Archives for December, 2010

Hedge Fund Sues CBOE Over ‘Insider Trading’

December 30th, 2010

Hedge fund Platinum Partners has sued the Chicago Board Options Exchange, accusing it of accidentally giving some investor advance notice of a change to the strike price of a listed fund.

The New York-based firm said it lost $10 million when the CBOE and Options Clearing Corp. mistakenly cut the strike price on India Fund options and then improperly gave that information to some market participants. In addition to the CBOE and OCC, Platinum names the sellers of the India Fund options as John Doe defendants.

“We’re not the litigious type of people,” Platinum chief Mark Nordlicht told Crain’s Chicago Business. “It’s just an unfortunate situation. There was clearly some insider trading that went on before the decision was publicly announced.”

Platinum’s suit was filed in Illinois state court in Chicago.

While Nordlicht may not be the litigious type, he’s certainly seen the inside of a courtroom before. In addition to leading Platinum, he is the co-founder and chairman of commodity broker Optionable Inc., which has been sued by the Bank of Montreal for allegedly helping a former trader conceal losses.

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Two Charged In $30 Million Hedge Fund Fraud

December 28th, 2010
By Linda Nguyen, Postmedia News December 28, 2010

An Ontario man has been indicted in the United States for allegedly being one of the masterminds behind a $30-million international fraud scheme.

James Jeffery, 58, of Belleville, Ont., is charged with multiple counts of mail fraud, wire fraud and conspiracy in relation to a Utah-based investment company, Coadum Capital, according to a news release this week by the Federal Bureau of Investigation. He has yet to make his first court appearance.

Jeffery’s partner, Thomas Repke, 57, of Salt Lake City, Utah, faces the same charges and was arraigned by an Atlanta judge on Monday.

It is alleged that Jeffery and Repke ran the hedge funds company in 2006-07.

According to the FBI, the company attracted more than 100 investors who put in more than $30 million. The company promised the investors that their monthly returns would be around five per cent and that their money was safe because it was protected in “escrow accounts.”

Some investors also received monthly literature that said: “Cash Deposit ALWAYS remains in escrow in your name,” and “Cash Depositor’s principal deposit NEVER at risk.”

But it is alleged that the investments were not actually kept in these protected accounts and as much as $20 million was transferred overseas by the company to Switzerland and the Mediterranean island of Malta. This money was then invested in a number of hedge funds run by a trader based in Malta. During this period, the money did not gain any returns and the original investments were lost.

“This indictment alleges a major international investment fraud scheme that defrauded over 100 victims around the country out of tens of millions of dollars, most of which has been transferred to overseas accounts,” said U.S. Attorney Sally Quillian Yates in a statement. “Those who prey on the investing public in this way will continue to find themselves facing federal felony charges.”

In total, the two men face 22 charges and, if convicted, each could be sentenced to a maximum of 20 years in prison and a fine of up to $250,000.

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Ex-UBS Banker Sentenced to Time Served

December 27th, 2010
By Kara Scannell in New York  December 22 2010 22:28
A former UBS mergers and acquisitions banker received a prison sentence of time served for aiding the government in a $7m insider trading case.

In issuing the sentence, US District Judge Richard Sullivan cited banker Nicos Stephanou’s co-operation with the government and the 19 months he had already served in a lower Manhattan prison following his December 2008 arrest. The judge sentenced him to the 19 months of time he had already undergone.

Mr Stephanou’s sentencing shows the potential rewards for Wall Street executives who co-operate in investigations. Insider trading cases can be more difficult to prove than accounting frauds because they are often based on circumstantial evidence. To be successful, prosecutors need to prove that the person traded based on inside information, while the defence usually argues the trades were made for other reasons. A company insider acknowledging he passed on confidential information can strengthen a case.

The government is relying on co-operative witnesses and taped phone calls to bolster its probes of alleged insider trading across Wall Street. The government’s case against Galleon Group’s co-founder Raj Rajaratnam and others at expert network firms for alleged insider trading is backed by people co-operating and recorded phone conversations. Mr Rajaratnam, who has denied wrongdoing, will go to trial in February.

