Jay Regan doesn’t look like a racketeer. You would imagine Jay Regan, the racketeer, to be a burly guy with a threatening gaze. Instead you find a slight man with a wiry build. You would imagine Jay Regan, the racketeer, to be hanging out in a back room in Jersey City or Bayonne. Instead you might find him in a corporate office on Hulfish Street in downtown Princeton or in a boardroom of the Princeton Day School, Centurion Ministries, or any of the many other nonprofit groups he has served over the years.
You would imagine Jay Reagan, the racketeer, when asked by a reporter to discuss his life in the nearly 30 years since his arrest and conviction on 64 counts of racketeering, to verbally take off the reporter’s head for even asking the question. Instead you hear him take a considered pause and then answer, in a cheerful voice, sure, when can we meet?
Jay Regan is not your typical racketeer. And the arrest of him and four of his partners in Princeton Newport Partners, an investment trading firm at 33 Witherspoon Street, was not the typical kind of case imagined when the federal Racketeer Influenced and Corrupt Organizations (RICO) Act became law in 1970. That 1987 raid, in which 50 armed federal agents stormed into Princeton Newport’s offices, was blockbuster news at the time. The subsequent six-week trial in federal court in New York also put Regan and his codefendants in the headlines. And all that was topped off by a remarkable reversal in 1991, when a federal appeals court dropped charges and Regan and his colleagues were freed to get back to work or — more accurately — to rebuild a business that had been destroyed by the federal charges.
As the Wall Street Journal reported, “a review of several thousand pages of the trial transcript shows that . . . the extraordinarily vague wording of RICO deprived the jurors of any clear rule of law under which to judge the case. . . RICO may well have deprived the defendants of a fair trial.”
But just as compelling as Jay Reagan’s legal battles with federal prosecutors are two other stories. First is his pivotal role in the creation of Princeton Newport Partners, the first of many quantitative hedge funds that now dominate the financial landscape, a story fleshed out with the publication earlier this year of “A Man for All Markets,” by Edward O. Thorp, Regan’s original partner.
The second story is how Regan managed to rebuild his business — now Harbourton Enterprises — and to maintain the cheerful tone that this reporter detected in that initial phone call to request an interview.
Nowadays you might characterize quantitative hedge funds as a dime a dozen. But that’s an inadequate metaphor, considering that they generate billions of dollars in profits for both their investors and their participants. For hundreds of firms the default approach to buying and selling stocks is no longer looking for the undervalued firm with the good story of imminent growth in a suddenly lucrative field — as in “have you heard about the firm that has new battery technology that will take over the electric car market?” Rather the approach now lies in creating computer algorithms that will scour the stock markets on a second-by-second basis, noting fleeting opportunities for arbitrage — differences in the price of the same good in separate markets. A stock option, for example, might become more valuable than the stock it represents. So prevalent is this approach today that, if you poll the math majors at a university such as Princeton, you will find roughly a third of them are heading off to Wall Street when they graduate.
It wasn’t always that way. The role of mathematicians in financial analysis is a relatively recent phenomenon, and it can be traced back to single firm founded in 1969 that came to be known as Princeton Newport Partners.
The spark came in the mid-1960s when Ed Thorp, then a young mathematics teacher, applied techniques he had developed for beating blackjack at the Nevada casinos to picking stocks that would outperform the general market averages.
“Gambling is investing simplified,” Thorp writes in his new book. “The striking similarities between the two suggested to me that, just as some gambling games could be beaten, it might also be possible to do better than the market averages. Both can be analyzed using mathematics, statistics, and computers. Each requires money management, choosing the proper balance between risk and return. Betting too much, even though each individual bet is in your favor, can be ruinous. . . On the other hand, playing safe and betting too little means you leave money on the table. The psychological makeup to succeed at investing also has similarities to that for gambling. Great investors are often good at both.”
The first sweet spot Thorp discovered in the market was in warrants — a security issued by a company that gives the owner the right to purchase common stock at a specified price. Thorp discovered that the price of warrants generally moves in relation to the stock itself. But there were times when the values were mismatched. At that moment the savvy investor could buy the relatively undervalued securities and hold them in hopes of their value increasing and “sell short” the relatively overpriced one. (Selling short means the investor borrows the shares and then sells them, expecting it will be cheaper to buy back the shares when it comes time to return them.) In effect the investor is “hedging” his bet and will likely make money whether the stock price goes up or down.
