What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in today's video we're going to revisit one of the biggest hedge fund failures in recent history. We've seen some pretty big and shameful hedge funds go out of business. Over the years there was sat capital, the prime jewel of billionaire steve cohen, which got shut down for four years by the sec only to get re-branded as 0.72. Then there was galion, the rising star in the hedge fund, world run by raj rajaratnam and perhaps the biggest one of them all long-term capital management run by nobel prize-winning economists in the financial embarrassment of the century.

These academics took on so much leverage and engaged. So much counterparty capital that, when their overly optimistic strategy unraveled, it nearly brought down the entire economy. But there is really no shortage of similarly dramatic unravelings of star hedge funds and most of the big cases in some way involve insider trading. In today's video we're going to go over the troubled history of piquo capital brought down by one of the biggest insider trading scandals to this day, piqo capital was started in the late 90s by arthur sandberg sandberg was an illustrious businessman with a privileged early life.

He attended the prestigious massachusetts institute of technology for college earning a degree in aeronautics and astronautics engineering. He then went on to work for the precursor to lockheed martin, one of the biggest defense contractors in the country. After working for a few years, he attended stanford earning a master's degree, also in engineering. After his time at stanford, he went to colombia where he studied to earn an mba.

Sandberg started his first hedge fund in the 1980s by early 2001, his most successful venture pickup capital management had become the single biggest hedge fund in the world, managing about 15 billion dollars for investors. The firm employed more than 100 analysts and was the envy of the financial industry, arthur sandberg, was on top of wall street, and things were looking up for him. In 2001, the tech bubble had just burst, and many tech names were in the doghouse one particular stock. Microsoft was among the stocks that the capital was less than bullish on.

However, after a cold streak in his microsoft, trades sandberg wanted to do something to gain some edge in his trades, so he came up with an idea. Pico was constantly receiving job applications from ambitious young professionals in all industries. He wanted to see if they could strike gold with the job offer from piquo. This includes people from companies like microsoft.

In early 2001, an ambitious product manager at microsoft, named david zilka, decided that he wanted to try his hand at the high-paying finance industry. He applied for a job at pico as an analyst and interviewed at the firm in january of 2001.. This was the opportunity that arthur sandberg was waiting for a month later, sandberg personally emailed zilka congratulating him on receiving a job offer as an analyst at piquo. Naturally, zilka accepted the offer after getting the job sandberg emailed zilka asking him for any insights that he had on his current employer microsoft.

He said quote: do you have any current views that could be helpful? Might as well pick your brain before you go on payroll zilka responded to the email in affirmation saying that he believed that microsoft was recovering from the recent weakness. At the time. Zilka was still working for microsoft. He wouldn't start officially working for piquo capital until late april in mid-march sandberg met with zilka to talk about microsoft on the very next trading day.

As that meeting sandberg put on a leveraged long position in microsoft, using what is called a synthetic stock position whereby he bought calls and sold puts of equal strike prices. However, the prevailing belief among the hedge fund community at the time was that microsoft would miss earnings which were to be announced on april 19th, after speaking with other colleagues in industry, contacts samberg changed his mind on microsoft and sold his long position. However, as the day of earnings approached, he again consulted silica sandberg approached silica, asking for any pieces of information that zilka might be able to provide about microsoft. Zilka then proceeded to email, his own colleagues, within microsoft, asking for information about microsoft's upcoming earnings release.

He explicitly asked one of them how the quarter had shaped up for microsoft and asked another whether or not they had heard whether microsoft will miss estimates. His colleagues unknowledgeable as to his true intentions to relay the information on to samberg, responded that the previous month was the best march on record for microsoft. In part, due to strong performance of windows 2000, they told zilka that microsoft was on track to revise its financial forecasts. Favorably, the next day on april, 9th zilka told samberg what he heard from his microsoft colleagues, he told sandberg that microsoft would likely beat earnings on the 19th.

After hearing this sambar put on a massive position of synthetic stock using calls and puts amassing a huge position of tens of thousands of options. Two days before microsoft reported zilka, further informed sandberg that he had heard from other colleagues high up in microsoft that the cfo of microsoft was being much more relaxed in the days leading up to the earnings release. He interpreted this to suggest that their previous intel about microsoft was accurate. After hearing this piece of information on the day of microsoft's earnings report, but before microsoft actually reported sandberg increased his position further by the equivalent of 600 000 shares.

