Discovering that the Securities and Exchange Commission is considering filing a civil fraud suit against his firm was probably not how Steve Cohen wanted to spend last week, but it happened. If that’s all he’s facing, he may well be relieved. SEC charges can often be resolved through a fine. If the Department of Justice gets involved, the stakes are much higher. The matter of whether the U.S. Attorney is intending to file criminal charges against Cohen or his firm is one of the biggest questions in the case.
The SEC and the DOJ investigate cases separately, although the two will often share information, according to legal experts. But the information flow isn’t necessarily both ways. In some cases, the SEC may not know what the DOJ is planning, or what kind of information, including wiretaps, it has. The DOJ has much more powerful tools at its disposal, including recorded conversations, confidential informants, and undercover agents. All the dogged-yet-underappreciated SEC can do is subpoena documents and conduct interviews.
“Wiretaps are very important in a crime like insider trading that has so many different elements, including the need to show intent,” says Tom Sporkin, a partner at Buckley Sandler and a former senior enforcement official at the SEC. “They provide a window into the defendant in his natural habitat. It’s not staged. He’s not the person sitting in front of the jury with a suit and tie on.”
SAC’s response to last week’s Wells notice is a crucial move in the chess game. A Wells notice notifies the recipient that the SEC is considering filing civil fraud charges. Now SAC may choose to respond in the form of a Wells submission. It’s the firm’s opportunity to try to convince the enforcement staff that they don’t have a case before charges are actually filed.
Chances are, with a case of this magnitude, the SEC isn’t just testing the waters; the commission is likely planning to file civil fraud charges, according to legal experts. The matter of whether to take this opportunity to respond and argue for one’s innocence is a delicate one. “You’ve got to be careful,” Sporkin says. “You’ve got to keep away from getting deep into the facts, because the submission could be used against you.” On the other hand, you don’t want to miss a chance to discourage any proceedings.
During a conference call on Nov. 28, SAC President Tom Conheeney told investors that they would not be responsible for any fines SAC incurred as a result of the SEC’s action, according to Bloomberg News. From SAC’s perspective, a massive fine would hardly be the worst outcome.