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Categorized | Financial

SEC cloud hangs over Cooperman’s APL trades

Posted on September 22, 2016

Leon Cooperman, chairman and chief executive officer of Omega Advisors Inc., speaks during a Bloomberg Television interview in New York, U.S., on Tuesday, Oct. 13, 2015. Cooperman said the U.S. Securities and Exchange Commission needs to address market structure problems caused by super-fast computers. Photographer: Chris Goodney/Bloomberg©Bloomberg

Leon Cooperman

It may have been past eight in the evening but Leon Cooperman could not wait to share the good news with his family. The veteran hedge fund manager had just finished a call with a senior executive at Atlas Pipeline Partners (APL), an energy company he held in his portfolio, learning that the company had just sealed a deal to sell off one of its biggest assets. “Good news on APL,” Mr Cooperman wrote to his unnamed relative in July 2010, according to a complaint from US regulators.

Mr Cooperman’s relative, however, was less enthused. After being informed by a colleague that the information explained some recent “fishy” activity in APL call options, the family member replied: “Somebody should investigate that.” Unfortunately for Mr Cooperman, a 73-year-old who has spent almost five decades trading on Wall Street, the Securities and Exchange Commission agreed.

    Mr Cooperman, who is accused of making “significant illegal profits” by the SEC with his trades in APL, was previously known for being one of the longest-standing hedge fund managers on Wall Street, having set up Omega Advisors in 1991. Now the Bronx-born son of a plumber has found himself at the centre of the highest-profile SEC probe into insider trading since the prosecution of Steven Cohen’s SAC Capital.

    The SEC’s insider trading allegations against Mr Cooperman follow a series of investigations into the close relationships that certain hedge funds enjoy with company management and the privileged information they can glean from them.

    “If the SEC has their facts right, it’s an easy one — it’s a headshot,” said David Chase, a lawyer and former SEC prosecutor. Mr Cooperman “should know better. He’s a big boy, he’s sophisticated, he knows how things work,” Mr Chase added.

    Mr Cooperman is accused by the SEC of breaking a promise to an unnamed APL executive not to trade on information that was provided about the forthcoming sale of its Elk City asset, helping him realise $4m in profits from the trade.

    A potentially more serious aspect to the insider trading probe, however, is the SEC’s allegation that Mr Cooperman attempted to cover up the information exchange.

    The SEC claims that when Omega received a subpoena, Mr Cooperman “contacted the executive and tried to fabricate a story to tell if questioned”. The executive was “shocked and angered” to learn that Mr Cooperman had traded ahead of the sale announcement, according to the complaint. Mr Cooperman says the SEC’s claim that he tried to fabricate a story around the trading was absolutely false, according to the person familiar with the matter.

    SEC v Leon Cooperman and Omega Advisors complaint

    “In breach of a duty of trust or confidence, Cooperman and Omega knowingly or recklessly traded APL securities”

    The alleged cover-up is “a big, big danger”, said Mr Chase.

    “The co-ordination of stories — that’s what Martha Stewart went to jail for, not for insider trading but for lying and obstructing justice for it,” he said. “The cover-up in many instances is worse in terms of penalties, and it could take what is otherwise a purely civil SEC insider trading case to the criminal realm.”

    By 2009 Mr Cooperman had established a 9 per cent stake in APL worth about $46m, and had begun to build relationships with the company’s executives, enjoying a level of access according to the SEC “that was not available to [Atlas’s] smaller shareholders”. But Mr Cooperman had become frustrated by the company’s poor performance and by the first half of 2010 he began to sell down his APL shares.

    On July 7 2010, he complained to a consultant working for his hedge fund that Atlas was a “shitty business”. Later that same day a phone call with an unnamed senior APL executive appeared to change Mr Cooperman’s mind. He began to buy up large amounts of APL call options, accounting for 90 per cent of the volume traded that day, building his position in the company over the following days.

    On July 28 the “good news” Mr Cooperman had shared with his relative became public — APL had sold its Elk City asset for $682m and its shares jumped 31 per cent.

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    For his part, Mr Cooperman appears incensed by the SEC’s accusations which followed a lengthy investigation. He and his Omega hedge fund could have settled with the regulator but he refused because he believes he and the fund acted appropriately, according to a person familiar with the situation.

    Since the SEC first made contact with Mr Cooperman, he has launched a staunch defence of his conduct, calling the investigation a “seriously misguided effort”.

    Central to his defence is that the trading in July of 2010 came three years after Omega first invested in APL, and that the size of the trades were insignificant relative to the size of Omega’s position and its overall assets.

    Mr Cooperman argues that because Omega did not realise any gains on his investment in APL, “it is illogical, and defies common sense, that the SEC would bring an insider trading case based on that trading pattern”.

    “Unfortunately, as sometimes happens in our business, this particular investment turned out to be unsuccessful.”