What We Know About Trading at SAC Capital

The investigation into insider trading that circles around SAC Capital is moving billionaire hedge fund manager Steven Cohen to attempt to shore up morale.

Cohen and his top lieutenants have been trying to calm SAC employees, telling analysts and traders who work for SAC that Cohen is confident he has done nothing wrong, according to a person familiar with the matter, who is not authorized to speak publicly about the case. SAC received a Wells Notice from the Securities and Exchange Commission in November, but no charges have been filed against Cohen.

Nonetheless, the atmosphere in the firm’s offices—hardly a bastion of good cheer, even under the best of circumstances—is described as tense, with the intimidating Cohen even more intimidating than usual.

Here are a few things we know about what it’s like to work and trade at SAC Capital:

The firm is intensely competitive, with more than 100 portfolio managers running their own pools of money and their own research staffs, essentially in silos isolated from one another. Camaraderie and chit-chat are minimal. Information flows vertically—up to Cohen—not horizontally among portfolio managers.

Sundays are important days for Cohen and SAC. That’s when the firm’s portfolio managers typically call in to update the boss on important positions and to pitch him on trading ideas, usually after sending Cohen an IM message to find out when he’ll be free to talk, according to a former investment professional with the firm. Cohen is very hands-on and accessible, this person adds.

There is a director of research at the firm one can bounce ideas off—the position is currently occupied by Perry Boyle, who has been with SAC since 2004—but Cohen generally likes to hear any ideas himself. Conversations tend to be brief, with Cohen asking whether his trader feels better or worse about something. It’s not uncommon for Cohen to blow in and out of a position in a short period of time. And if he’s not sure about the soundness of one idea, he may summon other analysts to poke holes in the investment thesis, leading to lively—and sometimes tense—debate.

Cohen also always wants to know a portfolio manager’s conviction level in a particular trade: A rating of 9 out of 10 means Cohen might take a position in his own portfolio, according to a person familiar with the investigation.The SAC model is to make very large bets over short time horizons with potentially huge payouts, so Cohen wants catalysts that are likely to make stocks move the right way—a future distribution deal in China, a positive earnings announcement—quickly. As the former SAC investment professional puts it: Everyone is trying to get an edge.

On Dec. 17, former hedge fund managers Anthony Chiasson, a co-founder of Level Global Investors, and Todd Newman, a former portfolio manager at Diamondback Capital Management, were found guilty of securities fraud, leaving intact the government’s perfect insider trading conviction record. Both Level Global and Diamondback were founded by former SAC traders. Chiasson and Newman face up to 20 years in prison.

Kolhatkar is a features editor and national correspondent at Bloomberg Businessweek. Follow her on Twitter @Sheelahk.

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The Four-Course Investment Menu - What Most People Don't Know About Investing

Breaking the Rules? Don't E-Mail About It

E-mail leaves a trail. This is not new information. Yet somehow it clearly hasn’t sunk into the minds of some people who are doing things they don’t want other people to know about. The latest proof: the Libor scandal, that most unsexy investigation into whether banks manipulated a key benchmark used to set the interest rate on $350 trillion worth of car loans, mortgages, and other debt. (Need a refresher? Check out my colleague Brian Bremner’s primer from March.)

Yesterday, Barclays (BCS) agreed to pay a record $451 million in fines to U.S. and British regulators and admitted it submitted false rates to the group that compiles Libor. Banks are supposed to submit rates that reflect their borrowing costs. By submitting a lower rate, a bank can make itself appear healthier. At times, a higher rate could boost the bank’s investments. To build their case against Barclays, the regulators quoted directly from e-mails and phone conversations among the bank’s loose-lipped traders and other bankers. Here are some choice exchanges in the settlement documents (PDF). Try not to wince.

How not to express thanks:

• “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger.” —A former Barclays trader now working at another bank. He was grateful that a Barclays colleague submitted a lower rate for him in October 2006.

• “when I retire and write a book about this business your name will be written in golden letters.” —A Barclays trader to a submitter who lowered the bank’s rate in March 2006.

How not to complain when you don’t get your way:

• “He’s like, I think this is where it should be. I’m like, dude, you’re killing us.” —A Barlcays trader complaining to his manager that Barclays wasn’t going to submit the low rate that he had “begged” for.

How not to collude with another bank:

• “duuuude … whats up with ur guys 34.5 3m fix … tell him to get it up!!” —A Barclays trader requesting a rate fix from another bank.

