Exclusive: U.S. authorities probe SAC for Weight Watchers - sources

Fri Dec 7, 2012 11:43pm EST

1 of 2. An exterior view of the headquarters of SAC Capital Advisors, L.P. in Stamford, Connecticut, in this picture taken December 13, 2010.

Credit: Reuters/Mike Segar

(Reuters) - U.S. authorities are investigating Steven A. Cohen's SAC Capital Advisors hedge fund for possible insider trading in the shares of the popular diet company Weight Watchers International Inc, according to people familiar with the matter.

The investigation focuses on trading in Weight Watchers shares in the first half of 2011, when SAC Capital had taken a sizeable position in the stock, and potentially could implicate the billionaire hedge fund manager, the sources said on Friday.

Regulatory filings show that Cohen's $14 billion fund briefly held 2.1 million shares in Weight Watchers during the period under scrutiny by authorities - at which time the diet company's stock price roughly doubled.

The inquiry is in its early stages and it is not clear whether anything improper was done either by SAC Capital or Cohen himself, said the people familiar with the matter, who requested anonymity. The trading in Weight Watchers would be permissible as long as it was based on fundamental research or derived from individuals who did not have access to non-public corporate information.

An SAC Capital spokesman said the firm was not aware of any investigation involving Weight Watchers. A spokeswoman for Manhattan U.S. Attorney Preet Bharara declined to comment. A spokesperson for Weight Watchers did not immediately respond to a request for comment.

The new line of pursuit ratchets up pressure on Cohen, 56, one of the hedge fund industry's most successful and best-known managers. The spotlight the probe casts on SAC Capital and Cohen could further rattle the hedge fund's investors, who account for roughly 40 percent of the firm's capital.

Two weeks ago, U.S. prosecutors charged a former SAC Capital employee, Mathew Martoma, with using inside information to generate profits and avoid losses totaling $276 million in shares of two drug stocks. The U.S. Securities and Exchange Commission also has formally warned SAC Capital that the firm could face civil charges.

A number of SAC's investors have said they have not made a decision on whether to redeem money from the firm. Investors have until mid-February to put in a redemption notice.

Martoma has not entered a plea but his lawyer has said he expects to be exonerated. SAC has declined to comment beyond saying, "Mr. Cohen and SAC are confident that they have acted appropriately."

Martoma is the seventh former SAC Capital employee to be charged or implicated by federal authorities for insider trading. The criminal complaint against Martoma, who last worked for CR Intrinsic, an affiliated fund of SAC Capital in 2010, for the first time alleges that Cohen personally approved the decision to sell-out of a big stake the hedge fund had in shares of Elan Corp and Wyeth, now part of Pfizer Inc.

Separately, U.S. authorities are also investigating SAC for suspicious trading in shares of biotech company InterMune Inc. in 2010, according to one of the people familiar with the probes. Officials at InterMune weren't immediately available for comment. The SAC spokesman declined to comment on the InterMune investigation.

Federal authorities have not charged Cohen, whose net worth is estimated by Forbes at about $8.8 billion as of September this year. The hedge fund manager has told his investors and 900 employees that neither he nor the firm has done anything improper in response to Martoma's arrest.

It's not clear what has prompted federal authorities to look into Stamford, Conn.-based SAC Capital's trading in shares of Weight Watchers. One of the people familiar with the investigation said authorities are looking at trading that both booked hefty profits and avoided losses for SAC Capital.

BIG MOVE INTO WEIGHT WATCHERS

Over his 20 years in the business, Cohen has emerged as one of the pioneers of sophisticated trading. His funds, which charge some of the highest fees in the $2 trillion industry, has boasted an average annual return of 30 percent since launch in 1992.

This year, SAC Capital's main fund is up about 12 percent, compared to the industry average of just over 5 percent. SAC Capital's only down year was in 2008, when it lost 19 percent of its value.

Cohen has endured federal authorities looking into trading at his firm for about five years now. The investigation into SAC Capital ran parallel with the federal government's undercover investigation that led to the October 2009 arrest of Galleon founder Raj Rajaratnam, who was convicted by a federal jury on May 2011 on 14 counts of insider trading.

SAC Capital's big move into Weight Watcher's stock in early 2011 gained attention in part because it came at a time that the once-heavyset Cohen had lost about 20 pounds. (It's not clear if he used Weight Watchers.) The trader has said he lost the weight to help with a chronic bad back.

A first quarter 2011 regulatory filing for SAC Capital showed the firm had acquired 2.1 million shares of the stock. But by the end of the next quarter, a subsequent filing revealed the hedge fund had unloaded nearly all of those shares.

It is not uncommon for a rapid-fire trading firm like SAC Capital to move in and out stocks - even big positions. SAC Capital, in particular, is not known for holding stocks for a long time.

