SEC Accusations Against US Billionaire Highlights Centrality of Insider Trading to Hedge Fund Profits

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  September 22, 2016

SEC Accusations Against US Billionaire Highlights Centrality of Insider Trading to Hedge Fund Profits

Former financial regulator Bill Black discusses the case of Leon Cooperman, who once accused Obama of unfair treatment of the rich
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William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. Black was a central figure in exposing Congressional corruption during the Savings and Loan Crisis.


KIM BROWN, TRNN REPORTER: Welcome to The Real News Network. I'm Kim Brown in Baltimore.

One of the most prominent hedge fund managers on Wall Street just caught charges on Wednesday from the Securities and Exchange Commission over allegations of insider trading. His name is Leon Cooperman. And aside from being tremendously wealthy, in 2011 he wrote a personal letter to President Obama eschewing the perils of so-called class warfare, basically saying that he thought the president's rhetoric on income inequality was off base.

And today we are joined from Kansas City, Missouri. We're speaking with Bill Black. Bill is an associate professor of economics and law at the University of Missouri-Kansas City. He's also a white-collar criminologist and a former financial regulator, plus the author of the book titled The Best Way to Rob a Bank Is to Own One. And he's a regular contributor right here on The Real News.

Bill, welcome. Thank you again for joining us.

BILL BLACK: Good to be back--all of one day later.

BROWN: That's right.

Well, Bill, let's start off with what Cooperman is accused of. The SEC says in 2010 that Cooperman profited illegally when he used his influence as a majority shareholder at a company called Atlas Pipeline Partners to gain nonpublic information about an upcoming transaction. His representatives tell CNBC of course that these charges are without merit. But, by the way, Bill, this sounds a lot like what Martha Stewart was accused of, of sorts.

BLACK: Well, actually, Martha Stewart was not accused of insider trading. She was accused and prosecuted successfully for lying to the FBI about insider trading. So the coverup was what got her.

But this one actually ties to your point. Just before he wrote that letter, which went viral among--this is not the 1 percent; this is the 0.0001 percent. This is the billionaire class. And there are Wall Street Journal stories at the time talking about how this went viral among the billionaire class, attacking Obama. Well, it turns out, if the SEC is correct, that he may not have been to the manner born, but he was to the manner largely through things like insider trading.

So, as you said, he owned a significant position and his hedge fund owned a significant position in an oil and gas company called Atlas. And the way he did business was to get really close with the CEOs in this situation--of course so that he could get inside information. And the CEO in this case, according to the SEC complaint, gave him critical inside information. And that was that Atlas was about to sell a big chunk of its operations for far more money than people had thought they were worth, and it was going to bring in $650 million. And Cooperman knew this would cause the stock price to rise dramatically.

And so Cooperman suddenly bought a lot of short-term options to purchase stock, which is a really risky thing to do unless you have inside information and know that there not only is going to be something good, but something good's going to happen really quick before your options expire. And it's also a cheaper way, if you do have insider information, to take a really big position, so that you can gain an enormous amount from the insider deal.

According to the SEC, Cooperman had been selling shares in Atlas for many months, and that there's an internal document in which he uses a vulgar term to describe how bad Atlas is and that they need to get out of these positions, they need to sell. Right?

And then, right after he has this phone call, I mean, like, minutes after he has this phone call with the CEO, in which the CEO--well, we presume it's the CEO; it's an unstated officer, but it's very likely the CEO--tells him, according to the SEC, we're about to do this deal; you cannot talk about this; this is insider, confidential information; you need to promise me you won't do any trading on that basis. And Cooperman, according to the SEC complaint, promised, and then lied. Cooperman's defense is, oh, we did all of this because of sound analytics, but his sound analytics were telling him to sell. It's only when he got the confidential information that he changed 180 degrees what he was doing and suddenly bought. So this is a story that doesn't make any sense.

So you have to ask yourself: where is the Department of Justice? Why isn't it prosecuting this (if the SEC is right) exceptionally strong case for demonstrating insider trading? And the SEC complaint says, on top of that, there was a coverup--and this does make it more like Ms. Stewart--in which he, Cooperman, tried to agree on a false story with the (presumably) CEO in case the SEC came around. And the implication of all that, of course, is that the CEO and other senior officers at Atlas are cooperating with the government and telling them, this is the lie he wanted us to use in unison with him so that he could cover up this scam.

BROWN: Well, Bill, hold on, let me interrupt you for a second, because, I mean, Leon Cooperman is a rich man. He's a billionaire. Like, the company that he owns and operates, Omega Advisors, is worth $10 billion. So why would Leon Cooperman need to engage in insider trading?

BLACK: Need is the wrong word. This has nothing to do with need. There's a joke in our family when our daughter would always phrase things in terms of need. This is pure desire. He wants money. He wants to be known as a genius who makes these buys and sells at exactly the right time because he's smarter and works harder and this rags-to-riches story he likes to tell about himself, when the reality, if the SEC is right, is that not just in this deal, but in deal after deal, his entire way of doing things is to get close to the CEOs by getting the stock position, talk to them, get insider information, and then, you know, it's like shooting fish in a barrel for him. So it's both money and it's prestige.

And the other thing is, the thing he was really upset about (Obama, of course) is that hedge fund guys are not only billionaires, but they get this exceptionally low tax rate that Mitt Romney made famous, right, of 15 percent. So they pay literally less than their secretaries pay as a percentage. But tougher times have fallen on the hedge fund industry, because it is (a) an industry built primarily on getting insider trading information and (b) on having these extraordinary profits. Their fees and their percentage of the wins are much, much bigger than elsewhere on Wall Street--and Wall Street, of course, is not exactly a place that treats people nicely. So the hedge funds are off the charts in how badly they turn investors. And this year there have been hundreds of billions of dollars in withdrawals from hedge funds, and people are starting to go, why are we getting gouged this way? So people like Cooperman also are afraid that the days that they could get away with everything are diminishing. And so they want to get that last extra tens of millions of dollars.

BROWN: The letter that he wrote to President Obama in 2011, let me read to you a quick excerpt of it. Quote:

With due respect, Mr. President, it's time for you to throttle-down the partisan rhetoric and appeal to people's better instincts, not their worst. Rather than assume that the wealthy are a monolithic, selfish and unfeeling lot who must be subjugated by the force of the state, set a tone that encourages people of good will to meet in the middle.

Bill, what is the middle that he is speaking of in this letter?

BLACK: The middle for him is that he gets to be a billionaire through insider information, making money the old-fashioned way--cheating--and he gets to keep all that money, he isn't prosecuted, he isn't investigated, and he pays a 15 percent tax rate of most.

BROWN: Well, there's the middle.

Well, Bill, we certainly appreciate your time. Thanks for joining us on such quick notice about this very interesting topic.

Cooperman, Leon Cooperman, has been charged by the SEC, accused of insider trading.

We've been speaking with Bill Black. He's an associate professor of economics and law at the University of Missouri-Kansas City. He's also a white-collar criminologist and former financial regulator, so he knows what he's talking about. And check out his book. It's titled The Best Way to Rob a Bank Is to Own One.

Bill, we appreciate your time as always. Thank you.

BLACK: Thank you.

BROWN: And thank you for watching The Real News.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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