Monday, April 1, 2013

One Picasso Too Many?

Charles Wilbanks of CBS Money Watch reports, For hedge fund baron Cohen, one Picasso too many?:
For most people, even those with bags of money, having to hand over $616 million to the government would ruin their day. For Steven Cohen, who runs hedge fund SAC Capital Advisers, it was such a relief that he went shopping -- for a Picasso. And a house. A $60 million house.

SAC, which he owns, recently agreed to two fines, one for $602 million and the other for $14 million, to settle two insider trading cases with the Securities and Exchange Commission. The settlements must be approved in court.

Not so fast, federal district judge Victor Marerro said Thursday. In refusing to immediately rubber-stamp the deal, the judge took issue with the fact that SAC was willing to pay a large fine to end the dispute, but not to admit any wrongdoing.

Permeating the story is Cohen's taste for the high life and his willingness to satisfy it publicly. Not long after the settlement was announced, news rolled in that Cohen had completed a deal to buy "Le Reve" by Pablo Picasso, a depiction of the artist's mistress, Marie-Therese Walter, for $155 million. He bought the painting from casino mogul Steve Wynn despite the fact that Wynn had accidentally put his elbow through it, prompting the need for restoration.

At about the same time came stories of Cohen's purchase of a new home in the Hamptons, an enclave for the rich and famous on Long Island in New York, where he already has a house. For the most part, stories have treated it as a colorful episode in the colorful life of a super-rich guy.

But the latest binge of conspicuous consumption may have ruffled the judge's feathers. Gary Aguirre, a lawyer in private practice who worked as a staff attorney at the SEC and helped bring down another hedge fund, Pequot Capital Management, thinks Cohen's actions suggest he is cocksure he won't be prosecuted. And Aguirre wonders whether Cohen just may be right.

"The flagrant, extravagant public demonstration of wealth is an in-your-face reaction to the SEC and the justice system," Aguirre said. "The guy's saying, 'I'll give you $600 million, and then I'll turn around and buy a $60 million house --because I can afford it."

The SEC didn't charge Cohen himself in the civil case, but it has accused several of his employees at his Stamford, Conn., hedge fund. In fact, the FBI today arrested the most senior SAC executive so far, portfolio manager Michael Steinberg, who was arraigned on charges that he traded the shares of two technology companies using inside information. He pleaded not guilty in a federal district court in Manhattan.

Federal settlements with large financial firms, as opposed to charging people criminally or at least taking them to trial on civil charges, have become a hot-button issue as resentment lingers over the longstanding coziness between government regulators and Wall Street, along with the lack of prosecutions stemming from the financial crisis. While agencies such as the SEC, underfunded and outgunned when going up against well-defended Wall Street financial institutions, have frequently chosen to settle, judges asked to approve the deals are getting sick of it.

Most notably, federal district judge Jed Rakoff refused in 2009 to accept a settlement between Bank of America (BAC) and the SEC in a case stemming from a suit over bonuses paid to executives after B of A's takeover of Merrill Lynch. Rakoff in 2011 also rejected a deal reached between Citigroup (C) and the agency, a decision now on appeal before the Second Circuit Court of Appeals.

Other judges have since refused to go along with the deals as well, but it's worth noting that those cases have all involved big banks. The ones that the government has been successfully prosecuting have charged insider trading against hedge funds such as Cohen's.

The sums paid in the settlement deals can be huge. But they have drawn criticism as little more than a cost of doing business, because the profits gained from the illicit transactions, whether insider trading in the case of Cohen's firm or the far more serious money-laundering case recently involving U.K. banking giant HSBC, are even bigger.

"What Cohen has done is to cut a deal, which allows him to pay an excise profit tax to the SEC and walk away," Aguirre said. "The judge said, 'At least we should get an admission that he's done something wrong. It just doesn't make sense to settle for that much if you haven't done anything wrong.'"

Aguirre, while acknowledging that insider trading isn't the most serious of financial crimes, argues that it undermines market stability and needs to be prosecuted.

"The only thing that stops this is for somebody to wake up in the morning in an orange jump suit," Aguirre said. "People then say, 'Hey, Charlie's in an orange jump suit! Should I really be playing this game on the other side of the line?'"
Poor Steve Cohen, he just keeps getting shellacked by the media for insider trading charges and now for his "flagrant and extravagant public demonstration of wealth."

To be fair, the article article above reads like a rag piece in some cheap tabloid. As Forbes reports, Cohen is an avid art collector:
In an extensive interview with Vanity Fair from 2010, the hedgie’s art adviser Sandy Heller revealed Cohen had bought more than 300 pieces since he began collecting in 2000.  Among the works the reporter mentioned in the story were Jeff Koons’ “Balloon Dog” (which is indeed a giant statue of a balloon dog), Vincent van Gogh’s “Peasant Girl in a Straw Hat” (1890), Francis Bacon’s “Screaming Pope” and, Gerhard Richter’s “256 Farben (Colors).”

