SAC Capital Advisors LP, the $14 billion hedge fund run by Steven A. Cohen, is under increasing government scrutiny as the U.S. investigates its trading in InterMune Inc. (ITMN:US) and Weight Watchers International Inc. (WTW:US), according to a person with knowledge of the matter.
The Federal Bureau of Investigation and the Securities and Exchange Commission are reviewing the trades, said the person, who asked not to be identified because the matter wasn’t public.
News of the probe comes after SAC told clients Nov. 28 that it had received a so-called Wells notice from the SEC related to Mathew Martoma, an ex-portfolio manager charged by federal prosecutors Nov. 20 with insider trading in two other stocks. The Wells notice, a warning that the SEC may sue, cited fraud and control-person liability related to the unit that employed Martoma, a person familiar with the matter said at the time.
“This could very well get worse for SAC as the government has shown tremendous success and has been so thorough in their insider-trading investigation,” said Mark Rifkin, a securities attorney at Wolf, Haldenstein, Adler, Freeman & Herz LLP. “Now is the time for SAC to get ahead of the story.”
Jonathan Gasthalter, a spokesman for Stamford, Connecticut- based SAC, said the firm wasn’t aware of any probe involving trades of Weight Watchers or InterMune. He declined to comment on whether the Wells notice, which the company received Nov. 28, cited the two companies.
The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed. The notice gives the recipient a chance to try to dissuade the regulator from taking action. In some cases, the SEC has decided to refrain from filing a complaint after sending a Wells notice.
The government is probing trades that SAC Capital made in Brisbane, California-based InterMune in the first half of 2010, said the person with knowledge of the probe. Some of those InterMune transactions were handled by Nikej Shah, the person familiar said. Shah, a former SAC portfolio manager, declined to comment on the probe. He hasn’t been accused of any wrongdoing.
Jerika Richardson, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, and John Nester, a spokesman for the SEC, declined to comment on the case. Jim Margolin, a spokesman for the FBI’s New York office, also declined to comment.
SAC bought 1.9 million shares of InterMune in the first quarter of 2010, after holding none in the prior two quarters, and held 10,983 shares at the end of the second quarter of 2010, according to data compiled by Bloomberg.
InterMune’s stock soared in the first week of March after the drugmaker’s experimental medicine for a deadly lung disease was reviewed more favorably by U.S. regulators than analysts had expected. Two months later, the stock slumped after the company’s application for a potential $1 billion-a-year lung treatment was rejected by regulators.
According to trading records, SAC Capital held Weight Watchers during a period when the price doubled. The firm held 2.1 million shares at the end of the first quarter of 2011 compared with 7,951 shares in the previous quarter, according to data compiled by Bloomberg. Weight Watchers, based in New York, surged in February 2011 after forecasting full-year earnings that beat analyst estimates.
The hedge fund cut its holdings in the second quarter of 2011, holding 77,857 shares as of June 30, 2011. The stock slumped in the first week of August after the firm increased spending on advertising and technology during the second quarter.
Neither SAC Capital nor its billionaire founder Cohen has been accused of any wrongdoing in relation to InterMune or Weight Watchers. Kristi Widmar, a spokeswoman for Weight Watchers, said the company hasn’t been contacted about the investigation and declined to comment further. A spokesman for InterMune declined to comment on the investigation.
Last month, Martoma was charged with insider trading for using nonpublic information to buy and sell the stocks of drugmakers Elan Corp. (ELN:US) and Wyeth LLC, earning $276 million for the fund.
SAC Capital’s owner sold the stocks after speaking with Martoma, according to prosecutors and an SEC complaint, which was the first time they had linked him to trades at the center of an insider case. Another person familiar with the matter said Cohen is the person identified in the criminal complaint as “Hedge Fund Owner” and in the SEC’s suit as “Investment Advisor A.”
Cohen hasn’t been charged with a crime in the Martoma case and hasn’t been sued by the SEC. The agency filed its suit against Martoma and CR Intrinsic Investors LLC, the SAC Capital unit where he worked. Martoma’s lawyer, Charles Stillman, has said he expects his client to be vindicated.
The criminal case is U.S. v. Martoma, 12-mj-02985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).
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