Wall Street firm Jefferies is providing major backing to a former senior SAC Capital Advisors executive despite its own struggle with insider trading at an internal hedge fund.
On Friday, public conglomerate Leucadia National Corp., which bought $43 billion New York-based investment bank Jefferies in November 2012, announced plans to invest $400 million in Folger Hill Asset Management and that CEO Richard Handler and President Brian Friedman would join the new hedge fund's board of managers.
Set for launch in early 2015, Folger Hill is led by Sol Kumin, who was chief operating officer of Steve Cohen's SAC from 2008 to January 2014. Kumin, who helped develop the firm's international offices and recruit its many traders, was never accused of wrongdoing during his tenure at SAC since 2005. But the firm pleaded guilty last year to criminal insider trading, and eight employees were convicted or pleaded guilty to similar charges. SAC is now a family office for billionaire Cohen and renamed to Point72 Asset Management.
Jefferies made the Folger Hill investment despite one high profile brush with insider trading. The co-portfolio manager of an internal hedge fund, Joseph Contorinis, is serving a six-year federal prison term in West Virginia for making millions of dollars based on nonpublic information about supermarket company Albertsons leaked to him by a UBS banker in 2005 and 2006. He was found guilty in 2010.
The Jefferies Paragon Fund was co-managed with Contorinis by then-CEO Handler's brother Michael, who was never accused of wrongdoing. Michael Handler had been an SAC portfolio manager before joining Jefferies. The then-$70 million Paragon fund was liquidated in June 2007 and Michael Handler is now in public service as the director of administration for the city of Stamford, Conn.
Folger Hill isn't Leucadia's only hedge fund-related investment. In 2013, the diversified firm—which also owns interests in beef processing, energy projects, real estate and more—acquired Topwater Capital, which backs nascent hedge fund managers. And it roughly doubled its stake in Phil Falcone's publicly traded holding company Harbinger Group in March. In 2013, Falcone was barred from the securities industry for five years and agreed to pay an $18 million fine for market manipulation and for favoring some investors in his Harbinger Capital Partners hedge fund over others. (He is still allowed to run Harbinger Group, which is a separate business.)
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Spokesmen for Point72 and Jefferies declined to comment. Kumin and a spokesman for Leucadia did not respond to requests.
Leucadia will also provide Folger Hill with a $20 million loan for operating expenses, according to a regulatory filing announcing the backing. Kumin is not an investment manager but instead will use his sizable professional network to build teams of traders to work under the Folger Hill umbrella, much like the so-called "multimanager" structure that SAC employed.
Todd Rapp, the former chief risk officer at $13 billion hedge fund firm Highfields Capital Management, will be Folger Hill's co-founding partner, according to The Wall Street Journal. Rapp did not respond to a request for comment.
"Leucadia is a value player, like Berkshire [Hathaway]. They probably think the SAC brand was oversold and there's nothing wrong with being involved," said Brad Balter, a hedge fund investor at $1.5 billion Balter Capital Management. "Here's a guy who could be very successful and they can be an early part of that on likely favorable terms."
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Other investors, particularly large institutions like public pensions and endowments, may be more skittish.
"It's a fact of life that institutions are very aware of headline risk, even if they feel OK about the specific investment. If investing with Kumin doesn't work, your board will say 'why would you invest with an SAC guy?'" Balter added. "It's going to take time for investors to get over that hurdle."
Without commenting specially on the matter, Jeff Willardson, a managing director at $10 billion hedge fund investor Pacific Alternative Asset Management, said institutions generally are hesitant to invest in firms that have ties to negative press.
"It's certainly more difficult to raise capital with such headline risk, even if the individual hasn't been accused of wrongdoing," Willardson said. "Institutions are cautious places and there are often many less controversial hedge funds competing for their dollars."
That doesn't mean Folger Hill can't succeed. Leucadia's $400 million pledge is contingent on Kumin raising the same amount from outside investors, according to the regulatory filing, an amount Kumin likely believes he can secure.
"Some investors will certainly be concerned about any SAC spinouts. However, others will certainly be interested ... especially when there have been no dark clouds over the specific individuals," Michael Hennessy, a managing director for investments at more than $4 billion hedge fund investor Morgan Creek Capital Management, wrote in an email. Hennessy said that a major firm like Leucadia backing Kumin with such a large amount will likely help persuade other investors to sign on.
To be sure, having SAC on a resume is a strong point for some.
"The SAC background is more of a positive than a negative. A lot of people view the people at SAC as extremely talented, and I think that that perception more than offsets the taint from insider trading," said Don Steinbrugge, managing partner of consulting and hedge fund marketing firm Agecroft Partners.
"They may have some difficulty raising money from some large institutional investors but he wouldn't get that money from them anyway until he gets well over $1 billion," Steinbrugge added. "There are a lot of investors who made a lot of money at SAC."
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Kumin also got another major endorsement in July when Starwood Property Trust announced that he had joined its board. "Sol is an experienced executive with a track record of helping to build and manage a top tier global investment company. He brings a broad perspective across capital markets and corporate strategy which will be of great value to our organization," Starwood CEO Barry Sternlicht said in a statement.
That was in sharp contrast to Manhattan U.S. Attorney Preet Bharara's statement in November on SAC's guilty plea.
"Today, SAC Capital, one of the world's largest and most powerful hedge funds, agreed to plead guilty, shut down its outside investment business, and pay the largest fine in history for insider trading offenses," Bharara said of the $1.8 billion settlement. "That is the just and appropriate price for the pervasive and unprecedented institutional misconduct that occurred here."
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—By CNBC.com's Lawrence Delevingne.