So you see, there’s a trail. But let’s just keep that secret between you and me. In the words of a Barclays trader, “really don’t tell ANYBODY.”

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The SEC Says Speak Up About Hack Attacks

(Clarifies that a security breach at Quest Diagnostics potentially exposed employees' personal information, not patients'.)

It’s getting tougher for some companies to keep quiet about cyberattacks. Securities and Exchange Commission guidelines on when cyberattacks should be disclosed have become de facto rules for at least six companies, including Google (GOOG) and Amazon.com (AMZN), agency letters show. The six were asked to tell investors in future filings that intruders had breached their computer systems, according to the SEC letters sent in March, April, and May. Hacking admissions can hurt reputations, give competitors useful information, and trigger investor litigation.

In January, cyberthieves raided Amazon’s Zappos.com unit, stealing addresses and some credit-card digits from 24 million customers. Amazon initially resisted mentioning the attack in its regulatory filings, even though it had told customers about it, saying Zappos didn’t contribute material revenue to the company. When the SEC persisted, Amazon replied that “we continue to believe that the cyberattack experienced by Zappos is not covered” by the SEC’s guidance on the subject. “However, in light of the staff’s comment, we will revise our disclosure.” Craig Berman, an Amazon spokesman, declined to comment.

Google agreed in May to mention its previously disclosed cyberassault—China-based hackers raided the company’s network—in an earnings report. “We comply with all applicable disclosure rules and regulations,” says Jim Prosser, a Google spokesman. The SEC also prodded American International Group (AIG), Hartford Financial Services Group (HIG), Eastman Chemical (EMN), and Quest Diagnostics (DGX)—all of which have suffered breaches—to improve disclosures, according to letters available on the regulator’s website. “Following a request from the Securities & Exchange Commission, Eastman has enhanced its disclosure reporting regarding cyberthreats and attacks,” says spokesman Brad Belote. Spokesmen for AIG, Hartford, and Quest declined to comment.

The SEC instituted a voluntary disclosure plan in an October advisory. This year the agency has sent companies dozens of letters asking about cybersecurity disclosures and later pushing them to disclose attacks, according to spokesman John Nester. He declined to say how many companies were told to disclose attacks, as the letters aren’t all public yet. “It’s not a rule, but the SEC, by taking a policy position, can effectively create a rule,” says Peter Henning, a former SEC lawyer who teaches at Wayne State University in Detroit. “It lets companies know what it would like to happen.”

The SEC doesn’t have the authority to order companies to spend money on security controls. What it can do is make them report cyber-risks so potential investors are aware of the problems. Under securities law, companies must disclose “material” information, meaning data that might influence investors’ decisions.

Companies may have business reasons for disliking such disclosures, says Michael Perino, a securities law professor at St. John’s University in New York. “If you’re constantly having to disclose actual or potential cyberattacks against the company, that gives information to competitors, to everybody, about the vulnerabilities of the company,” he says.

The SEC can force disclosure without making rules because companies need to stay on good terms with the regulator, which reviews their financial filings and can “make things difficult,” Henning says. Resisting a letter from the agency can be costly, amounting to $250,000 in legal fees, according to Henning. “If it’s complex, your lawyers write drafts in response, you have conference calls with them,” he says. “The SEC knows that’s their power. If you want to litigate with them, it costs millions.”

The bottom line: To keep investors informed about potential risks to a business, the SEC wants companies to report cyberattacks.

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Nine Things You Should Know About Facebook's IPO

Facebook could be worth nearly $140 billion by today’s market close

The social network priced its shares at $38 apiece, valuing the company at $104 billion. The average first-day “pop” for a technology company is 32 percent; if Facebook follows that trend, it’ll be worth $137 billion by day’s end. But there’s little about Facebook that’s average, including its public offering. This is the technology’s biggest initial public offering and history’s second-biggest IPO, period, and it will raise about $16 billion. Statistics suggests that the first-day pop—if there is one—will be more modest than average.

A lot of the smart money is getting out

Early investors such as the venture capital firm Accel Partners are selling an unusually high number of shares. Nearly 60 percent of the stock sold today comes from insiders, compared to 37 percent for Google (GOOG) when it went public in 2004. Goldman Sachs (GS) is selling about half its stake, far more than the firm initially planned. “If you really thought that 12 months later the stock would be 50 percent higher, you wouldn’t leave that on the table,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, told Bloomberg News.