The same strategy could be applied to convertible bonds, or convertible preferred stock, or options — financial instruments that would normally move in tandem to the stock with which they were associated but on occasion might be over-valued or under-valued.
In 1967 Thorp’s book, “Beat the Market,” came out. Thorp set up a limited partnership through which he was able to manage investments for himself and some friends and colleagues. From the management fees for the partnership (20 percent of the profits) Thorp was making about as much money a year in the market as he was teaching college math. It was a nice living, but not enough to change anyone’s lifestyle.
Enter Jay Regan. The son of a pediatric surgeon in Buffalo, NY, Regan had “no bloody idea” what he would do with his Dartmouth College degree in philosophy. He moved to New York, where his sister and her husband were living. Since his fraternity at Dartmouth, Alpha Delta Phi, is known as one of the inspirations for the film, “Animal House,” Regan presumably knew something about the beverage business. So he tended bar for a while before he decided to get more serious.
His brother-in-law suggested he try Wall Street. “I knew zilch,” says Regan, but he managed to get an interview with F. I. Dupont. The interviewer said “Mr. Regan, what’s your view of the Dow Jones Industrial Average and where it might be in the next few months?” Regan literally did not know what the Dow Jones Average was. He never got a callback from that interview. His brother-in-law suggested he start reading the Wall Street Journal.
Eventually Regan got hired in the retail sales department at White Weld & Co., and then into the Institutional department at Kidder Peabody. “I wasn’t that good at retail sales,” he says. “I finally did reasonably well at institutional sales.” One of his bonuses paid for his honeymoon — he and his wife, Amy, had met in New York in 1966 at the wedding of a mutual friend.
“Along the way someone gave me a copy of Ed Thorp’s ‘Beat the Market,’” Regan says. Regan was intrigued by Thorp’s strategy for hedging positions in a company’s warrants (convertible into stock), and the stock itself (see sidebar, this page).
“I read the book and said this is a shit-load more fun than calling on institutions,” says Regan. “I just picked up the phone and called him.” His question was simple: Was there some way they could turn the concept into a real business?
Thorp invited Regan to visit him in his office at the University of California-Irvine. “Ten years younger than I and of medium height, the 27-year-old Regan had thinning, reddish hair, freckles, and the social skills of a promoter. A Dartmouth graduate in philosophy, he quickly took in the principles on which I based my investment methods,” Thorp writes in his book.
“We seemed to make a natural team. I would generate most of the ideas but he would bring suggestions and trading possibilities from ‘the Street.’ I would do the analysis and compute orders for him to execute through various brokers. He was to handle taxes, accounting, and most of the legal and regulatory paperwork, things I wished to avoid so I could focus on research and development.”
While the partnership details took a few lawyers and a few weeks of dotting i’s, the basic deal came together in a single day, sealed with a simple handshake. Thorp proposed that they form a business with each of them having equal ownership.
“Ed probably could have taken more than 50 percent, but he didn’t,” Regan says today.
First known as Convertible Hedge Associates and later renamed Princeton Newport Partners (PNP), the firm’s operation “was a revolutionary idea,” writes Thorp. “Hedging risk was not new but we took it to an extreme never before tried. . . This nearly total reliance on quantitative measures was unique, making us the earliest of a new breed of investors who would later be called quants, and who would radically transform Wall Street.”
Notwithstanding the technical and analytical underpinnings, the firm needed some old-fashioned shoe leather to help round up investors. Regan and Thorp both put up $25,000 or so — “not much money,” Regan says. “We needed to figure out ways to raise more money.” There were already a few hedge funds in operation, but not very many. Regan reasoned that investors in those would be good prospects. “It turned out you could go into the County Clerk’s office and get the names of investors in those funds.”
So he did just that, jotting down the names, and then looking up the phone numbers. “I was able to spend 15 minutes with Larry Tisch,” says Regan. “He owned a big part of New York.”
