SAC Increasingly Central In Insider-Trading Investigation

Nov 24 2010 | 5:11am ET

As the U.S. probe into alleged insider-trading at hedge funds grows, SAC Capital Advisors has yet to be accused of wrongdoing. Indeed, the hedge fund giant has been asked only to provide information—along with Citadel Investment Group and dozens of other firms subpoenaed last year.

Still, there is an unmistakable sense that SAC or founder Steven Cohen is the "big fish" that the Justice Department most hungers to take down. Two hedge funds founded by alumni of the firm—including one led by Cohen's brother-in-law—were raided this week. And the Federal Bureau of Investigation asked the head of one of the research firms at the center of the investigation to wear a wire in conversations with SAC, a client.

SAC told investors yesterday that it received an "extraordinarily broad" subpoena, identical to those served on several other hedge funds.

"Neither the subpoena nor any other information of which we are aware suggests that anyone at SAC has engaged in wrongdoing," it said.

Certainly, however, the FBI has some suspicions to that end. Last month, it confronted Broadband Research's John Kinnucan at his home in Portland, Ore., accusing him of passing on confidential information and then asking him to tape his calls with SAC, The Wall Street Journal reports. Kinnucan refused to cooperate.

Among the FBI agents conducting interviews with research firm employees about the use of so-called expert networks is B.J. Kang, who participated in the Galleon Group investigation last year and who led an insider-trading probe into SAC three years ago.

Certainly, an increasing number of SAC veterans have found themselves ensnared in insider-trading cases in recent years. Two of the firms who saw their offices raided this week, Diamondback Capital Management and Level Global Investors, were founded by SAC alumni. One of Diamondback's three founders, SAC vets all, is Richard Schimel, who is married to Cohen's sister, Wendy. And Richard Grodin, the former SAC portfolio manager who now runs Stratix Asset Management, has also been subpoenaed.

Choo Beng-Lee, a cooperating witness in the Galleon Group case, said that he traded on confidential information during his time at SAC. One witness in the Galleon case has reportedly provided information about SAC.

Jonathan Hollander, a former analyst at SAC's CR Intrinsic Investors division, has been linked to two insider-trading cases, one against former Blackstone Group banker Ramesh Chakrapani and the other against hedge fund manager Steven Fortuna, a key government witness in the Galleon case and a close friend of Timothy and Todd McSweeney, the founders of hedge fund Loch Capital Management, the third firm raided on Monday.

Another former SAC employee, Joseph Skowron, is at the center of the insider-trading case against a French doctor. Yves Benhamou has been charged with passing confidential information to FrontPoint Partners; Skowron led that firm's healthcare hedge funds. Skowron has been suspended and FrontPoint is closing his funds.

Last year, the Securities and Exchange Commission launched an investigation into possible insider-trading at SAC. The probe was prompted by a lawsuit filed by Fairfax Financial Holdings, which accused SAC of conspiring with others, including Kynikos Associates, to drive down its share price.

SAC has been the focus of a number of such claims, including those made by Cohen's ex-wife, Patricia Cohen, who accused her ex-husband of insider-trading in the 1980s, before he founded the hedge fund. SAC was also the target of an extortionist rabbi, who promised a congregant's silence in exchange for $4 million.

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