To justify its valuation, Facebook will need to annoy its users …

Thanks in large part to General Motors’s (GM) decision to de-friend Facebook, there are a lot of questions about the efficacy and future of Facebook’s ad-dominant revenue model. And it has high expectations to live up to: The $38 price gives Facebook a whopping 107 price-to-earnings ratio. (For comparison, Apple’s (AAPL) is around 13.) To dramatically boost ad revenues, the two best options are either to put more ads on the site—which would annoy users—or find more places to put ads. The latter means creating a network of ad inventory across the Web, much the way Google’s Doubleclick sells ads and places them on sites like that of the New York Times (NYT). This would give Facebook far greater reach, but could also give users the creeps. Imagine updating your Facebook status (“Really loving that new Carly Rae Jepsen song!”) and then seeing ads to buy the track Call Me Maybe at every site you visit.

… or do something besides advertising

Currently Facebook’s only source of non-ad revenue is its digital currency, Facebook Credits, which people use to buy virtual goods, such as tractors in FarmVille (ZNGA). During the first quarter of 2012, payments grew to make up almost 18 percent of Facebook’s revenue—close to $200 million in total. Overall, though, fewer than 2 percent of Facebook’s users have bought virtual goods with their payments option. There’s a lot of potential growth, in other words, along with hints that a big online operator such as Spotify may begin accepting Facebook Credits in the future.

Facebook has plenty of revenue options beyond payments and advertising

Facebook is a force: It accounts for 9 percent of all online visits in the U.S., according to Experian Hitwise, a company that measures website traffic. Hitwise also says that Americans spend an average of 20 minutes per Facebook visit. Worldwide, nearly 1 billion people have a Facebook profile. As investor Chris Dixon puts it, Facebook has real assets—including “a vast number of extremely engaged users, its social graph, Facebook Connect”—and should be able “to monetize through another business model,” apart from advertising. It could create the Social Smartphone, sell data analytics products, charge for higher-res photo and video storage, or perhaps hawk vintage Mark Zuckerberg hoodies.

There’s already a “Facebook Mafia”

Heard of the PayPal Mafia? Former executives from the online-payment provider have gone on to start big-time tech firms, such as LinkedIn (LNKD), Yammer, and Yelp (YELP). (And one member, Peter Thiel, cut the first big check for Facebook.) A Facebook Mafia has already emerged, and members have founded Asana, Path, and Quora. The Facebook Mafia is real, even though the name could use some work, says Dave Morin, Path’s chief executive officer, who previously developed Facebook’s development platform. “I guess we can’t escape from calling it that,” he says.

Facebook goes where Google won’t in photos

Facebook owns one of the largest photo repositories in the world, and its facial-recognition technology is getting a workout scanning them all, with more than 300 million photos uploaded per day. Facebook stores 60 billion images, a whopping 1.5 petabytes of data. For each uploaded photo, Facebook stores four images of different sizes. The site shows as many as 550,000 images per second. This is an area that has upset privacy critics and represents something that Facebook is willing to do that even Google isn’t: Google’s Eric Schmidt said last year that the company had built an app that would let people snap photos of others and identify who they are but decided not to release it, due to privacy concerns. Google and Facebook both have sophisticated facial-recognition technology, but Google requires users to opt into its photo-tagging service. Facebook users are included automatically.

Facebook’s new campus could be cursed

Late last year the social network moved into a 57-acre site in Menlo Park that was previously inhabited by Sun Microsystems. Sun’s fortunes soured shortly after the computer company took up residence there. The same thing has happened, in different times and places, to software-maker Borland, Silicon Graphics, and even Apple (which nearly went bankrupt three years after it moved into its current Cupertino, Calif., headquarters at 1 Infinite Loop). The good news: Companies that move into pre-existing campuses seem to fare better. Google, for instance, took up residence in SGI’s old digs.

Up north, Facebook is the only thing better than hockey

Facebook is one of the top two websites in every country except China. The social-networking site is most loved in Canada, where it wins 12 percent of all online visits.

With Barrett Sheridan, Douglas MacMillan, Jordan Robertson, Mark Milian, Peter Burrows, Karen Weise, and Caroline Winter

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Lloyds Said to Seek About 2.5 Billion Pounds From Branch Sales

July 05, 2011, 11:01 AM EDT By Ambereen Choudhury and Gavin Finch

July 5 (Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, is seeking about 2.5 billion pounds ($4 billion) for the 632 branches it’s selling to comply with a European Union ruling on taxpayer aid, two people familiar with the sales process said.

