Roomy Khan

From Reuters:

“Between 2004 and November 2007, I along with several co-conspirators engaged in a conspiracy to commit securities fraud,” Khan said. “I used inside information provided to me by co-conspirators who worked for publicly traded companies and investor relations companies who had access to confidential information on particular companies and used it to make profitable trades.

“I provided the information to several co-conspirators who worked for various hedge funds, who also traded on the inside information for profit.”…

“These trades were made on the basis of the inside information provided to me by a source in New York City,” Khan said…

“I deleted an incriminating email sent to me — sent to me from one of my co-conspirators, rather than turning it over to the government investigators,” said Khan.

And this ain’t the first time:

Raj Rajaratnam, the hedge fund executive accused of participating in a massive insider trading scheme, moved on Thursday to unseal a 2000 criminal case against the woman who admitted to giving him confidential information about a number of companies. (Read the motion after the jump.)

In that case, the woman, Roomy Khan, was accused of passing along nonpublic information about Intel to an unnamed representative of the Galleon Group in 1998. A person briefed on the matter previously identified the Galleon representative to The New York Times as Mr. Rajaratnam, the firm’s founder.

Ms. Khan pleaded guilty in that case in 2001 and was sentenced in 2002. However, the case has remained under seal since then, leaving only a two-page charging information as the only publicly available document.

It’s a sordid tale:

Roomy first ran afoul of authorities in early 2001, after they discovered she had faxed Galleon confidential information about Intel several years earlier. She was sentenced to six months of home detention, fined $30,000 and ordered to pay $120,000 in restitution to an undisclosed individual, according to Federal Bureau of Investigation spokesman Joseph Schadler.

By 2002, she appeared to be back on her feet. The couple earlier received a $2 million revolving credit line and later borrowed $5 million against their house, according to California property records.

Around that time, Roomy and Sakhawat crossed paths with Robert Hyams, according to a person to familiar with the Khans. After meeting the Englishman, their problems only grew.

Hyams had told the couple he was a Stanford University professor and dabbled in real estate on the side, according to a person familiar with the Khans. Hyams couldn’t be reached for comment.

In December 2002, the Khans cut a $26 million deal to sell two houses to Hyams, who backed out, costing the couple tens of thousands of dollars in lost fees, according to a lawsuit the Khans filed against him in January 2003 in San Mateo County Superior Court.

At that time, Hyams was being sought by U.K. authorities, after he failed to pay for artwork — including a Chagall painting — he had won at a Christies auction.

Hyams later pleaded guilty to 10 counts of attempting to obtain property by deception. In January 2006, he was sentenced to five years in prison. Authorities described Hyams as “a career con-man who has a string of convictions for fraud and has left a trail of misery and bad debt behind him,” according to a press release from London’s Metropolitan Police Service.

A California court ordered Hyams to pay the Khans tens of thousands of dollars for breach of contract. But the couple didn’t get a penny, according to the person involved in the litigation. Hyams couldn’t be reached for comment.

The Khans faced subsequent problems in January 2005, when Deutsche Bank alleged Digital Age Capital, a financial consultancy Roomy had established, had failed to make timely payments on money owed to the bank. A year and a half later, the New York State Supreme Court ordered Digital Age Capital and the Khans to pay $103,750 to Deutsche Bank.

With broader implications:

The Galleon case is already the biggest hedge fund insider trading scheme in Wall Street history, and in Thursday’s complaint one of the suspects admitted to years of insider trading apparently overlapping with his time at a former job at SAC Capital, perhaps the nation’s best-known hedge fund.

From Susan Pulliam at the WSJ:

Federal authorities in the Galleon Group insider-trading case are investigating the activities of a former SAC Capital Advisors analyst who has been cited, but not named, in a criminal complaint filed in the case, according to people familiar with the matter.

The complaint, filed last week in a New York federal court, alleges that an unnamed individual—identified by people familiar with the matter as former SAC analyst Mark Adams—provided nonpublic information in 2008 and 2009 regarding a Massachusetts “information technology” company. That company is software firm EMC Corp., where Mr. Adams once worked, the people say. The alleged trading took place after Mr. Adams left SAC and was at another hedge fund…

SAC’s tie to the case stems from a plea agreement signed in October by Richard Choo Beng Lee, a former SAC trader who is witness in the government’s Galleon case. Under his agreement with the government, Mr. Lee has agreed to provide information to the government about the activities of other SAC traders during the period he was employed by an SAC division, from 1999 until 2004, people familiar with the matter say.

From Susan Craig at the WSJ in August:

Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster “neutral” in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.

The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.”

If you know me at all, you know where I’m headed next:

Goldman is in the business of serving SAC Capital, which is known to pay more and higher commissions than any firm on Wall Street (a model pioneered by Michael Steinhardt). And, apparently, one of Goldman’s services is to give SAC Capital advance notice of the contents of its research reports, so that SAC Capital can trade on that inside information, effectively transferring money from the accounts of average investors into the bank account of Steve Cohen, whom BusinessWeek magazine has called “the most powerful trader on Wall Street.”

For those who do not know, Steve Cohen is the proprietor of SAC Capital. He spent his formative years as the top trader for Gruntal & Company, a brokerage that stood firmly on “The Shabby Side of the Street” – as Fortune magazine described it. Gruntal was staffed largely by criminals, some with ties to the Mafia. In the 1990s, Gruntal’s management was implicated in what was then the biggest case of embezzlement in the history of Wall Street.

