Indictment Splits Bicoastal Firm : Newport Beach Math Whiz Cleared but N.J. Partner Cited

Princeton/Newport Partners is the brainchild of a Newport Beach mathematician who turned a successful gambling system into a computerized investing program and a New York stock broker who was tired of buying shares for others.

The former broker, James Sutton Regan, was one of five partners indicted Thursday by a federal grand jury in New York in the first case in which racketeering charges were filed against officials of a securities firm.

But the math whiz, Edward Oakley Thorp, was not included in the indictments. In fact, he said Thursday, he had little contact with federal investigators during the two years they have been probing the investment group’s activities.

Thorp is a former university mathematics professor who gained fame in 1962 with the publication of “Beat the Dealer,” a book that proved it was possible to win at blackjack by following a card-counting system.

That he was not touched by the grand jury probe may stem in large part because Thorp and the number-crunching end of the business has remained in Newport Beach, while Regan set up the trading side of the operation in Princeton, N.J.

That decision was made in 1969 when Princeton/Newport was founded--in part with $25,000 of Thorp’s blackjack winnings and $100,000 in royalties from the book the wiry red-headed mathematician wrote after being banned from casinos in Nevada.

Because of the bicoastal branches, Thorp’s operation has little contact with Regan’s other than the continual electronic transmission of data from the computers in California to the trading desks in New Jersey. The separation apparently convinced federal investigators that Thorp and his crew of 40 were not involved.

In a telephone interview from his offices in a Newport Center high-rise Thursday afternoon, Thorp talked about the business he and Regan have built from a two-man outfit into a 75-partner operation that specializes in hedged investments.

Thorp said that the partnership--which is managed by Oakley-Sutton Management Inc., a firm he and Regan own--has never had a money-losing quarter. For the first six months of this year, however, things have been slightly off: The partnership has earned a return of only 6.5% on its investments, he said. “But that’s 13% annualized,” he added.

Initially, Thorp said he would talk about the business but not about the indictments. He abandoned that position toward the end of a half-hour interview, however, to defend his partners and his company.

He said he believes that Regan and the other Princeton/Newport officials are innocent and that the government has manufactured a case to pressure them into testifying against officials at several major brokerages as part of the broadening probe of insider trading activities on Wall Street.

“One thing that makes the government charges so absurd,” he said, “is that our investment strategies are mechanical. They don’t involve the mischief we are being charged with.”

Those investment strategies are what have set Princeton/Newport apart from other securities investment partnerships over the years.

Hedging, which is what it all boils down to, is an investment strategy that has been going on for years. What Thorp brought to it was a proprietary system for using computers to pick the best investment choices.

The traders still make use of native intelligence, specialized knowledge of the markets and gut instinct, but that stew is seasoned with an enormous dash of data churned out by Thorp’s computers.

Thorp heads a team of 40, including other mathematicians, statisticians, economists, computer scientists and specialists in business and finance. Together, they develop and feed into the computer programs they have designed data that enables the computers to identify choice investment targets--usually options, warrants, bonds and futures contracts.

In 1986, Princeton/Newport’s equity was $150 million. Today, said Thorp, the partnership’s net worth is close to $270 million.

And the investment group is not one that welcomes all comers. Thorp recently said that the minimum investment for an individual partner is $2 million, which requires a net worth of $10 million and limits the investing pool to less than 5,000 in the United States.

But just waving $2 million doesn’t make Princeton/Newport open its doors. Thorp said that the partnership has gone for several years at a time without adding new members.

“We are a collection of private individuals who invest as a partnership,” Thorp said. “We are all sophisticated, qualified investors.”

He said he does not believe that the indictments will threaten the stability of the partnership, largely because of its exclusive nature.