He got two meetings with Charles Evans, a businessman and brother of Robert Evans, the movie producer. “On the second meeting he told me he’d give us $100,000 but we’d have to have our office in his building at Fifth Avenue and 57th Street. I think he wanted to keep an eye on me,” says Regan with a smile.
Eventually the firm earned the confidence of a critical mass of investors and started off in 1969 with $1.4 million in capital. Regan and his wife had the first of their three children and concluded Manhattan was not the place to raise them. But the Regans knew people living in Princeton. So the family and the business made the move. (Thorp and his side of the business remained in Newport Beach, CA.)
Princeton Newport Partners was based first on Alexander Street. From there it moved to 19 Vandeventer Avenue (the historic house that most recently became home to an evangelical Christian group). Later it moved to 33 Witherspoon Street, at the corner of Spring Street.
From 1969 to the end of 1987 the amount invested rose from $1.4 million to $273 million. Its limited partners saw their wealth grow at 18.2 percent annualized — after fees. PNP had no losing years — and not even a losing quarter. With the standard management fee of 2 percent plus 20 percent share of the gains, Princeton Newport had a lucrative business model. As Forbes Magazine headlined a 1986 article describing Princeton Newport’s success: “Simple? Yes. Easy? No.”
In late 1987 Princeton Newport Partners began to attract some other attention — from federal agents who were investigating charges of insider trading. As recounted in “Den of Thieves,” the 1991 book by James Stewart, the Wall Street Journal reporter who covered much of the investigation, the feds were targeting Michael Milken, the so-called “junk bond king.” His trail led to Robert Freeman, head of arbitrage at Goldman Sachs. Investigators soon turned from him to others in the industry who knew him, including his college classmate from Dartmouth, Jay Regan.
To get information on Regan and company, the investigators subpoenaed a former Princeton Newport employee, William Hale. They hit what they thought was pay dirt: When asked why he had left the firm, Hale told the prosecutors, “I didn’t leave. I was fired.” When asked why, Hale said he “couldn’t stand all the crimes they were committing,” referring specifically to “parking” of securities to create losses to offset temporary gains as the computer-driven trading bought and sold stocks.
On the morning of Thursday, December 17, 1987, Steve Smotrich, PNP’s chief financial officer and custodian of records, went to the federal courthouse to answer questions in what he thought was still a fishing expedition into securities trading activities. Smotrich, whose father owned a clothing store and whose mother was a home economics teacher in Norwich, CT, studied accounting at Bentley College in Waltham, MA, and looked forward to work as a corporate auditor — work that he thought would be exciting. On this day he got more excitement than he ever could have imagined. Toward the end of the session, the questioning took a strange turn. Smotrich was asked about the layout of the Spring Street office and where records were physically stored.
As Smotrich headed back to Princeton, armed federal marshals pulled up to the corner of Witherspoon and Spring streets and presented a search warrant to the startled receptionist. Regan was in a back room, talking with some of his traders. Someone came in and said “Jay, there are three or four guys here who claim they have a search warrant.” Regan thought it was a joke. “I figured it was a couple of my college buddies playing a trick on me.”
But it was for real. In fact, according to the account in “Den of Thieves,” Bruce Baird, an assistant to U.S. Attorney Rudolph Giuliani, directed the raid. In an earlier arrest of several other Wall Street brokers, Baird had concluded that “the government hadn’t been forceful enough to intimidate the suspects into pleading guilty and cooperating.” Baird’s team, made up of 50 U.S. marshals, “armed and wearing bulletproof vests,” according to Stewart’s book, “pushed their way through the glass doors of Princeton Newport’s offices. After showing their warrant, they swarmed through the offices as terrified employees froze at their desks. No one was allowed to leave until the marshals completed their work. They pulled open filing cabinets and desks, emptying the contents into cardboard boxes. By the end they had carted off more than 300 boxes containing documents, records, and — most important — all the tape recordings they could find.”
At the end of the day every nook and cranny of the office had been searched. Women’s purses were inspected. The resulting charges were related to trades that PNP had made to create losses that would offset corresponding gains that arose during the firm’s hedging maneuvers.
But most knowledgeable observers believed that the charges — filed under the Racketeer Influenced and Corrupt Organizations or RICO Act — were also intended to get the Princeton Newport principals to testify against Michael Milken, the controversial “junk bond” trader who had dealings with PNP. Regan and his fellow defendants refused to cooperate.