SAC Capital's trading strategy relies on analysts and portfolio managers gathering information about a company's prospects before making a trading decision. Cohen has told people privately he believes his firm has drawn unwanted scrutiny from the government because of its long history of success.

Cohen has become an avid art collector in recent years, with a number of Jeff Koons sculptures gracing the grounds of his 30-room mansion in Greenwich, Conn.

Cohen, who grew up on Long Island in Great Neck, New York, is also pursuing the kind of charitable legacy building done by other famous Wall Street money managers. In 2010, the North Shore-LIJ's pediatric hospital was renamed the Steven and Alexandra Cohen Children's Medical Center of New York, after Cohen and his second wife in recognition of their donations.

More recently, he took a minority ownership stake in the New York Mets baseball team after failing to win the rights to buy another team, the Los Angeles Dodgers.

(Reporting by Matthew Goldstein, Jennifer Ablan and Emily Flitter; Editing by Tiffany Wu and Bernard Orr)

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Comments (2)
Reuters1945 wrote:
About the time I was starting out in business, ages and ages ago, in my youth, I did some design consulting work for a corporation for which I was owed more than 15,000 US dollars, a considerable amount almost 50 years ago and it was a sum that had been well earned.

For some time they dragged their feet on paying me but assured me I would receive a check “soon”. I got into the habit of checking their Stock price on a daily basis and the trading activity was always on the light sight. No major blocks ever changed hands.

Then one day I noticed that over a million shares had been sold, an amount that made the normal number of daily shares traded for this particular stock, pale by comparison.

Two days later it was announced in the papers that due to major cash flow problems, that the company would be seeking to go into Chapter 11.

Within hours the company’s stock plummeted to half its value and it continued falling in succeeding weeks.

Eventually, like all the Creditors during the subsequent Chapter 11 process I was forced to settle for ten cents on the dollar against what I had been owed.

But I never forgot how either the President and/or people in his immediate circle, et al, had all bailed out, cashed out, just two days before news of the pending collapse hit the news.

That was my first real experience with the fact that human nature being what it is, when people have inside information, about anything, it is hard to resist the temptation to use that information.

We, “the little people”, on the outside, not privy to the machinations that go on at the top of the proverbial pyramids of the corporate world, invest our hard earned (often life) savings into the Stock Market and are always annoyed and/or shocked when revelations of insider trading activity are made public, which is often.

But how much insider trading activity is never discovered at all, ever, and just flies under the radar.

With so many millions of transactions and billions of emails and faxes flying here, there and everywhere, there is really no way, anyone, whether the government and/or private observers can reasonably ever know everything that is happening on any one trading day.

And once again, human nature, being what it is, the temptation for people to rationalize their actions, the well known ability of people to decide that something/anything, is really a “grey area” and that they are not “essentially” breaking any Laws, invites the phenomenon of insider trading to occur more often than anyone would ever wish to believe is possible.

“Uncle Charlie” cannot resist the temptation to suggest to his brother’s new Son in Law, that maybe it would be a “good idea” to take a look at “XYZ” Tool Corporation.

They say only one eighth of a glacier’s total ice mass is ever visible above the water line. And seven eighth of that glacier’s immense mass is totally hidden from view at all times. Remember the Titanic which was proclaimed Unsinkable- at least until it sank.

There is no realistic reason to believe that the amount of “insider trading” shenanigans and misbehavior, that come to light and ever get exposed to the long arm of the Law via Securities Investigations, are the whole story.

That famous film “Wall Street” got it right. There will always be those people who honestly in their gut believe that “greed is good”- if not for humanity in general, then at least for themselves.

Considering a new hot stock pick ? Caveat Emptor.

Dec 07, 2012 9:38pm EST  --  Report as abuse
tatman wrote:
1945: i had a very similar experience back in 2002 with a publishing company. inside, they knew what was happening and continued to utilize my services on a major assignment that was to hit the shelves for the christmas season. after working tirelessly for 3 months dedicated exclusively to this company, the paycheck never came. i had just purchased a home a few months prior, and found that christmas to be one of the bleakest in my life, struggling to keep everything i had invested in as the company pocketed their money, then filed for bankruptcy. months later, i received $150 for over $10,000 in contracting labor.

the suspicious thing with SAC here is that they are pulling in 25% profitability above and beyond anyone else in the industry. that alone screams INVESTIGATION and IMPROPRIETY. you are 100% correct on human nature — and i believe there is most likely a LOT of investigating due to this company. let’s just hope the overseers have the cajones to uncover the truth and hold those accountable, and do not bow to the darker side of human nature themselves…

Dec 09, 2012 11:55am EST  --  Report as abuse
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