When it rains – for hedge fund managers, it pours – If it’s not lack of alpha, it’s insider trading. Moments ago, the SEC charged iconic hedge fund manager, Omega Advisors’ Leon Cooperman with insider trading, accusing him of generating substantial illicit profits by purchasing securities in Atlas Pipeline Partners (APL) in advance of the sale of its natural gas processing facility in Elk City, Oklahoma.
The SEC adds that Cooperman “allegedly used his status as one of APL’s largest shareholders to gain access to the executive and obtain confidential details about the sale of this substantial company asset. Cooperman and Omega Advisors allegedly accumulated APL securities despite explicitly agreeing not to use the material nonpublic information for trading purposes, and when APL publicly announced the asset sale its stock price jumped more than 31 percent.”
According to the SEC’s complaint, when Omega Advisors received a subpoena nearly a year-and-half later about its trading in APL securities, Cooperman contacted the executive and tried to fabricate a story to tell if questioned about this trading activity. The executive was shocked and angered when he learned that Cooperman traded in advance of the public announcement.
The SEC’s complaint further charges Cooperman with failing to timely report information about holdings and transactions in securities of publicly-traded companies that he beneficially owned, alleging that he violated federal securities laws more than 40 times in this regard.
Looks like Leon won’t be making an Ira Sohn or CNBC appearance conferences in the near future.
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From the SEC’s press release:
The Securities and Exchange Commission today charged hedge fund manager Leon G. Cooperman and his firm Omega Advisors with insider trading based on material nonpublic information he learned in confidence from a corporate executive.
The SEC alleges that Cooperman generated substantial illicit profits by purchasing securities in Atlas Pipeline Partners (APL) in advance of the sale of its natural gas processing facility in Elk City, Oklahoma. Cooperman allegedly used his status as one of APL’s largest shareholders to gain access to the executive and obtain confidential details about the sale of this substantial company asset. Cooperman and Omega Advisors allegedly accumulated APL securities despite explicitly agreeing not to use the material nonpublic information for trading purposes, and when APL publicly announced the asset sale its stock price jumped more than 31 percent.
According to the SEC’s complaint, when Omega Advisors received a subpoena nearly a year-and-half later about its trading in APL securities, Cooperman contacted the executive and tried to fabricate a story to tell if questioned about this trading activity. The executive was shocked and angered when he learned that Cooperman traded in advance of the public announcement.
“We allege that hedge fund manager Cooperman, who as a large APL shareholder obtained access to confidential corporate information, abused that access by trading on this information,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement. “By doing so, he allegedly undermined the public confidence in the securities markets and took advantage of other investors who did not have this information.”
The SEC’s complaint further charges Cooperman with failing to timely report information about holdings and transactions in securities of publicly-traded companies that he beneficially owned, alleging that he violated federal securities laws more than 40 times in this regard.
The SEC’s complaint was filed in federal district court in Philadelphia and seeks disgorgement of ill-gotten gains plus interest, penalties, and permanent injunctions against Cooperman and Omega Advisors as well as an officer-and-director bar against Cooperman.
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Here is the chronology of events laid out by the SEC:
APL Negotiated the Sale of its Elk City Operating Facilities
By mid-2010, APL had been experiencing financial difficulties. Though its stated principle objective was to “generate cash for distribution” to its shareholders, APL had not declared a cash dividend for the fiscal quarters ending June 30, 2009 through June 30, 2010.
By May 2010, APL had announced to the market that it intended to improve its balance sheet in order to reinstitute a distribution to APL shareholders.
On May 18, 2010, Enbridge Energy Partners, L.P. (“Enbridge”) made a confidential, nonbinding offer to purchase APL’ s Elk City operating facilities for $720 million. Elk City was a significant APL asset, which included 800 miles ofnatural gas gathering pipeline, a hydrogen sulfide treating plant, and three cryogenic processing plants, with a total capacity of approximately 370 million cubic feet ofnatural gas per day and a combined natural gas liquid production of20,000 barrels per day.
Subsequently, APL retained financial and legal advisors, and the parties conducted due diligence and negotiated the terms ofa possible agreement. From May through July 2010, Enbridge and APL conducted these negotiations pursuant to a confidentiality agreement. Dwing this time period, APL’ s executives evaluated the financial impact ofselling Elk City at various prices from $550 million to $720 million.