Sure enough. Zilka's insider information proved correct. After the close on april 19th, microsoft announced beats on both the top and bottom line, beating estimates for both revenue and profit. The next day, microsoft stock jumped one and a half percent on the news, based on the enormous position which sandberg had built up on microsoft.

Pequod made 14.8 million dollars in a single day. A total of 4.1 million dollars of those profits went directly to sandberg and its hedge fund, as fees to their investors. Samberg's idea of hiring someone from microsoft in order to trade, microsoft stock had paid off big time after the 15 million dollar windfall by sandberg. He showered zilka with praise and encourages other employees to learn from zilka in an email to silica sandberg told him quote.

I shouldn't say this, but you've probably paid for yourself already. It should be noted that during this entire time, zilka was still technically an employee of microsoft. At the time that microsoft reported earnings, he was on the payroll of both microsoft and pico capital. After the successful insider trading of microsoft, stock zilka expected that he would be rewarded with important responsibilities within piquo.

Instead, sandberg remained more interested in zilka's microsoft, intel than his analyst capabilities at one point, zilka even emailed sandberg over concerns that he had that the stocks that he was being told to cover for piquo were also being covered by other analysts of the firm in response. Sandberg told him to not worry about the little things like that and instead focus on bringing in more intel about microsoft. However, since his employment at microsoft ended the next month, zilka soon found himself unable to satisfy sandberg's desire to gain insider information about microsoft. Zilka proved not to be valuable as an honest analyst at piquo.

After all, he had come from being a product manager at microsoft and had no prior experience in the finance industry. His only value to sandberg as a microsoft insider had passed just five months later. He was laid off from bequo. The insider trading incident was not discovered until many years later.

During this time, piquo capital management continued to manage billions of dollars of capital for investors. Meanwhile, zilka sued piquo for the untimely termination of his job at piquo. As a result of the lawsuit, zilker received more than 2 million from the hedge fund, but that 2.1 million dollar payment was enough to keep the cat in the bag about the insider trading incident. It wasn't until zilka's ex-wife karen kaiser sued for part of that two million dollars that lords began, connecting the dots when zilka and karen divorced shortly after he was fired from piquo the courts determined to split in assets between zilka and karen.

However, the split did not include the 2 million settlement paid to zilka by pico capital because it had not been paid out at the time when it was paid out karen sued to be entitled to part of it. She hired lawyers to help her with the case and combed through old files from a computer that she had shared with zilka during their marriage on an old hard drive. She found zilka's old records containing his correspondences with his colleagues at microsoft, including the emails in which his colleagues told him that microsoft would be earnings. Her lawyers realized that this evidence would be enough for the sec to convict.

In 2004, the sec first began investigating the incident along with the us attorney's office, with insufficient evidence to charge anyone in the scandal. They closed the case two years later, however, in early 2009, the sec was given the hard drive containing zilca's emails from his ex-wife. The content on the hard drive was direct evidence and enough to incriminate zilka and pico capitals. Insider trading.

In the end, the sec and sandberg reached a settlement that had sandberg pay back the 15 million dollars of ill-gotten profits, as well as an additional 3 million dollars. In penalties, sandberg was also banned from managing outside capital and soon thereafter turned piquo into a family office. Zilka was also ordered to pay two hundred fifty thousand dollars in accordance with his total earnings, while doing insider trading at piklo. No one did any time in jail in the end.

What happened in this scandal was a greedy hedge fund manager convinced a young product manager at microsoft to leave his high paying career and join his hedge fund. He then used his new employee to gain non-public information about microsoft and make tens of millions of dollars in trading profits. Zilka became an insider trader and betrayed his former employer and colleagues at microsoft after he was no longer useful with insider trading, sandberg fired him and presumably moved on to the next opportunity. After years of investigations and litigation, nobody, but the lawyers won, the world's biggest hedge fund was forced to shut down and the reputation of wall street was damaged even further than already was this scandal ruined the personal and professional legacies of multiple people and cost innocent market Participants, millions, but unfortunately, human greed will probably never allow these scandals to stop happening.

Alright guys that wraps it up for this video, if you like the content, make sure to hit that like button and subscribe for future videos also leave a comment saying who you think did the most shameful thing in this scandal. As always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.