SAC: Steve Cohen’s (Allegedly) Corrupt “Information Gathering Machine”

Steve Cohen’s (Allegedly) Corrupt “Information Gathering Machine”
By Charles Gasparino
Time
July 25, 2013

When I first met Steve Cohen back in 1999, we were discussing SAC’s vaunted trading strategies, the ones that made his hedge fund one of the most successful in the finance world and burnished Cohen’s rep as one of the world’s best traders.

I said that based on my reporting — I was working for the Wall Street Journal at the time — Cohen started SAC in 1992 with a technique that wasn’t that much different than a day trader: He was trading huge blocks of stock by looking for “teenies,” or small price increments, that he could magnify into massive returns because of the sheer size of his trades.

It was the only time Cohen seemed angered during our discussion, as I recall. “No,” he shot back emphatically, “we employ real trading strategies around here. We do research.” Cohen went on to explain how his firm, SAC, had transformed itself into something much more than a day-trading sweat shop — it was now, he claimed, essentially the biggest and best information gathering machine in the world.

That information machine has now been deemed by the U.S. Department of Justice to be a criminal enterprise. Today’s indictment, filed in Manhattan federal court, of the once mighty hedge fund accuses SAC a multi-year “scheme” to profit from the use of illegal tips—also known as inside information.

It’s interesting to note that, according to prosecutors, the alleged scheme began in 1999—around the time Cohen was boasting of the firm’s new information edge. It’s also interesting to note that while Cohen himself wasn’t charged in the indictment, references to him in the documents are everywhere, which means all those headlines of Cohen himself being “out of the woods” are probably wrong.

In other words, don’t be surprised if you see an indictment of Cohen in the coming weeks as well.

If you don’t believe me, read the indictment. “The SAC Owner had sole trading discretion over his portfolio and made these decisions principally based on trading recommendations from SAC [portfolio managers],” it says. “In particular, at all relevant times the SAC Owner required each [portfolio manager] to share ‘high conviction’ investment ideas–i.e., the investment recommendations in which the SAC [portfolio managers] had the greatest confidence–with the SAC Owner. In fact, providing such ideas to the SAC Owner was an express part of a SAC PM’s duties and was emphasized to SAC [portfolio managers] in the hiring process and once working at SAC.”

As my book about the Fed’s relentless pursuit of Cohen, Circle of Friends, explains, the Feds believe having a “high conviction” investment idea is code for trading on material, non-public information, a.k.a. insider trading. They also believe almost no major trade gets done inside SAC without Cohen’s blessing — and based on my sources inside the government, they believe it’s just a matter of time before they connect the dots to Cohen himself.

I should point out that Cohen maintains his innocence and that the information machine he created runs for the most part on information and research of the legal variety. His people tell me the few bad apples at SAC that have used inside information — as many as 9 former or current company executives have been implicated during the insider trading crackdown — are anomalies.

The Feds, of course, feel they have proof that SAC, under Cohen’s watch, is a dirty shop.

One thing is certain: The mounting pressure from the government probe that’s been investigating the firm since at least 2007 is taking its toll on Cohen, both professionally and personally. Money from outside investors has been fleeing the fund for months as the government’s scrutiny has intensified.

With the indictment, SAC is basically being put out of business, though Cohen could still conceivably manage his own personal fortune of around $9 billion. But the Feds are looking for a chunk of that as well. The indictment says the scheme occurred over an 11-year period and that SAC has to give back its illegal profits.

Since most of the money now in SAC in Cohen’s, that means his net worth could take the hit and that hit could amount to billions.

A friend of mine of who knows Cohen personally said he ran into him at the MLB All-Star game at Citi Field, the home of the New York Mets, in which Cohen owns a small stake. Cohen “looked terrible…and he’d gained 15 pounds” since the time the two met just a month or so earlier. More than that, my source told me, Cohen conceded that his business was basically finished and “at this point my No. 1 goal is not getting personally indicted.”

If that’s the case, he should have stuck with trading teenies.

Read more: http://business.time.com/2013/07/25/steve-cohens-allegedly-corrupt-information-gathering-machine/#ixzz2a7Q44Aqd

Criminal Tax Penalties for ALEC? CMD's Investigation Provides Facts for Powerful New Complaint by Former IRS Official

Criminal Tax Penalties for ALEC? CMD's Investigation Provides Facts for Powerful New Complaint by Former IRS Official
by Brendan Fischer
PR Watch
July 9, 2012

This month, a former leader of the Internal Revenue Service filed a complaint that the American Legislative Exchange Council (ALEC) has violated the terms of its nonprofit status by operating primarily for the private benefit of its corporate members, based on documents and research from the Center for Media and Democracy (CMD), which manages PRWatch, ALECexposed, and SourceWatch. The complaint, which also alleges that ALEC misrepresented itself in tax filings, raises additional allegations beyond those in earlier IRS complaints filed by Common Cause.

"Astounding" Violations of IRS Law

ALEC "elevates commercial gain for a few over the well-being of society's less fortunate" through "an agenda largely crafted by the organization's corporate members," the complaint states (a pdf of the complaint is below). Marcus Owens, the former chief of the Service's nonprofit division, filed the complaint on behalf of Clergy VOICE, a group of Christian ministers in Ohio. "ALEC has deliberately and repeatedly failed to comply with some of the most fundamental federal tax requirements applicable to public charities," the complaint says. Owens is a nationally recognized expert and leader on nonprofit tax law and a member of the noted law firm Caplin & Drysdale.

