America’s biggest investment managers aren’t thrilled with the GOP tax bill.
Under a little-publicized provision of the bill, clients would be forced to sell their oldest shares first when cashing out of positions, according to a report from Laura Saunders of the Wall Street Journal. That would reduce flexibility in terms of minimizing taxes, something that investment firms fear could end up costing clients loads of money.
He seems like an American success story: an ambitious Russian who came to the U.S. and went from business school to Wall Street to his own hedge fund.
But somewhere along the way, U.S. authorities say, Vitaly Korchevsky began orchestrating a new type of financial crime.
Korchevsky, 50, was one of several men arrested Tuesday morning in the biggest case of insider trading linked to the fast-growing threat of global cybercrime. Charges against him were unsealed Tuesday in Brooklyn, New York federal court.
The alleged scheme stretched from the affluent suburbs of Philadelphia, where Korchevsky ran a small investment fund, to the darkest realms of the Internet.
Working from Russia or Ukraine, hackers infiltrated several computer systems used by corporations to report sensitive information like earnings and then, allegedly with Korchevsky’s help, made millions of dollars trading on the confidential data, people familiar with the matter say.
Little that is known about Korchevsky seems to hint at his alleged role in bringing together these two illicit worlds. Less than prominent in financial circles, he has spent a decade and a half moving from one mid-level job to the next.
After completing university in Russia, Korchevsky collected an MBA in 1995 from Regent University, a private Christian institution founded by the televangelist Pat Robertson. He also passed the Chartered Financial Analyst exam, considered the gold standard among financial professionals.
By 1999 he was working in the asset management division of Morgan Stanley, where he helped manage several Invesco American Value funds, according to Morningstar.
From there he joined Victus Capital in New York and then Investment Counselors of Maryland in Baltimore. He left in 2009, two years before registering his own hedge fund, NTS Capital Fund, in Glen Mills, Pennsylvania.
Other than traffic violations, Korchevsky’s U.S. legal record appears clean, as is his official Wall Street record filed with the Financial Industry Regulatory Authority.
In an era of high-profile Wall Street scandals, the scheme laid out by prosecutors is relatively small in dollar terms. U.S. prosecutors said the nine men netted $30 million.
However, a broader, parallel lawsuit filed Tuesday by the Securities and Exchange Commission listed 17 men, including the nine charged, and 15 companies as defendants in a scheme that allegedly earned more than $100 million.
The regulator said Korchevsky made about $17.5 million in illicit profits. By comparison, the insider trading scheme hatched by Galleon Group LLC co-founder Raj Rajaratnam netted about $72 million, while the $275 million insider trading case of SAC Capital Advisors LP portfolio manager Mathew Martoma was called the biggest ever against a single person.
Ukraine’s Hackers: What Do We Know?
An international police operation into the “Shylock” banking malware, which infected more than 100,000 computers, led to properties in Ukraine being searched and computers seized in 2014.
In June, Ukrainian police arrested five people suspected of links to ZeuS and Spyeye, two viruses that target online bank accounts around the world.
Nonetheless, the confluence of computer hacking and insider trading raises the stakes for investors and federal authorities.
Thought to be in Ukraine and possibly Russia, the hackers infiltrated the computer servers of PRNewswire Association LLC, Marketwired and Business Wire, a unit of Warren Buffett’s Berkshire Hathaway Inc., according to a person familiar with the matter. They stole more than 150,000 press releases over the duration of the scheme.
They then allegedly fed the information to Korchevsky and others in the U.S. who used it to buy and sell shares of dozens of big companies, including Panera Bread Co., Boeing Co., Oracle Corp., Hewlett-Packard Co. and Caterpillar Inc., ahead of the news.
The defendants traded in personal brokerage accounts and then siphoned the money offshore through Estonian banks, the person said.
Korchevsky was taken into custody at his home in Glen Mills, where he operated NTS Capital. NTS has made no filings since its initial one four years ago, and it’s unclear if the fund is still in operation. Korchevsky is now facing securities fraud and conspiracy charges by federal prosecutors in Brooklyn.
He is scheduled to make his first court appearance Tuesday afternoon in Philadelphia federal court.
As a kid growing up in Cleveland, Cohn found out he had dyslexia, a reading disorder. He struggled in school. By the time he was in sixth grade, he had attended four different schools. Teachers and classmates had written him off as an “idiot.” Cohn has even said publicly that he was a “horrible” student.
By July he took a job “to appease” his father selling window frames and aluminum siding for the home-products division of United States Steel in Cleveland.
Around Thanksgiving, he went on a work trip to the company’s offices in Long Island. Cohn persuaded his manager to give him Friday off to visit New York City for the first time.
There he headed for Wall Street and the commodities exchange at Four World Trade Center. From the observation gallery, he watched the action in the trading pits with other Wall Street hopefuls.
That’s when he came up with a clever plan to make an introduction to one of the brokers. He left the visitors’ gallery and waited by the security entrance to the trading floor for a few hours. Nothing happened. He was about to give up.
