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.


Jeff Matthews
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.


17 comments:

Aaron Koral said...

After reading Pequot's statement categorically denying the charges leveled by Aguirre's May 30th letter to the Senate Banking and Finance Committee, I tend to believe Samberg is not guilty of any wrong doing IMHO (I could be mistaken, though). A question I would ask, though, is why would Aguirre target John Mack (former CEO of Credit Suisse, and current CEO of Morgan Stanley) in the investigation of Pequot, unless Aguirre truly believed that Mack "tipped" Pequot to the impending deal between GE and Heller Financial a month before the deal's closing - remember, Credit Suisse was an adviser to the impending deal between GE and Heller (in the spirit of your web site, I got that information from Kara Scannell's column with the WSJand I am not making that up)? Just wondering....

settlements said...

Jeff,

That was a rather amusing blog. You seem to be very adept at distorting the facts.

For starters, you neglect to understand and/or identify that the SEC came about this investigation based on 18 referrals from the NYSE.

How about the fact that while $18 Million may be small potatoes to this hedge fund, as teh $200K was to Martha stewart, it was not about the net value but teh legality of the trades itself.

You also fail to identify that your "disgruintled employee theory" has some most alarming problems - most notably that 11 days prior to termination he received one of the largest merit increases in the agency for good performance.

You should probably post a link to the actual memo's of Mr. Aguirree (your disgruntled employee and let your readers determine for themselves how ludicrious these allegations are.

If you do not have them, try these:

http://www.faulkingtruth.com/Files/aguirre_congress0623.pdf

and...

http://www.faulkingtruth.com/Files/aguirre_cox0623.pdf

I hope you do not decide to hold back this post from your blog because it simply gives your readers more information to conclude for themselves what is happening here.

BelowTheCrowd said...

Back in my days as a minor editor on the Columbia student rag, somebody once came up with a motto for us. It was "All the news that fits, we print." this occured at roughly 3am and after several beers, so nobody was really serious, but I think it's probably a better motto for the Times these days. The quantity of reporting seems to be dictated more by the need to find copy to surround their ads than by the actual importance of the stories. If it fits, it prints.

[Our publisher, a guy by the name of Fitzsimmons (aka "Fitz"), quickly modified our motto to a wholly more appropriate "All the news Fitz prints." Eventually this was transformed into the tounge-twisting "All the new that fits, Fitz prints." We did have fun...]

padawancowboy said...

Jeff,

Did you bother to read the letter from Aguirre to the Senate Banking Committee before blogging?

It is heart-breaking:
http://www.faulkingtruth.com/Files/
aguirre_congress0623.pdf

Looks like you and the other hedgies have succeeded in capturing the SEC. Bravo. Thomas Jefferson would not be surprised.

~ PC

Logicalthought said...

In my dealings with Pequot, I have found them to be a truly class act (zero "hedge fund arrogance"), with extremely rigorous compliance procedures. Thus, if this is anything beyond blind luck, it has to have been isolated to a single, "rogue PM" within their organization.

Jeff Matthews said...

I see that "Settlements" has reappeared, after a lull in his frenetic postings on the Overstock affair.

Unfortunately, he has retained his old habits of writing before reading--this time claiming I neglected to note 18 case "referrals" from the NYSE to the SEC...when in fact it appears in the 9th paragraph.

If he ever decides to actually read what I write he might really come up with something to complain about.

As for "Padawan Cowboy," it is good to have our old CEO back posting. My only surprise is he mentions Jefferson rather than Ling-Ling the Panda or some other ancient Chinese authority.

I trust his business his going "swimmingly," as always.

settlements said...

Jeff,

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.

Now an active trading fund may get lucky at times as you say but, do they get so lucky that they go long the stock that rises (Heller)and short the stock that falls (GE) in the same undisclosed merger? I believe that was one of the red flags that was to suddenly make the exact right move in a single undisclosed transaction seems like more than just luck.

For the record, the Aguirre memo is about far more than a single Pequot investigation. An investigation they arrogantly deride the SEC for even initiating [as if Pequot never got the SEC to initiate an investigation FOR them]. No, this memo was about a co-opted agency that has watched politically connected people destroy our nation's people and small businesses inorder to inflate their ego's and their overflowing personal portfolio's.

padawancowboy said...

"As for "Padawan Cowboy," it is good to have our old CEO back posting. My only surprise is he mentions Jefferson rather than Ling-Ling the Panda or some other ancient Chinese authority."

Hahaha... Funny guy, Jeff. (What's that Homer Simpson line? "It's finger Ling-ling good.")

I notice you completely ignored the substance of my post. Honestly, did you read the letter? Even Roddy can't ignore it:

http://www.nypost.com/business/letter_details_pequot_probes_business_roddy_boyd.htm

As for me being Patrick Byrne, prove it. I have no idea where he is in the world, but I'm pretty sure he's not where I am right now.

~ PC

Its_strange said...

Front Line has Senator Dodd on film telling some Wallstreeters that were part of the Enron scam what a "great job" they were doing just weeks before the thing blew up. And yes, Dodd refused a interview Front line wanted...

