| Jacob Gottlieb, Visium Asset Management (Bloomberg) |
By Michelle Celarier
The insider trading probe of Jacob Gottlieb’s Visium Asset Management is sending hedge funds a clear message: The federal government isn’t through going after them — even though an appellate court has made all but impossible the type of massive crackdown that New York’s Southern District U.S. Attorney Preet Bharara undertook.
In March, Visium informed investors that it was facing a probe by both the Department of Justice and the Securities and Exchange Commission. Given the new, tighter rules on what constitutes insider trading, lawyers say that for the case to proceed, the investigation must provide direct evidence tying individuals at the firm to payments for inside tips.
Still, the New York Southern District U.S. Attorney’s office loves nothing better than taking down big targets, especially hedge funds, say former assistant U.S. attorneys in Bharara’s office. For Bharara, a new insider trading case could help restore his glory after several of his convictions were tossed in the wake of the appeals ruling that narrowed the definition of insider trading. And the assistant U.S. attorneys who try the cases also know that a successful litigation of a big target will land them a job in a prestigious law firm.
Investors aren’t waiting. They’ve already decided to pull $1.5 billion from a once–$8 billion Visium fund that focuses on health care stocks.
It’s not surprising that money is fleeing. Many public pension funds have rules that require redeeming from any fund under investigation. A mere allegation of insider trading, meritorious or not, has a “material impact on a firm’s ability to raise money from institutional investors,” says Ron Geffner, a former SEC enforcement official who is now a partner at law firm Sadis & Goldberg. “Even the rumor of an investigation can be damning.”
Details about the Visium probe are still sketchy, although prosecutors are looking at one current and several former employees at Visium. Visium has confirmed it has put Sanjay Valvani, a partner who oversaw pharmaceutical stocks and is a target of the probe, on paid leave.
The firm has said it is cooperating with the investigation. Gottlieb, who has a medical degree from New York University Medical School, started Visium in 2005 after a stretch at Balyasny Asset Management.
The Visium probe is the largest such investigation since the rules were changed by a Second Circuit appellate decision in the Todd Newman and Anthony Chiasson case, which is still reverberating in the Southern District of New York federal court. Newman worked at Diamondback Capital Management, while Chiasson worked at Level Global Investors. Both hedge funds were shut down as a result of the indictments of the two portfolio managers. When convictions were overturned, Level Global founder David Ganek (who was never indicted) sued the government, claiming it had “fabricated” evidence to obtain search warrants for the fund’s offices and his personal effects. In an unusual development, the judge in that case has allowed the case to go forward, a decision the government appealed earlier this month.
An environment tougher on prosecutors is making the feds take notice. “Given recent legal developments, and public sentiment, there’s pressure for the feds to be more careful when putting together a case,” says Geffner.
Before Newman’s case was tossed, Bharara had an unbroken string of convictions in his wide-ranging insider trading crackdown, in which more than 80 individuals were either convicted or pleaded guilty to insider trading. But the appeals court ruled that the government had not proved that Newman and Chaisson, who were several people removed from the illicit tips, traded on information they knew had been obtained from someone who received a “pecuniary” benefit, i.e., money. After the U.S. Supreme Court refused to hear the case, about a dozen of Bharara’s other convictions were tossed, including those of people who’d pleaded guilty and had helped the feds make their cases against Newman, Chaisson and others in what prosecutors called a “corrupt circle of friends.”
The SEC, too, was forced to drop several cases. And when the criminal conviction of Michael Steinberg, a former top lieutenant of SAC Capital Advisors’ Steven Cohen, was overturned because of the appellate ruling, the SEC’s outstanding “failure to supervise” case against former hedge fund kingpin Cohen lost critical supporting evidence. In early January the SEC only ended up banning him from running a hedge fund for another two years.
But the law could shift once again. A California appeals court took a broader view of insider trading, disagreeing with the New York one, saying that the personal benefit need not be a financial one. The split-circuit decision led the U.S. Supreme Court in January to agree to hear that case — giving hope to Bharara’s office that it might claw back some of its power to prosecute. A decision from the Supreme Court is expected within the next year, according to attorneys knowledgeable about the matter.
Counting on the Supreme Court might be unwise. But one thing is in Bharara’s favor: Antonin Scalia, the justice who publicly said he was keen to rein in “prosecutorial overreach” and said he was itching to take on the insider trading issue, died in February.
As for Visium, in addition to its losing clients, the probe may be taking Gottlieb’s attention away from managing money as the firm is also in the red this year. Visium Institutional Partners Fund is one of the worst-performing funds this year, according to HSBC’s ranking, down 13 percent through March. Visium’s bigger, offshore fund has fallen 7.45 percent after a healthy 2015, in which it gained 5.6 percent. It still has an annualized return of 9.62 percent since inception in 2005.
