Wall Street scourge Janet Tavakoli usually reserves her fire for big cheating firms, but the derivatives and structured finance expert saved a few rounds for the SEC as well in an interview Thursday on the government’s criminal indictment of SAC Capital on insider trading charges.
In an interview with ThinkAdvisor, a week after U.S. Attorney for the Southern District of New York Preet Bharara indicted the hedge fund and the SEC brought civil charges against founder Steven Cohen for failure to supervise, Tavakoli discerned a “lack of will” on the part of the SEC and described Bharara as the “motor” driving the case.
“It seems like the SEC has a habit of trial by email,” said Tavakoli, a frequent expert witness in cases involving financial complexity. “You have to be lucky for people to be incriminating themselves and providing evidence needed for successful prosecution.”
She urged the government securities enforcer to examine SAC’s business relationships, obtain trading records and not assume it has a slam-dunk case.
Not that there is a shortage of leads. Tavakoli points to the improbability that any firm could obtain such high average annual returns–in the neighborhood of 40% a decade ago and around 25% more recently–at a time when Treasuries are paying a pittance.
Add to that SAC’s reputation as Wall Street’s top commission generator and its unique fee structure–3% annual fees and 50% of profits, compared to the usual hedge fund 2% and 20% arrangement.
“The SEC should be asking what did [SAC] get in return [for its high commissions]?,” Tavakoli asks. She also thinks the SEC should be interested in how the firm generated consistently stratospheric returns. “You can’t create money out of thin air in equity markets,” she says, wondering if the name Madoff rings any bells.
And that leads to Tavakoli’s main point about the SEC, and her warning to financial advisors: the need for the federal agency to claw back unjust gains.
“As long as the SEC is so slow and lame about prosecution [the message is] you can enjoy the benefits of criminal activity for a long time–you are now enabling the less diligent, the less skeptical and in worst-case scenario silent co-conspirators to prosper.”