The Insider Trading Extravaganza and the Year of Wall Street’s Big Yawn

getty The Insider Trading Extravaganza and the Year of Wall Street’s Big Yawn“They better be fucking confident that they’re right before they destroy reputations,” a major New York hedge fund manager was saying just before midnight on Monday. Attorney General Eric Holder had confirmed an investigation of Wall Street that afternoon, 10 days after The Journal had broken news of a three-year insider-trading probe that “could eclipse the impact on the financial industry of any previous such investigation.” In between, the F.B.I. raided two hedge funds founded by alumni of the cinematic billionaire Steven A. Cohen’s SAC Capital.

“Are there hedge funds doing illegal things? I’m sure,” the New York investor said from the office off his bedroom, where his wife was awake. The investigators, though, “are aggressively attempting to expand the definition of insider trading, and using these incredibly aggressive tactics that are business-threatening, and that combination is a dangerous brew.”

‘It’s just the scandal du jour, I suppose,’ a mortgage strategist at a recently subpoenaed hedge fund said on Monday. ‘I reckon we’re all a bit jaded. So yeah, from my perspective, it’s a “jeez, here we go again,” laugh kind of thing.’

He tried to troubleshoot his iPad as he talked. “They hate Steve Cohen. Why? Because he’s really rich; he’s worth billions; he’s got a braggadocio art collection,” he said. “If they nail that guy, it’s a ticket to a $4 million-a-year white-collar job at Davis Polk. That’s what motivates them! It’s just a fact.”

“For a government rooted in populism, arresting and prosecuting hedge fund managers serves to distract voters,” a note from Monness, Crespi, Hardt & Co’s Sydney Williams III declared earlier in the day. His firm is the quiet boutique brokerage that organized a private “idea dinner” for hedge funds this February, where a short talk from an SAC Capital manager about shorting the euro led to an investigation into collusion. “But it makes better headlines to go after ‘evil’ and ‘greedy’ hedge fund managers,” the note’s finale says. “In acting rashly, the wrong people are made to suffer.”

This historically huge hedge fund raid, Wall Street thinks, is overzealous and underwhelming. For finance, it’s been the year of the shrug. “When I read this,” a former Lehman Brothers managing director told this newspaper when the firm’s Repo 105 accounting scandal broke in March, “I giggle a little bit.”

It was the same response when Goldman was sued a month later; the stock market collapsed in the so-called “flash crash” after that; and the foreclosure fiasco unfolded this autumn. To outsiders, those may have felt like crises that not only exposed systemic corruption and ravenousness, but could fundamentally change the way Wall Street makes its money.

But life went on. “They just want to be mad and don’t know what they’re talking about and want to be outraged,” another Lehman alumnus, a senior executive, had said.

“It’s just the scandal du jour, I suppose,” a mortgage strategist at a recently subpoenaed hedge fund said on Monday. “I reckon we’re all a bit jaded. So yeah, from my perspective, it’s a ‘jeez, here we go again,’ laugh kind of thing.”

 

BY THE TIME a Nov. 20 story went up on The Journal‘s Web site, announcing investigations into “multi-insider trading rings” that touched Goldman Sachs, UBS, Deutsche Bank and the multibillion-dollar fund Ziff Brothers, it had already been an odd month. On Nov. 10, the powerful Brooklyn rabbi Milton Balkany was convicted of trying to extort $4 million from Mr. Cohen’s SAC in exchange for keeping quiet about insider trading. That day, it was reported that the billionaire Phil Falcone had angered Goldman by borrowing money from his own hedge fund to pay taxes.

The day before the story’s debut, Bloomberg reported that FrontPoint Partners, famous for manager Steve Eisman’s bet against the subprime housing market, was shutting down its $1.5 billion health care fund. Joseph F. “Chip” Skowron III, the fund’s co-manager, and a former analyst at SAC, had allegedly acted on insider information about drug research. FrontPoint, which Morgan Stanley is in the middle of selling, was reportedly faced with billions of withdrawal requests, although its chief executives said in a letter to investors this month that it is “stable operationally and financially.” Mr. Skowron, a handsome former Harvard physician who is said to carry a photo of himself with an ill child in a Kosovo operating room, is now on leave.

The Journal story said the insider-trading investigation was centered on expert networks like Gerson Lehrman, where consultants are paid as much as $1,000 per hour to provide “an investing edge” through information. John Kinnucan, a wonderful principal at one research firm, sent an email to clients declaring that he was on his porch sipping wine when he got a “gracious offer to wear a wire” from “two fresh faced eager beavers from the FBI,” which he declined.

The note’s recipients included billionaire Ken Griffin’s Citadel and SAC. Indeed, ever since the arrests of the Galleon Group’s Raj Rajaratnam and well over a dozen associates, including the cooperating witness and former SAC trader Richard Choo-Beng Lee, investigators’ eyes have seemed to be on Mr. Cohen. On Sunday night, Reuters mentioned that ex-SAC analyst Jonathan Hollander’s prosecutorial limbo. A former UBS investment banker said this year that he was given insider information from a managing director at the private-equity giant Blackstone, and also fed it to friends like Mr. Hollander.