Bloomberg News

SAC Digs In as Deadline Nears for U.S. to File Insider Cases (1)

May 20, 2013

SAC Capital Chairman Steven Cohen

Steven "Steve" Cohen, chairman and chief executive officer of SAC Capital Advisors LP. Photographer: Scott Eells/Bloomberg

SAC Capital Advisors LP’s Steven Cohen is hunkering down as a deadline approaches for the federal government to file criminal or civil insider-trading cases against the billionaire hedge-fund manager.

A five-year statute of limitations will expire at the end of July for the U.S. Attorney in Manhattan to charge Cohen with illegally selling shares of two stocks based on tips received by Mathew Martoma, a former fund manager at his firm. The Securities and Exchange Commission, which won a record $602 million settlement with SAC Capital over the trades in March, also must move by July to sue Cohen personally.

The firm, based in Stamford, Connecticut, signaled a new phase in its defense of insider claims when it told clients in a May 17 letter that it was no longer cooperating unconditionally with the government. SAC Capital, which manages $15 billion, said it expects “substantially more clarity” in coming months, according to the letter, portions of which were provided to Bloomberg News.

“When they say they are no longer fully cooperating, they may end up in front of a judge arguing over the subpoena or the breadth of it,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor.

Following the settlement in the Martoma case, the SEC said it wasn’t precluded from pursuing additional claims against the firm or Cohen. Since the government’s five-year crackdown on market corruption began, at least nine current or former SAC employees have been tied to allegations of illegal trading. Four have pleaded guilty.

Full Cooperation

The Martoma case, which centered on trades in drugmakers Elan Corp. and Wyeth Inc., was the first to link Cohen, 56, directly to alleged inside information. Cohen hasn’t been accused of any wrongdoing.

Jonathan Gasthalter, a spokesman for SAC Capital at Sard Verbinnen & Co., declined to comment on the letter. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, and John Nester, an SEC spokesman in Washington, also declined to comment on SAC’s disclosure.

Full cooperation generally means that recipients of a subpoena will turn over the requested information while complying with the strictest interpretation of what is being demanded, Gordon said.

“You don’t give them more than they ask for unless you think it will exculpate your client,” he said.

Withdrawals Due

To avoid potential investor lawsuits, SAC Capital may have felt compelled to tell clients it had changed its stance on cooperation before a June 3 deadline to put in withdrawal notices, Gordon said. Before last week, Cohen’s firm had said it was cooperating with the investigation.

The letter may indicate that either the SEC or the U.S. attorney is preparing to sue or indict Cohen, said lawyers who asked not to be named because of the sensitive nature of the case.

Cohen received a subpoena to testify before a grand jury in the probe as part of a broader round of requests from prosecutors last week that included other SAC executives, the New York Times reported late yesterday, citing lawyers and executives briefed on the case.

“More often than not, hedge-fund managers feel that the SEC demands more information than it is entitled to, or is not sensitive to the costs related to providing the information” in the course of an investigation, said Ron Geffner, a partner at Sadis & Goldberg in New York who was previously an enforcement lawyer with the SEC.

Five Years

Some of those costs include fleeing clients. In February, investors asked to pull $1.68 billion from SAC’s funds. About $660 million was returned at the end of March, with the remainder coming out by the end of the year. Earlier this month, the firm told clients it was extending the deadline to ask for withdrawals for the second quarter to June 3 from mid-May. It also recently told them it was beefing up its compliance.

The statute of limitations for securities fraud is five years, which means the U.S. is running out of time to file new charges based on the Wyeth and Elan trades, which occurred in late July 2008. The U.S. Supreme Court in February, ruling in an unrelated case, said that the five-year clock for seeking civil penalties starts ticking when the fraud occurs, not when it is discovered.

If the deadline passes, SAC Capital may potentially face charges based on trading in other stocks. The U.S. is investigating the firm’s trading in InterMune Inc. (ITMN:US) and Weight Watchers International Inc. (WTW:US), a person with knowledge of the matter said in December. The transactions may have occurred more recently than those in Elan or Wyeth. Neither SAC Capital nor Cohen has been accused of any wrongdoing in relation to InterMune or Weight Watchers.

Wells Notice

In addition, the SEC told the firm on Nov. 20 that it planned to sue for securities fraud and control-person liability for failing to supervise employees. The litigation threat took the form of a Wells notice, which invites the recipient to explain why it shouldn’t be sued, and came the same day the U.S. accused Martoma of insider trading.

Under a provision of the Dodd-Frank financial overhaul, the SEC must bring an action within 180 days, though the director of enforcement can extend the deadline.

The Wells notice cited fraud and control-person liability related to the unit that employed Martoma, a person familiar with the matter said at the time.

To contact the reporters on this story: Kelly Bit in New York at kbit@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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