At Last We Know How Hedge Funds Are Making All That Money

By Pam Martens: December 13, 2012 

The ink was barely dry on the $1.9 billion get-out-of-jail-free card that those corporate lawyers that now head up the U.S. Department of Justice handed global bank, HSBC, on Tuesday when long-overdue outrage erupted from the media.  There was so much attention to the HSBC stench that a potentially more fascinating and equally smelly deal from the Justice Department went down with little attention the very next day.  More on that in a moment. 

On the Justice Department’s decision to add part of the drug money laundered by HSBC to its own coffers and call it a day without prosecuting HSBC or any of its employees, CNN quoted Notre Dame law professor, Jimmy Gurulé, an international expert on criminal law.  Gurulé said the settlement “makes a mockery of the criminal justice system,” adding that “there appears to be an exception for employees of large banks that have engaged in particularly serious and egregious violations of the law. That’s an insane policy.” 

CNBC quoted a statement on the HSBC deal issued by Global Witness, the human rights nonprofit group, which said “Fines alone are not going to change banks’ behavior: the chances of being caught are relatively small and the potential profits from accepting dodgy clients are too big. Fines are seen as a cost of doing business.” 

In an editorial, the New York Times called the HSBC settlement “a dark day for the rule of law.” Fingering their worry beads (the beads they threw out the window when their editorial page happily advocated for the repeal of the Glass-Steagall Act – the daddy of too big to fail or jail –) the Times questioned why no individual at HSBC was charged in such a well documented case of money laundering for drug cartels.  The editorial said  “it boggles the mind that a bank could launder money as HSBC did without anyone in a position of authority making culpable decisions.” 

But if the Time wants its mind genuinely boggled, it need only peruse the settlement that snuck in one day later – the insider trading case against the iconic Tiger Asia Management LLC hedge fund that magically became a one-count prosecution of wire fraud – which, having worked 21 years on Wall Street, I can assure you is not the same thing as insider trading. But even more incredulous, the company without the apparent aid of human beings, committed the crime and was the sole defendant charged by the Justice Department — giving  corporate personhood a whole new dimension. 

You know there’s something really fishy going on when the U.S. Attorney for New Jersey decides to prosecute a hedge fund based in Manhattan – which last time I checked was still a New York jurisdiction. Here are excerpts of the press release from the U.S. Attorney’s office for the district of New Jersey:

“Tiger Asia Management LLC, an international hedge fund management company, pleaded guilty today to a wire fraud scheme, U.S. Attorney Paul J. Fishman announced.

“Company founder Sung Kook ‘Bill’ Hwang, 48, of Tenafly, N.J., pleaded guilty on behalf of Tiger Asia Management before U.S. District Judge Stanley R. Chesler in Newark federal court to an Information charging the company with one count of wire fraud. Following the guilty plea, Judge Chesler sentenced Tiger Asia to one year of probation and ordered Tiger Asia to forfeit more than $16 million in criminal proceeds…

“On three separate occasions in December 2008 and January 2009, investment bankers contacted Tiger Asia and asked whether Tiger Asia was interested in purchasing shares of stock in one of two Chinese companies whose stock was traded on the Hong Kong Stock Exchange. Before providing further information to Tiger Asia concerning the companies or the terms of the proposed sales, however, the investment bankers first required that Tiger Asia agree to be ‘brought over the wall,’ or ‘wall-crossed,’ standard industry terms which meant that Tiger Asia was required to keep the information disclosed to it confidential and could not buy or sell stock based on the information.

“On each of these three occasions, a Tiger Asia executive agreed to these restrictions and then violated the agreement. Almost immediately after receiving the confidential information, Tiger Asia used that information to trade millions of shares of stock in the companies at issue. By trading on this valuable, nonpublic information in violation of its agreements, Tiger Asia reaped more than $16 million in illicit profits.” 

The actual criminal information filed with the court explains precisely how this hedge fund was making big money and precisely how formal this so-called “wall” was.  In one example:

“On or about December 18, 2008, a representative of UBS AG (‘UBS’), a financial services company headquartered in Switzerland, contacted R.P. The UBS representative asked R.P. whether Tiger Asia Management wanted to be ‘wall crossed’ with respect to the sale of a large block of stock for which UBS was acting as the placement agent.  The UBS representative told R.P.that if Tiger Asia Management agreed to be wall crossed, it would have to keep the information that would be disclosed confidential and could not trade in the securities that were the subject of the information. R.P., on behalf of Tiger Asia Management, agreed to these restrictions. 

“Once R.P., on behalf of Tiger Asia Management,agreed to be bound by these confidentiality and trading restrictions, the UBS representative told him that UBS intended to sell approximately 3.3 billion shares of Bank of China stock at a discount of between approximately 8% and approximately 10% of market price.  The UBS representative also told R.R. that the deal would close on or about December 31, 2008.” 

Now what was the formal arrangement for sharing this market-moving, insider information?  Was it a contract drawn up by the legions of white shoe law firms working for Wall Street?  Was it a formal letter signed between the compliance departments of UBS and the hedge fund?  No.  It was an email between the UBS trader and the hedge fund trader that was sent four days after the first conversation and went like this: 

“This e-mail is being sent to memorialize a previous conversation between us whereby you agreed on behalf of Tiger Asia to receive confidential information from UBS…in connection with a potential sell down of the shares in Bank of China. As part of that conversation, you expressly agreed that Tiger Asia will hold any information regarding Bank of China and UBS AG in confidence…[and] you will not engage in trading activities regarding any security of Bank of China.” 

And the very official, very contractually binding, very legally expressed response from Tiger Asia was: “Got it. Thx.”  

According to the Justice Department, on multiple such occasions including this one, Tiger Asia proceeded to short the stock being offered, then used the stock it purchased at a deep discount from the block trade to cover its short and make multi-million dollars in profits. A slam dunk trade if ever there was one.

The stench in this scenario rises from the following: if the big Wall Street firms doing these block trades with hedge funds were really serious about insider trading, they wouldn’t be hanging their agreements on emails and “Got it. Thx.” They would have legally signed contracts in place. (In addition to UBS, deals involving Morgan Stanley, Bank of America, and RBS are mentioned in the Tiger Asia matter.)

Among the many conflicts is that hedge funds are frequently among the largest customers of the big Wall Street firms, having lines of credit, margin accounts, trading relationships, and mutual interests.  

There is the suspicion that the way this case was prosecuted – or not prosecuted – was to tie up with a neat bow the fear of prosecution for trades such as these, set a low bar for future such actions, and get it all done before President Obama might decide to make changes within the top ranks of the U.S. Department of Justice.

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