Government investigators have been scrambling through the heat wave to make decisions about whether to bring securities fraud charges against a certain billionaire hedge fund owner based in Greenwich, Conn.
The assumption had been that prosecutors had five years to charge said hedge fund owner, SAC Capital founder Steven Cohen, for trades that took place in July 2008 in Elan (ELN) and Wyeth (WYE), which form the basis of an insider trading case that was filed last November against former SAC portfolio manager Mathew Martoma, or for August 2008 trades in Dell (DELL) that the government alleges were based on inside information. Cohen has not been charged, and he had been feeling that by the end of this summer, the worst of the legal threats against him would be over, according to a person familiar with his thinking.
Recently, however, the government has adopted a different line: Prosecutors now believe they have six years, instead of five, to bring a case.
Manhattan U.S. Attorney Preet Bharara confirmed his thinking on the matter at the CNBC Institutional Investor Delivering Alpha Conference in New York on July 17. “There are a lot of armchair lawyers and armchair prosecutors who think they know what the legal theories are that we can pursue, and think they know what the statute of limitations issues are, and often they’re quite wrong,” a heavily powdered Bharara told Jim Cramer on stage at the Pierre Hotel, emphasizing that he wasn’t referring to any case in particular. “Dodd-Frank, which was enacted three years ago today, I believe, enlarged the securities fraud limitations from five years to six years. So we have a lot of legal theories that we can pursue.”
The relevant piece of the Dodd-Frank Act, which was passed on July 21, 2010, in response to the financial crisis, is Section 1079A, “Financial Fraud Provisions,” which includes a section called “Extension of Statute of Limitations for Securities Fraud Violations.” It reads: “No person shall be prosecuted, tried, or punished for a securities fraud offense, unless the indictment is found or the information is instituted within 6 years after the commission of the offense.”
The provision does not appear to be widely familiar to those within the white-collar defense community; a number of legal experts were surprised to learn that it’s embraced by prosecutors. Letting the five-year clock run out also comes with risks, including the possibility that a defendant such as Cohen or someone else could mount a challenge to charges filed after the five-year deadline, based on the fact that the Dodd-Frank legislation was passed after the alleged illegal trades occurred.
The deadline extension does not apply to civil charges that could be filed against Cohen by the Securities and Exchange Commission. The government alleges that Cohen started selling Elan and Wyeth shares after his portfolio manager Martoma told him he was no longer “comfortable” with the positions. The sales began on July 21, 2008, and continued for several days. Because July 21 falls on a Sunday this year, the agency has until this Friday, July 19, to file any more charges.