Among Steve Cohen’s most recognizable possessions is Damien Hirst’s famous shark.  Titled “The Physical Impossibility of Death in the Mind of Someone Living,” the piece features a 14-foot tiger shark pumped with 224 gallons of formaldehyde in order to preserve its body.  Cohen paid $8 million for the 22-ton piece in 2006.

With Picasso’s “Le Reve,” Cohen will add a piece that he’s been pursuing for years, and will deliver a windfall to Steve Wynn. The casino mogul apparently put his elbow through the piece in 2006 as he was showing it off to friends; he had already agreed to sell it to Cohen. Wynn didn’t force the hedgie to buy it, but rather fixed it himself. He reportedly got $45 million in insurance for breaking it, which, added to the final price tag (which was $16 million above the original price agreed with Cohen), means he made more than 43% ripping a six-inch tear into a Picasso. Not bad.
Not bad at all, and despite the astronomical price tag, the Picasso painting is stunning, his crown jewel. It will likely increase in value as the world's ultra wealthy vie for bragging rights over whose art collection is most impressive.

Nonetheless, Cohen has bigger problems to deal with. The WSJ reports that the SAC probe reaches higher with the arrest of Michael Steinberg, a longtime portfolio manager at the prominent hedge fund firm and its most senior employee to be enmeshed in the sprawling federal probe:
The Securities and Exchange Commission separately filed a civil insider-trading suit against him in Manhattan federal court Friday.

Mr. Steinberg appeared at a brief hearing in Manhattan federal court, dressed in charcoal pants, a white shirt and black sweater, and was released on a $3 million bond secured by his home. He nodded in response to questions from the judge, pleading not guilty.

"Mr. Steinberg was at the center of an elite criminal club where cheating and corruption were rewarded," said George Venizelos, FBI Assistant Director-In-Charge of the New York office. "Research was nothing more than well-timed tips from an extensive network of well-sourced analysts."

The development shows the government continues to aggressively pursue SAC and its employees, just two weeks after the firm agreed to a record $616 million penalty to settle two civil insider-trading suits brought by the SEC. In settling, SAC neither admitted nor denied wrongdoing.

Court approval of the larger $602 million settlement was held up Thursday, as the judge cited a pending case challenging the SEC policy of letting defendants settle without admitting or denying wrongdoing. A different judge will consider the smaller settlement.

The smaller $14 million settlement related to trading by Mr. Steinberg and another portfolio manager at SAC's Sigma unit, according to Friday's indictment and SEC complaint. The SEC said their trading resulted in more than $6 million in illicit profits and avoided losses at SAC based on confidential information.

An SAC spokesman said of Mr. Steinberg: "Mike has conducted himself professionally and ethically during his long tenure at the firm. We believe him to be a man of integrity."

Mr. Cohen, SAC's leader, hasn't been accused of wrongdoing. An SAC spokesman has said both the firm and Mr. Cohen acted appropriately and will continue to cooperate with continuing investigations.

Investors in recent weeks have sought $1.7 billion in withdrawals from SAC funds. SAC portrayed the settlements two weeks ago as a sign it was putting its troubles behind it.

The firm has sought to calm restive investors since then. Mr. Cohen, said a person familiar with the matter, recently spent $155 million to buy a Picasso painting from casino executive Steve Wynn, agreed to pay $60 million for an oceanfront property in Long Island's East Hampton, and listed a Manhattan condo for sale for $115 million.

Friday's charges against a longtime Cohen aide underscore how authorities are attempting to build a case against Mr. Cohen, who people familiar with the matter say is under investigation, and the charges could renew the public image of SAC as a firm under siege.
It remains to be seen how Steinberg's arrest will impact the firm and its ultra secretive boss. It will be tough to prove Michael Steinberg broke insider trading law, and even tougher to prove the perfect hedge fund predator had any knowledge of this or condoned such illegal activities.

And even if Cohen is found guilty of any wrongdoing, he will settle the charges and go back home to marvel Picasso's "Le Reve." You see, while America's $124 billion secret welfare program keeps expanding, elite financial sharks like Cohen can pretty much get away with murder in a society governed by money, power, Wall Street and disability. And that's no April Fool's joke!

Below, FBI agents arrested longtime SAC Capital Advisors trader Michael Steinberg Friday morning at his Park Avenue apartment on insider-trading charges. The WSJ's Jenny Strasburg reports.