SAC Could Face Criminal Charges; Cohen Subpoenaed

May 20 2013 | 9:38am ET

After years of investigations and rumors, prosecutors appear to be closing in on SAC Capital Advisors.

Last week, federal prosecutors issued a subpoena to firm founder Steven Cohen and other SAC executives, seeking their testimony before a grand jury that may be considering charges against the firm. And on Friday, SAC told clients that it was ending its "unconditional" cooperation with the authorities—and its practice of keeping clients informed about the investigation.

SAC has said that it is confident that it and Cohen have done nothing wrong, while nine current and former SAC employees have faced insider-trading charges. While the firm has, until now, pledged its cooperation, earlier this year it struck a $616 million settlement with the Securities and Exchange Commission over allegations of illegal trading by staff members. And while the terms of that settlement made clear that the SEC—and prosecutors—could continue to probe other allegations of fraud at SAC, the hedge fund appears to believe that the deal put an end to its most serious legal issues.

The belief was shattered when, several weeks ago, prosecutors indicated that they were intensifying the investigation, during a meeting with SAC's lawyers. Prosecutors asked the lawyers about Cohen and SAC's trading, and then issued the subpoena against Cohen and several other SAC employees. Those events led SAC to end its practice of "unconditional" cooperation, it wrote to investors on Friday.

"While we have in the past told you of our cooperation with the government's investigation, our cooperation is no longer unconditional, and we do not intend to give updates in this area going forward," the hedge fund wrote.

"In the past we have tried to be as transparent with you as possible about the state of the investigation, while balancing our desire for transparency with the need to keep the details of a sensitive investigation confidential," SAC continued. "During this period, however, the need for confidentiality will limit our ability to share with you details about how the investigation is progressing."

Despite the apparently ominous term, SAC said it remained confident that the recent developments "will not have a financial impact to our funds" and in its belief that the next several months will bring "substantially more clarity."

That confidence could be bolstered by the fact that prosecutors could be running out of time: A five-year statute of limitations on some of the most serious allegations is set to expire in July.

For years, Cohen has appeared to be a major target of federal investigators—most recently, when they sought the cooperation of former SAC trader Mathew Martoma, who is accused of insider-trading, against Cohen. Martoma, who has declined to help prosecutors, was behind the trading that led to the larger portion of SAC's March settlement. According to The Wall Street Journal, at least a dozen Federal Bureau of Investigation agents are working on the case full-time, with others involved part-time.

The grand-jury subpoena would seem to indicate that prosecutors are seeking criminal charges against SAC itself: Federal guidelines frown upon calling the target of an investigation before a grand jury considering charges against that person. SAC's announcement that it had ended its unconditional cooperation indicates that Cohen, who has been deposed previously, including in the Martoma case, would invoke his Fifth Amendment right against self-incrimination. Prosecutors say that Cohen traded on confidential information provided by Martoma, who has pleaded not guilty, but did not indicate that Cohen knew the information was secret.

Prosecutors could also be trying to force Cohen to lie to a grand jury, opening himself up to perjury charges.

The news comes at a delicate time for the $15 billion hedge fund. While SAC's performance remains impressive, in February, investors withdrew $1.7 billion from the firm, despite its efforts to ease its redemption terms in an effort to stave off the redemptions. SAC has again eased its withdrawal policies and postponed its redemption date until next month.

Despite those efforts, at least one large investor, the Blackstone Group, is making plans to redeem about half of the $550 million it has invested with SAC on behalf of clients. That could convince other clients to quit the firm.

While cooperation may have tapered off, SAC's lawyers have held talks with prosecutors about a deferred-prosecution agreement. The criminal conviction of a corporation, while rare, generally proves a death sentence for the company involved. Under a deferred-prosecution deal, SAC could essentially settle criminal charges that would be dismissed later if it avoids further criminal allegations.


In Depth

Why Ponzi Schemes Work: An In-Depth Look At The Allen Stanford Fraud

Dec 21 2014 | 10:30am ET

Texan Allen Stanford first appeared on the radars of financial regulators in 1997...

Lifestyle

Hedgie Funds US Squash Program

Dec 24 2014 | 8:46am ET

Squash, anyone?

Guest Contributor

EidoSearch’s Top Three Market Projections For 2015

Dec 23 2014 | 4:03am ET

It is that time of year again when prognosticators make their big market calls for...

 

Sponsored Content

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

December 2014 Cover

Futures 2014 person of the year

Jeff Sprecher was simply looking for a platform to trade energies when launching ICE 14 years ago but it has grown to reach the pinnacle of both the listed futures and equities world.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.