The deadline for the first round of bids is next week, said the people, who declined to be identified because the matter is private. A Lloyds spokeswoman declined to comment.

--Editors: Francis Harris, Edward Evans

To contact the reporter on this story: Gavin Finch at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Seven Mainstream Fallacies About Investing With Self Directed IRAs

With the current downturn in the stock market and the likelihood that interest rates will remain low in the long term, there has been considerable interest in investing self directed 401(k) or IRA funds in real estate.

Ironically, there seems to be a direct correlation between the surge of interest in this area and the lack of accurate information about it. There are several fallacies promoted as fact about this kind of investment. I would like to address each of them in turn.

Fallacy #1 - This kind of investment is not considered appropriate by the IRS

This is flatly untrue. It has been perfectly legal to purchase real estate with your IRA funds since 1974 and to direct any profits, whether rental or capital, back to your IRA. You can also use your IRA funds to pay for the maintenance fees and development, decorative and other upgrade or modernization work on your real estate holdings.

Where the confusion lies is that any real estate investments you make may not be used by yourself or your immediate family, otherwise the 'profit' you make from their use would be regarded as a withdrawal from your IRA and subjected to the usual taxes and penalties.

While the IRS is sometimes accused of not reading its own code, what this actually means is that your parents, grandparents, children and grandchildren may not use the property for any purpose. Yet your brother or sister and their family may. So, if, for example, you invested in a holiday property in Mexico, your brother, sister in law and their children can use it for their holidays and pay you the rental but you couldn't go and stay with them during their vacation.

Fallacy #2 - If it's legal, why haven't I heard of it until now?

Who would tell you, your current financial advisor? They will only let you invest your IRA in investments that their firm offers because they earn a commission off what they sell you. At a bank you will be limited to CDs. At a brokerage firm you will be limited to stocks and bonds.

There are any number of companies that help investors take their IRA cash and use it to purchase real estate for investment purposes or for any other legal investment purpose. The company's representatives who do this are called 'IRA Custodians' or 'Self Directed IRA Custodians' - depending on the exact financial arrangements you have made.

Third-party IRA custodians look after your investments and will advise you on the kinds of choices - stocks, shares, bonds, mutual funds, CDs, business opportunities or real estate - you can make. They retain a degree of control over the disposition of funds and over the writing of checks.

Self directed IRA custodians are not allowed to advise you on your investment choices. They are mainly there to help you properly and legally administer your funds and to avoid accidentally making withdrawals or incurring penalties and taxes.

Both types of custodian take fees - and there is considerable variation in the rates charged and the services offered. So it pays to shop around.

This contrasts with the behavior of traditional investment community which has control over 97% of retirement accounts and has been making considerable profit from it for over 30 years. They have no motivation to inform you of alternatives that would be of no benefit to them.

As investors become ever more depressed and disappointed with poor investment returns in traditional funds, they want to take control of their own investments and to make more tangible investments such as real estate or more profitable ones such as business ventures.

But the response of their current custodians is that such investments are either illegal, over complex, too expensive or simply un-doable - advice which is neither objective, impartial or factual.

So in order to take advantage of these opportunities, investors have to take their business elsewhere.

Fallacy #3 - It is prohibitively expensive to invest in real estate

In Publication 590, " Traditional IRAs", you are prohibited from taking the following actions with your IRA -

* borrowing money from it

* selling property to it

* receiving unreasonable compensation for managing it

* using your IRA as security for a loan

* buying property for personal use (present or future)

These regulations do not prevent you from using your IRA funds to purchase investment property outright. Nor does it prevent you borrowing money (through a non-recourse loan) or using other people's IRA in partnership in order to part fund the investment.

(An alternative route is to take a low-cost option to buy a property within 60 days and, if you manage to find a buyer at a higher price, you can make an immediate profit for with little up-front cash.)

Neither of these routes makes it prohibitive to procure real estate. Real estate investments should not eat up all your cash, particularly if you partner with others.

Not being permitted to receive unreasonable compensation for managing your IRA is not the same as not being permitted to receive reasonable compensation. If you check out the fees charged for administration as long as you stay within the current price range available on the market you cannot be accused of being 'unreasonable'.