APL advised personnel working on the Elk City sale that information regarding the potential sale was material nonpublic information and that trading on the information would violate APL’s insider trading policy. By July 7, 2010, APL had taken additional steps to ensure secrecy ofthe Elk City negotiation, including using code names and entering into confidentiality agreements with potential counterparties.
APL’ s board ofdirectors discussed the potential Elk City transaction during a nonpublic meeting on June 18, 2010. By the morning ofJuly 7, 2010, APL’s board ofdirectors planned to consider the sale ofElk City at the board’s July 27, 2010 meeting.
On July 19, 2010, APL agreed to sell Elk City to Enbridge for approximately $680 million, subject to approval by the companies’ respective boards ofdirectors and the finalization ofdeal documentation. On July 27, 2010, the respective boards ofdirectors ofAPL and Enbridge approved the Elk City sale.
The next morning, on July 28, 2010, APL publicly announced that it had entered into an agreement to sell Elk City for $682 million in cash. APL stated that the asset sale would enable the company to: (a) eliminate virtually all ofits senior secured debt and significantly deleverage its balance sheet; (b) allow APL to reinstate distributions to shareholders; and ( c) allow APL to participate in its Marcellus Shale gathering venture. That day, APL’s share price increased by $3.87 or approximately 31.3%, closing at $16.22 per share. The price ofAPL’s bonds and other APL-related securities also increased significantly as a result ofAPL’ s public announcement ofthe Elk City sale.
Cooperman Was One of APL’s Largest Shareholders and Had Great Influence and Access at APL
By July 2010, Cooperman had been a hedge fund manager for a number of years. One strategy Cooperman employed was to accumulate large positions in publicly-traded companies and develop close relationships with those companies’ senior executives.
Cooperman employed this strategy with APL. According to a statement he filed with the Commission, as ofDecember 31, 2009, Cooperman was the beneficial owner ofover nine percent ofAPL’s common stock, worth approximately $46 million. By mid-2010, Cooperman had developed close relationships with APL’s senior executives.
As a result ofhis APL ownership and status, Cooperman had a level ofaccess to APL’s executives that was not available to APL’s smaller shareholders. Through this access, Cooperman had numerous telephone conversations and meetings with APL executives.
During the first half of 2010, Cooperman reduced his stake in APL, by, among other things, directing accounts he controlled to sell APL stock worth millions ofdollars. Indeed, until July 7, 2010, there was no day in 2010 on which the Cooperman Offshore Account, Hedge Fund Accounts, Managed Accounts and Family Accounts collectively were net buyers of APL common stock, call options or bonds. In an April 30, 2010 email, Cooperman stated that he was “scaling out of APL on strength.” The Cooperman Offshore Account, Hedge Fund Accounts, Managed Accounts and Family Accounts did not t.rade APL stock, options or bonds in the six weeks prior to July 7, 2010.
On July 7, 2010, Cooperman expressed to Omega Consultant that APL was a “shitty business.”
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In July 2010, Cooperman Misappropriated Information about the Elk City Sale from APL Executive 1
Cooperman spoke with APL Executive 1 on the telephone on July 7, 19 and 20, 2010. During these telephone conversations, APL Executive 1 informed Cooperman that APL was negotiating the sale ofElk City and Cooperman asked APL Executive 1 questions about the Elk City sale. In at least one ofthese conversations, APL Executive 1 told Cooperman that APL was selling its Elk City facility for approximately $650 million.
Despite knowing that information about the Elk City sale was material nonpublic information, APL Executive 1 told Cooperman about the Elk City sale because he believed Cooperman had an obligation not to use this information to trade APL securities. Indeed, during one ofthese conversations in which APL Executive 1 told Cooperman confidential information about the Elk City sale, Cooperman explicitly agreed that he could not and would not use the confidential information APL Executive 1 told him to trade APL securities. Cooperman, however, did not abide by his agreement to maintain in confidence, and not trade on the basis of, the Elk City sale information.
On July 7, 2010, Cooperman spoke to APL Executive 1 at approximately 2:06 p.m. EDT for about six minutes. Despite taking a bearish position on APL throughout the first half of 2010 and calling APL a “shitty business” earlier that day, after speaking to APL executive 1, Cooperman began buying APL securities.
