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Steven Cohen’s SAC Capital Advisors, one of the biggest and most successful hedge funds, has landed repeatedly in the crosshairs of the federal crackdown on insider trading. Cohen was deposed by the U.S. Securities and Exchange Commission earlier this year about whether he illegally bought and sold stocks using inside information, two people familiar with the matter said in June. U.S. prosecutors said last year they were looking at trading accounts at SAC, including one run by Cohen that draws on the best ideas from the firm’s portfolio managers and analysts.
Some of those ideas apparently came from questionable sources. A former SAC portfolio manager told the FBI that it was “understood” that people assigned to give their best recommendations to Cohen would deliver insider information, according to an agent’s notes of the conversation. The former fund manager, Noah Freeman, pleaded guilty to securities fraud in February 2011 after speaking to FBI agents and federal prosecutors in New York in late 2010. “Freeman and others at SAC Capital understood that providing Cohen with your best trading ideas involved providing Cohen with inside information,” according to a Dec. 16, 2010, memo written by FBI Special Agent B.J. Kang.
The memo turned up in court filings in a related case. It doesn’t quote Freeman saying Cohen, 56, knew the information came from illegally obtained tips, ordered Freeman to provide them, or traded on the data. Neither Cohen nor Stamford (Conn.)-based SAC, which manages $14 billion, has been accused of criminal or civil wrongdoing. “Mr. Freeman testified under oath that he went to great lengths to hide his illicit activities from SAC by, for example, using code words and communicating off of firm systems,” says Jonathan Gasthalter, a spokesman for SAC. “His testimony makes clear that SAC did not condone his activities.”
The federal assault on insider trading burst into public view in October 2009 with the arrest of Raj Rajaratnam, co-founder of Galleon Group. Freeman is one of five current or former SAC employees implicated so far. Michael Steinberg, a portfolio manager at SAC’s Sigma Capital Management unit, has been placed on leave by SAC, a person familiar with the matter says. He’s an unindicted co-conspirator in the case against Jon Horvath, a former SAC analyst he supervised, people familiar with the case say. Horvath pleaded guilty to charges of securities fraud on Sept. 28. Steinberg hasn’t been charged with a crime.
Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara last year accused Freeman and another SAC fund manager, Donald Longueuil, of being part of an insider-trading scheme while at SAC. Freeman, Longueuil, and two others charged in the case have pleaded guilty to criminal insider-trading charges. Longueuil, 36, is serving a 2½-year prison term. Freeman is cooperating with prosecutors and hasn’t been sentenced. In April 2011, Jonathan Hollander agreed to settle SEC allegations that while working as an analyst at SAC he traded in his personal account using inside information about a pending takeover of the Albertson’s grocery chain.
Freeman, 36, a 1999 Harvard graduate who said he once managed a $300 million portfolio of technology stocks at SAC, spoke at length with the FBI. Excerpts of his interviews were filed in federal court in New York by Winifred Jiau, a former consultant with Primary Global Research who was convicted last year of insider trading and is appealing her conviction.
At one point in his career at SAC, Freeman, who worked in the firm’s Boston office, said he sat next to Cohen. “Freeman pitched to Cohen many trading ideas over the 18 months he was at SAC and some of the trading ideas involved dirty information,” according to the memo by Kang. “At SAC Capital you were paid a percentage of Cohen’s trade if Cohen placed a trade based on your tip,” Freeman said, according to the Kang memo. “It was clear to Freeman that to survive at SAC Capital, you had to feed Cohen with trading tips.”
Benjamin Rosenberg, a lawyer for Freeman, declined to comment on the memos filed about his client. Ellen Davis, a spokeswoman for the U.S. attorney, also declined to comment, as did FBI spokesman Jim Margolin. Steinberg’s lawyer, Barry Berke, declined to comment on his client’s status at SAC. Steve Peikin, a lawyer for Horvath, didn’t respond to a request for comment.
Bradley Simon, a former federal prosecutor, says FBI memos like the one about Freeman aren’t taken under oath and aren’t admissible at trial because they’re hearsay. Still, lying to federal investigators in such situations can constitute a felony. “By ultimately giving Freeman a cooperating agreement, the government made a determination in their view that what he said was true,” says Simon. “Otherwise, they wouldn’t have signed him up.”
Legal experts say that while federal probes usually take time, new guilty pleas, such as the one by Horvath, signal that they’re progressing. “While there’s no way to know if Mr. Cohen is or isn’t a target, everyone is at risk,” says Anthony Sabino, a law professor at St. John’s University in New York. “Not just someone like Cohen or people who worked at SAC, but anyone who’s dipped their toe into the pool of insider trading better watch out as more people plead guilty and agree to cooperate.”
The bottom line: A former portfolio manager at Steve Cohen’s $14 billion hedge fund told the FBI that he gave his boss tips based on inside information.