I have already covered the restrictions on buying property. But it should clarified that 'future' use does not preclude you taking your property out of your IRA after you have reached 70 ½ when you are forced to take distributions and using it as a retirement home or vacation property.

Fallacy #4 - Real estate investment is trouble with a capital T

Real estate prices have been undergoing a considerable boom in prices over the past few years, but, despite the obvious gains, it is often considered a risky and troublesome form of investment with at least as many headaches as owning your own home. You may have to find tenants, or improve the property before selling it, or just maintain it.

All of this is true, but there are people and companies who will do this for you. Arguments that this will eat away at your profit leading to a poor final return on your investment are also fallacious as fees are charged for all investments you make. The difference is that you can see where the fees are applied and what you are getting for your money.

In addition, you gain some advantages over the stock market - lower risks, less market volatility, property insurance. While mutual funds and corporate stock have both been subjected to sudden and sharp nosedives over the past few years and slow and uninspiring recoveries. Nobody insures you against the loss of investment funds in the stock market. Ask Enron's investors!

Fallacy #5 - Real estate funds are not liquid investments

It's difficult to see why this argument is put forward in what has been a seller's market for several years. Besides when has liquidity been the only benefit on a losing proposition in the stock market? And, at least until IRA funds are available for withdrawal, liquidity is not going to benefit most investors.

Fallacy #6 - Real estate investment is riskier than the stock market

It is difficult to comprehend how anyone could believe that real estate is more risky than the stock market. While it is true that in the long run the stock market returns a solid 10% per year overall, the danger in the short term is that any gains can be wiped out by a sudden drop in the market or in individual stock. Companies can afford this risk, individuals on the other hand cannot.

It is true that real estate prices can also drop, but this normally happens only in very unusual circumstances. Prices do not fluctuate the same way they do on the stock market.

So when given the choice be it owning and managing investment property or taking the cash from your IRA and investing it in an S&P 500 index fund, you are being given the choice between sticking all your eggs in one shaky basket or properly diversifying your holdings and increasing your money earning opportunities. The choice is obvious. Nor is the advice ever to put all your funds into real estate either. About 25 to 40 % of your portfolio should go into real estate and the rest into other more traditional investments. The percentage will depend of course on the level of risk, the investment's profit potential, and on your individual financial position.

Nor are property returns less than those in the stock market. On average the stock market returns 10%; property returns in recent years have been as high as 23 % a year. Ideally, when you self direct your IRA if you can locate pre-construction projects, lend your IRA funds and participate in an equity position you can compound the rate of return. Your return on investment therefore can be much higher without turning a wrench, fixing a leaky faucet or swinging a hammer. Best of all, all the gain goes into the IRA either tax free or tax deferred.

By diversifying your holdings you can invest in several different kinds of assets so that you can weather any investment climate from a bear market to a real estate crash.

Real estate deals are therefore no more and can be a lot less risky than other forms of investment. However, as with any financial deal, you should do your homework first and run the numbers with your financial advisor.

Fallacy #7 - My CPA, my financial planner and Family Lawyer understand all there is to know about self directed IRAs

Your family attorney, financial planner, and CPA are unlikely to be experts in self directed IRA regulations and self directed IRA investing market. For specialized expert advice, you should add a self directed IRA advisor to your advisory team, in the end their advice will save you both time and money. Of course, you should check out the company the Better Business Bureau, your state's Attorney General's office and make sure they comply with any state licensing requirements.

Some Conclusions

* With poor stock market performance likely to continue now is the time to think about diversifying your holdings

* Real estate IRA investment is legal and need not be overly expensive, complicated or inconvenient

* You should take the time to thoroughly investigate the process, the self directed IRA custodian and his or her company before you sign any documents

* You should run the numbers with an independent financial advisor

* Remember signing with a self directed IRA custodian does not oblige you to buy real estate - you can make any of the traditional investment choices as well as considering other lucrative business or property ventures

* You don't have to buy real estate solely from cash in your funds you can borrow money or work in partnership with others

* All investments carry risk but using real estate to diversify your holdings can also give you protection against stock market vagaries

To find out more, simply go to Google.com and type in "use IRA cash to invest in real estate."

Joshua Geary with Best Online Results Best Online Results is an avid writer, business strategist and online marketing consultant. For more information on self directed IRA real estate investing, then visit the link.