| Leon Cooperman, chief executive officer of Omega Advisors Inc. (Illustration by Hellovon). |
By July 2010, Leon Cooperman was having a bad year. The flagship hedge fund of Omega Advisors, his then-19-year-old firm, was down almost 5 percent through June — a decline that threatened the comeback he had been enjoying since the financial crisis of 2008, when Omega lost 35 percent of its value in the stock market rout. In 2009, Cooperman had bet the market would recover, and his prognostication had proved correct: His fund gained 52 percent that year.
But in 2010, as the May “flash crash,” the BP oil spill, and troubles in Greece pummeled the market — it bottomed on July 2, down 16 percent — the veteran hedge fund manager, then 67 years old, was watching some of his long-term holdings tank. One in particular rankled so much that on July 7 Cooperman called an Omega consultant and referred to the company, a small, Pennsylvania-based oil and gas concern called Atlas Pipeline Partners, as “a shitty business,” according to a Securities and Exchange Commission complaint, filed in a Pennsylvania federal court, alleging insider trading in Atlas securities. Indeed, shortly after criticizing the business in such crude terms, Cooperman learned from an insider that Atlas was preparing a sale of one of its operations, and he began to buy up the company’s shares, options, and bonds, the SEC says. On September 21 the SEC charged Cooperman and Omega with insider trading in Atlas securities, making illegal profits of about $4 million. In an unusual move, the SEC threw in minor charges alleging more than 40 instances where Omega flouted reporting requirements regarding its ownership of other stocks — a seeming attempt to show disregard for the rules. And that’s not all: The case is replete with allegations of broken confidentiality, dozens of suspect trades and a pattern of misconduct; at least three government witnesses confirming Cooperman’s alleged misdeeds; and even an alleged cover-up. Add it all up, and the SEC has stitched together a compelling story of alleged illegal activity that could be hard to overcome (read about the case for Leon Cooperman here).
“When juries hear those facts, they think it’s not the kind of thing innocent people do,” says Terence Healy, a former SEC assistant chief litigation counsel who is now a partner at Hughes Hubbard & Reed. If Cooperman is not stopped, the SEC says, he will continue to break the law.
The allegations have shocked the already troubled hedge fund world. For his part, Cooperman has denied the charges and vowed to clear his name.
“We’re going to win [the case], but basically they’ve ruined my business because people have a tendency to fire, aim, ready,” he said at a conference in New York just days after the news hit, hinting, in the wake of an investor exodus, that he might soon end up running a family office. Much damage has already been done: Investors pulled some $3 billion between the time Cooperman told them in 2015 that he was under investigation through early-October 2016. Some $2 billion of his now-$4.6 billion in assets is partner money, he says.
Cooperman says he has declined an offer from the SEC to settle the case for $8 million; Bloomberg reported that the SEC also wanted to impose a temporary ban on Cooperman managing money. It appears from the complaint that negotiations had been ongoing for more than a year before the case was filed, as the five-year statute of limitations was “tolled,” or delayed, in 2015. If the case goes to trial and the SEC wins, it would mark a humiliating end to the storied career of a man widely viewed as a dean of the investment management industry. Cooperman faces monetary fines and a disgorgement of more than $16 million. Though this would be a mere drop in the bucket for him, he could be prohibited from serving as a director or officer of any public company or research firm and possibly have to shut down his hedge fund for a specified time period. Cooperman could easily survive those demands, but such an outcome would destroy his legacy, which he is determined to try and preserve.
The government’s effort is just the latest in a string of more than 100 insider trading cases in recent years, most of them criminal as well as civil. Cooperman has not been indicted on criminal charges, although a probe by the U.S. attorney in New Jersey is ongoing. Still, he is the biggest fish the feds have been able to land. Even Steven Cohen, the former SAC Capital Advisors hedge fund kingpin, never was personally charged with insider trading despite years of trying by Preet Bharara, U.S. attorney for the Southern District of New York.
Cooperman says he wants to preserve his legacy, and for good reason. Worth an estimated $3 billion, he is not the wealthiest hedge fund manager, nor is Omega Advisors one of the biggest funds, despite a hefty double-digit annualized gain during its lifetime. (It peaked at about $11 billion in 2014.) But Cooperman, 73, is one of the industry’s best-known managers, having helped bring hedge funds to mainstream attention with his regular appearances on business network CNBC, speeches at industry conferences, and interviews in the financial press. Surprisingly, even now he is making the rounds to defend himself, a move that would undoubtedly make a high-priced defense lawyer cringe.