During his time at Gruntal, Cohen was investigated by the SEC for trading on inside information provided to him by Michael Milken, the most famous – and most destructive – financial criminal the world has ever known. Today, Cohen maintains close business relationships with Milken’s cronies and with former Gruntal managers, such as Howard Silverman, who somehow avoided prosecution, and now operates a “dark pool” platform that allows Cohen to process trades without public scrutiny.

Cohen is no doubt a mathematical whiz (after all, he’s a hedge fund manager). But, with some effort, I have cracked his trading strategy. I’m sure this strategy has some algorithmic expression, but for the sake of simplicity, let us just call it, “cheating.”

From Bloomberg:

Cohen is among the top-paid hedge fund managers, earning an estimated $900 million in 2007, according to AR magazine, a hedge fund industry publication. SAC Capital International, SAC’s largest fund, lost about 19 percent in 2008…

“The charges today should not be viewed as the other shoe dropping,” U.S. Attorney Preet Bharara at a news conference in New York on Nov. 5. “No one should assume that our aggressive policing of the hedge-fund industry will stop at these two cases.”

Is Steve Cohen the Sith Lord that Patrick Byrne hints at?

I really think in terms of a composite of two people. Some day I might sack up and let the world know who the master minds are, but not now.

I read somewhere at Deep Capture that SAC Capital (Steven A. Cohen) is responsible for 25% of trades on the stock market. This is gonna make Madoff look like a piker.

From Whitney Tilson at Zero Hedge:

There are roughly three types of HFT systems:

1) Correlation Systems—These systems constantly look across sectors and the market to determine if a transaction in one security should be reflected in other parts of the market. For example, if someone lifts my offer in the Educator STRA, I will attempt to lift someone else’s offer in COCO or CECO as soon as possible. This is a pure arms computer and mathematics arms race. Goldman is a big player here as it fits nicely into their execution business.

2) Dark Pools—Currently the most favored of the HFT traders, these “liquidity enhancements” allow market makers to get a look into the order before it hits the market. Depending on the “Dark Pool” they allow between 1-3 milliseconds for certain players to see the order before the general market. Our experience is that Dark Pools do not enhance execution in any way and may in fact be negative. Knight plays in this space.

3) Momentum Guys—These guys try to quickly figure out what is happening in the market and move join the Gold Rush. As opposed to the Correlation systems, they are attempting to load up the risk as much as possible. The most famous is SAC Capital.

Many of the market makers are playing in all three places, but I tried to indicate the strength of player.

It is only the “Dark Pool” that I find to be effectively illegal. It does two things that allow the market maker to peer into the order. I know that if I can see part of the order, I can take advantage of the market and move my quotes effectively. In a correlation system, I can in fact move all of the related quotes. Lose money on filling a small part of the first order to make a killing on the rest of the sector.

The second is the source of the order also means something. When I call up a stock order, Goldman knows that I am market maker and I will not run them over. If SAC calls, they know that they are getting only part of the order and that there is a lot of momentum behind it. (In fact, SAC’s order is so valuable that they will pay for it in order to take advantage of the information.) Therefore, getting orders from multiple sources can allow be to differentiate as to the value of the source.

For a pure HFT player, obfuscation, complexity of rules, shifting regulatory environment, etc are all boons because they create profit opportunity and they create barriers to entry from other players. Market fragmentation and lack of transparency mean that the people who facilitate execution can demand a bigger vig for their participation.

Philosophically, I believe that there is an important role for market makers in our capitalistic system. They provide liquidity into markets allowing for the free trade of financial markets. They deserve to be rewarded for some of the risks they take.

Historically, we have developed a system of balance to create a reward based system. Market Makers would receive certain advantages for making markets (Location and Time advantage of the floor, exemption from Reg T funding requirements, etc.) in exchange for meeting certain obligations (minimum quote size and spread)

It is very clear that the balance is out of whack. I would go further and state that the increasing proportion of transactions being done by fewer and fewer institutions is also incredibly unhealthy for the market.

From Charles Duhigg at the NYT in July:

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades.

Matt Taibbi expressed his outrage:

It’s kind of amazing that with all the uproar over the Galleon business, nobody is making much hay over the recent revelations about the AIG bailouts, which make former Goldman chief and former New York Fed chairman Stephen Friedman look every bit as guilty of insider machinations as Raj Rajaratnam of the Galleon fund…

It seems that when the state stepped in and decided to bail AIG out, its former director, Stephen Friedman, was among those making the decision that AIG’s counterparties should be paid 100 cents on the dollar for its CDS debts. It never made sense that AIG/AIGFP would decide on its own to pay its creditors 100 cents on the dollar for its debts, but now we know, thanks to reporting from Bloomberg, that it wasn’t AIGFP and its CFO Elias Habayeb who was making that decision.

It was, instead, a group of people from the New York Fed who gave that order a group that included Tim Geithner and Friedman. Goldman ended up getting almost $14 billion from AIG after the bailout. And Friedman, we later found out, bought 50,000 shares of Goldman stock after this deal was struck. He resigned in May from the Fed, a few days after the Wall Street Journal broke the story about Friedman’s stock purchases…

Second, the non-punishment of Friedman just stands out like a hairy, golf-ball-sized mole on the face of the American capital markets. No question about it, it’s interesting that Galleon and Raj Rajaratnam are getting perp-walked by the FBI (note that it’s the FBI, and not the castrated and seemingly completely captive SEC, that’s going to be pushing these enforcement actions). Galleon isn’t small potatoes and from what I understand there are other hedge funds with even higher profiles that may fall later on. These are surprising and meaningful moves and and it suggests that the enforcement community is not yet completely corrupted.

But Goldman’s continued impunity leaves a mighty stink-cloud over American business, no matter how many Raj Rajaratnams get dragged off to jail.