On July 7, 2010, at Cooperman’s and Omega’s direction, the Cooperman Offshore Account, Hedge Fund Accounts and Managed Accounts purchased a total of 1,966 APL call options with a strike price of $15.00, expiring August 21, 2010. The call options purchases accounted for over 90% ofthe day’s trading volume in that option series. On July 7, 2010, APL’s stock price closed at $9.66, and the call options the Cooperman Offshore Account, Hedge Fund Accounts and Managed Accounts purchased were significantly out-of-the-money.
At Cooperman’s and Omega’s direction, the Cooperman Offshore Account, Hedge Fund Accounts and Managed Accounts continued to purchase APL securities between July 8, 2010 and July 19, 2010. The chart below reflects these purchases:
On July 19, 2010, at approximately 3:19 p.m. EDT, Cooperman spoke on the telephone with APL Executive 1, while APL Executive 1 was located in the Eastern District of Pennsylvania. By the time ofthis telephone conversation, APL had reached an agreement in principle to sell Elk City. APL senior executives, including APL Executive 1, were preparing for a July 27, 2010 meeting ofAPL’s board ofdirectors to discuss the Elk City sale.
On July 19, 2010, after his call with APL Executive 1, Cooperman created an entry on his electronic calendar for July 27, 2010 at 10:30 a.m. with the subject line “APL Board Meeting.”
On July 20, 2010, at approximately 9:43 a.m. EDT, Cooperman spoke on the telephone with APL Executive 1 for about seven minutes, while APL Executive 1 was located in the Eastern District ofPennsylvania.
Almost as soon as his call with APL Executive 1 concluded, at approximately 9:50 a.m. EDT, Cooperman called Omega Consultant on the telephone. During the telephone conversation, Cooperman told Omega Consultant that Cooperman had learned from someone at APL that APL had reached a deal to sell Elk City for $650 million. Cooperman and Omega Consultant discussed how APL’s stock price would react to public disclosure ofthe Elk City sale. Omega Consultant told Cooperman that the announcement that APL was going to sell Elk City for $650 million would cause APL’s stock price to increase significantly.
On July 20, 2010, Cooperman and Omega directed the purchase ofmore APL securities, as follows:
a. The Cooperman Offshore Account, Hedge Fund Accounts and Managed Accounts purchased a total of3,800 out-of-the-money APL call options with a strike price of$15.00, expiring November 20, 2010. This activity constituted over 95% ofthe daily volume oftrading in that option series;
b. In an account Cooperman managed on behalf ofa minor family member, Cooperman purchased $50,000 ofAPL’s 8.75% bonds due June 15, 2018 at an average price of$92.75 per unit; and
c. The Cooperman Offshore Account purchased 61, 700 APL shares at an average price of $10.3056.
On July 21, 2010, based on the material nonpublic information Cooperman told Omega Consultant, Omega Consultant incorporated a $650 million asset sale into Omega Consultant’s model of APL’s financials, which Omega Consultant saved on Omega’s computer systems. Omega Consultant’s revised model indicated that APL’s Elk City sale would significantly enhance APL’s credit standing and the company’s ability to reinstitute cash distributions on an earlier-than-expected schedule and in larger-than-expected amounts.
At Cooperman’ s and Omega’s direction, the Cooperman Offshore Account, Family Accounts, Hedge Fund Accounts and Managed Accounts continued to purchase APL securities between July 21, 2010 and July 27, 2010. The chart below reflects these purchases:
The July 21, 2010 purchase of3,021 APL call options with a strike price of $17.50, expiring August 21, 2010, made up the entire daily volume of trading in that option series. The July 22, 2010 purchase of 1,250 APL call options with a strike price of$17.50, expiring November 20, 2010, made up the entire daily volume of trading in that option series. The July 27, 2010 purchase of 500 APL call options with a strike price of$17 .50, expiring November 20, 2010, made up the entire daily volume of trading in that option series.
On July 22, 2010, at approximately 9:40 a.m. EDT, Cooperman called APL Executive 2’s Philadelphia, Pennsylvania office telephone line. Cooperman asked APL Executive 2 about the progress ofthe Elk City sale. APL Executive 2 was surprised that Cooperman knew about the Elk City sale given that APL had taken substantial steps to keep the transaction confidential.
On July 27, 2010, at approximately 7:52 p.m. EDT, Cooperman spoke on the telephone with APL Executive 1, who told Cooperman that APL’ s board had approved the Elk City sale.