The pivotal moment for Regan: He got a call at night from the head of the Princeton Newport defense team, Ted Wells, a Harvard Law and Harvard Business School alumnus known for high profile white collar criminal defense. Wells told Regan he could get a deal if he testified against Milken. “If you plead guilty to a minor felony, you’ll get off with no jail time,” Regan recalls Wells telling him. “I sat in my kitchen thinking about it, drinking a stiff martini, and talked to my wife,” Regan says. “Then I called Ted back. ‘Tell ‘em to go f— themselves.’ If we had cut a deal it would have haunted us for years.”
But even in the darkest days Regan maintained his sense of humor. At one meeting with the feds he showed up wearing a baseball cap that said “Shit Happens.”
The complicated trial took more than a month during the summer of 1989. Figuring that this was a way to show his kids how the real world worked, Regan had his entire family go to court whenever they could. His older son had just completed his freshman year at college. His daughter worked as an unpaid assistant to the defense team. Says Regan: “My kids are still very skeptical of what they read in the papers.” He adds, “In retrospect it was an amazing experience. Your mettle really gets tested.”
Wells, the Princeton Newport attorney, argued that the trades were allowed under IRS regulations. The defense even had a former IRS commissioner, Donald Alexander, prepared to testify. The judge would not permit it.
In the end the jury, led by a bus driver from the Bronx, was apparently moved by the prosecution’s down-to-earth summation: “You don’t need a fancy tax law expert because common sense tells you it’s fraudulent. It’s phony.”
But not everyone thought the case was so simple. Shortly after the trial Regan reached out to the Wall Street Journal. Reporter L. Gordon Crovitz, who would later become the newspaper’s publisher, asked Regan if he would sit for a follow-up interview. Regan met the reporter in a conference room at the Journal’s office. The conference table was stacked high with thousands of pages of trial transcripts. “His first words to me were ‘Mr. Regan, you got f —ed,’” says Regan. The resulting article, highly critical of the prosecution’s case, was, says Regan, lifting his arms toward the sky, “my salvation.”
At sentencing the judge gave the defendants minimum terms. On appeal virtually all charges were dropped.
The Princeton Newport case lasted from December of 1987 until September of 1992, when the last of the charges were vacated by a federal judge. Regan had spent an estimated $5 million in the defense of himself and the others. And Princeton Newport Partners was out of business, another business made up of many of the same principals sprung up at the same location, where it remains in business to this day (see sidebar on TGS, page 34).
Around Princeton Jay Regan and company suddenly had a black cloud overhead. “I was on the board of Princeton Day School,” says Regan. “When it came time to renew my term, they didn’t ask me. That sort of annoyed me.”
Smotrich, whose children were ages six and eight at the time, recalls people he knew looking the other way if they ran into him at the supermarket. “You got to know who your real friends were.”
Even Ed Thorp seems to distance himself from his former partners in Princeton. In 1987, Thorp writes in his new book, “the government used evidence from the raid and testimony from a disgruntled former employee to develop their case. Ironically, when this man was being considered for a job as a trader by the Princeton office, they flew him to Newport Beach to get our opinion. We said emphatically that he was not suitable. However, it was our practice for each office to have the last word in the areas of business for which it was primarily responsible. The Princeton office hired him . . . Our two offices, more than 2,000 miles apart, had very different activities, functions, and corporate cultures.”
This reporter’s interest in the Princeton Newport began several years ago when I ran into Steve Smotrich at a social gathering (his wife and my significant other had become friends). I didn’t recognize his name at first, but the obligatory question — “so what do you do in town?” — led to a brief discussion of Princeton Newport Partners. I wondered if Regan would be willing to tell his story and share the details of how his new company, Harbourton Enterprises, had risen from the ashes. “You’d have to ask him,” Smotrich said in a tone that was neither encouraging nor discouraging.
Earlier this year I discovered that Ed Thorp, still sharp as a tack, had written his memoir and that it included a detailed account of his partnership with Regan. I made the call to Regan’s office.
So how did Regan rebound from Princeton Newport?
