The United States government is preparing to charge SAC Capital, the multi-billion dollar hedge fund operated by the reclusive Wall Street trading legend Steven A. Cohen, with criminal charges, according to multiple reports. Manhattan-based federal prosecutors, working in conjunction with the FBI, are poised to move against the massive hedge fund as early as this week.
On Wall Street, this type of criminal charge amounts to a death sentence, because few major clients would be willing to invest money with a firm under federal indictment. It’s possible that lawyers for Cohen, a secretive 57-year-old billionaire with lavish tastes in art and real estate, will try to settle the case, but the New York Times called that outcome “unlikely.” What the feds are really trying to do is send a message to other Wall Street hedge fund honchos that insider trading is unacceptable.
If the feds do file charges against SAC, it would be one the most high-profile Wall Street insider trading cases in U.S. history. Taken together with civil charges filed last Friday, the government’s impending action appears designed to put SAC Capital out of business. The feds have been investigating SAC Capital, a Stanford, Conn.-based hedge fund, for several years. Cohen, who owns the fund, hasn’t personally been accused of insider trading, but the firm that bears his initials is deeply embroiled in what the feds have called the largest insider trading scheme in U.S. history.
Last November, the U.S. charged one of SAC’s former portfolio managers, Mathew Martoma, with orchestrating a $275 million insider trading fraud. Martoma is charged with trading illegally on inside information he obtained from a doctor involved in a 2008 pharmaceutical trial. The feds had hoped to convince Martoma to testify against Cohen, but have thus far not been successful.
Steve Cohen denies that he did anything wrong over the last two decades, during which time he became one of the wealthiest men on Wall Street. But last Friday, federal regulators, under the direction of Mary Jo White at the SEC, charged Cohen with failing to supervise two of his traders who have been accused of insider trading. On Wall Street, insider trading is considered a very serious crime, and it can result in a lifetime ban from the securities markets, not to mention years in prison.
Cohen, who is worth an estimated $8 billion and lives with his family in a palatial mansion in Connecticut, is not likely to be charged, according to the Wall Street Journal. Last month, faced with a grand jury probe, Cohen’s lawyers informed the government that their client would invoke his Fifth Amendment right against self-incrimination. Since the beginning of the year, several SAC clients have sought to withdraw more than $5 billion, but Cohen retains at least $8 billion of his own money in the fund.
Federal criminal charges against SAC Capital would represent a career highlight for Manhattan U.S. Attorney Preet Bharara, who has made insider trading his signature law enforcement mission. On Wall Street, Bharara’s pursuit of Cohen prompts comparisons to Ahab’s pursuit of Moby Dick. Bharara’s ongoing investigation into insider trading in the hedge fund industry has already led to the convictions of former Galleon Group founder Raj Rajaratnam and former Goldman Sachs director and McKinsey managing director Rajat Gupta. Rajaratnam is currently serving an 11-year prison sentence, and last year Gupta was sentenced to two years in prison.
An SAC spokesman declined to comment Tuesday, and didn’t immediately return a request for comment early Wednesday. Last Friday, the SEC announced civil charges against Cohen, alleging that he failed to supervise two of his employees who have been accused of insider trading. The SEC’s civil action came two weeks after reports emerged that Cohen himself was poised to avoid criminal charges. The SEC is seeking to bar the reclusive hedge fund titan from overseeing investor funds, essentially a Wall Street death sentence for a hedge fund operator.
Earlier Tuesday, SAC sought to fight back against the SEC allegations. In a 46-page document, SAC lawyers said Cohen shouldn’t be held responsible for the alleged insider trading of his employees. Why? Because he didn’t read the email that the government says should have raised “red flags” with any “reasonable” hedge fund operator about insider trading concerns. “Cohen has no memory of having seen it and no witness will testify that they discussed it with him,” said the document, which was reviewed by TIME.
Martoma has pleaded not guilty to insider trading charges and is set to go on trial in November. He faces decades in prison for what the feds have called the largest insider trading scheme in U.S. history. Martoma’s alleged fraud resulted in $275 million in ill-gotten gains for SAC. In March, SAC Capital agreed to pay a $616 million penalty to the SEC to settle the insider-trading civil case, without admitting or denying guilt.