On July 27, 2010, at approximately 8:36 p.m. EDT, Cooperman sent an email to a family member, who also was a hedge fund manager, stating:
Good news on APL … [t]hey sold their ELK City operation for $682mm which will enable them to pay off bank debt, de-risk company because keep whole contracts largely gone and fund their Laurel Mountain obligations. We think stock worth at least $15 in near term—for what that is worth. Cooperman’s family member forwarded this email to a colleague who replied, in part: “That explains the fishy $17 August calls, etc. I still haven’t come across any press release -want to see how it’s discussed ….” Cooperman’s family member responded: “Somebody should investigate that.”
On July 27, 2010 at approximately 9:20 p.m. EDT, Cooperman emailed two Omega traders, stating: “APL has done a major deal and I’m told there will be a call at 10:30am. Please get me dial in info.”
Then at 9:44 p.m. EDT on July 27, 2010, Cooperman sent an email to an Omega trader, stating: “When you get in please check how much APL we could buy to get to 9.9% … Depending on trading level we might add.” Federal securities laws generally require a person to disclose within ten days that he has become the beneficial owner of greater than ten percent of a class ofequity securities, like APL stock.
On July 28, 2010, at approximately 6:59 a.m. EDT, APL publicly announced for the first time that it was selling Elk City for $682 million. As a result, on that day, APL’ s stock price increased approximately 31 % and other APL-related securities greatly increased in value.
After this announcement, Cooperman emailed a family member stating that: “[minor family member] will be pleased to know that the bond I bought [for minor family member] the other day has risen 7% in price as the company just sold some assets that resulted in an improvement oftheir credit standing.”
The Cooperman Offshore Account, Hedge Fund Accounts, Managed Accounts and Family Accounts generated profits ofapproximately $4.09 million by trading APL securities at Cooperman’s direction between July 7, 2010 and July 27, 2010.
As a result ofCooperman’s and Omega’s unlawful conduct, at Cooperman’s direction, the Cooperman Offshore Account, Hedge Fund Accounts, Managed Accounts and Family Accounts made significant ill-gotten gains by trading on the basis ofmaterial nonpublic information about APL’ s Elk City sale.
Cooperman Concealed and Then Attempted To Cover-Up His Insider Trading
Cooperman carefully guarded the information he misappropriated from APL Executive 1, communicating it to Omega Consultant, but not sharing it with his family member, who was also a hedge fund manager and at times an APL investor. Indeed, on July 28, 2010, after APL announced the Elk City sale, Cooperman’ s hedge fund manager family member emailed APL Executive 3 twice, complaining about APL options activity prior to the public announcement ofthe Elk City sale, stating:
Can you please call me[?] Been trying to get you last few days[.] [T]here had been some fishy options trades in apl [sic] before this that somebody should investigate.
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I also would like to make sure that the sec [sic] looks into the shady option trades and volume in apl [sic] last 2 weeks or so in front ofthis deal[.] How do I become a whistle blower[?]
APL Executive 1 was shocked and angered when he learned that Cooperman and/or accounts that Cooperman managed traded in APL securities in advance ofthe public announcement ofthe Elk City sale.
In late 2011 or early 2012, Cooperman spoke on the telephone with APL Executive 1. During this call, Cooperman informed APL Executive 1 that the Commission had sent Omega a subpoena relating to trading in APL securities in advance ofthe announcement of the Elk City sale. Cooperman improperly sought APL Executive 1 ‘s assurance that APL Executive 1 had not shared confidential information with him in advance ofthe announcement of the Elk City sale, despite knowing this was not true. APL Executive 1 believed that Cooperman was attempting to fabricate a story in case the two were questioned about their conversations regarding Elk City.
In late 2011, Cooperman also informed APL Executive 3 that the Commission had sent Omega a subpoena relating to APL trading in advance ofthe announcement ofthe Elk City sale. Cooperman told APL Executive 3 to tell APL Executive 1 that Cooperman and APL Executive 1 had not discussed confidential information related to the Elk City sale prior to the time APL publicly announced it.
In connection with an investigation concerning Cooperman’s and Omega’s conduct, including the trading in APL securities referenced above, the Commission issued a subpoena for Cooperman’s testimony. Cooperman invoked his Fifth Amendment privilege against self-incrimination in response to Commission questions regarding Cooperman’s and Omega’s trading in APL securities.
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For those wondering, here are Omega’s Top 30 stock holdings as of June 30:
Full filing below (pdf):
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