After the trial and appeal Regan and one of the attorneys working on the defense team, David Mills, went into business together. At the time the savings and loan industry was in a crisis and the Resolution Trust Corporation was selling off troubled assets. Regan and Mills saw an opportunity to bid on some undervalued assets. “Here we were, recently convicted on racketeering counts and asking for credit,” Regan says. “The banks were resistant at first. But then we sent them the Wall Street Journal article.”
Today Regan has about 20 people working with him managing Harbourton Enterprises, a private investment firm, on Hulfish Street in Princeton as well as offices in New York, Portland, Oregon, and in West Palm Beach, Florida, where Harbourton still runs a trading room that does quantitative trading. “My son and I are investing in a lot of stuff that is still 100 percent quantitative,” Regan says.
It remains a profitable — if not easy — business. After Princeton Newport was shut down, Ed Thorp was able to restart his hedge fund activity. In 2012 Thorp’s net worth was estimated at $800 million. In a recent list of the 50 wealthiest New Jerseyans published in NJBiz, Regan was not mentioned. But he has no complaints. “I don’t go around talking about myself too much,” he says.
(Smotrich has also landed on his feet. Still working with Regan 30 years later, Smotrich calls the Princeton Newport raid and trial “a life lesson that I don’t regret.” He now satisfies his thirst for excitement by racing high powered cars. He and a friend drove a 600-horsepower Dodge Viper in this year’s One Lap for America race, a legalized version of Brock Yates’s “Cannonball Run” coast-to-coast race.)
Post Princeton Newport Partners, Regan’s operations include some new dimensions: an expanded philanthropic presence and investments in promising start-up ventures, many of which carry the promise of a social benefit.
Regan’s family foundation, founded four years before the federal raid and named after Harbourton, the Hopewell Township community in which the Regans have lived for the past 45 years or so, has blossomed along with the family business. His wife is the president. His daughter and younger son, also based on the West Coast, both work part-time for it.
Regan, who donated enough money to the Hillary Clinton campaign to be invited to lunch with her, and his wife are both oriented toward progressive causes. The Harbourton Foundation reflects that progressive view. As the mission statement says, the foundation “was established to help individuals and communities in need. We partner with and fund organizations that promote healthy individuals, healthy communities, and a healthy planet . . . . The foundation’s areas of interest are human rights, health, and the environment.” Through the foundation Regan has discovered the horrors of child trafficking. “What’s amazing is how much of it occurs in this country,” he says.
Among the causes the Harbourton Foundation has supported is the Woods Hole Research Center (not to be confused with the oceanographic institute), one of the leading think tanks in the area of climate change. Amy Regan serves as a director.
Other Regan family beneficiaries include the Nichols School in Buffalo, Regan’s alma mater, which received a seven-figure donation to offer scholarships to students in need; and Operation Smile to create the Regan Resident Leadership program for plastic surgery residents to attend an Operation Smile medical mission to perfect their surgical skills while also working with a global patient population. This program is named in honor of Regan’s father, known for his excellence in cleft lip and cleft palate reconstructive surgery.
When investing its assets the foundation tries to pick not just good financial returns but social returns as well. Both the foundation and the investment company have invested in PanTheryx, based in Boulder, Colorado, which produces medical nutrition products to combat infectious diarrhea, a life- threatening disease that contributes to 9 percent of child deaths worldwide, second only to pneumonia. The company website quotes World Health Organization estimates that “roughly three quarters of a million children die each year from diarrhea complications, killing nearly as many children as HIV/AIDS, malaria, and measles combined.”
Closer to home, Harbourton has donated to the Millhill Child & Family Development Center in Trenton; and the Young Scholars’ Institute (YSI), a year-round after-school learning center in Trenton that provides educational, cultural, and recreational activities for students in grades Pre-K through 12.
Regan discovered another worthy non-profit shortly after his racketeering conviction was overturned. He was at a memorial service for a friend, and one of the speakers was Jim McCloskey, the founder of Centurion Ministries, the Princeton-based organization that works to free prisoners wrongly convicted of crimes they did not commit. “He was unbelievable,” says Regan. “I asked if I could meet with him at his office.”
Regan ended up on the organization’s board of trustees, severing for many years as president. To say that he is sympathetic to the cause is an understatement. Says Regan: “There but for the grace of God go I.”
