Cohen, Loeb, and Chanos, their funds and stock manipulation.

I was reading the book "The Divide" by Matt Taibbi, he gets into these guys and there funds going after Canadian company Fairfax in a short sale move. 

He also alludes to how when they built their funds it was based on a lot of insider information. Does anyone have any idea how they did this, or the history of it? I know back in the 90s you could trade on material nonpublic information, is that the answer? Also, if some many people who this, how much these guys aren't in jail? I know Cohen was barred and had to start the family office, but I'm just looking for insight. 

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Yes, that is the case. I suggest you go into The Corner of Berkshire & Fairfax; they had a huge legal battle with Cohen in the Fairfax case. Back in the day, I would say that was a time period where the SEC was the most active and so were the funds. It is totally true that their empires were built on insider information, their settlements with the SEC should speak enough.

Rome wasn’t built in a day and Rome wasn’t built by a group of happy people. Rome was built on a lot of blood and bones; such is the case with every empire. Even in corporate America, which one of them got to where they are by being honest? The problem I think, in specifically Cohen’s case, was not insider trading but getting caught doing it. Everybody did it back then, at least in the HF space, if the PM didn’t do it, you’d find one analyst who did it, that’s just how it was.

Today, these funds donate ton of money to governments and make the government act in their interest and the SEC is nothing but a paper tiger now. Their fund structure has changed, they are hiring exceptional talent and using them to generate returns in a rather clean way.

In their defense, if I was in their shoes, I’d probably have done the same. That was just how rampant insider trading was in that era, well, I wouldn’t necessarily call it insider information, but there was a huge latency issue between companies and investors regarding any information at all as opposed to today where the internet has narrowed it down a lot.

HF Manager: Hey Mark, last time I saw you was the alumni meeting, how are you? We must catch up sometime, btw, your money that is with us is doing great.

Mark: Really? That’s good to hear, also, you know that drug our company is awaiting approval for, yeah, looks like its ‘almost’ done. A big step for humanity.

HF Manager: Congrats, let’s meet sometime after a couple of months, don’t want the SEC to know we got the information early. Hahahaha.

That’s typically how it went. These weren’t on the phone where people would be bugged or monitored, it was either there C-Suite guys meeting or the employees, let’s say, analyst from a HF has a buddy in a tech company that is about to breakeven or in a biopharma.

The SEC back then had a hard time tracing it all back to the funds that is why they failed convicting a lot of people.

My only mistake was not being born in the 80s where after college I could have made easy money.

I would be interested in getting some more senior contributors to share their experience in the industry "back in the day". My impression was that insider trading wasn't always as blatantly illegal and brazen as some movies/shows like to present it (bribing a doctor in the midwest with $100k in cash for early details on the drug trial), and more considered part of the game in the same way we treat due diligence to get an edge on rate changes nowadays. 

Ex: I imagined it was more along the lines of - my expert network, which was set up through the help of GLG (or my privileged northeast upbringing's personal/professional network), has given me access to lots of people, all of whom are sharing somewhat gray area non-public information, and my job is to beat the street in finding the best non-public ("underappreciated") information at a given time since everyone on the buyside is looking for the same. Insider trading as it is, is already pretty fuzzy, and I am sure given the incentive structure in our industry, some investors began to dip over the line into the more outright illegal behavior. Like most illegal activity, I am sure it was a series of an incremental steps that brought those who partook to that point. Mostly rationalized as "hey this is part of the game and we are getting paid to find incremental information - and everyone is trying to do the same."

Definitely interested to learn more from those who were around during those times though, as I could be totally off and it was just straight up understood as illegal rather than a "gray area", and there were those that did it and those that avoided it. 

Pretty universally understood that Cohen's philosophy was to build a network of PMs w/analysts who can source "gray" information from everywhere, leaving him insulated, and a platform to bet on incremental rate changes in business performance / expectations. Which is kind of funny as this model basically laid the foundation for today's pod shop market neutral model, which is just a more sophisticated, highly regulated, institutionalized version of that... sort of. 

Fair take. 

Just as reference, in the book I was reading that mentioned that Chanos had an analyst downgrade report from Morgan Keegan (now Raymond James) ahead of time and was using it short sale. Also it was discussed that Loeb and Chanos had emails and text messages confirming this. Traders at their shops also had messages showing that they were asking the analyst for more reports after the first report didn't drop the stock enough. 

Your intuition is along the very lines of how SAC Capital Advisors and Galleon Group were charged and ultimately shut down.
Expert network interviews were used to obtain non public information and the SEC was able to get several analysts to fold as a result.

I recall one woman mentioned in court documents who was an advisor on semiconductors and asked for Cheesecake Factory gift cards as her payment method. The stories behind some of the payments are hilarious. Imagine getting several thousand dollars in cheesecake and then being interviewed by the SEC for it.

The 60s-90s were a huge era in terms of scientific advancements in investment theories and mathematical models, so realistically, if you were extremely smart in the 70s-90s you wouldn't go to work for the SEC, you'll be on Wall Street trying to put into practice your investment theory or mathematical model. This asymmetry in terms of knowledge and background between those who went to Wall Street vs. those who went in the SEC is extremely wide, so if you were to be the SEC, your main concern would be to not exceed your legal powers by pursuing unlawfully people because you had a hard time understanding how their investment theory worked or on what non-publicized investment theory they were trading. This presumption that some stellar traders out there were trading by having figured out the next Black-Scholes Model (when in reality they were trading on insider information) made the SEC pursue only those people where they were 110% sure that they were trading on insider information (easy targets: bankers and those traders directly dependant on bankers e.g. Boesky because they would have a very bad excuse on how they're able to hit so many constant wins).

In a few words, even public authorities may lack the confidence to chase people if they lack proper personnel, experience with it (the Insider Information Act was enacted in 1988), and they're in the middle of one of the golden days of finance where scientific theories and developments where popping from every corner. Going now retrospectively to charge those guys for things they did in the 90s is futile because as every criminal law textbook will tell you: If in a maximum of 72 hours after the crime took place, if you didn't sort it out, then your chances of solving the case become extremely slim and practically impossible after some months (so we're dealing with cases from 30 years ago where the main criminal foundation are precisely social interactions, which is the hardest thing to investigate; read: impossible). More so, even if the SEC went to investigate something from 30 years ago by its initiative what message would send to its stakeholders? That we're stuck for 30 years in a case? That despite all our assets we have trouble solving what we're set up to solve? That the SEC doesn't use its resources efficiently i.e. past cases that no longer affect markets instead of imminent risks and concerns on markets?

At the end of the day, many things prohibited by laws and regulations were previously done by some smart people until the Government came to say that this is abusive. The entire conflict between smart people doing money in abusive manners (not necessarily illegally) vs. the Government preventing those by implementing regulations, always existed in history (and by the way, that's how the banking system appeared and developed). Every law and regulation on sophisticated things such as insider information, corporate transactions, and so on, appeared as a consequence of people doing it until the Gov't stepped in; but prevention by regulations only gets the Government so far because of the asymmetry of knowledge and know-how between practitioners vs. lawmakers, so there's always room to exploit areas that seem to be regulated until either the Government comes with a new regulation covering precisely what you're exploiting or you hit a bad swing that steps your action in one of the illegalities regulated out there (that's why even Citadel gets in so many fines and litigations - many of their trades are millimeters close to trespassing from the legal to the illegal, and when they do, they face the SEC; still, even Citadel does some shady that in 5-10 years will become illegal, but currently no one is regulating those because you can't expect the Gov't to understand what's going on even when other hedge funds don't understand what's going on).

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