But to those who know him, that’s classic Cooperman. He’s widely considered something of a curmudgeon, known for a gruff manner that is often attributed to growing up on the mean streets of New York City’s South Bronx, the son of a plumber. Cooperman isn’t one to mince words and admits he’s difficult to work for. As he put it in a 2013 interview with Alpha, “I don’t tolerate fools well.” Like many of his peers, Cooperman prides himself on long workdays and frequent communication with corporate executives to learn more about the companies he owns.
So, after complaining about Atlas earlier in the day on July 7, 2010, Cooperman at 2:06 p.m. did what he usually does: He picked up the phone and called one of the company’s executives.
The call would change his life forever.
Leon Cooperman told investors he knew the Cohen family that controlled Atlas Pipeline well; he first invested in the company in 2007 through a PIPE, or private investment in public equity. By December 2009 his funds owned more than 9 percent of Atlas’s stock, valued at $46 million, according to the SEC complaint. More recently, Cooperman told investors he had paid $150 million for his shares, so he likely was more than $100 million in the red in 2010.
He had watched the stock slide from a high of $44 to as low as $7, and during the first half of 2010, Omega sold millions of dollars’ worth of Atlas shares, according to the SEC. In fact, “during the first half of 2010 there was no day on which [his various accounts] were net buyers of Atlas common stock, call options or bonds,” the SEC alleges, adding that Cooperman had said in an e-mail that he was “scaling out of [Atlas] on strength.”
In May 2010, Atlas announced it was planning to shore up its balance sheet to return cash to shareholders, which it hadn’t done in almost a year. Behind the scenes it was working on a deal to sell its Elk City, Oklahoma, operations. By the time Cooperman made his fateful call to an Atlas executive on July 7, the company’s board of directors had agreed to take up the sale at its next board meeting, scheduled for July 27, according to the SEC complaint. During Cooperman’s call, which lasted only six minutes, the executive — whom the SEC did not name — told the hedge fund manager Atlas was negotiating the sale of its Elk City properties because “he believed Cooperman would maintain the information in confidence,” the SEC alleges. It was the first of three calls Cooperman would make to the same executive ahead of the Elk City sale announcement. In one of them Cooperman “explicitly agreed he could not and would not trade on the confidential information,” according to the complaint.
Cooperman did not stick to his word, according to the SEC. The day he learned of the pending deal, the agency says, Cooperman and his various Omega hedge fund accounts purchased a total of 1,966 Atlas call options, with a strike price of $15, expiring August 21. Those out-of-the-money options accounted for 90 percent of the trading in those options on a day when the stock closed at $9.66.
Then Omega started buying stock and bonds. On July 13 it bought 101,100 shares of Atlas stock, 3.5 million bonds, and 1,980 call options. Omega continued to buy Atlas stock: 62,500 shares on July 15 and 125,000 shares on July 16. On July 19, the SEC alleges, Cooperman had another phone conversation with the Atlas executive, after the company had reached an agreement in principle to sell its Elk City operations. That day Omega made another stock purchase, of 55,000 shares. On July 20, the firm bought 3,800 out-of-the-money call options with a strike price of $15, expiring November 20. On that day Omega accounted for 95 percent of the options trading. The firm also bought 61,700 shares. All of the share purchases were between $10 and $11.25 per share. Then, for an account that belongs to his grandson, Cooperman bought $50,000 worth of Atlas bonds.
Over the next few days, Omega kept buying Atlas securities, including 1 million bonds on July 21. Between July 21 and July 27, the firm purchased almost 5,000 call options with a $17.50 strike price, expiring November 20. On three separate days Omega’s purchases accounted for the entire volume of trading in the options, the SEC says. The sheer magnitude of the purchases will make it hard for Cooperman to argue the whole thing was a coincidence, lawyers say.
On July 28, Atlas announced the sale of Elk City for $682 million, and its stock jumped by more than 31 percent for the day, closing at $16.22 — putting many of Omega’s options in the money. Earlier in the year Omega had sold the same number of call options as it purchased, so it ended up flat on those trades. But Omega could have lost money if it hadn’t bought the exact number of the same priced and dated calls to offset the sales.
Atlas apparently was a bad investment overall. The company was sold to Targa Resources in 2015, and Omega sold its shares. It could have been worse: The firm eventually lost only $34 million on its investment in Atlas. Making a profit off inside information isn’t required for it to be illegal, prosecutors like to point out. But the SEC says Omega did make money — $4 million — between the time Cooperman received the inside information and when the deal was made public. And by the end of July 2010, Omega’s flagship had come back and was up almost 4 percent for the year.
