Feds Still After Stevie Cohen

The rumours keep swirling around Steve Cohen and his massive hedge fund SAC Capital. The latest story details dozens of confidential reports about suspicious trading ahead of market moving moving news. According to the Wall Street Journal,FINRA, a self regulating agency for securities firms, has described the hedge fund’s trades in some cases as unusually prescient and particularly profitable.

In 2006, the National Association of Securities Dealers, which is a predecessor of FINRA, told the SEC that “The staff is particularly concerned about the SAC account.” The Wall Street Journal viewed 18 referrals made by FINRA and the NASD between 2002 and 2011 and said that regulators were “vexed” at SAC’s repeated appearance in routine screens of suspicious trading around mergers and acquisitions, earnings announcements and other significant market moving news.

All told, the potential profits and avoidance of losses on the suspicious trades that were reported to the SEC was $15 million. Examples include a $530,766 potential loss avoided in shares of Red Robin Gourmet Burgers, and other unnamed instances when SAC made as much as $2.3 million in a single stock or avoided losses of as much as $1.2 million.

The hedge fund, which is one of the world’s largest and manages around $14 billion, said in a statement that “every day our firm transacts in thousands of securities,” and “it is not surprising that we would be included in a small percentage of Finra referrals.” Bingo! The SEC has been going after SAC Capital and Cohen for what seems like forever. The legendary trader has been dogged by amorphous rumours throughout his career, but nothing ever sticks!

These latest reports appear to be more innuendo and hardly prove any type of impropriety whatsoever. It’s starting to get ridiculous. The SEC should either make a case, or just give up, and stop leaking information and trying to fool the public into believing they have fangs. The new information regarding SAC that has made its way to the Wall Street Journal, Reuters, Bloomberg, etc. is almost laughable in how weak it is with regard to any potential insider trading case.

Let’s look at the facts. As best as we can tell, Finra and the NASD referred 18 different instances of suspicious trading at SAC to the SEC between 2002 and 2011. The Wall Street Journal also is reporting that other regulators flagged at least 27 other SAC trades since 2000 and passed the information onto the SEC. On the surface, this is indeed suspicious, no?

Once put into context, however, it is obvious that the chances of a substantive case resulting from these instances is slim to none. SAC Capital has always been a trading house. They are known for making rapid fire trades and moving in and out of the market at a frenetic pace. The firm accounts for around 4% of NYSE volume every single day!

Given the massive volume of trading that SAC accounts for, it sure would seem to make sense that they get lucky once in a while. In fact, an argument could be made that there should be more instances of suspicious trading over a 10 year period than what is being reported. It is the law of large numbers.

Furthermore, the money involved here is downright inconsequential. There is absolutely no way in the world that Steve Cohen would knowingly allow one of his traders to trade on inside information to make what amounts to pennies for him and SAC. The total cited in these latest reports is $15 million of profits and loss avoidance over nearly a decade relating to suspicious trades.

Are you kidding me? This is a $14 billion hedge fund. Steve Cohen is worth roughly $9 billion personally, making him one of the very richest people in the world. If you believe that Cohen has one rational bone in his body, these “suspicious trading” allegations appear to be nothing but a wild goose chase as they relate to him.

Of course, this does not mean that some of SAC’s hundreds of traders may not have done something inappropriate. That is a distinct possibility. But to infer that the culture at SAC or that Cohen himself is somehow culpable based on the evidence presented in the press this week is a farce. The only logical conclusion that can be drawn from the evidence appears to be that one of the largest trading firms on Wall Street got lucky a few times over the last decade.

This article shouldn’t be construed as some sort of blind defence of SAC and Cohen, either. Insider trading should be vigorously prosecuted, and I am inclined to believe that there may have been some shady deals in Cohen’s past when he was making a name for himself on Wall Street. Furthermore, a number of former SAC traders have been ensnared in recent investigations.

The fact remains, however, that the government has never been able to make one thing stick to SAC itself or Cohen. They have never produced any credible proof of wrongdoing at the hedge fund whatsoever. It is always limited to rumour and innuendo.

If the Feds want a big fish like Cohen, they are going to have to bring the evidence. What has been presented in the media is so tenuous that it actually furthers the position that there is nothing prosecutable that they have been able to uncover at SAC. It certainly doesn’t support the idea that Cohen and his hedge fund are serial insider traders.

–Scott Rubin

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