“And then literally right after the market’s (sic) closed, I see this pretty well-dressed guy running off the floor, yelling to his clerk, ‘I’ve got to go, I’m running to LaGuardia, I’m late, I’ll call you when I get to the airport,'” Cohn told Gladwell in the book. “I jump in the elevator, and say, ‘I hear you’re going to LaGuardia.’ He says, ‘Yeah,’ I say, ‘Can we share a cab?’ He says, ‘Sure.’ I think this is awesome. With Friday afternoon traffic, I can spend the next hour in the taxi getting a job.”
It was truly a brilliant move, one most people wouldn’t have the guts to make.
It turned out the man Cohn was sharing the cab with was also running the options business for one of the big brokerage firms. Cohn didn’t know what an option was, but he pretended as if he did.
“I lied to him all the way to the airport,” Cohn told Gladwell. “When he said, ‘Do you know what an option is?’ I said, ‘Of course I do, I know everything, I can do anything for you.’ Basically by the time we got out of the taxi, I had his number. He said, ‘Call me Monday.’ I called him Monday, flew back to New York Tuesday or Wednesday, had an interview, and started working the next Monday. In that period of time, I read McMillan’s “Options as a Strategic Investment” book. It’s like the Bible of options trading.”
(By the way, Gladwell notes, it still takes Cohn about six hours to read 22 pages.)
After a few years working on the floor of the commodities exchange, Cohn was contacted by Goldman Sachs. In 1990 he accepted a position in Goldman’s commodities trading unit, J. Aron. In 1994 he was made partner — one of the most coveted titles on Wall Street.
Now he holds one of the top spots at the Wall Street investment-banking giant. He has even said he wouldn’t be there without his dyslexia.
“The one trait in a lot of dyslexic people I know is that by the time we got out of college, our ability to deal with failure was very highly developed,” Cohn told Gladwell. “And so we look at most situations and see much more of the upside than the downside. It doesn’t faze us. I’ve thought about it many times, I really have, because it defined who I am. I wouldn’t be where I am today without my dyslexia. I never would have taken that first chance.”
When BlueCrest Capital Management LLP founder Michael Platt expanded into stocks this year to compete with Millennium Management LLC and SAC Capital Advisors LLP for traders, he tapped an unusual funding source: his banks.
He received a $750 million loan from 16 banks in July, enabling his hedge-fund firm, which oversees $34.2 billion, to hire at least 25 equity money managers and provide them with capital to start trading immediately, said two people with knowledge of the loan, who asked not to be identified because it isn’t public. Typically, hedge funds need to persuade clients to invest in new ventures and expand gradually, the people said.
HSBC Holdings Plc (HSBA), Citigroup Inc. (C),JPMorgan Chase & Co. (JPM) were among the banks eager to burnish their relationship with Europe’s third-biggest hedge-fund firm, which pays banks tens of millions of dollars a year in fees for trading and other services. The loan shows Platt’s clout as one of Wall Street’s most coveted clients and how aggressive he is to keep gathering assets and add new investing strategies, investors and executives at other funds said.
“I can’t think of any other examples like this,” said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut-based firm that advises hedge funds on fundraising. “It’s just the nature of finance where if you are big and successful, people want to do business with you. If you are small and struggling, then it’s wait and see.”
Bankers and former colleagues describe Platt, 45, as a tough negotiator. He’s also loathe to cut deals that might cost him money, even when the person sitting on the other side of the table is hedge-fund royalty. After George Soros decided in 2011 to stop managing money for outside clients and turn his hedge-fund firm into a family office, the billionaire investor went to other money managers to ask whether they would oversee some of his $25.5 billion of assets.
Among those Soros spoke to was Platt, saying he would like him to take on more than $1 billion, while paying BlueCrest a 0.5 percent management fee and a 10 percent performance fee, according to a person with knowledge of their discussion. Platt thanked Soros, 83, for the meeting and declined the offer, saying plenty of investors were willing to pay BlueCrest 2-and-20, the industry standard of charging a 2 percent management fee and 20 percent of any profits, the person said.
Michael Vachon, a spokesman for Soros, and BlueCrest declined to comment on the meeting.
All of the big American Wall Street banks have reported their fourth-quarter earnings, and you can pretty much use one word to describe them — rotten.
Most of the talk has centered on a full-on rout in trading revenue, especially in the bond, currency, and commodities markets. Citi’s trading revenue was down 14% overall from the same time last year. JPMorgan Chase’s bond trading revenue fell 23% from the same time last year.
Even Goldman Sachs, the only bank to eke out an earnings beat, saw its bond-trading revenue fall 29%. It was the talk of Goldman’s conference call — the fact there was a difference between good volatility in markets (just a touch) and bad volatility in markets (too much).
But while the focus on trading revenue makes for sexy headlines, it leaves out one big unsexy factor that decimated bank earnings. Yes, we’re talking about legal costs.
Perhaps people are simply tired of talking about this factor, because a lot of the transgressions banks are paying for date back to the financial crisis. Perhaps cynics are just tired of repeating the phrase “cost of doing business.”
