| Leon Cooperman, chief executive officer of Omega Advisors Inc. (Scott Eells/Bloomberg). |
When Leon Cooperman’s New York hedge fund firm, Omega Advisors, bought a stake in alternative-investment firm Resource America in 2002, the manager could not have known the investment would eventually play a major role in defining his legacy. Nor could he have known that in 2007, when he bought shares of Resource America spin-off Atlas Pipeline Partners (APL). But that company is at the center of the Securities and Exchange Commission’s charges that the billionaire former Goldman, Sachs & Co. partner and his firm engaged in illegal insider trading of Atlas stocks, bonds, and options during the summer of 2010. However, the fact that Cooperman had owned an investment in Atlas’s ancestral company and held on to it long after the questionable trades took place is among several compelling reasons legal experts — many of whom previously worked for the SEC — think the hedge fund manager will ultimately defeat the insider trading charges brought by the regulator and maintain his storied reputation on Wall Street (read about the case against Cooperman here).
Cooperman declined to comment for this story. He has denied all the SEC’s accusations in public pronouncements and letters to clients, and has refused to settle the charges. On a conference call with his investors in September, he asserted: “Let me state unequivocally and emphatically that the firm and I did not engage in insider trading. The charges against us are entirely baseless, and we intend to defend ourselves in court.”
So how will Cooperman convince a jury and win his civil case against the SEC? Ultimately, lawyers say, the most important task the hedge fund manager’s legal team faces is to establish exactly what kind of investor he is — and to prove that his trading in Atlas’s stocks, bonds, and call options fit within the historical trading style he established as a long-term value investor during 25 years of operating Omega. As Cooperman has pointed out, his firm employs detailed fundamental analysis and holds stocks for years at a time but often trades around its investments using stock options and other hedges. Far from the typical get-rich-quick motive in most insider trading cases, Cooperman’s Atlas trades fit a pattern of how his firm has traded in numerous other companies for decades, his lawyers will argue. Indeed, Cooperman didn’t make any money from the Atlas trades, and the investment turned out to be a losing one for Omega. And although profit is not a prerequisite for establishing insider trading, lawyers point out that Omega’s loss undercuts the government’s narrative about a possible motive.
To that end, it is very important to show that Cooperman owned shares of Atlas for a long time leading up to the period of the alleged illegal trading, lawyers say. Omega owned Atlas and related entities for more than a decade, starting with its 2002 Resource America investment, staying invested in the company long after the allegedly illegal trades took place. The firm made its first investment in Atlas three years before the trades in question, when Cooperman bought more than 1.9 million shares for $44 apiece in a PIPE transaction (a private investment in a public equity), on the advice of one of his analysts at the time.
In a letter sent to clients shortly after the SEC brought its initial charges, Cooperman said Omega “significantly increased the firm’s position” in Atlas over the next few years, “based on the continued fundamental research, detailed analysis, and recommendation of the same investment analyst,” adding more than 2 million shares from 2007 through 2009 “at prices ranging from a high of about $43 to a low of around $5.10 per share.”
Cooperman noted in the letter that even as Atlas’s stock price tanked during that period, Omega held on to the stock and even increased its holdings, “reflecting our confidence in the company’s long-term value, our belief that the stock was undervalued, and the encouragement we consistently took from [Atlas] management’s public insistence, and the Street’s belief, that the company would fix its liquidity problems.”
This history helps to establish the narrative that Cooperman’s purchase of Atlas shares in July 2010 was not a quick in-and-out deal designed to make a fast buck on sensitive nonpublic information. Rather, Cooperman’s lawyers will likely argue, Atlas was a stock in which the hedge fund manager had strong conviction, holding more than 9 percent of its shares as of December 2009. He owned the stock through good times and bad times.
Lawyers say it will be important to prove Cooperman’s assertion that he bought the $3.8 million of shares in July 2010, in the weeks leading up to the day Atlas’s stock surged more than 30 percent, for one main reason: He wanted to balance the portfolios of two separate accounts — one of which was new to the firm at the time — with the rest of the portfolios managed by Omega.
In investment parlance this is known as running portfolios pari passu, such as when investment managers hold the same positions at the same sizes in the offshore versions of their onshore funds. This is not only Omega’s standard policy but also is common among many investment managers who have a wide variety of clients and portfolios. They aim to make sure all the accounts hold the same investments and that each security represents the same percentage of that particular portfolio’s total assets.
