Regulation

How Sad Will SAC Capital's Redemption Song Get?


Michael Steinberg, SAC Capital Advisors LP fund manager, exits federal court in New York, on March 29, 2013

Photograph by Jonathan Fickies/Bloomberg

Michael Steinberg, SAC Capital Advisors LP fund manager, exits federal court in New York, on March 29, 2013

As the June 3 investor-withdrawal window comes and goes, early indications suggest that SAC Capital may look very different by the end of the year. There could be as little as $1 billion of outside client money left in the fund after today’s redemption deadline, according to Bloomberg News. The only money Cohen can count on at this point is his own, which, at $7.5 billion, is an enormous sum but would be only a shadow of what was once one of the mightiest trading forces on Wall Street. The most significant sign of what is to come may have been the decision by Blackstone Group, SAC’s largest outside investor, to redeem close to $400 million, the majority of its investment with the firm.

Blackstone was not comforted by the record $602 million civil settlement SAC reached in March with the Securities and Exchange Commission over the firm’s liability for alleged illegal trading in drug stocks Elan (ELN) and Wyeth, according to a person familiar with the matter. The Elan and Wyeth trades are at the heart of ongoing civil and criminal cases against former SAC portfolio manager Mathew Martoma, who has pleaded not guilty. SAC also agreed to pay $14 million to the SEC to resolve the firm’s liability for trading in tech stocks Dell (DELL) and Nvidia (NVDA), which form the basis of charges against current SAC portfolio manager Michael Steinberg, who has pleaded not guilty. “These settlements are a substantial step toward resolving all outstanding regulatory matters and allow the firm to move forward,” SAC spokesman Jonathan Gasthalter said at the time of the settlements.

It was clear, though, that the SEC, the Department of Justice, and the FBI weren’t finished with Cohen and his company. Since Blackstone made its decision, a number of other investors have also asked to withdraw funds. Meanwhile, the clock is running out on deadlines to file charges over trades at the center of the Martoma and Steinberg cases. The government has until the end of July to charge Cohen, or anyone else, for trading in Elan that occurred in July 2008 and until the end of August to file charges over trades that took place in Dell in August 2008. The government has issued grand jury subpoenas to a handful of SAC executives

To further complicate matters, Canadian insurance company Fairfax Financial Holdings (FFH:CN) filed an appeal on Friday of its $6 billion racketeering lawsuit against SAC in New Jersey state appellate court. In its original suit, filed in 2006, Fairfax alleged that SAC and a handful of other hedge funds took short positions in Fairfax and conspired to drive the stock price down. All denied the charges. The case against SAC was dismissed by a judge in 2011 on the basis that there was no direct evidence that SAC had been involved in the alleged conspiracy. “This case revealed substantial evidence of systemic insider trading and market abuse by prominent hedge funds, and the appeal argues the jury was entitled to hear and pass upon that evidence,” said Michael Bowe, an attorney with Kasowitz, Benson, Torres & Friedman, which is representing Fairfax. SAC spokesperson Jonathan Gasthalter said: “The trial court thoroughly rejected Fairfax’s claims, and we are confident its decision will be upheld.”

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

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