Herb Greenberg has a good blog out now..And as some poster said Wallstreet will stand still if Court TV covers Patrick's testimony

Jeff Matthews said...

Well, "Padawan," if you're not Patrick Byrne, why else would you think I claimed you were?

Re-read what I wrote: I didn't actually mention a name when I referred to "our old CEO back and posting."

I simply mentioned fancy Chinese name-dropping and one of your favorite adjectives.

You named yourself.

padawancowboy said...

Jeff,

How many CEO's post on your blog?

Why do you insist on dodging the Aguirre letter?

~ PC

cadamyale said...

A couple things stand out here.

First, it is curious that Pequot allegedly had both the acquiree (long) and acquiror (short) correct in this transaction well before it was announced. I do not know if that is par for the course in Hedgie World. It does seem, to me, somewhat suspicious to engage in merger arb well before the announcement of the merger. It would be a little bit different if Pequot had merely been purchasing shares of Heller during the alleged timeframe. It is not a stretch to speculate that Pequot limited the size of the transaction by design, so as to avoid any undue attention.

Nonetheless, Aguirre, while at times very coherent, cannot be assumed totally credible. His decidedly anti-hedge fund preamble notes that, "Likewise, the value investor has no clue that an attractively priced small cap is on its way to bankruptcy via the naked shorting of an $8 billion hedge fund," betraying a lack of sophistication regarding finance and capital markets. Shorts wish they had this kind of power!

That said, Jeff, this is news. Damn right, it is fit to print! The story may not be pretty nor fully developed, but I do not think anybody denies the transactions took place and that they were, for whatever reason, (perhaps a little too) prescient. They warrant scrutiny.

NYT and others may have it out for the hedgies, but that does not mean that does not mean that this particular issue should be taken lightly.

One cannot deny that much like any industry, the hedge fund industry contains its share of both scrupulous and unscrupulous operators. Given the high stakes (and egos and competitiveness) in this game, one has to conceed that the temptation to cheat is strong. Even for those with otherwise spotless and sterling reputations.

If Pequot did nothing wrong, the investigation will bear itself out properly.

QuestionMark and the Mysterians said...

And just in case you don't know who Settlements is, my money's on infamous internet stalker Dave Patch. His constant mistyping of the same basic word on most of his diatribes give him away.

But hey, the bad Dr. did mention him by name in one of his rambling conference calls/paranoid meltdowns, so on his deathbed he will at least have that going for him.

Jeff Matthews said...

"Padawan Cowboy": The only CEO that I know of who posts on this blog is Patrick Byrne--er, you.

I seriously doubt Bill Gates bothers.

DaleW said...

First, it is curious that Pequot allegedly had both the acquiree (long) and acquiror (short) correct in this transaction well before it was announced. I do not know if that is par for the course in Hedgie World. It does seem, to me, somewhat suspicious to engage in merger arb well before the announcement of the merger. It would be a little bit different if Pequot had merely been purchasing shares of Heller during the alleged timeframe. It is not a stretch to speculate that Pequot limited the size of the transaction by design, so as to avoid any undue attention.

It's 100% par for the course for a fund to take a hedged position in advance of a widely-rumored deal prior to its announcement. At the time, GE was one of the world's largest corporations, was one of the the world's most active acquirers, and was active in M&A for this kind of company. It's far from a stretch to conceptualize this as a run-of-the-mill trade for a large, well-run, active hedge fund.

PS: Why has this story drawn out all the Overstock weirdos? Yeesh.

john lichtenstein said...

Cadamyale, it just sounds like Pequot and GE were thinking along the same lines, that GE was trading on the high side and Heller undervalued. So they both sold GE and bought Heller. That Pequot was on the right side of this in more than one way is no big deal without actual evidence of a tipoff.

Jeff M, Gary Weiss has a very different first take on the story.

Padawancowboy, since Herb Greenberg seems to have stumbled about without ever asking this, why did Overstock draft the Anifantis testimony?

Jack Doueck said...

At Stillwater we feel strongly that all hedge fund managers with more than $25 million under management or more than 14 clients should register with the SEC. We have been registered with the SEC and have been through a very thorough but appropriate audit last summer. The SEC Auditors checked all our books and records. They reviewed our checks and balances, trying to discover any conflicts of interest, any inconsistencies between what we promise our clients and what we actualy deliver. They checked the books and records of our funds and our management company. When I saw the level of detail that they paid attention to, I was very excited about the possibility that EVERY hedge fund that we invest in would be subject to these periodic audits without a lot of notice. That is a good check for the industry in general. Our Stillwater Asset Backed Lending business invests money with other asset backed hedge funds which are complex and difficult to do the due diligence work on. If every one of these funds were audited by the SEC, we would feel much safer and more certain that these managers would be operating in accordance not only with GAAP, but with
the rules of the SEC, that they are delivering what they are promising and that there is less of a chance of foul play.
That being said, the best way to regulate the Hedge Fund Industry is for SEC to require that every manager publish or make public their assets (in general, without specifics) via independent administrators and brokers on a monthly basis. That would further deter greedy and reckless managers from fraud. Our decision to register with the SEC was a good one and we hope managers follow our lead.

Jack Doueck
Stillwater Asset Backed strategies