It's Crazy How Inbred The Hedge Funds In This Huge Insider Trading Scandal Are

Steve Cohen

Everyone involved in the insider trading scandal that’s blowing up the hedge fund world right now seems to have ties to each other – and to Steve Cohen’s SAC Capital.The government seems to have an axe to grind with hedge funds in general, and with SAC Capital, which is run by Steve Cohen and manages around $12 billion, in particular.

Clearly, the feds have been planning a huge bust of a number of hedge funds for (at least) months now. Only a couple days after the Wall Street Journal reported the investigation this weekend, the feds began raiding hedge funds, probably because they figured if they didn’t, all of the information they’d hoped to find would be shredded if they waited any longer.

Three funds were raided on Monday, and Charlie Gasparino says that up to twelve hedge funds will be named in the huge investigation, so we’re anticipating that more will be raided in the days to come.

What’s happened, it seems, is that the government has discovered a huge “ring” of friends or acquaintances who all know each other.

They seem to have found a number of witnesses, one of whom is Nicos Stephanou, who are aware of an advanced networking scheme that the feds suspect amounts to insider trading.

Nicos Stephanou

The witnesses are probably cooperating with the investigation because it’s to their advantage. Stephanou, for one, has been named in insider trading charges before, and is cooperating with the feds in exchange for, presumably, a lighter sentence.

Because of witnesses like him, the feds apparently suspect that hedge funds obtain special information from “experts” who give their customers, in this case hedge funds, information about companies that they’re considering investing in.

The experts, from what we can tell, are really just well-connected people who offer insight that is borderline non-public and borderline totally kosher. The feds seem to believe that the information teeters too far over the edge of non-public information, and that by accepting it and trading on it, hedge funds are insider trading.

Currently, that’s the topic of a huge debate at the forefront of this scandal. Everyone is wondering whether info from “experts” should be considered non-public, illegally handled information or not.

Most people seem to consider it more borderline than the fed seems to be treating it, by raiding hedge funds and, from what we’ve seen, making a huge deal out of this. But Jim Chanos, a famous hedge fund manager, has an interesting opinion – he believes that the information funds can get from expert networks is actually “too good to trade on.”

Jim Chanos 921

One of the “experts” in the middle of this case, John Kinnucan, would surely disagree, given that he was asked to wear a wire to try to trap a trader at SAC, declined, and then sent an email to all of his contacts to warn them about the feds’ attempt to implicate them, too.

So, many things remain to be seen, and we’ll likely have to watch this case unfold painfully slowly. But based on what’s happened so far in this huge case, a few things are obvious.

One, is that a number of people who are being identified in the investigation have been implicated in insider trading cases before, including Stephanou.

So it seems like the investigation is as wide-reaching as the feds could possibly make it, and that in exchange for information, those witnesses are being offered more forgiving sentences.

Level Global’s David Ganek

And two, the finance world is “small,” in the sense that everyone knows everyone. 

Let’s look at who’s involved in this mess and who they’re connected to.

John Kinnucan, the “expert” we mentioned a moment ago, was a client of Loch Capital, one of the funds raided today, which is run by former SAC guys.

Then there’s Jonathan Hollander, a former trader at a SAC Captial subsidiary, who was charged in 2006 with receiving confidential information about the status of buyout negotiations involving the Albertstons supermarket chain. He’s connected to SAC’s Steve Cohen, Nicos Stephanou and Ramesh Chakrapani.

Ramesh Chakrapani is a former Blackstone banker who was charged with giving Hollander insider information, but the charges were later dropped, igniting suspicions that he’s another one of the feds’ witnesses.

SAC Capital, meanwhile, is where the four hedge fund managers whose funds were raided today used to work. Their names are Larry Sapanski and Richard Schimel, at Diamondback, and David Ganek and Anthony Chiasson, at Level Global.

Chiasson is reportedly friendly with Todd Deutsch, a former Galleon Group fund manager who is also being looked at, according to the Wall Street Journal. The two exchanged stock ideas, says the Journal.

Chip Skowron

And the other SAC-legacy owned fund, Diamondback, by the way, owns or owned HGSI, the investment that triggered rumours of insider trading by Chip Skowron at FrontPoint just a month ago.And Level Global received an investment from Goldman Sachs recently, which is interesting because “low level employees” at Goldman are said to be named soon.

As you can see, the “inbreeding” going on here is vast, and it could make the feds’ case either incredibly easy – or nearly impossible, depending on what exactly they did and how the role of “expert networks” is judged.

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