Singapore May 7 2024: To the outside world, Simon Sadler was the “block-trade king” in Asia, running a hedge fund that produced stellar returns for many years. Inside his firm’s Hong Kong headquarters, it was a pressure cooker for investment staff.
Sadler’s Segantii Capital Management Ltd. has long played a vital role helping Wall Street banks unload chunks of stock, dominating one of the market’s last old-school businesses by what colleagues described as Sadler’s sheer force of will.
Interviews with more than a dozen people with ties to Segantii paint a picture of a hard-charging work culture that didn’t brook anything but success. One former employee recalled watching a trader who made a mistake get verbally berated extensively by Sadler in front of co-workers. Others said staff broke down in tears on the trading floor following difficult interactions with him.
Last week, authorities thrust Segantii into the global spotlight, accusing the firm, one of its veteran traders and Sadler himself of crossing a legal line in the pursuit of market-moving information and profits. Hong Kong’s Securities and Futures Commission criminally charged all three with insider trading tied to a block trade in 2017.
Across the financial world, the allegations are raising questions about how the firm operates, how banks and clients might react and how far the probe might reach.
“Segantii intends to defend itself vigorously against the charge,” the firm said in a brief statement after the charges were unveiled last week. It declined to comment for this story.
Sadler, a former trader at Dresdner Kleinwort Wasserstein and Deutsche Bank AG, founded the firm in Hong Kong in late 2007 with $26.5 million. He built Segantii into a regional giant with offices in London, New York and Dubai, trading globally with a focus on Asia-Pacific equities and equity-linked securities. The firm had $4.8 billion in assets under management at the end of March.
In recent years, Sadler’s profile grew beyond finance after he bought the UK’s Blackpool Football Club in 2019.
Sadler and the former trader, Daniel La Rocca, appeared in Hong Kong’s Eastern Magistrates’ Court on May 2 and didn’t enter a plea. The next hearing on the matter is in June.
Banks’ Partner
Segantii’s trading partners are a virtual Who’s Who of global finance. The hedge fund listed nine banks as its prime brokers in a March performance update to investors. That included some of the world’s largest investment banks, such as BNP Paribas SA, JPMorgan Chase & Co. and Goldman Sachs Group Inc.
Some of the prime brokers are reviewing their ties and exposures to Segantii, deliberating internally about how to manage relationships with the fund in the wake of the insider-trading charges, according to people familiar with the matter.
At least two banks have decided to dial back dealings with the fund while the case is pending — meaning they will not extend new financing or add fresh positions for Segantii, the people said. Some others have no immediate plans to make changes, the people added.
Spokespeople at BNP, Goldman and JPMorgan declined to comment.
Information Leaks
Sadler and La Rocca were accused of trading on inside information that they got from a former employee at Bank of America Corp.’s Merrill Lynch division, the Financial Times reported Friday, citing a summons issued to the defendants in March. Segantii sold shares of Hong Kong-listed apparel retailer Esprit Holdings Ltd. in June 2017, according to the paper, before a block trade that month.
Block trades are off-exchange, privately negotiated transactions that are often hashed out by humans on phones and keyboards. Banks handling the sales have to walk a fine line, with employees sometimes seeking to gauge institutional investors’ appetite for a stock by asking hypothetical questions — or formally swearing potential buyers to secrecy in a process dubbed “wall-crossing.”
In Hong Kong, banks have discretion over which investors to allocate shares to in block trades and institutional tranches of other equity markets deals.
Banks also prize their relationships with wealthy clients, institutions and companies that own large amounts of stock — another reason to keep pending sales under wraps. Banks that aren’t careful risk inadvertently tipping off or spooking the market, sending prices tumbling, eroding their clients’ proceeds and even incurring losses themselves.
For regulators, the guiding principle is that investors shouldn’t be allowed to trade on confidential information that can move securities prices.
The Segantii case adds to mounting scrutiny of block trading that has already swept up the likes of Morgan Stanley. In a landmark case in January, the bank agreed to pay $249 million to settle US accusations that employees leaked deals to favored funds that bet against — or “shorted” — shares before block trades. The bank benefited because those funds then served as ready buyers for the stock, lowering any risk to Morgan Stanley’s balance sheet as it bid alongside competitors to win mandates.
Segantii’s multistrategy fund has suffered only two small annual losses in more than 16 years of operations. Its annualized return of 12.17% since inception has exceeded the S&P 500 index’s 10.24% total return, and is more than twice that of the Eurekahedge Asian hedge fund index, according to Segantii’s March update. The track record made it one of the most consistent performers in the regional hedge fund industry.
Its assets under management have declined by more than $1 billion since March 2023, largely due to investor withdrawals, Bloomberg reported earlier.
In Hong Kong, the maximum penalties for insider dealing are a HK$10 million ($1.3 million) fine and 10 years’ jail time. Offenders would also be subject to civil sanctions, which include disgorging the profits they made and bans of up to five years from corporate managerial roles and trading in regulated financial products.
