Further Circumstantial Evidence Of Pervasive Insider Trading By SAC?

When back in November, long-before anyone had even heard of expert networks, Zero Hedge compiled a forensic analysis of SAC's 13F filings and holdings in various biotech companies (in this case ITMN, CYBX, MYGN) which had undergone actionable clinical trials and the result was either price surges or plunges, we concluded that there was indirect evidence that at least based on changes in stock holding patterns, SAC, one could certainly claim, was trading with a near-100% batting average ahead of critical clinical trial outcomes, leading to questions about trading propriety of the world's most infamous hedge fund. We also repeatedly asked the question: "Did SAC consult with an expert network or an outside consultant on any of the trades?" This was before it was made clear a few weeks later that there was a huge SEC operation looking at expert network hedge fund collusion. We are happy to see that today, roughly three months later, Bloomberg has extended our holdings analysis and has come to the conclusion that "SAC’s trading mimics insider dealings identified by prosecutors." In other words, the circumstantial evidence against Stevie Cohen and his trading methods continues to mount.

From Bloomberg:

SAC Capital Advisors LP traded at least 11 stocks near the time of insider trading in the same shares that prosecutors have identified at other hedge funds, according to data compiled by Bloomberg.

Former SAC portfolio managers Noah Freeman and Donald Longueuil obtained material, nonpublic information on two of the 11, Advanced Micro Devices Inc. and Marvell Technology Group, in a conspiracy beginning before they joined the hedge fund in 2008, according to a lawsuit filed this week by the Securities and Exchange Commission. The SEC accuses Longueuil of trading Marvell shares in May 2008 based on an illegal tip from Freeman. SAC hired Freeman that June and Longueuil that July.

SAC securities filings from 2006 through 2009 show position changes in at least nine other stocks during periods when prosecutors have said Galleon Group LLC co-founder Raj Rajaratnam and others were trading based on insider tips. The companies are Akamai Technologies Inc., Atheros Communications Inc., ATI Technologies Inc., Clearwire Corp., EBay Inc., Google Inc., the former Hilton Hotels Corp., Intel Corp. and Polycom Inc.

The $12.8 billion hedge fund’s positions in the 11 stocks moved up or down consistent with buying and selling that federal prosecutors have described in criminal filings related to other insider trading cases, the data compiled by Bloomberg show. Rajaratnam is awaiting trial next month after pleading not guilty to a 19-count U.S. indictment alleging securities fraud.

This is pretty much precisely what Zero Hedge observed, and what caused us to speculated back in November that all the peripheral investigations in insider trading were merely a smokescreen focusing on SAC. This is before it was known that SAC is indeed the chief target in the SEC's biggest insider trading bust in history.

Bloomberg goes on to observe several specific cases of what can only be described as blatant insider trading collusion:

Earlier that year, in March 2008, Rajaratnam received a tip that Intel planned to invest in Clearwire, a broadband service provider, according to government lawyers. Galleon bought 260,800 Clearwire shares just before the stock jumped on news reports of talks with Intel, prosecutors said.

SAC added 1.1 million shares of Clearwire to its holdings in the same quarter, which ended about a week after Galleon’s purchases on March 24 and 25. It then sold two-thirds of its position by the end of the next quarter, the hedge fund’s SEC filings show.

The SEC suit against Longueuil says he generated a $2.5 million trading profit in Marvell Technology in May 2008 based on the illegal tip from Freeman. SAC owned 309,636 shares of Marvell on June 30, 2008, according to its SEC filings, and also held options to buy and sell more shares.

Later, in January 2009, an employee of Marvell told a Galleon portfolio manager of a reduced internal revenue forecast at the Santa Clara, California-based maker of computer chips, according to government correspondence with Rajaratnam’s defense attorneys. During that same quarter, SAC liquidated its 203,498 shares of Marvell, the hedge fund’s filing shows.