Ultimately, the value of co-operating is decided by a judge at the time of sentencing. Mr Stephanou’s time in custody could have outweighed other factors.

Mr Stephanou, a London resident, was the government’s star witness at the criminal fraud trial of his friend, Jefferies portfolio manager Joseph Contorinis. After his arrest, Mr Stephanou secretly taped phone calls with Mr Contorinis and other friends from his native Cyprus. During the trial, Mr Stephanou testified that he tipped off Mr Contorinis about takeover deals including supermarket chain Albertson’s 2006 sale to a Cerberus Capital-led consortium.

Mr Stephanou was part of UBS’s mergers team that advised Cerberus on the acquisition. Prosecutors alleged that Mr Contorinis traded on the information and made $7m in profits.

A federal jury convicted Mr Contorinis in October on seven counts of conspiracy and securities fraud and he was sentenced to six years in prison. At the time of the sentencing, Judge Sullivan said insider trading “is a serious crime” that can cause “considerable” damage to the economy.

Mr Stephanou pleaded guilty in May 2009 to seven counts of conspiracy to commit securities fraud and securities fraud. Two other friends he tipped off have also pleaded guilty.

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No New Money For SEC, CFTC In Temporary Budget Deal

December 24th, 2010

Two of the U.S.’s top regulators—already crying poverty prior to receiving new powers and oversight mandates earlier this year—will have to make do without any more money for the new two-and-a-half months. At least.

Congress on Tuesday passed a stop-gap funding measure to keep the federal government up and running through March 4, but without the big increases Democrats had sought for the Securities and Exchange Commission and Commodity Futures Trading Commission. Both have been charged by the Dodd-Frank financial regulation reform bill with many more responsibilities than before; the SEC alone must write more than 100 new rules and has said it needs more staffers and resources to do the job.

The Dodd-Frank bill had envisioned doubling the SEC’s budget by 2015.

“Operating under the continuing resolution is already forcing the agency to delay or cut back enforcement and market oversight efforts,” SEC spokesman John Nester said. “The longer we operate under significant budgetary restrictions, the greater the impact.”

“Current funding is far less than what is required to properly fulfill our significantly expanded role,” CFTC Chairman Gary Gensler told a Congressional committee earlier this month.

While this week’s deal is temporary, it is unclear that a permanent budget bill will favor either agency. Republicans—who voted nearly unanimously against the Dodd-Frank law—are to take control of the House of Representatives next month and it is unclear that they will be willing to boost the regulators’ budgets.

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Harbinger Sued Over Spectrum Brands Deal

December 23rd, 2010

Philip Falcone

Harbinger Capital Management’s new permanent capital vehicle has found itself the target of litigious, unhappy investors.

Alan Kahn, an investor in Harbinger Group, has sued the acquisitions company over Harbinger’s plan to transfer its stake in Spectrum Brands Holdings. Under that plan, Harbinger hedge funds will see their stake in Harbinger Group grow to 93%, with Harbinger Group taking on the Spectrum stake in exchange. But that means Harbinger Group is “vastly overpaying” for the stake, Kahn alleges.

The deal means that Harbinger will have “suffered no loss of control over Spectrum,” the Delaware lawsuit says. “Thus HCP has diluted the minority shares; acquired a virtually 100% interest in HGI; and at the same time managed to maintain control over the very consideration that it has ‘paid’ as consideration of the deal. Such blatant self-dealing is unconscionable.”

The complaint also names Harbinger founder Philip Falcone.

Kahn wants a judge to overturn the deal, which allows Falcone to be “the overwhelming majority owner of a publicly-traded company where he answers to no one,” the lawsuit alleges. “Indeed, he will no longer need to appease dissatisfied investors that have fled his fund in the wake of his personal cash crunch.”

Falcone has found himself under fire for a $113 million loan he took from his hedge funds to pay a tax bill. Falcone has also taken at least two personal loans from banks in recent months, including a $22.5 million mortgage on his Manhattan mansion.

