NEW YORK (Reuters) – Add another name to the list of former staffers at Steven Cohen’s $13 billion hedge fund SAC Capital Advisors to draw scrutiny in a federal investigation into insider trading on Wall Street.
A year ago, federal regulators accused a former Blackstone Group investment banker, Ramesh Chakrapani, of tipping off a friend — referred to as “tippee 1” in a Securities and Exchange Commission complaint — about the 2006 buyout of the Albertsons supermarket chain.
Until now the identity of that friend has been a mystery. But Reuters has learned from three people familiar with the Chakrapani case that he is Jonathan Hollander, a 34-year-old former analyst at SAC.
The sources also confirmed that the firm where the trading in question took place in January 2006 is CR Intrinsic Investors, an SAC subsidiary.
In court papers, regulators contend that the Albertsons tip resulted in a series of trades that generated $91,000 in profits for the friend and his parents, as well as $3.5 million in trading profits for his firm.
Hollander, who worked for nearly four years as a junior analyst with CR Intrinsic before leaving in December 2008, declined to comment in an e-mail message. His attorney, Aitan Goelman, similarly declined to comment.
Neither Hollander nor SAC have been charged with wrongdoing in any insider trading investigation.
SAC spokesman Jonathan Gasthalter says the hedge fund began looking into the allegations involving Hollander and the fund’s trading in Albertsons stock after the SEC charged Chakrapani in January 2009.
“After reviewing the initial complaint in this matter, SAC thoroughly investigated this former employee’s trading in Albertsons and, on its own initiative, presented the findings to government authorities in February 2009,” said Gasthalter. “We have cooperated fully with the government’s investigation and will continue to do so.”
The sources familiar with the matter said Hollander’s involvement in the Chakrapani case is another piece in the puzzle for federal prosecutors in New York who are focusing their attention on the activities of several former traders and analysts who either worked at Cohen’s SAC or at hedge funds that got money from his firm.
Insider trading is notoriously tough to prove, and the Chakrapani complaint may end up going nowhere.
Indeed, the SEC is moving to dismiss its case against Chakrapani, though the agency says it could refile civil charges against the banker later on.
The Chakrapani case is separate from the big insider trading investigation that led to the arrest this fall of Galleon Management co-founder Raj Rajaratnam and more than a dozen other traders, tech company executives and consultants.
In fact, there are significant differences between the Chakrapani and Galleon cases. Perhaps most significantly, none of the evidence in the Chakrapani case came from telephone wiretaps, which were used to great effect in the investigation into Rajaratnam.
Instead, the SEC case against Chakrapani, according to court filings and people familiar with the investigation, largely rests on testimony of a key cooperating witness, and matching trading records in Albertsons stock with the timing of some 20 phone calls and 18 text messages between Chakrapani and Hollander in early January 2006.
The SEC attorneys filing the Chakrapani lawsuit come from the agency’s Philadelphia regional office. The SEC lawyers in the Galleon case are based in New York and Washington.
One cooperating witness in the Galleon investigation, former SAC tech analyst Richard Choo-Beng Lee, has agreed to tell prosecutors of any insider trading he may have done at SAC, when he worked at the hedge fund from 1999 to 2004.
Other former employees of SAC or hedge funds backed by the firm who have been linked to the Galleon probe in either court filings or by people familiar with the inquiry include: Richard Grodin, Mark Adams and Steven Fortuna.
Fortuna never worked at SAC, but did work at Stratix Asset Managment, a firm founded by Grodin and where Lee also once worked.
The confirmation of Hollander’s role in the Chakrapani case comes just a few weeks after Cohen’s ex-wife disclosed in a lawsuit that the hedge fund billionaire had his own run-in with securities regulators more than two decades ago. In the lawsuit, she revealed that Cohen, when he was a trader at Gruntal & Co, was investigated by the SEC for potential insider trading in 1986 but was not charged.
So far, there is no indication that Hollander, who now runs a small consulting business called Chesapeake Advisory Group, is cooperating with authorities. In recent court proceedings, lawyers for the SEC have said it is the agency’s understanding that Hollander is not cooperating and would assert his Fifth Amendment right against self-incrimination if called to testify.
People with knowledge of the investigation said that Hollander’s apparent lack of cooperation may be one reason the SEC is now trying to move on.
The Chakrapani case has been subject to some unusual legal wrangling.
In April — for reasons that have never been fully explained — prosecutors dismissed a related criminal charge against Chakrapani just three months after bringing the case. The criminal action also cited an unidentified and uncharged co-conspirator, who turns out to be Hollander, according to the sources.
Since then, prosecutors have told the federal judge overseeing the SEC’s civil case on a number of occasions that their investigation of the Blackstone banker is continuing.
In July, U.S. District Judge Richard Sullivan dealt the SEC a blow when he refused to stay the civil case against Chakrapani and ordered a quick trial date.
Federal prosecutors immediately began objecting because one of the key witnesses against Chakrapani in the SEC lawsuit is slated to be the key witness in a related insider trading criminal trial involving other defendants.
The government’s key witness, Nicos Stephanou, is a former UBS banker. He has already pleaded guilty to passing on confidential information about the Albertsons deal and other buyouts. Stephanou, Chakrapani and Hollander worked together at Credit Suisse in the late 1990s and were friends, say people who know them.
Federal prosecutors are reluctant to have Stephanou testify in a civil trial before he is called as a witness in several pending criminal trials, according to court filings.
Criminal defense attorney Ira Lee Sorkin, who most notably represented convicted stock swindler Bernard Madoff, said that in recent years judges have become reluctant to automatically stay SEC actions until the completion of a related criminal case.
“Judges are increasingly getting angst about stays because it means a civil case is hanging over a person’s head,” said Sorkin. “There is a basic unfairness.”
That is exactly the argument being made by Chakrapani’s lawyer, Michael Sommer. The attorney said he wants Judge Sullivan to not only dismiss the SEC case but to do so with prejudice. A dismissal with prejudice would preclude the SEC from refiling the insider trading charge against the suspended Blackstone banker at a later date.
In court papers, Sommer says a dismissal with prejudice is necessary to clear his client’s name and help him return to his job at Blackstone. The private equity firm last month provided Sommer with a letter saying it would consider bringing the banker back if the SEC suit is dismissed with prejudice and “we can satisfy ourselves that the U.S. Attorney will not reinstate its proceedings against Mr. Chakrapani.”
It’s by no means clear Blackstone will get that kind of reassurance.
Hollander, a Stanford University Business School graduate, is in the same kind of legal limbo as his friend. While he has not been charged with any wrongdoing, he has no assurance from federal authorities that he will not be, said people familiar with the case.
Meanwhile, people who know Hollander said they would be surprised if he had done anything wrong. They point to his charitable work, including coaching youth baseball in Harlem.
Still others note that hedge funds — including Hollander’s — were routinely trading in Albertsons stock in the weeks leading up to the January 2006 buyout.
For now, Hollander’s fate may ultimately rest with whatever the government decides to do with Chakrapani.
(Additional reporting by Svea Herbst-Bayliss in Boston; Editing by Jim Impoco and Martin Howell)