“As a general matter, to the extent that multiple accounts have substantially the same investment mandate, we try to manage them pari passu, subject to capital availability, market prices and similar factors,” Cooperman stressed in the letter to clients.
The hedge fund manager also emphasized in communications with his investors that he did not have a personal interest in either of the portfolios. Lawyers acknowledge it is common for investment advisers to balance the weightings of all positions in all of their managed portfolios the same way. “That’s not a defense, but it suggests a motivation that doesn’t sound sinister,” says John Coffee Jr., a professor at Columbia Law School.
According to a transcript of his September 21 conference call with investors, Cooperman noted that the amount of Atlas stock he had bought for these two new separate portfolios was not exactly sizable; the $3.8 million Omega paid for the shares accounted for less than 0.08 percent of the firm’s assets under management at the time and just a 2.5 percent increase in Omega’s investment in the stock. The implication: If Cooperman were really trying to make a quick buck on the trade, he would have bought many, many more shares.
When the stock surged 31.3 percent on July 28, 2010 — when Atlas announced it would sell its Elk City, Oklahoma, operating facilities to Enbridge Energy Partners for $720 million — Omega did not sell any shares and therefore did not quickly realize gains from that one-day jump in the stock price. (Although investors had been anticipating Atlas doing something significant to shore up its finances, they bid up the stock on the announcement of the Elk City deal on the certainty of a transaction and the specifics of the terms of the deal.) Rather, Omega continued to hold on to the stock for more than a year and even bought an additional 100,000 shares in August and September 2010, Cooperman pointed out to clients.
“When we finally did sell some stock, we sold only 6,100 shares in August 2011, and maintained a net long position — even as the stock price fell into the single digits — until we sold out of our position just last year,” Cooperman wrote in the September 21 letter.
The SEC says Omega made roughly $4 million from the insider trades. But Cooperman asserts this is a misleading statistic because he did not sell the stock after its quick surge.
“The SEC is relying on a theoretical calculation of unrealized gains — not actual profits,” Cooperman told clients during the September conference call. “So, to be clear, the firm and I are being sued for insider trading based on purchases of [Atlas] stock even though we didn’t sell stock after the July 28 announcement and made no money from any increase in the stock price after the announcement. I am told that this is very rare, if not unprecedented, in an insider trading case.”
The SEC also accused Omega of insider trading by buying Atlas call options in July 2010. With options, investors put up a fraction of the value of the underlying stock, which they may — but are not obligated to — buy at a specific price by a specific future date in the hope of making a large sum in a short period of time. This is an especially favored strategy among individuals caught trading illegally on insider information.
By the same token, many investors use certain options trades to hedge their positions by betting in the opposite direction of their common-stock position.
Cooperman acknowledges the options trades but insists they were not designed to make a profit. He contends that he and Omega were not long Atlas call options before or at the time of the July 28, 2010, announcement.
The manager says Omega sold Atlas call options between February 2010 and May 2010 at strike prices of $15 and $17.50, respectively, and that remained the firm’s position going into July 2010.
“As APL’s stock price declined in July and the price of the options dropped to as low as 5 cents, we began covering those options positions, thereby flattening out our APL call option position,” he said in the conference call with investors.
Cooperman explained that Omega purchased the exact number of $15 Atlas call options it had sold earlier in the year, offsetting its existing options position. “As a result of flattening out its options position, Omega didn’t realize any gain from the increase in Atlas Pipeline’s stock price following the Elk City announcement,” Cooperman added in the letter. “It is illogical, and defies common sense, that the SEC would bring an insider trading case based on that trading pattern.” The options purchases as well as the stock purchases did not result in any realized profits for Cooperman or Omega based on the stock’s rise in price following the July 28 announcement, the hedge fund manager explained in the call.
Lawyers say it is important to put Cooperman’s trading in Atlas securities in historical context with his trading over the past few decades. Thomas Gorman, a partner at Dorsey & Whitney who specializes in defending SEC investigations and enforcement actions and criminal white-collar securities cases, explains: “He can say: ‘This is how I trade. I’ve been in the business a long time.’ He probably has other examples that may look odd to a nontrader, but this is how he trades. Even if it is really complicated and hard to understand, it doesn’t matter. More important is the pattern.”
One potentially damaging allegation by the government is that Cooperman was bearish on the stock in the first half of 2010. In this context, the phone call in which the SEC says Cooperman called Atlas a “shitty business” looks pretty bad.