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SEC Wants Judge To Force Rajaratnam To Hand Over Wiretaps

December 22nd, 2010

Rajaratnam and Chiesi

Having lost his fight to keep thousands of wiretaps out of his criminal trial, Galleon Group founder Raj Rajaratnam will now have to renew his fight to keep them out of the hands of the Securities and Exchange Commission.

The SEC yesterday demanded that Rajaratnam and former co-defendant Danielle Chiesi, both accused of insider-trading, turn over some of the 18,150 wiretaps that they received from prosecutors in the crimin

al case. And it seems likely that the two will lose at least the first round: The judge presiding over the civil case, U.S. District Judge Jed Rakoff, had ordered them to turn over the taps even before U.S. District Judge Richard Holwell, who is overseeing the criminal case, ruled on their legality.

received an at least temporary reprieve when a federal appeals court ruled that Rakoff erred by granting the SEC’s request before Holwell ruled. But now that Holwell has ruled that the wiretaps were, in fact, legal, it is unclear that Rajaratnam and Chiesi will still have the appeals court’s ear.

“Given that the legality of the wiretaps has now been established, and given that the SEC is only seeking relevant intercepts, the SEC’s ‘significant’ right to obtain the relevant intercepts outweighs whatever arguable remaining privacy interests defendants and others may have,” the agency said in its filing.

“The SEC’s significant right of access to relevant, legally intercepted communications relating to the defendants’ insider trading scheme, and the substantial prejudice it will suffer if deprived of these intercepts, clearly outweighs any remaining, diminished privacy interests implicated in disclosing the relevant intercepts. Without the recordings, the SEC likely will be deprived of important admissions and in many instances the best, most direct evidence of wrongdoing.”

Rajaratnam and Chiesi may reprise their earlier arguments against giving the SEC the taps, noting that the agency lacks the authority to use wiretaps.

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Ex-Citadeler Belisle Launches Catastrophe Fund

December 21st, 2010

A Citadel Investment Group veteran has launched a catastrophe risk fund, called the first listed vehicle of its kind.

CatCo’s Reinsurance Opportunities Fund raised US$80 million on the London Stock Exchange. The firm will invest directly in extreme catastrophe risks and is targeting returns of between 25% and 15% over Libor. CatCo will have a variety of catastrophe exposures, limiting its exposure to a single catastrophic event to 20% of assets, the Financial Times reports.

The Bermuda-based firm is headed by Tony Belisle, who helped create collateralized reinsurance contracts during his days at Citadel. The fund is backed—and CatCo is owned—by Qatar Insurance Company, which put up US$25 million. Other investors included the Co-operative Insurance Society and Henderson Global Investors, who each invested US$16.1 million, Baillie Gifford, which invested US$8 million, and JPMorgan Asset Management, which invested US$6.5 million.

CatCo is still planning an open-ended hedge fund. That vehicle could raise as much as US$1 billion, the FT reports.

The new firm’s success on the LSE follows Catlin’s abandonment of a planned listed fund investing in fully-collateralized reinsurance contracts. Catlin gave up its bid to raise £150 million due to lack of demand.

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Nomura Loses Prime Brokerage Head

December 20th, 2010

By Nisha Gopalan (Wall Street Journal)

Just as global hedge funds are ramping up in Asia, Nomura Holdings Inc. has lost its top person for running the prime-brokerage business that banks use to service the industry’s needs.

Tim Wannenmacher, Nomura’s global head of prime services, has resigned, a person familiar with the situation said Friday. Nomura hasn’t announced a successor.

Mr. Wannenmacher, who was based in Hong Kong, resigned for personal reasons, the person said. It wasn’t clear immediately where he’ll be going. Mr. Wannenmacher was previously at Lehman Brothers, and moved to Nomura when the Japanese bank took over the collapsed Wall Street bank’s Asian and European operations.

Prime brokers provide a wide range of services to hedge funds, including helping them set up and trade shares.

Mr. Wannenmacher’s resignation comes as global hedge funds try to beef up their presence in Asia. Billionaire financier and philanthropist George Soros opened a Hong Kong office for his Soros Management Fund LLC fund in November and D.E. Shaw is moving one of its six executive committee members to Hong Kong from New York.

