U.S. prosecutors plan to charge SAC Capital Advisors LP, the hedge fund founded by Steven A. Cohen, as soon as this week as part of a wide-ranging probe of insider trading, according to a person familiar with the matter.
The U.S. attorney’s office in Manhattan doesn’t plan to charge Cohen at this stage, said the person, who asked not to be identified because the matter is confidential.
Charges against the $15 billion Stamford, Connecticut-based hedge fund might spell its demise, a fate it may also face from an administrative proceeding filed last week by the U.S. Securities and Exchange Commission. The SEC claimed Cohen failed to supervise its employees adequately to prevent insider trading, and seeks to ban Cohen from the financial industry.
Prosecutors, unable to obtain enough evidence to charge Cohen, 57, decided their next best option to discourage crime and punish alleged wrongdoing was to charge his firm, which carries with it the prospect of shutting it down, a second person familiar with the matter said.
The Wall Street Journal earlier reported the plan to charge SAC. Peter Donald, a spokesman in the FBI’s New York office, declined to comment yesterday on any planned charges against SAC. Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., also declined to comment.
Previously, Cohen has denied any wrongdoing in trades his firm conducted, saying he had acted appropriately. This week his firm issued a 46-page response to the SEC proceeding, denying wrongdoing.
An indictment of a company, rather than an individual, is a rare tactic by prosecutors. It was most famously used in 2002 in the case of accounting firm Arthur Andersen LLP, which was found guilty of charges related to its role as Enron Corp.’s auditor.
Following the indictment, Arthur Andersen, unable to practice before the SEC, collapsed, costing the jobs of thousands of people. The Justice Department issued guidelines after that, advising prosecutors what to consider before indicting another financial firm. The conviction was eventually overturned.
At a conference last week, Preet Bharara, the U.S. Attorney for Manhattan and leader of the SAC probe, gave his view of this matter: “We have a lot of power to bring cases like that and we don’t do it a lot in part because of Arthur Andersen, and part because we care about what the interest of justice requires and we care about collateral consequences.”
Bharara declined to address what his plans were for Cohen or SAC. Speaking hypothetically, he added, “But there are circumstances in which it is appropriate to do, particularly when you have continued malfeasance over time among a large number of people.”
Less than a year ago, the U.S. Attorney in New Jersey charged Tiger Asia Management LLC, a hedge-fund management company, with wire fraud. The SEC filed a parallel lawsuit accusing the company, the fund owner and portfolio manager, and the fund’s head trader, of illegal trading.
In the criminal case, the fund owner, Sun Kook “Bill” Hwang, pleaded guilty on behalf of the company and agreed to forfeit $16 million in ill-gotten gains. The firm was shut down.
Theodore Wells, a lawyer for Cohen, didn’t return a call or e-mail seeking comment on the planned charges against SAC.
Cohen doesn’t recall reading an e-mail on Dell Inc. (DELL:US) that was cited by the SEC in its administrative order as evidence he failed to supervise his employees, according to a report given to the firm’s employees July 22.
While Cohen sold his stake in Round Rock, Texas-based Dell after being forwarded the e-mail, evidence suggests he did so because one of his portfolio managers started selling the stock, SAC said in a 45-page paper that seeks to rebut many of the facts outlined in the SEC’s order. There’s no evidence Cohen ever read the communication, according to the paper.
Cohen was accused of ignoring red flags in trades conducted by two portfolio managers, Mathew Martoma and Michael Steinberg, who have both been charged with securities fraud and face separate trials in November in Manhattan federal court.
“Any claim that Cohen overlooked red flags showing unlawful conduct by SAC employees is contrary to his and SAC’s longstanding demonstrated commitment to the firm’s compliance efforts,” Cohen’s lawyers wrote in the paper.
In the SEC’s July 19 order, the agency presented new details that it said showed Cohen received “highly suspicious” information that should have caused any reasonable hedge-fund manager to investigate the basis for the alleged wrongdoing.
The SEC has scheduled a hearing in the matter for Aug. 26 in Washington, with Chief Administrative Law Judge Brenda P. Murray presiding.
Martoma, 39, was arrested in November for alleged insider trading in Elan Corp. and Wyeth. Prosecutors said he received confidential information from Dr. Sidney Gilman in July 2008 that caused him and Cohen to abruptly sell their holdings. The trades earned SAC profits and avoided losses of more than $275 million, the government said. Steinberg was arrested in March for trading in Dell and Nvidia Corp. (NVDA:US) based on illicit tips given to him by his analyst. Martoma and Steinberg, 41, have pleaded not guilty.
The SEC said in last week’s order that Cohen received a tip about Dell that was also sent to Steinberg, and that he traded afterward. Cohen sold off more than $11 million in Dell stock within minutes of getting a copy of an e-mail from Jon Horvath, Steinberg’s analyst, on Aug. 26, 2008, two days before Dell was scheduled to release earnings.
SAC countered in its report that Cohen sold his shares because one of his portfolio managers, who had initially recommended that Cohen buy Dell, and whose trading Cohen relied on frequently in establishing his own positions, was selling some of his shares. That portfolio manager is Gabriel Plotkin, according to people familiar with the matter.
The report stated that at that time, Cohen only opened about 11 percent of his messages. SAC argued that even if Cohen had read the e-mail, which mentions a “second-hand read” from someone inside the company and warned that Dell’s gross margins would be less than the market expected, there is no evidence that it contained material nonpublic information.
SAC defended its compliance team, saying it deploys some of the most aggressive communications and trading surveillance in the hedge-fund industry. The firm said it has daily reviews of e-mails, instant messages and internal write-ups, as well as weekly reviews of randomly selected portfolio manager teams and electronic communications between investment professionals and their former employers.
In a 2011 deposition taken in connection with a lawsuit against SAC filed by Fairfax Financial Holdings Ltd. (FFH), Cohen said, “I’ve read the compliance manual, but I don’t remember exactly what it says.”
Cohen also said during the deposition that no employee had ever been punished for violating the firm’s compliance policy.
Of the $15 billion SAC oversees, about 60 percent of it is money from Cohen and employees. With his net worth estimated at about $9 billion by the Bloomberg Billionaires Index, Cohen has returned 25 percent a year in his funds since founding his firm in 1992, after taking half of the profits in fees, a record unsurpassed by other equity hedge-fund managers.
The government’s planned charges against the hedge fund stem from a six-year insider-trading crackdown on fund managers, analysts and insiders at technology companies. It has resulted in charges against more than 80 people and convictions of 73.
Prior to last week’s SEC filing, the government’s major actions against alleged inside traders and their associates have largely been tandem federal enforcement efforts -- pairing simultaneous charges by Bharara’s office with SEC lawsuits.
Since Cohen agreed in March to pay $616 million to end allegations tied to the July 2008 drug company trades, financial penalties are less of a priority for the regulator in this matter, said a person familiar with the matter who requested anonymity because the matter isn’t public. As part of the March agreement, Cohen’s funds would neither admit nor deny the allegations of wrongdoing.
In the white paper, SAC seeks to refute much of the evidence presented by the SEC in its administrative order alleging Cohen should have been aware Martoma had obtained inside information about two drug companies, Elan and Wyeth.
It doesn’t, however, address the question of what Martoma said to Cohen in a 20-minute telephone call on July 20, 2008, after which Cohen reversed his long position on the stock.
Gasthalter declined to comment on the call.
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