Saturday, June 24, 2006
All the So-Called News That’s Fit to Print
S.E.C. Is Reported to Be Examining a Big Hedge Fund
That was the dramatic headline atop an above-the-fold article in yesterday’s New York Times.
Being familiar with the hedge fund world in general, and the hedge fund supposedly being investigated in particular, I immediately zeroed in on the article, which started off getting right to the point:
One of the nation's most prominent hedge funds… is under investigation by the Securities and Exchange Commission for possible insider trading, according to government officials briefed on the case.
Now, the motto of the New York Times is, as its declining base of aging readers knows, “All the News That’s Fit to Print.”
And until the media monopoly of big-city papers like the Times was broken by the advent of the Internet, it did seem that if a story wasn’t carried in the Times, it wasn’t much of a story.
While there have been many take-offs on the Times’ high-browed, self-important, Father Knows Best motto over the years, my personal favorite stems from college days, when I was given a copy of a hilarious and subversive student paper from Rensselaer Polytechnic Institute. Its motto: “All the News That Sh-ts, We Print.”
And the deeper I read into Friday's breathless hedge-fund-being-investigated article, the more I thought it fit the old RPI motto than the Times’ own version.
For starters, the second paragraph tantalized the prospect of many examples of possibly heinous behavior, as follows:
The S.E.C. declined to confirm or deny that it was investigating [the fund]. But a lawyer who once led the agency's investigation has told Congress that the fund's trading had repeatedly aroused suspicion among stock exchange officials, prompting them on 18 occasions to refer cases to the S.E.C. for further investigation, records show.
But the juicy details of those cases were not forthcoming:
Mr. Aguirre's letter to Congress did not specifically identify any of the trades. But according to government officials, the trades Mr. Aguirre said had made the fund $18 million involved one of the biggest mergers in 2001: the General Electric Capital Corporation’s $5.25 billion buyout of Heller Financial…
Now, $18 million sounds like a lot of money—and for a lot of hedge funds it might be—but given that the fund in question had, we are told, $7 billion in assets at the time of the Heller deal….then the Heller-related profits amounted to something in the range of two-tenths of one per cent of the value of the fund.
Furthermore, according to the story, the fund bought its Heller position starting a month before the deal.
Furthermore, any hedge fund or money manager with $7 billion or more in assets that trades as actively as the hedge fund in question, is, I’m betting, likely to have more than a few lucky trades, statistically speaking.
Along those lines, keep in mind the recent blockbuster disclosures from the Wall Street Journal regarding back-dated option grants, in which the Journal discovered that certain companies repeatedly granted its senior managers stock options at the lowest possible stock price of the year, year after year after year—with statistical probabilities that such grants were pure good luck (in the case of KLA-Tencor) as low as one in twenty million.
I’m guessing the odds that an actively managed $7 billion fund gets a few takeovers in its portfolio is not as improbable as one in twenty million.
The weak link in this story, as I read it, is that it’s based on disclosures contained in a letter written by a former SEC lawyer (who, it turns out, was fired by the SEC) to perhaps the last group of people to whom you’d ever think of writing a letter regarding a complicated financial securities issue: members of Congress.
Worse, one of those members of Congress happens to be my own Senator, Chris Dodd, whose main qualification for his job as “ranking Democrat” on the Senate Subcommittee on Securities and Investment is that he has a magnificent, Kennedy-esque head of hair and huge, somber eyebrows. Plus he is smooth and witty on the Imus show. Oh—and his father was a Senator.
(Word has it that Senator Dodd is exploring a bid for the upcoming Democratic Presidential Nomination. Given that he is from Connecticut, which is now I believe technically a wholly-owned subsidiary of the Mohegan Sun casino, I’d say the Senator has as much chance of winning the nomination as the U.S. soccer team had of winning to the World Cup.)
All the news that’s fit to print? Hardly.
More like so-called news.
I Am Not Making This Up
© 2006 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 2:27 PM