However, lawyers dismiss the significance of these sentiments. They stress that because Cooperman still owned Atlas stock, it is perfectly understandable that he felt the need to add the stock to the new separate accounts to balance them with Omega’s other accounts, despite his lack of enthusiasm for the company. Many investors hold on to stocks they are not very happy with, for a variety of reasons.
Also, lawyers say they would go through securities records to show other firms were also buying the stock at the time Cooperman was expressing negative sentiments about the company. They would note that it is not uncommon to buy shares of a so-called shitty business. “There were people buying Amazon when it was deemed a piece of junk, and look at where it is now,” says Gorman.
Another major issue that lawyers will need to address is concern over Cooperman’s private conversations with a key individual at Atlas, whom the SEC calls APL Executive 1. The SEC says Cooperman spoke with the executive by phone on three different occasions in July 2010, during which the executive told Cooperman that Atlas was negotiating the Elk City sale; in one conversation the executive said the company was selling the facilities for about $650 million.
“Despite knowing that information about the Elk City sale was material nonpublic information, APL Executive 1 told Cooperman about the Elk City sale because he believes Cooperman had an obligation not to use this information to trade APL securities,” the SEC’s complaint states. It adds that Cooperman “explicitly agreed that he could not and would not use the confidential information . . . to trade APL securities.” The agency then asserts that Cooperman did not abide by his agreement to maintain the confidence and not trade on the basis of the sale information.
Several legal experts say the government will probably argue that Cooperman violated the SEC’s Rule 10b5-2, which was adopted to resolve insider trading issues where the courts have disagreed. According to the SEC, this rule provides that a person receiving confidential information “would owe a duty of trust or confidence and thus could be liable under the misappropriation theory.” This could be the linchpin of the SEC’s case. To prove Cooperman violated the rule, the government must show he intentionally acted on insider information and misappropriated his duty.
However, lawyers say that in his defense Cooperman is likely to acknowledge speaking with the individual several times, but only about how the company expected to fix its problems and not that Atlas planned to do the Elk City deal for $650 million. Lawyers emphasize there is no proof or transcript of the exact content of the conversation.
“How do we know [the Atlas executive] said that?” asks Alex Lipman, a partner in the white-collar defense and government investigations practice at Brown Rudnick. Lipman has more than 25 years of experience in both private practice and government, with a focus on SEC enforcement, white-collar crime, securities litigation, and regulatory and corporate governance matters.
APL Executive 1 insists the conversation with Cooperman was confidential. But Lipman asserts, “It just so happens that [story] gets him out of a personal jam.”
Lawyers say that perhaps the executive violated internal corporate guidelines for speaking with investors — or even violated the SEC’s Regulation Fair Disclosure (Reg FD), which stipulates that companies must share material information with all investors within 24 hours.
Cooperman’s lawyers doubtless will turn all of the July 2010 conversations between Cooperman and Executive 1 into a “he said, he said” conversation, especially as there does not seem to be a document of agreement of confidentiality. “It is a gray factual issue,” says law professor Coffee.
“Those cases are very difficult for the government to win,” adds Dorsey & Whitney’s Gorman. The government has the burden of proving intent to defraud, say the legal experts.
In a trial, Cooperman’s lawyers will cross-examine the Atlas executive to try to determine exactly how the conversation played out and to find discrepancies in the two individuals’ stories. The hedge fund manager’s lawyers also will look deeply into the executive’s background, character, and business history. It could get ugly.
Lawyers who discussed the case with Alpha figure Cooperman probably has some records of discussions with his analysts, who may be able to provide their analysis of the stock at the time and show they independently expected Atlas to take steps to improve its financial health in line with what the company chose to do and what was supposedly discussed in the private meetings with management.
In defending Cooperman, several experts say, lawyers will cite parallels to the Mark Cuban case, which has similarities to the Omega chief’s.
In 2008 the SEC alleged that Cuban had traded illegally on insider information when in 2004 he unloaded his stake in Montreal Internet company Mamma.com upon learning of negative news. In doing so, regulators charged, Cuban avoided a $750,000 loss. At the time, the bombastic billionaire was the company’s largest shareholder.
In June 2004, Cuban had an eight-minute phone conversation with Guy Faure, former chief executive officer of Mamma.com, in which he learned that the company was planning a PIPE deal that would dilute the value of Cuban’s and other investors’ holdings.
“Now I’m screwed. I can’t sell,” Cuban reportedly replied, according to Faure, whose recorded deposition was played in court. Jurors in that case were instructed to determine whether Cuban had received material nonpublic information about the stock offering and whether he had agreed to keep the information confidential and not act on it.
