Steven A. Cohen’s SAC Capital Advisors LP told investors, employees and counterparties that it will stay open for business as the U.S. accused the $14 billion hedge-fund firm of engaging in an unprecedented insider-trading scheme over more than a decade.
The government has no plan to freeze fund assets, prevent redemptions or affect interests of SAC counterparties, the firm said yesterday after the government’s criminal charges were made public. The company, based in Stamford, Connecticut, denied it encouraged or tolerated insider trading and said it will continue to operate as it works through the allegations.
“The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years,” SAC, which employs more than 1,000 people worldwide, said in a statement and in a letter to investors.
No major financial-services firm has survived a criminal indictment in the U.S. While Cohen has vowed to keep open the most successful equity hedge-fund manager, clients have already pulled billions from its funds. Deutsche Bank AG (DBK) and Goldman Sachs Group Inc. are among counterparties weighing the reputation-related and financial consequences of continuing to provide trading, lending and prime-brokerage services to SAC, one of Wall Street’s largest trading clients, according to people familiar with the matter.
Cohen was at the firm’s red-brick headquarters yesterday in front of his seven computer screens, carrying out business as usual, according to two people with knowledge of the firm. They asked not to be identified because the firm is private.
Some SAC employees were upset as the headlines flashed across their screens at 9:25 a.m. that the firm had been indicted, yet tried not to get distracted and continued trading, according to one of the people, who spoke on condition of anonymity. SAC’s main fund has climbed more than 10 percent this year through the middle of the month, the people said.
Some of the workers are concerned that there could still be more arrests, according to people who have spoken with them. Manhattan U.S. Attorney Preet Bharara said at a news conference that SAC was a “veritable magnet for market cheaters,” adding that investigations would continue. Richard Lee, a former SAC portfolio manager who pleaded guilty to insider-trading charges on July 23, is at least the 11th person to be linked to such activity while working at the firm.
Employees have started to send out resumes to seek jobs for next year, said the people. Even those who are looking may stay until early 2014, when they will get incentive payments for this year. SAC portfolio managers typically have contracts guaranteeing them 15 percent to 25 percent of the profits they generate.
Jobs may not be easy to come by.
“The problem today is that competitors, while believing that there are good-quality portfolio managers at SAC, don’t want to recruit a potential ticking time bomb,” said Jason Kennedy, chief executive officer of Kennedy Group, a London-based recruiter.
The firm’s communication with clients was minimal. A two-paragraph letter was sent to investors, repeating the statements given to the press.
On July 24, before the indictment was unsealed, SAC held a conference call with employees after the 4 p.m. stock market close in which the firm’s lawyer, Martin Klotz at Willkie Farr & Gallagher LLP, outlined possible scenarios involving government actions. Cohen spoke little on the call, the people said.
Cohen has reduced trading in his portfolio, known as the “Cohen Account,” in recent months to the lower end of the $2 billion to $3 billion it manages.
SAC was charged with four counts of securities fraud and one count of wire fraud in an indictment unsealed in Manhattan federal court. The alleged scheme, which involved more than 20 companies and went back as far as 1999, helped reap hundreds of millions of dollars in illicit profits, the U.S. said. The charges and related regulatory action may result in the firm’s dissolution.
SAC must forfeit “all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses,” the government said in a parallel civil action.
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 obstruction of justice charges related to its role as auditor for Enron Corp., the energy giant whose scandal led to bankruptcy.
Following the indictment, Arthur Andersen, unable to practice before the U.S. Securities and Exchange Commission, collapsed, costing the jobs of thousands of people. The conviction was eventually overturned, and the Justice Department issued guidelines advising prosecutors what to consider before indicting another financial firm.
SAC said yesterday that it expects the U.S. Attorney’s office to agree to a protective order that will allow the firm to continue to trade with counterparties.
Bank of America Corp. (BAC:US), JPMorgan Chase & Co. (JPM:US) and Morgan Stanley (MS:US) are among Wall Street banks continuing to trade with SAC, according to four people briefed on the matter. The firms are still providing trading and prime brokerage services to the hedge-fund firm, said the people, who asked not to be identified talking about a specific client.
It’s unclear whether other lenders including Goldman Sachs, Deutsche Bank and Citigroup Inc. (C:US) had changed any of their dealings with SAC. Spokesmen for the banks declined to comment. Banks have been grappling with the reputational and financial consequences of continuing their dealings with SAC.
Cohen is worth $9.5 billion, according to the Bloomberg Billionaires Index. He is also one of the world’s biggest art collectors, with works by Van Gogh, Manet, de Kooning, Picasso, Cezanne, Warhol, Johns and Richter.
Since he started his firm, Cohen has achieved average annual returns of 30 percent, with just one money-losing year: 2008, when his main fund tumbled 19 percent.
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