| Leon Cooperman, Omega Advisors (Scott Eells/Bloomberg) |
When the Securities and Exchange Commission was mulling whether to bring civil insider charges against Leon Cooperman and his hedge fund firm Omega Advisors 18 months ago, the regulator offered to settle with the legendary investor if he agreed to pay a $9 million fine, accept a five-year bar from the securities industry and essentially admit guilt.
The one-time Goldman Sachs partner turned it down, and in September 2016, the SEC formally accused Cooperman and his firm of trading various securities of Atlas Pipeline Partners using illegal inside information, as well as violating other SEC rules relating to making timely filings of securities holdings. In response, Cooperman insisted he did nothing wrong and was determined to go to trial so he could preserve his 50-year Wall Street legacy.
His resolve paid off. Last week Cooperman and the SEC reached a settlement which calls for him to pay $4.95 million and to agree to a compliance monitor for five years. The monitor will also be tasked with certifying each month that insider trading did not play a role in any trades. Most crucially, there is no industry ban and no admission of wrongdoing.
The upshot: Cooperman’s settlement was not only a victory for the legendary hedge fund manager — it could make it much easier in the future for others who face similar charges.
“Leon Cooperman just proved that fighting SEC charges is better than settling quickly, by reaching a favorable SEC insider trading settlement after a fierce Court battle,” states an analysis of the case published by the law firm Sadis & Goldberg.
Cooperman declined to comment. However, he is planning to tell all on Tuesday, when he is scheduled to appear on CNBC in the noon hour.
Of course, besides legal costs, Cooperman also experienced huge opportunity costs.
He suffered $4 billion in redemptions from the investigation and eventual charges. If he were up, say, 10 percent gross, his firm would have made an additional $80 million just based on a 20 percent performance fee. It also would have received another $40 million from its roughly 1 percent management fee, for a total opportunity loss of $120 million. On an 8 percent annual return, we’re looking at lost performance fees of $64 million per year. This year the firm’s Omega Overseas fund had gained 6.3 percent through April after gaining nearly 5 percent in 2016, its first profit in three years.
In any case, Sadis & Goldberg points out that the SEC was unwilling to settle on terms favorable to Cooperman until the Court threw out part of the case two months ago on a motion to dismiss. For example, Cooperman argued the case should be thrown out because the SEC’s complaint failed to specify whether an oral agreement he allegedly had with an Atlas executive was made after or before the executive disclosed insider information.
“The Court agreed with Cooperman that the SEC’s possible reliance on a post-disclosure oral agreement raised ‘a novel issue’ which ‘no court ha[d] squarely addressed’ previously,” Sadis points out. “Nevertheless, the Court held that the SEC’s allegations were sufficient to plead a ‘plausible’ insider trading claim, at least at the pleading stage.”
Cooperman also sought dismissal on the basis that the Eastern District of Pennsylvania was not the proper venue for two SEC claims that he violated certain rules by failing to make SEC filings disclosing holdings of certain sizes of eight different companies in a timely manner on 40 different occasions.
“Cooperman argued that venue was improper because these violations did not involve any ‘act or transaction constituting the violation’ or Cooperman ‘transact[ing] business’ in the Eastern District of Pennsylvania, as required for venue under the securities laws,” Sadis points out. The Court agreed and dismissed the two claims, the law firm notes.
“The SEC’s decision to settle the Cooperman case without an industry bar or suspension is very rare,” the law firm asserts. “In recent years, the SEC has routinely demanded a bar or suspension as part of an insider trading settlement.”
It points out, for example, that SAC Capital’s Steven Cohen wound up being barred for nearly two years from associating in a supervisory capacity with any broker-dealer or investment adviser as part of his settlement, “even though much of the SEC’s case was undermined by the Second Circuit’s decision raising the standards for proving tipper-tippee insider trading liability.”
So, the law firm says, the Cooperman settlement is a major setback for the SEC.
“The Cooperman settlement shows the SEC is often unwilling to reach a reasonable settlement until its allegations face the cold reality of failure in Court,” Sadis states. “This is particularly true in insider trading and large fraud cases, where the SEC has investigated for years before engaging in settlement discussions. By that time, it is harder for the SEC to remain objective about the case; and internal SEC pressure for higher sanctions increases. Thus, the more serious the SEC charges are, the more it pays to fight the SEC in Court.”
