Bloomberg News

SAC Capital Netted $14 Million in Trading Flagged by Finra

November 02, 2011

(Adds statement from Bridger in 23rd paragraph.)

Oct. 25 (Bloomberg) -- SAC Capital Advisors LP, the hedge fund run by billionaire Steven A. Cohen, made at least $14 million in the past 10 years on suspicious trades, according to the Financial Industry Regulatory Authority.

The brokerage industry’s self-regulatory body referred trades in 19 companies to the U.S. Securities and Exchange Commission for further investigation, according to Finra documents reviewed by Bloomberg News and to two people briefed on the matter. The hedge fund’s bets -- on stocks including Genentech Inc., ViroPharma Inc. and United Therapeutics Corp. - - drew Finra’s attention because they were made before market- moving events such as acquisitions and the release of clinical- trial results for new drugs.

Finra, which monitors securities markets for price spikes linked to news such as mergers and earnings, made 259 referrals to the SEC last year for possible insider trading. The information isn’t an allegation or proof of securities-law violations. SAC Capital, which oversees about $14 billion, hasn’t been accused of any wrongdoing involving the transactions.

“Every day our firm transacts in thousands of securities and, given this level of activity, it is not surprising that we would be included in a small percentage of Finra referrals,” Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC Capital, said in an e-mailed statement. “No one at Finra has ever contacted the firm, spoken with our investment professionals or reviewed our research in connection with these matters. We have experienced inquiries by the SEC over the years and cooperated fully, without any negative finding or charge.”

Federal Crackdown

SAC Capital, which Cohen founded in 1992, has come under scrutiny on multiple fronts as part of a broad federal crackdown on insider trading throughout the $2 trillion hedge-fund industry. The government is looking into trades by SAC Capital, Diamondback Capital Management LP and Balyasny Asset Management LP in health-care companies before deals such as AstraZeneca Plc’s 2007 purchase of MedImmune Inc. were announced, the Wall Street Journal reported in December.

Barry Colvin, vice chairman for Balyasny in Chicago, didn’t return phone calls. Steve Bruce, a spokesman for Stamford-based Diamondback, declined to comment on the report.

In 2003, SAC Capital made a profit of $158,500 after buying 10,000 shares of Genentech, valued at $390,000, on May 16, according to the Finra documents. The South San Francisco-based company said on May 19 that its experimental Avastin drug helped colon-cancer patients live longer in a study, which had exceeded Genentech’s expectations. The stock rose 45 percent after the announcement.

ViroPharma, United Therapeutics

Finra said SAC Capital avoided losses of about $553,000 by betting against ViroPharma on Feb. 3, 2009, almost a week before the firm announced the results of a drug trial. ViroPharma, based in Exton, Pennsylvania, lost more than half its value after experimental drug maribavir failed in tests on patients receiving bone-marrow transplants.

Finra said SAC Capital made a $2.3 million profit in 2007 by buying shares in United Therapeutics and holding it briefly until the results of a drug trial were released.

The hedge fund bought 100,000 shares of the Silver Spring, Maryland-based biotechnology firm on Oct. 29, 2007, and three days later the stock rallied 38 percent when United said its drug Viveta met the main goal in a study in patients with pulmonary arterial hypertension. Finra said SAC Capital sold the stock the same day.

Officials for the companies whose stocks were traded by SAC declined to comment or didn’t respond to calls seeking comment.

Cohen Trades

The U.S. Attorney in Manhattan said in court papers in March that it was investigating trading accounts run by Cohen, 55. The disclosure came a month after two former SAC Capital portfolio managers were charged with insider trading while working at the firm. Donald Longueuil was sentenced in July to a 30-month prison term, while Noah Freeman, who pleaded guilty, has yet to be sentenced. Neither SAC nor Cohen hasn’t been accused of any wrongdoing in the transactions.

Before alerting the SEC, Finra investigates the chronology of how the corporate news at issue was released and who knew about it prior to the announcement. In the referral, Finra provides the SEC with an outline of possible connections between those who made suspicious trades and those who knew the confidential information.

Finra hasn’t made public the trades it forwarded to the SEC, which enforces federal securities laws. The documents reviewed by Bloomberg News detailed 18 trades by SAC Capital. The regulator also sent the SEC information on the firm’s investment in Cougar Biotechnology Inc. before it was bought by Johnson & Johnson in 2009, according to two people who asked not to be named because the case is under SEC investigation.

Referral Increases

The Cougar investment was based on research and public information, Gasthalter said on Oct. 20, after the Wall Street Journal reported that the SEC was probing the deal.

Nancy Condon, a spokeswoman for Finra in Washington, declined to comment on the SAC Capital referrals.

“Sometimes referrals about an individual or entity will increase because we ask SROs to refer all suspicious activity by traders already under SEC investigation,” John Nester, an SEC spokesman in Washington, said in an e-mailed statement. SROs are self-regulatory organizations such as Finra. Nester declined to comment on any specific referrals.

Senator Grassley

Senator Chuck Grassley said in May that he had received about 20 examples from Finra of possible insider trading by SAC Capital, without disclosing the stocks involved.

Grassley, a Republican from Iowa and the senior GOP member of the Senate Finance Committee, has asked the SEC to explain how it handled referrals from Finra and securities exchanges regarding suspicious trades by SAC. He said in June that the SEC has provided an unacceptable response to his request for information about possible insider trading at the hedge fund.

Grassley, asked to comment on the content of the referrals, said in an e-mailed statement that the referrals “begin to shed light on the work that goes into building enforcement cases. Looking at how much legwork the self-regulating agencies perform for the SEC and then what the SEC does with the information are key to understanding whether the system works the way it’s supposed to work.”

Bridger, Deutsche Bank

Eleven of the 19 trades cited by Finra occurred more than five years ago, putting them outside the statute of limitations on most insider-trading rules. In some of the trades referred to the SEC, other hedge funds profited as well, though none were accused of any wrongdoing, Finra said in the documents.

The organization said Bridger Management LLC, a hedge fund based in New York, made about $1.8 million from the United Therapeutic trade, while Deutsche Bank AG’s DWS Investment GmbH unit made a $1.44 million profit.

“We cooperate with all regulatory outreach, and have received no communications regarding this subject matter,” Roberto Mignone, founder of Bridger, said in an e-mailed statement. “After reviewing this particular investment, we are confident without hesitation that our research practices met all regulatory as well as our own very high compliance standards.”

Lem Brewster, a spokesman for Frankfurt-based Deutsche Bank, declined to comment.

SAC Capital and New York hedge funds Millennium Partners LLC and Tokum Capital Management LP profited from Hologic Inc.’s 2008 purchase of Third Wave Technologies Inc., according to Finra.

Third Wave

The regulator said SAC Capital made $485,000 after buying 400,000 shares of Madison, Wisconsin-based Third Wave between May 20 and June 3, 2008, before Hologic announced on June 9 that it would buy the firm. Third Wave shares rose 12 percent between May 20 and June 8. Third Wave was the subject of takeover speculation since at least June 2007 when Reuters reported that it may be a potential takeover target.

Millennium, the $13 billion hedge fund run by Israel Englander, made $1.08 million from the deal, while Tokum, which became part of New York-based Perella Weinberg Partners LP in January 2010, after the Third Wave takeover, made $384,000, the documents show.

Tripp Kyle, a spokesman for Millennium, declined to comment, as did Kara Findley, a spokeswoman for Perella Weinberg.

--Editors: Larry Edelman, Josh Friedman

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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