Cuban was found not guilty; the jury ruled the information he’d learned was not confidential and that he had not promised not to trade on it. “They had a case with no confidentiality agreement,” Cuban’s lawyer Stuart Slotnick told Bloomberg at the time.
In Cooperman’s case — although the government will claim that, as a result of the confidential discussions, Cooperman knew there was a deal to sell the Elk City facilities and acted on that information — the SEC may have undermined its own argument early in its complaint. In the complaint the SEC points out that in the first half of 2010 it was well known that Atlas was experiencing financial problems. However, the complaint continues, by May of that year Atlas had announced that it “intended to improve its balance sheet in order to reinstitute a distribution to APL shareholders.” Under that logic, if the SEC said the company had made public announcements about taking steps to boost its balance sheet and resume its payouts, it is arguably irrelevant whether Cooperman knew about a specific asset sale. The general theme, known to the public, was that the company was taking steps to improve its financial situation, which would be good for the stock no matter what strategy it deployed to accomplish that.
“His trading is not consistent with having very specific information,” says Brown Rudnick’s Lipman. “It is consistent with knowing whatever everyone else knows. His trading is consistent with investing for the long term.”
The SEC also accuses Cooperman of contacting APL Executive 1 after receiving a subpoena, to discuss concocting a common story — suggesting a cover-up. This sounds damaging on its face. Cooperman flatly denied it in his conference call with investors, saying simply, “That claim is false — it didn’t happen.”
Lawyers say they would argue that it is not surprising that Cooperman would call the executive after receiving a subpoena, as he probably was surprised and wondering whether the executive knew anything about the investigation, and what he planned to tell the government. “This is very typical,” Gorman says. The lawyers would also assert that the government’s account of the discussion is incorrect.
To underscore why his buying Atlas’s shares was not part of a larger campaign to take advantage of insider information on a major piece of positive news, Cooperman is expected to point out that he was the largest investor in Cobalt Capital Management, a Short Hills, New Jersey, hedge fund firm run by his son Wayne Cooperman.
At the time, Cobalt was short Atlas’s stock. If Leon Cooperman was sure the stock was going up, the thinking goes, it would have made sense to tell his son to cover his short position and go long. This did not happen. According to the SEC’s complaint, Wayne Cooperman was shocked to see the stock suddenly spurt in price on July 28, the day Atlas announced the Elk City sale.
Another argument further clouds the image of a nefarious hedge fund manager taking all he can: the matter of the bond investment the elder Cooperman made for his grandson.
The SEC points out that on July 20, eight days before the Elk City deal was announced, Cooperman purchased about $50,000 worth of Atlas’s 8.75 percent bonds on behalf of his grandson. The SEC noted this fact to illustrate one of Cooperman’s many purchases of APL securities shortly before the deal was announced.
The hedge fund manager’s defense: $50,000 is a paltry sum for a billionaire to shell out. Besides, Cooperman has pointed out to his clients, Omega was invested in Atlas bonds well before July 2010 and had already accumulated a substantial long position by then.
Cooperman repeatedly has made it clear in published interviews, speeches, and client communications that he is determined to clear his name and retain his positive legacy. For those who know him, there is little doubt he’ll want to take the stand and testify to defend the reputation he has built up over decades in an industry based on the dual pillars of good name and performance.
Several lawyers advise against this, however. Instead, they would have Cooperman take the Fifth to avoid incriminating himself. The reason: There is a potential criminal case hanging over Cooperman’s head — something the manager conceded in his initial letter to clients.
Lawyers stress that whatever Cooperman says in civil court can be used against him in its criminal counterpart. “The fact a criminal case is hanging out there makes it tougher to defend,” one securities lawyer concedes.
Aside from that, legal experts believe Cooperman has an excellent chance of prevailing and clearing his name.
“String it all together, you have the story of an investor who is active, clearly talks to the company, wants to know what is going on, gets enough info consistent with what the company says publicly, and doesn’t even sell,” Brown Rudnick’s Lipman concludes. “He’s loading up on a company’s debt when the company says publicly it is in the process of selling assets to improve its balance sheet. Why is that not perfectly logical?”
Given the evidence available to them, many lawyers believe Leon Cooperman has a very strong case. The industry titan undoubtedly would receive this assessment with good cheer, for much is at stake beyond a relatively minor fine. If he loses, although he surely would remain a billionaire, the hedge fund manager will relinquish something much more precious to him than money: His legacy and reputation after nearly 50 years on Wall Street, obliterated by a $3.8 million trade.•
