Explaining Southern California's economy

Why LA should be glad Steven Cohen didn't buy the Dodgers

Hedge Fund Manager Charged In Major Insider Trading Case Appears In Court

Spencer Platt/Getty Images

Former hedge fund portfolio manager Mathew Martoma exits a New York federal court after being charged in one of the biggest insider trading cases in history. He worked for CR Intrinsic Investors LLC, a firm that was associated with Steven Cohen's SAC Capital Advisors.

Speculation about the size of a potential deal for AEG — estimates range from $8-$10 billion — has quickly made Angelenos forget about the $2-billion-plus price that Guggenheim Baseball Management and Magic Johnson paid for the L.A. Dodgers earlier this year. Angelenos may have forgotten something else: Until Guggenheim Partners swept in from Chicago to add another half billion to the deal, the price for team was hovering around $1.6 billion and the leading bidder was Steven Cohen.

As I explained at the time, Cohen — one of Forbes' wealthiest Americans, with a net worth north of $8 billion — was one of the few bidders for the Dodgers who could basically write a check for the team. In fact, that seemed the likely outcome, until Mark Walter and Guggenheim emerged from the background. Cohen had even paired up with local L.A. billionaire Patrick Soon-Shiong, the richest guy in town. It wasn't enough in the end to trump Guggenheim's bid.

Cohen is usually described as a secretive hedge fund operator who performs his financial voodoo from Hedge Fund Land, the affluently leafy suburbs of Connecticut. He's shown plenty of interest in sports teams before moving on the Dodgers. He took a stake in the New York Mets, acting as a kind of financial white knight for one of Major League Baseball's more troubled franchises and showing MLB owners that he's a good baseball citizen.

But now Cohen himself could be in trouble. Last week, his firm, SAC Capital Advisors, was referenced with what the Wall Street Journal called "veiled mentions" in a legal complaint filed by the Securities and Exchange Commission against what were described as investment operations affiliated with SAC. 

Cohen was referred to as "Portfolio Manager A," which prompted Bess Levin at Dealbreaker to break out the all-caps: "YOU ARE PORTFOLIO MANAGER A. YOU NEVER WANT TO BE PORTFOLIO MANAGER A!"

This isn't particularly surprising, however. The SEC investigation involves Mathew Martoma, a former SAC employee who was arrested last week in Florida by the FBI for his part in a $276-million insider-trading scheme. He was just the latest Cohen protégé to end up in the Fed's crosshairs. 

But the circle around Cohen is tightening, as it has been for years. The "Hedge King," as he's known on Wall Street, has long been suspected of skirting the law when it comes to his trading strategy, which relies on what's been described as "information arbitrage" — a fancy way of saying that you know something before somebody else does and can use that information to make money. 

When Cohen was in the running for the Dodgers, I referenced a 2010 Duff McDonald Fortune story about the man and how SAC has managed to keep some distance between itself and the people who are, you know, actually getting arrested:

The implication is that SAC has exported its expertise to these spinoff firms, and if the outposts are getting busted, then the home office might be where the apprentices learn to cheat — from the master.

But [McDonald] goes on to speculate on Cohen's future. And it's here that we can find clues to why the hedge-fund king might want to buy the Dodgers:

Here's my bet on how this is going to play out. In the next year or two, Cohen is going to retire. In the process, he will likely wind down SAC—a huge proportion of which is his own money in any event—and will amuse himself with his gigantic art collection, doing things like selling a Manet for $33.2 million, as he did this past June. He will tell people he has nothing left to prove, and that the constant hounding by the authorities took all the joy out of the thing.

That "constant hounding" has now moved beyond the "hounding" phase. It might be more accurate to describe it as the everything-but-indictment phase. Of course, it's not as Guggenheim Baseball Management is without its own problems, as the New York Times' Andrew Ross Sorkin noted in the aftermath of the deal. Why would a staid fund from Chicago be developing a private-equity-type sideline business investing in professional sports teams? (Guggenheim is reportedly kicking the tires on AEG, by the way, this time with Cohen's old partner Soon-Shiong joining its camp.)

But the question there isn't, "Is this legal?" Rather it's, "Is it a good investment or the plaything of some rich dudes?"

Obviously, if Cohen had won the bidding for Dodgers, he might have shut down his hedge fund to concentrate on running a baseball team. As it stands, he hasn't retired just yet (and it certainly isn't out of the question that he could try to get in on the AEG bidding, although his name hasn't come up yet as an on-the-record bidder for Phil Anschutz's empire).

But regardless, if the SEC has a case and it does finally snare the the Hedge King, Angelenos may count themselves lucky they didn't end up with Cohen owning the hometown team — possibly at the same time he was fighting off the most serious indirect accusations from the Feds he's faced so far. 

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

blog comments powered by Disqus