If a hedge fund manager buys shares ahead of a major corporate announcement but fails to lock in his profits from the resulting price rise, could it still count as insider trading?
Leon Cooperman, the billionaire founder of Omega Advisors, and the US Securities and Exchange Commission are now going to court to find out.
This week, the SEC filed civil insider trading charges against Mr Cooperman and Omega, alleging that they “generated substantial illicit profits” of $4.1m by buying shares, bonds and options in Atlas Pipeline Partners after receiving information about a planned asset sale from a company executive in July 2010. The SEC also says Mr Cooperman explicitly promised not to trade on the information, which later boosted Atlas’ share price by 31 per cent when it was made public. Mr Cooperman “categorically” denies wrongdoing, writing in a letter to his investors that his Atlas investment “was based on fundamental research, rigorous analysis, and insight - not inside information.” He also pointed out that Omega had been investing in the company since 2007, and the shares bought in July 2010 represented a tiny fraction of the firm’s total investment.
Crucially for his fight against the SEC, Mr Cooperman also argues that he never made money from his July 2010 trading. Although Atlas shares leapt to $16.22 when the asset sale was announced, Mr Cooperman and Omega did not sell, and ended up losing money on their investment when they sold out last year. Mr Cooperman also argues that the options he bought offset a different set of options he had previously sold - so he did not make any money from them either. “In short, none of the trading is indicative of someone trying to . . . reap profits from inside information,” he wrote.
All these details matter because of a quirk of US law. While the UK and EU defines market abuse to include almost any trading while in possession of non-public, market-moving information, the American rule is much narrower. It requires enforcers to show that confidential information was intentionally “misappropriated”. If Mr Cooperman’s lawyers can show the July 2010 trades were a minor part of a broader - ultimately unsuccessful - investment strategy, the SEC may well have trouble proving he meant to misuse inside information.
But do not count the regulators out - they have a couple of key weapons.
First, they are bringing a civil case, so they have a lower standard of proof than a criminal prosecution. Second, they have neatly sidestepped a controversial 2014 appeals court decision that makes it harder for regulators to prove insider trading. This ruling requires proof that the person who tips off a trader has reaped financial benefit. But the SEC alleges that Mr Cooperman effectively stole the information, so there was no tipper.
Finally, on the important question of bad intent, the SEC has highlighted Mr Cooperman’s behaviour when he learnt regulators were on his tail. The complaint alleges that the hedge fund titan contacted the Atlas executive and sought assurances that there had been no sharing of confidential information “despite knowing this was not true.” The executive “believed Cooperman was trying to fabricate a story in case the two were questioned.”
Now it will be up to a court to decide: Does the alleged cover-up show that Mr Cooperman knew he was trading on inside information? Or is his failure to sell his shares proof that he is, as he insists, an innocent man? Stay tuned.