There is no statute clearly stating what constitutes insider trading, making the definition of the fraud a murky one that has been left to the courts to interpret. In December 2014 an appeals court struck down the convictions of hedge fund managers Todd Newman and Anthony Chiasson on a narrow definition that requires prosecutors to prove that the recipient of illicit information who traded on it provided a “personal benefit” to the insider who offered it. It was a stunning rebuke to U.S. Attorney Bharara, whose office had prosecuted the men; soon several other federal convictions were thrown out. Since then a California insider trading case based on a “benefit” to tippers has found its way to the U.S. Supreme Court, which may help clarify the matter. Oral arguments were heard in October, but a decision isn’t expected until next year.
The uncertainty appears to be one reason federal prosecutors have not charged Cooperman criminally. The hedge fund manager says they’ve told him they are waiting for the Supreme Court to weigh in, leaving the investigation open. But the SEC, whose civil cases require a lower standard of proof — a “preponderance of the evidence,” in contrast to “beyond a reasonable doubt” — has charged Cooperman and Omega using an entirely different theory of insider trading: The agency alleges that Cooperman “misappropriated” the information from the insider because he knew it was confidential and promised not to trade on it.
Trading on “material nonpublic information” is not illegal in itself, lawyers point out. In the 1960s a federal court ruled that insiders must “disclose or abstain” from trading. But a 1997 ruling in United States v. O’Hagan added a “duty of confidentiality” to the standard. Cooperman is accused of violating SEC Rule 10b5-2, enacted in 2000, prohibiting “the purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence that is owed directly, indirectly, or derivatively, to the issuer of that security or the shareholders of that issuer, or to any other person who is the source of the material nonpublic information.”
The SEC must prove that the Atlas executive gave the information to Cooperman on a confidential basis and that the hedge fund manager agreed not to trade on it. “The misappropriation theory is that he stole the information by lying to the executive,” says Michael Bowe, a securities litigation partner at Kasowitz Benson Torres & Friedman.
There is no suggestion that the SEC has direct evidence — a wiretap, for example — proving Cooperman promised not to use the information. That means if the case goes to trial, prosecutors will have to convince a jury that an executive at a small oil company (run by a powerful family in the state where the case was filed) is more believable than a billionaire hedge fund CEO. Former small-time trader and lawyer Mike Kimelman, who was convicted of insider trading in 2011, thinks the odds are against Cooperman. “Juries just don’t like hedge fund billionaires,” says Kimelman, who believes the SEC has a “good case.”
Cooperman declined to comment to Alpha and took the Fifth when called before the SEC during its investigation.
The agency lost a similar case, against billionaire Mark Cuban, owner of the NBA’s Dallas Mavericks, in part because the executive who was critical to the case was in Canada and could not be subpoenaed to testify. Cuban’s celebrity status in Dallas, where the case was heard, also likely helped him, lawyers say.
The case against Cooperman appears to be easier to make. Prosecutors will have to show the motive of the corporate executive to share the information with Cooperman, a longtime investor who was turning negative on the stock. “He’ll need to say, ‘We never would have said a word to this guy if there was any chance he would have traded, and we were completely taken advantage of. We were merely acting in good faith, trying to increase his confidence in the company so he wouldn’t sell any more stock,’” says Yale University securities law professor Jonathan Macey.
Indeed, the Atlas executive only learned that Cooperman had traded on the confidential information some 11 months later, after the hedge fund manager had received a subpoena from the SEC about his trades, the complaint alleges. The executive was “shocked and angered” to learn that Cooperman had traded ahead of the public announcement, according to the SEC complaint. At that time, “Cooperman improperly sought [the executive’s] assurance that [he] had not shared confidential information in advance of the announcement of the Elk City sale, despite knowing this was not true,” the SEC alleges. The executive, it adds, “believed Cooperman was attempting to fabricate a story in case the two were questioned about their conversations regarding Elk City.”
Introducing another witness against Cooperman, the SEC also alleges that the hedge fund manager instructed another Atlas executive to tell the first executive to stick to Cooperman’s version of events. The cover-up may be worse than the alleged crime, as phone calls trying to coordinate the story “suggest a guilty heart,” says a former SEC enforcement lawyer.