Another relatively new wrinkle is on the business side of Regan’s operation. The “quants” who made their money coldly trading stocks under the almost invisible hand of computerized models are also investing funds in start-up enterprises — businesses with the proverbial “good stories” that appeal to so many of us. It’s an approach that never happened at Princeton Newport Partners. Among the Harbourton investments:
Lucid Energy, a Portland, Oregon-based provider of renewable energy systems for in-pipe hydropower and smart water infrastructure. Here’s a business with a story everyone can appreciate. Next time you turn on a faucet at your house think of all the water coursing through the mains that lead from the original source of that water — a mountain lake, a reservoir, a river — to the water mains that feed the pipes that connect to your house. What if the energy in that water flow could be harnessed the same way a hydroelectric plant harnesses electricity from a mountain stream?
In the case of the Portland Water Bureau, the LucidPipe Power System uses the gravity-fed flow of water to spin four 42-inch turbines that are now producing electricity for Portland General Electric customers under a 20-year power purchase agreement with the utility. Harbourton was involved with several other investors, as well the U.S. Department of Energy.
When you explain this system to sustainable energy proponents, the first thing they might do is raise a skeptical eye. Those turbines, they will tell you, increase the friction in the water flow, thereby creating a need for other energy to be expended to make sure the water reaches your faucet with the same pressure. But the Lucid Energy people have thought of that. As the vice president for research and strategic partnerships at Portland University, Jonathan Fink, says, water coming into Portland is gravity-fed, and the water utility has to slow down the water as it comes into town. “Typically, the energy [of the rushing water] is lost as heat. With Lucid’s technology they can convert it into electricity,” he says. The technology is “pretty much a win-win.”
American Cash Exchange, producer of the Poni Card, which provides a means for people without bank accounts to securely transfer money. For Regan and the team at Harbourton, the Poni card has to be one of its biggest challenges. The idea, first developed by a former Princeton physics professor named Don Licciardello, seems simple.
As described in a 2007 article in U.S. 1, “If a migrant worker wants to send his mother $300, he now stands in line at a check cashing business to buy a money order to be sent through the mail, or he buys a wire transfer.
“Under the American Cash Exchange system, he goes to a retail outlet or a bank to buy a Poni PIN. He pays for an even number of pesos, at that day’s exchange rate, plus a sending fee. He calls his relative back home (a free five-minute call that comes with the Poni PIN purchase) to reveal the secret PIN. His mother takes her Poni ATM card to an ATM at a convenience store or bank. Using the secret PIN she withdraws the exact number of pesos that her son purchased. She needs no bank account, and she is charged no hidden mark-up or back-end fee.”
The company’s patented idea: To connect cash to a one-use-only 12-digit PIN generated randomly, rather than to an account number printed on a card.
But the business has lots of challenges. Among them: Regulatory hurdles. Regan and Harbourton, however, now have a formidable name in banking associated with them: John Reed, the former CEO of Citibank, named chairman of the board in February, 2016.
Working with start-up companies has been an eye-opener for Regan. “I’m amazed at how much is involved in getting a business started,” he says. The Poni card, for example, “has taken forever to get it to work. But the idea that you can use any ATM, 24/7, is the kind of idea that I can relate to.”
What’s next? Not retirement, certainly, and the mere mention of the word triggers a quote he attributes to Carl Icahn: “What do you want me to do — sit around and play shuffleboard all day?” Regan says he and his Harbourton colleagues are “looking at new things all the time.” It’s hard to generalize about what attracts him to a potential investment opportunity, but, he says, “the idea has to sound right — make sense right from the beginning.”
Regan emphasizes he is “not a quant, not a geek from the physics department. My ability is to spot good ideas, and then figure out a way to put together teams to be effective. If we are looking at some high tech venture I have to call in the experts to explain it to me.”
That’s not a stretch. Regan thinks back through the years, past the dark cloud of the federal investigation, and back to that first team he put together with Ed Thorp. “What was I — 25? 26?” he asks. “And there I was calling Larry Tisch.”
You could not imagine a racketeer being as enthusiastic as Jay Regan is. “I just love what I’m doing,” he says.