ALEC is afforded a variety of benefits by virtue of its "charity" status -- not least of which is giving corporations a tax deduction for paying ALEC membership dues -- but in exchange for those benefits, ALEC is supposed to primarily serve public or charitable interests (rather than private interests) and engage in minimal lobbying.

"ALEC is doing an extraordinary amount of lobbying, but reporting to the IRS they are doing NO lobbying," Owens told CMD. "Even when North Dakota forced two of ALEC's attorneys to register as lobbyists, they still reported [on their IRS filings] they did no lobbying. That is astounding."

"I have never seen such a systematic and extensive operation . . . to sidestep disclosure and ethics rules in a way that really allows them to have an extraordinary impact," Owens said.

Corporate Control over Model Bills Give Private Benefit

In the complaint, Owens and Clergy VOICE allege that ALEC operates primarily for the benefit of its corporate members by offering "not only unprecedented access to state lawmakers -- the very individuals who introduce and support the state laws that positively impact the corporations' bottom lines -- but also the opportunity to draft those laws." The complaint references "model" bills like the asbestos liability act, which specifically shields ALEC member Crown Holdings from asbestos liability claims, and the Drug Liability Act, which benefits ALEC member pharmaceutical companies like Pfizer or Merck by protecting them from lawsuit when their products injure or kill (as CMD discussed when that model bill was introduced in Wisconsin).

ALEC is structured to give private benefit to its corporate members, the complaint states, with its operating procedures giving ALEC's "corporate donors authority to approve or veto every legislative and policy proposal developed by ALEC's Task Forces," and its bylaws giving "corporate members disproportionate authority to appoint and remove legislators from the Task Forces."

According to the complaint, "[t]his effectively ensures that the only model laws distributed to ALEC's Legislative Members and disseminated nationwide are those that have been co-drafted and subsequently blessed by ALEC's corporate donors."

"Further, the legislative proposals that clear this process appear to be motivated substantially, if not primarily, by the pecuniary interests of ALEC's corporate members."

The complaint also notes that ALEC's legislative board and most legislative members are Republicans -- and that most of ALEC's operations provide a private benefit to the Republican Party.

Scholarships Are "the Definition of a Bribe"

The site of the ALEC 2011 States & Nation Policy Summit in Scottsdale. Clergy VOICE also alleges that ALEC operates to benefit its legislative members through the "scholarship program" that allows corporations to pay for the flights, hotel rooms, meals, and entertainment of ALEC politicians. The meetings are ”held in luxury hotels, frequently in vacation-worthy destinations like San Diego, New Orleans and Scottsdale,” and scholarships fund “perks such as meals, recreational activities, and subsidized childcare for legislators and their families.” (CMD has previously described the scholarship scheme here.)

Additionally, “[m]eeting agendas include events like golf tournaments, open bar parties and baseball games — all subsidized directly or indirectly by ALEC’s corporate members,” the complaint says.

Despite this, ALEC has told the IRS that it provides no scholarships and funds no travel or entertainment expenses for elected officials...

Throw Clarence Thomas Off the Bench:The Supreme Court justice broke the law by not disclosing his wife's $700K

Throw Clarence Thomas Off the Bench
The Supreme Court justice broke the law by not disclosing his wife's $700K think-tank payday. Paul Campos on Clarence Thomas' "preposterous" defense and why he likely won't be punished.
March 3, 2011
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The criminal-law scholar George Fletcher once quipped that the maxim "ignorance of the law is no excuse" is one of the few fundamental principles of law that most people actually know. As harsh as this principle may sometimes be when applied to ordinary citizens, applying it to justices of the Supreme Court seems only reasonable.
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Clarence Thomas. Credit: Dennis Brack / Getty Images

Thus it's difficult to feel sympathy for Clarence Thomas, as he finds himself embroiled in a controversy over his failure to reveal the sources of his wife's non-investment income (or indeed that she even had any such income). The 1978 Ethics in Government Act requires all federal judges to fill out annual financial-disclosure forms. The relevant question on the disclosure form isn't complicated: Even if Justice Thomas wasn't a lawyer, he shouldn't have needed to hire one to explain to him that the box marked NONE next to the phrase "Spouse's Non-Investment Income" should only be checked if his spouse had no non-investment income.

In fact Ginni Thomas was paid nearly $700,000 by the Heritage Foundation, a "conservative think tank," between 2003 and 2007, as well as an undisclosed amount by another lobbying group in 2009. Justice Thomas' false statements regarding his wife's income certainly constitute a misdemeanor, and quite probably a felony, under federal law. (They would be felonies if he were prosecuted under 18. U.S.C. 1001, which criminalizes knowingly making false statements of material fact to a federal agency. This is the law Martha Stewart was convicted of breaking by lying to investigators.)

Thomas' defense is that he didn't knowingly violate the law, because he " misunderstood" the filing requirements. This is preposterous on its face. Bill Clinton was impeached—and subsequently disbarred—for defending his false statements about his affair with Monica Lewinsky with an excuse that wasn't as incredible as the one Thomas is now employing.