Instead of a “he said, she said,” case, this is “he said, they said.” In fact, Omega’s consultant could be a third witness in building the SEC’s case against Cooperman: The agency claims the hedge fund manager told the consultant about receiving the insider information. On July 20, 2010, the SEC alleges, Cooperman called the consultant as soon as he got off the phone with the first Atlas executive. During that call Cooperman told the consultant that he had learned of the deal to sell the Elk City unit and discussed the impact on the stock price, according to the complaint. By the next day the consultant had incorporated this inside information into his model of Atlas’s financials, the SEC alleges.
The SEC’s case is damning for other reasons. Attorneys and hedge fund managers alike say the best-practices standard for hedge funds of Omega’s stature is a written requirement that when anyone in the firm receives material nonpublic information about a company, its stock is put on a restricted list, which means no one in the firm is allowed to trade in its securities. “If someone in an organization gets MNPI, firms have a rule that it gets put on the no-trade list,” says lawyer Bowe.
Even Cooperman admitted in an interview on Bloomberg TV in October that “if you have inside information, you should not use it.”
A written compliance manual that specifically proscribes trading on any material nonpublic information is something many big investors have come to expect of their managers. “In recent years the heightened regulatory scrutiny over hedge funds has led most institutional investors to demand a strong compliance culture,” says Jedd Wider, a partner at Morgan, Lewis & Bockius, who runs the firm’s hedge fund practice. He notes that compliance officers are supposed to make sure the rules are followed, even by the CEO of the firm.
The SEC’s complaint against Cooperman and Omega raises doubts about the strength of the firm’s compliance, suggesting that its weakness could allow the hedge fund manager to run afoul of the law. And it’s not just about insider trading. Half of the 34-page complaint is devoted to allegations that Omega simply did not file appropriate reporting disclosures with the SEC when its ownership of a security met certain thresholds. More startling, many of these 40-plus cases occurred after Cooperman knew he was under investigation. In fact, one case occurred in August of this year, after Cooperman had received a Wells notice — an alert from the SEC that it is about to bring charges.
Omega was often months late in making the required filings when the firm’s ownership increased in stocks in which it held more than a 5 percent stake. For example, Omega bought 50,000 shares of Altisource Portfolio Solutions on April 21, 2014, making it a 5.06 percent shareholder and requiring the firm to file a Schedule 13G within ten days, or by May 1, 2014. But Cooperman didn’t make that disclosure until January 23, 2015. During that time, when the market did not know how much Omega owned, Cooperman purchased an additional 5 percent of Altisource stock.
Investors say it’s not unheard-of for hedge funds to miss the reporting deadlines if they haven’t fully established their positions — or if they’re trying to get out of one. That way, they can continue buying stock without alerting others they are a big buyer, which might push up the price. Alternately, they could sell without bringing the price down.
But doing so legally requires getting a waiver from the SEC, and some skip that step. To some funds, it may be considered a small infraction of the rules that is worth paying a fine for if they get caught. The SEC seldom follows up on these cases; it simply doesn’t have the manpower.
“Most people think they’ll never be under the microscope of regulators,” says former SEC litigator Healy. “Look at the number of registered broker-dealers and the number of regulated investment advisers and the amount of trading, and compare that to the limited number of examiners. The SEC is outnumbered by a factor of 1,000.”
The SEC’s inclusion of the failures to disclose, minor as they are, in its case against Cooperman is designed to make the point that he routinely flouts the law, say lawyers and hedge fund managers. “It just confirms the guy thinks he can do what he wants,” says a fellow fund manager. It could help inoculate the SEC from the obvious question of why a billionaire hedge fund manager would bother breaking the law to make a mere $4 million. Adding in the disclosure violations allows the agency to argue: “This is just how he is. He does this big and small,” lawyer Bowe says. “Regular people would understand that. It’s the rich guy who stiffs the contractor.”
The tragedy of Cooperman’s case is not just that a legend’s reputation has been tarnished. There’s a Shakespearean element: It appears that the hedge fund manager’s son may have unwittingly turned him in — or at least wanted to do so.
On the eve of the Elk City sale announcement, Cooperman sent an e-mail to his son Wayne Cooperman — whose Cobalt Capital Management was short Atlas — saying the company had sold the Elk City operation for $682 million. “We think the stock is worth at least $15 in near term — for what that is worth,” the father told his son, according to an e-mail quoted in the SEC’s complaint.
The next day, after the sale was announced, the SEC says Wayne Cooperman shot off an angry e-mail to yet a third Atlas executive, saying, “I would also like to make sure that the SEC looks into the shady options trades and volume in Atlas the last two weeks or so in front of this deal.” Then the younger Cooperman asked, “How do I become a whistleblower?”•
