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Today's Top News1. Expert networks return to the spotlight
The long, dense shadow of the on-going insider trading investigations has reached an unlikely firm: Private equity powerhouse Silver Lake Partners, which focuses mainly on technology companies. The company also invested in the controversial expert network group called Gerson Lehrman Group, which Silver Lake continues to list as one of its investments. The firm, the epitome of a new-age research firm, exists to pair hedge funds with industry experts and has long generated controversy. The issue has come alive again in the wake of the charges against former SAC Capital analyst Mathew Martoma, who was able to cultivate at least one high value drug industry source through Gerson Lehrman. DealBook notes that, "In fairness to Gerson Lehrman, the various complaints against Mr. Martoma make clear that the firm put Mr. Martoma and Dr. Gilman through a number of compliance programs and repeatedly provided them with notices — boilerplate e-mails — that Mr. Martoma was not to seek inside information and Dr. Gilman was not to provide it." One e-mail explicitly instructed that the expert "will not reveal any information that the [expert] has a duty to keep confidential, including material nonpublic information." The e-mail also said experts "participating in clinical trials may not discuss the patient experience or trial results not yet in the public domain. Based upon the complaints against him, Mr. Martoma appears to have tried to dupe Gerson Lehrman about the true intent of his requests to talk to (the industry expert) by mischaracterizing the subjects he hoped to discuss." In some quarters, Gerson Lerhman is known as the crème de la crème of the expert network industry, and thus far it has avoided direct involvement in the scandals. Others expert network firms have been implicated of course, including Primary Global. The most notorious arrest was that of John Kinnucan, who founded Broadband Research. The FBI tried to flip him, which prompted him to launch a series of increasingly bizarre public attacks. Kinnucan pled guilty to insider trading charges in July. For more: Read more about: research, Expert Networks
2. Cohen indemnifies investors against enforcement losses
Limited partners in SAC Capital funds are more than right to worry about the possible fallout from the insider trading scandal that has engulfed former SAC Capital analyst Mathew Martoma. The company has already addressed a key issue. Reuters reports that SAC Capital has indemnified limited partners in funds against any losses that might result from enforcement actions. In the Martoma case, securities regulators, in charging former SAC Capital employee, are also seeking to force the SAC Capital division where he worked to disgorge the $276 million in allegedly illicit trades. Even before the Martoma charges were handed down, SAC Capital "changed its legal structure some time ago to make sure that individual investors would not be liable for any legal claims that might arise." Cohen himself, or his management company, "will have to cover any court-ordered disgorgement of illicit profits. That means Cohen's own capital, which is believed to account for at least half of the $14 billion managed by SAC Capital, is at risk." This will certainly help in keeping nervous limited partners in the truck, but their patience will not be unlimited. At some point, the investments in SAC Capital may simply prove too difficult to justify. For more: Related articles: Read more about: SAC Capital, Limited Partners 3. "Death put" lawyer pleads guilty
There's a lot of opportunity in the fine print. That mindset allowed Joseph Caramadre, an estate- planning lawyer based in Rhode Island, and his associate, Raymour Radhakrishnan, put together a "can't-miss" investment, which was brilliant or fraudulent--- or both. In exchange for guilty pleas, federal prosecutors will recommend that a judge give them prison terms of no longer than 10 years. Each faced a maximum sentence of 25 years in prison. All for a scheme that basically involved having clients buy variable annuities and listing terminally ill patients as the annuitant. Once the annuitant died, his clients reaped the benefits of the policy. Until he plead guilty, Caramadre defended his investment strategy as legal. Investment News notes that, "Caramadre did his research and concluded that Rhode Island law did not require that people buying variable annuities have an insurable interest. As imagined by the insurance companies, variable annuities have two participants. There's the investor, the person who puts up the money. That person typically also serves as the annuitant, or the 'measuring life.' If that person dies, the death benefit is paid to the beneficiary, usually a spouse or child. Caramadre realized it didn't have to be that way. There was no requirement that the investor and the annuitant be the same person. In fact, as he read the contracts, the annuitant didn't need to have a relationship with the investor at all. Caramadre or one of his clients could buy an annuity on the life of someone who was not expected to live long and then pocket any profit when that person died…If they chose well, the account went up and they reaped the benefits. If they chose poorly, the death benefit kicked in and they recouped their original investment." The fine print may allowed for it, but the industry uproar was what you would expect. In the end, there was no reason to think he could do this indefinitely. There are some macabre twists to this. As it turns out, Caramadre paid terminally ill patients for the right to use them as annuitants. "Prosecutors charge that he instructed participants in the scheme to lie, to steal identity information and to forge the signatures of annuitants in an effort to defraud insurance and bond companies," Investment News reported. For more: Read more about: Enforcement Action, Annuities 4. More modifications, but not all are successful
Joseph Smith Jr., who is overseeing compliance by the top five banks with the historic settlement of mortgage abuses charges in February, has issued an update. It notes that the banks have extended more than $26 billion in relief to more than more than 300,000 homeowners, an average of roughly $84,385 per borrower. The conventional wisdom is that banks, led by Bank of America, will fulfill their settlement obligations sooner than expected. The incentive is that banks get extra credit for doing more in the first year of the three-year settlement period. They have every reason to front load the process. All this is encouraging, and I certainly do not want to rain on the recovery parade. At the same time, it should be noted that modified mortgages are not necessarily a complete solution. Non-agency mortgages, for example, even when modified, are showing signs of stress. Bloomberg notes a report from JPMorgan showing that more than 28,000 modified home loans (non-agency securities) turned delinquent in September, a rise of 24 percent from the prior month. The percentage of all non-agency loans between 30 and 60 days past due soared 0.44 percentage point to 3.54 percent, the highest since February 2010. These were the types of mortgages that are prone to recidivism. Still, the great hope was that a modification would push them into the performing category permanently. Modifications of other loan types will likely have a higher chance of success long-term. For more: Related articles: Read more about: Modifications, mortgage 5. SAC Capital skating close to prosecution again
Has Steven Cohen once again outmaneuvered investigators? He and his firm have skated close to the edge of prosecution on several occasions. According to the Financial Times, "the SEC warned the hedge fund in 2003 in a Wells Notice that it intended to file civil charges against it in connection with an investigation into a former SAC trader. He was suspected of trading on research reports written by his wife, a high-profile Wall Street analyst, before they were published. No charges were ever filed against SAC or the trader. The Financial Industry Regulatory Authority, Wall Street's self-regulating body, referred 20 instances of suspicious trading by SAC to the SEC between 2002 and 2010, according to people familiar with the matter. There were never any charges." The government's best hope for a case of substance seems to reside with Mathew Martoma, who for now anyway seems to be sticking to the code of Omerta. It must be a maddening situation for prosecutors. With Martoma in the truck, the government's case against Cohen and/or SAC seems pretty good. Without him, a case might not even exist. It's possible that prosecutors could plough ahead with circumstantial evidence, but the road would be much tougher. For more: Related articles: Read more about: insider trading, SAC Capital Also Noted
SPOTLIGHT ON... Journalist defends Steven Cohen A journalist at The Guardian says that hedge fund managers are being unfairly targeted. "Many of the people who work for Cohen seem to do what I do. We call up people and ask for information." He adds that, "A high-performing hedge fund, like Cohen's SAC, also sounds like a news organization of old – when there were no limits on expenses, and coziness with your sources was the norm, and the feeling of belonging to a club produced reliable and remarkable gossip." That is the first time journalism has been likened to hedge fund work. The financial rewards are nowhere near the same. Article Company News:
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Wednesday, November 28, 2012
| 11.28.12 | Expert networks return to the spotlight
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