Here’s the scoreboard for you:
Bank of America shelled out $393 million for legal expenses, down from $2.3 billion a year before. That said, in the third quarter the bank shelled out $5.6 billion for legal costs — so there’s that.
JPMorgan’s legal expenses held steady for the fourth quarter of 2013 and 2014, roughly hovering at about $1 billion.
Goldman Sachs fared better, spending $161 million legal expenses in the fourth quarter of 2014, down from $561 million at the same time last year and $194 million the previous quarter.
Citigroup’s legal expenses increased from the same time last year to $3.5 billion from $1 billion. In the third quarter of 2014 the bank spent $1.3 billion on legal expenses.
Morgan Stanley’s legal expenses aren’t totally clear. We know only that the bank spent $284 million “for legacy residential mortgage related matters” and that “Non-compensation expenses of $2.8 billion decreased from $4.1 billion a year ago, primarily reflecting lower legal expenses.”
It looks bad, sure, but we’ve seen worse.
The issue is that, seven years after the crisis, Wall Street is starting to settle into a new normal.
If these legal issues — some from the crisis, some not — are merely the “cost of doing business,” then it’s starting to look as if business is costing too much. Two or three years ago it seemed clear that these fines would, sooner rather than later, become a thing of the past. A big Wall Street bank would announce a massive legal cost, and that bank’s stock wouldn’t move an inch. Investors didn’t really care.
But that kind of thinking is becoming increasingly problematic as it is clear these expenses actually do matter, and this quarter is an excellent example of why. Combine a weak quarter in trading (or equity underwriting, or any other sector of the business) along with legal costs, and all of a sudden you have a nasty cocktail of big-bank failure. With these legal costs as they are, it doesn’t take much to tip the scales.
Trading issues happen — the market is cyclical and every trader will tell you that one minute you’re killing it, and the next minute you’re getting your face ripped off. That’s natural. The mess that those losses make when combined with legal expense, however, is not so natural.
The longer this goes on, the more people will catch on to that.
A federal judge in Manhattan on Friday sentenced Matthew Taylor, a former Goldman Sachs trader, to nine months in prison for covering up an $8.3 billion unauthorized trade at the firm.
In 2012, the Commodity Futures Trading Commission accused Mr. Taylor of hiding the trade to protect his year-end bonus of $1.5 million. Prosecutors said Mr. Taylor acted out of “greed and pride” and had sought a sentence of 33 to 41 months. Mr. Taylor’s trade cost Goldman $118 million, a figure he has been ordered to repay.
Mr. Taylor, who once earned seven figures on Wall Street, now cleans pools six days a week in Florida. Mr. Taylor, who was dressed in a dark suit and blue tie, apologized to the court, his wife, his two children and even Goldman for his conduct, adding that it was “painful beyond words” to be the source of distress to his loved ones.
Mr. Taylor, who graduated from the Massachusetts Institute of Technology, owned a home in the Hamptons by the time he was 28.
“In short, Mr. Taylor, you were, in the words of Tom Wolfe, ‘a master of the universe,’ ” the judge, William H. Pauley III, said.
The C.F.T.C. accused Mr. Taylor, who traded equity derivatives products in New York, of hiding the $8.3 billion position he had taken in electronic futures contracts tied to the Standard & Poor’s 500-stock index. Though his superiors had ordered him to reduce the risk on his trading book, he instead ratcheted up the position. To conceal the size of the position, he entered “multiple false entries” into a Goldman trading system, booking trades that he never actually made.
Goldman fired Mr. Taylor after learning about his cover-up and reported the unauthorized trades to authorities within days. The C.F.T.C. did not bring charges against Mr. Taylor until five years later, during which time he was able to get another job as a trader with Morgan Stanley.
Mr. Taylor left Morgan Stanley during the summer of 2012 and pleaded guilty to wire fraud earlier this year.
“This case presents a paradigm of everything that is wrong with Wall Street and the regulators that are charged with protecting the public,” the judge said. “So much for Goldman’s concern about the financial markets.”
Goldman said in a email statement that it notified the Financial Industry Regulatory Authority, the brokerage industry’s policing arm, about Mr. Taylor’s dismissal and made clear “that he was fired for misconduct related to ‘inappropriately large proprietary futures positions in a firm trading account.’”
In August, Mr. Taylor agreed to pay a $500,000 fine in a civil matter related to the criminal case. He had earlier been forced to to give up $3 million in deferred compensation when Goldman fired him.
Mr. Taylor is the second Wall Street trader to receive prison time in less than a month. In November, Kareem Serageldin, a former trader at Credit Suisse, was ordered to serve two and a half years for inflating the value of mortgage bonds as the housing market collapsed.
“Mr. Taylor accepts the judgment of the court,” Thomas C. Rotko, a lawyer for Mr. Taylor, told reporters outside of the courtroom. “We are pleased that the judge saw this matter as we did as an indictment in part of the regulatory system itself.”