Investor Clawbacks An Open Question In SAC Case

Jul 29 2013 | 11:23am ET

If SAC Capital Advisors is convicted of insider trading, will its investors be forced to pony up their shares of its ill-gotten gains?

Federal prosecutors last week filed criminal fraud charges against the hedge fund. In previous hedge fund fraud cases, including the Bernard Madoff Ponzi scheme, criminal convictions were followed by civil actions seek disgorgement not only from the fraudster him, but also from investors who benefitted from the allegedly illegal actions. In the SAC case, prosecutors say the insider-trading scheme went on for 11 years.

Other hedge fund cases have no featured investor clawback attempts, including that against Galleon Group founder Raj Rajaratnam.

Tavakoli Structured Finance's Janet Tavakoli suggests that, if SAC is convicted, an attempt to seize some of its hundreds of millions of dollars in allegedly illicit gains is likely. Such a move would mean that SAC's outside investors—almost all of whom have moved to redeem their money from the hedge fund—would not be safe.

Others, including The New York Times' Gretchen Morgenson, have concluded clawbacks are unlikely. Morgenson notes that Manhattan U.S. Attorney Preet Bharara said Thursday, "We are always mindful to minimize risks to third party investors. In other words, we have not restrained any money, and we will discuss with the company a reasonable method going forward to protect everyone's legitimate interests."

In addition, prosecutors have said they will seek some $10 billion from SAC if it is convicted—more than enough to cover its alleged ill-gotten gains.


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