Citi, Morgan Stanley Put SAC On Watch

Dec 6 2012 | 12:13pm ET

Two major banks are recommending that investors not put money into SAC Capital Advisors funds as the firm faces insider-trading charges.

Citigroup's private bank and Morgan Stanley have both put SAC on watch, advising clients not to increase their allocations to the firm for the time being. The moves follow the decisions of Lyxor Asset Management and a smaller U.S. fund of hedge funds to redeem from SAC in the wake of the arrest of a former portfolio manager and a Securities and Exchange Commission warning that it is preparing a fraud complaint against the prominent hedge fund.

In addition, the Blackstone Group said it is monitoring the situation and has not decided what to do about its SAC investments, Bloomberg News reports.

Citi's decision, at least, does not indicate that it is unhappy with SAC or planning to redeem its clients' investments. Rather, the bank reportedly puts on watch all firms that face a large amount of media attention.

Former trader Mathew Martoma was arrested last month and charged in what prosecutors called the most "lucrative" insider-trading scheme ever, allegedly earning SAC some $276 million. Martoma allegedly traded on confidential information about Alzheimer's drug trials; his alleged source is cooperating with prosecutors.

On the same day Martoma was arrested and sued by the SEC, the regulator sent a Wells notice to SAC, indicating that it faces civil charges in the case. Media reports indicate that the regulator would also like to charge firm founder Steven Cohen, frequently the target of insider-trading investigations but never charged. Martoma's case is the first to directly link Cohen to allegedly illegal activity, although court documents show no evidence that Cohen knew Martoma's trades were based on non-public information.

SAC has denied any wrongdoing and says it is cooperating with the investigation. The hedge fund is up 12% this year.

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