As a reminder this is how the analysis went when it was performed last:

When we first looked at the HGSI news, we pored through CapIQ data of who else may have dumped the stock in advance of the clinical trial. Two other names stuck out: HealthCor and... SAC. This is all before we knew about the existence of the Balkany transcripts. In "Were There Other Hedge Funds Involved In The Human Genome Sciences Insider Trading Scandal Besides FrontPoint?" we presented the following 13F derived data:

First, here is the FrontPoint 13F historical holdings of HGSI (via CapIQ). What we have is the proverbial smoking gun right there.

The shift away from HGSI stock (and then back into it) is so blatantly obvious, one can forgive Morgan Stanley for hoping they would get away with it.

Yet here is where we notice some very comparable action at some other hedge funds.

First: HealthCor Partners:

And secondly, and far more curiously, S.A.C. itself, the fund which served as the springboard for FrontPoint's entire healthcare team:

And the following:

A quick glance at the CYBX stock price over the mid 2004-2005 period, together with SAC's disclosed holdings in CYBX, reveals an interesting pattern on the long side (obviously companies don't have to disclosed their short positions in 13F filings).

CYBX P/V chart:

SAC holdings in CYBX:

What is interesting is that not only does the CYBX chart demonstrate that the rabbi was spot on with his stock price recollection, but that SAC may have well acquired a million shares of the company ahead of its February 3 2005 announcement which sent the stock surging from $24 to the mid $40s. As to whether SAC may have shorted CYBX in advance of the August 12, 2004 adverse 8K which cut the stock price in half, that alas, can not be determined by 13F filings. What is obvious is that once the catalytic upside event occurred and SAC made about $20 million on its 1MM shares (assuming of course it bought the CYBX shares in advance of the favorable 8K) SAC never again expressed an interest in CYBX (and in fact its interest in the name had been dwindling over the several prior quarters as can be seen in the chart above).

The plot thickens when we take a comparable look at Intermune.

AS the chart below shows, ITMN is insider trader's dream: two massive moves in the stock - the first one tripling it from $15 to $45, the next one plunging from $45 to $10.

What we do know, again courtesy of SAC's 13F filings, is that the firm which previously had rarely had a concentrated position in ITMN, suddenly went from zero as of December 31, 2010, to almost 2 million shares by the end of Q1... A quarter in which conveniently the stock tripled. Had SAC bought the stock ahead of the favorable press release from March 9 (InterMune's fortunes soared along with its stock to as high as $48 a share after a U.S. Food and Drug Administration advisory panel voted to recommend pirfenidone's approval), it would have made $60 million virtually overnight. Yet SAC's holding were back down to zero by the end of Q2, a quarter in which on May 4, the stock plunged by almost 80% on this adverse piece of news (The agency refused not only refused to go along with the advisory panel vote but told InterMune that another clinical trial would be required before the agency reconsidered the pirfenidone approval decision).

Third, looking at Myriad Genetics once again reveals a peculiar trading pattern by SAC. While the transaction in question in MYGN occured after the particular conversation by the rabbi, readers should keep in mind that as noted earlier odd patterns would only emerge in long holding positions: SAC had no obligation to disclosed short bets. And a long term chart of MYGN indicates that the firm sure has had its share of let downs in the past. Yet even just looking at the long side begs a question: as can be seen on the chart below MYGN, announced a cut in guidance on May 5, which led to a trouncing of the stock.

Yet as the 13F summary shows, as of the end of the quarter in which the beating was administered, SAC owned no shares, after owning 700k the quarter just prior...

... and increasing its holdings to 1mm in the quarter after once the stock had not only stabilized but had once again jumped on favorable news.

To be sure, all of this continues to be nothing less than circumstantial evidence of insider trading. The smoking gun, as we suggested previously would be a transcript of an expert network conversation, or a memo which indicates that the reason for purchasing or selling stock is based on non-material information. On the other hand, this is precisely the easiest evidence to cover up in what even the SEC is starting to realize is nothing less than a "mosaic theory" of information arbitrage, which also happens to be a great ploy to divert legal attention from the SEC's incompetent lawyers.