592 SH)
ASSURED GUARANTY LTD: $18,694 (1,092,565 SH)
BAIDU INC: $218,058 (2,124,911 SH)
CIENA CORP: $50,317 (3,231,669 SH)
CITRIX SYS INC: $267,199 (3,915,578 SH)
CONCUR TECHNOLOGIES INC: $26,738 (540,821 SH)
CROWN CASTLE INTL CORP: $167,996 (3,805,120 SH)
F5 NETWORKS INC: $330,496 (3,183,660 SH)
GOOGLE INC: $264,100 (502,292 SH)
INTERDIGITAL INC: $264 (8,900 SH)
INTERNATIONAL RECTIFIER CORP: $46,117 (2,186,672 SH)
J2 GLOBAL COMMUNICATIONS INC : $214 (9,000 SH)
NETAPP INC: $189,361 (3,803,195 SH)
NETFLIX INC: $34,864 (215,000 SH)
NETLOGIC MICROSYSTEMS INC: $51,985 (1,884,888 SH)
NEUTRAL TANDEM INC: $9,227 (772,143 SH)
NUTRI SYS INC NEW: $11,828 (614,747 SH)
NVIDIA CORP: $4,254 (364,138 SH)
PLANTRONICS INC NEW: $240 (7,100 SH)
QUALCOMM INC: $456,476 (10,114,139 SH)
SBA COMMUNICATIONS CORP: $75,819 (1,881,359 SH)
SEAGATE TECHNOLOGY PLC: $49,851 (4,233,616 SH)
SKECHERS U S A INC: $25,682 (1,093,323 SH)
SOLARWINDS INC: $22,275 (1,290,551 SH)
STEC INC: $6,029 (484,250 SH)
SUCCESSFACTORS INC: $15,382 (612,584 SH)
TD AMERITRADE HLDG CORP: $63,339 (3,921,890 SH)
TECHTARGET INC: $1,939 (369,258 SH)
UTSTARCOM INC: $6,967 (3,210,529 SH)
VEECO INSTRS INC DEL : $10,461 (300,000 SH)
WESTERN DIGITAL CORP: $51,906 (1,828,305 SH)