Nomura hasn’t had a high-profile defection since earlier this year, when several former Lehman bankers left after two-year-guaranteed bonuses dating back to the takeover of the U.S. bank’s regional operations in late 2008 expired.

Those departures included Sigurbjorn “Siggi” Thorkelsson, Nomura’s head of equities for the Asian-Pacific region, who’s since gone to Barclays PLC; Thomas Siegmund, its co-head of fixed income for Asia outside Japan, who left for UBS; and Colin Banfield, Nomura’s joint head of investment banking, who moved to Citigroup Inc.

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Distressed Debt Hedge Funds Distressed by Madoff Trustee

December 15th, 2010

Irving Picard, the court-appointed trustee overseeing the clawback of Madoff Ponzi money, has recently been filing lawsuits like a man possessed. Hedge funds specializing in distressed debt have taken notice, reluctantly. Putting discretion ahead of valor, many of these funds are now offering cash to settle outstanding claims made by Madoff’s victims.

“Virtually every sophisticated distressed investor is looking at the Madoff situation,” Thomas T. Janover, a lawyer at Kramer Levin Naftalis & Frankel, told the New York Times. Janover has represented clients who are considering buying claims.

Interest in the Madoff claims has been piqued in recent days by the spate of lawsuits filed by the Madoff trustee, Irving Picard. Some of the targets of the hundreds of lawsuits he’s filed are well-heeled banks—like JPMorgan Chase and UBS.

One nameless Madoff investor showed the newspaper letters he’d received from six companies offering from 20 to 34.5 cents for every dollar in claims. The letters came from firms including the Greenwich, Conn.-based hedge fund Contrarian Capital Management; Austin, Tex.-based Fulcrum Credit Partners; and Rutherford, N.J.-based Hain Capital Group.

Fortress Investment Group, Perry Capital, Silver Point Capital, the Baupost Group and Farallon Capital Management are among the hedge funds the paper says are “actively exploring the market.”

Picard has recovered $2 billion to date, and approved claims worth $5.9 billion. He’s filed over $50 billion in so-called clawback lawsuits.

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BlueCrest’s Special Asset Finance Fund Has Run Out of Money

December 14th, 2010

The last two years have not been kind to the Special Asset Finance Fund run by BlueCrest Capital Management. The specialist credit fund of funds is at the end of its rope following a two year period of suspended redemptions.

The U.K. asset manager said in an investor call on Thursday that net assets in SAF, which invests in 30 specialist credit funds, fell from a reported $210 million at the end of August 2008 to just $6 million by Sept. 30 this year, two investors told Reuters.

But investors were told they may be left with even less.

“The new manager of SAF, Robert Heaselgrave, said a large part of net asset values were stale and could have deteriorated, so the fund could be subject to further writedowns,” one European investor told Reuters on condition of anonymity.

“The manager said indicative values could continue to deteriorate, and that SAF still owed leverage provider KBC$197 million. He gave us little hope of getting anything back.”

BlueCrest, which manages over $24 billion, declined to comment.

The fund, launched in July 2007 and seeded by BlueCrest principals, was opened to outside investors in early 2008. It lost heavily in the $3.65 billion Ponzi scheme of convicted fraudster Tom Petters and suspended redemptions shortly after the discovery of the fraud in October 2008.

Documents seen by Reuters show that at the end of August 2008 — the most recent data available at the time redemptions were suspended — the fund had net assets of $210 million and borrowing of $244 million.

“We didn’t expect so much leverage, they said they only used it for bridging purposes,” said the investor.

Fund documents said SAF could use leverage of up to 150 percent of assets under management.

Investors who spoke to Reuters said that early last year they asked for the fund to be liquidated in an effort to recover part of their investment but were rebuffed by BlueCrest, whose principals still held a majority of fund voting rights.

BlueCrest also told investors that Shezad Syed, portfolio manager of SAF since its launch in July 2007, was leaving his position as he was not specialized in fund liquidations, and would be replaced by Heaselgrave, these people said.

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