Legal Issues

Facing Subpoenas, SAC Capital Ends Full Cooperation


SAC has seen current and former traders picked off and charged one after the other like chipmunks at target practice

Photograph by Ilbusca/Getty Images

SAC has seen current and former traders picked off and charged one after the other like chipmunks at target practice

Updated, 9:11 a.m., to include information about subpoenas received by Steven Cohen and other SAC executives.

The next few months are going to be those that Steven Cohen never forgets.

Long seen as the central figure in a multiyear government investigation into insider trading on Wall Street, the founder of the $15-billion hedge fund, SAC Capital, has indicated to his investors that things may be about to get even uglier.

In a letter sent to investors on Friday, SAC said it would no longer fully cooperate with the government’s inquiry into illegal trading at the firm, which has seen current and former SAC traders picked off and charged one after the other like chipmunks at target practice. “While we have in the past told you of our cooperation with the government’s investigation, our cooperation is no longer unconditional,” the letter read rather ominously. It went on to say that the fund would no longer update investors about the investigation, adding that its new hunkered-down position would not impact its funds or investments.

Late yesterday, The New York Times reported that Cohen and other SAC executives have received subpoenas to testify before a grand jury.

The question now, says Jahan Raissi, co-chair of the Securities Enforcement Defense Group at Shartsis Friese, a San Francisco law firm, “is how long are they going to keep running the business like this?”

That’s indeed the question facing many investors, who’ve been deciding whether to continue withdrawing money from the fund. Investors asked to pull $1.7 billion from SAC during the first quarter, which will be coming out of the fund in quarterly increments during the course of the year. The fund recently further relaxed its redemption policy, giving investors two options if they’d like to take all their money out by the end of 2013: They can withdraw in thirds over the remaining three quarters, notifying SAC of their intentions by the end of May, or they can wait until mid-August and take out 50 percent by the end of September and the rest by yearend.

According to one current investor, the 50-50 option is helpful because it keeps the exit window open through a critical period of time—late July. That’s when the five-year statute of limitations runs out on trades at the heart of what the government describes as the largest insider trading case ever filed, its allegations against former SAC portfolio manager Mathew Martoma. Martoma was charged in November by U.S. prosecutors for the Southern District of New York and the Securities and Exchange Commission with insider trading in drug stocks Elan (ELN) and Wyeth. He’s alleged to have discussed one of his Elan trades with Cohen in late July 2008, before Cohen unwound his own shares. The government has indicated it will identify co-conspirators in the case by the end of July, leading to speculation that Cohen could be named. Cohen has not been charged with a crime and until now has maintained his firm’s full cooperation with the government.

In the meantime, SAC awaits final clearance of its record $602 million civil settlement with the SEC regarding the Martoma trades, which has been approved, conditioned on an appeals court ruling on the standard neither-admit-nor-deny-guilt provision that’s part of most SEC settlements. The settlement would resolve SAC’s civil responsibility for Martoma’s actions, but would leave Cohen himself open to charges. Through a spokesperson, SAC declined to comment.

Under certain circumstances, the five-year deadline on charges pertaining to the Martoma trades could be extended. Until that happens, the anxiety level inside certain 35,000-square-foot mansions in Greenwich, Conn., is likely to remain high.

 

Kolhatkar_190
Kolhatkar is a features editor and national correspondent for Bloomberg Businessweek. Follow her on Twitter @Sheelahk.

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