SAC Capital, the giant hedge fund run by billionaire Wall Street titan Steven A. Cohen, informed its clients on Wednesday that the firm is under investigation by the Securities and Exchange Commission, according to multiple reports. In a brief 8 a.m. conference call, Tom Conheeney, SAC’s president, told clients that the $14 billion hedge fund has received a so-called Wells Notice from the SEC, which is often a precursor to formal charges, according to multiple reports.
SAC is grappling with the fallout from a federal insider trading investigation, following the arrest of one of its former portfolio managers, Mathew Martoma, who is accused of orchestrating a $276 million fraud. Martoma, who appeared on $5 million bail in U.S. federal court on Monday in New York City, has been charged with misusing information he got from a University of Michigan doctor involved in an important pharmaceutical drug trial in 2008.
Martoma, a 38-year-old graduate of Stanford Business School, has been charged with one count of conspiracy to commit securities fraud and two counts of securities fraud; each fraud count carries up to 20 years in prison. He was arrested by the FBI at his home in Boca Raton, Fla., last Tuesday morning. On Monday, a federal judge affirmed his bail and ordered Martoma and his family to surrender their passports. In other words, he’s not going anywhere.
(MORE: Insider-Trading Scandal: Are the Feds Closing In on Billionaire Hedge-Fund Mogul Steven Cohen?)
When the SEC issues a Wells Notice to a company, it signals that federal civil charges could be forthcoming. (See this handy CNBC explainer.) SAC now has the opportunity to reply to federal regulators in what’s known as a Wells submission. A spokesman for SAC declined to comment beyond a written statement emailed to TIME: “Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry.”
The disclosure of the Wells Notice indicates that federal authorities are investigating SAC itself, in addition to Martoma. Wednesday’s client call was intended to reassure clients that may have been spooked by the multiple ongoing investigations. It’s unclear what immediate impact the Wells Notice will have on SAC, but it’s safe to assume that big institutional investors and other potential clients are not flooding the hedge fund with new business, given the ongoing investigations.
Cohen, one of the most highly scrutinized hedge fund titans on Wall Street, has not been charged or even named by federal prosecutors, who have filed criminal charges against Martoma, or by the SEC, which has filed civil charges against the former trader. However, Cohen was obliquely referred to as Portfolio Manager A in the SEC complaint unsealed last week. Federal regulators said Portfolio Manager A collaborated closely with Martoma on the allegedly fraudulent trades.
On Wednesday’s conference call, Cohen offered a brief (one-minute) defense of his firm, according to reports. “We take these matters very seriously, and I am confident that I have acted appropriately,” Cohen said, according to The Wall Street Journal.
(MORE: Fallen Icon: Former Goldman Sachs Director Rajat Gupta Found Guilty)
Conheeny, SAC’s president, told clients that he was “deeply disturbed” by the federal charges against Martoma, and said that the hedge fund had told its employees that the kind of conduct alleged is unacceptable. Federal prosecutors have charged Martoma, a former portfolio manager at SAC Capital subsidiary CR Intrinsic Investors, with receiving and acting upon confidential information gleaned from a neurology professor who played a key role in a major pharmaceutical trial involving an Alzheimer’s drug. After the alleged insider trading occurred, Martoma received a $9.3 million bonus.
The charges against Martoma are part of the federal government’s ongoing investigation into insider trading in the hedge-fund industry — a probe that 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 month Gupta was sentenced to two years in prison.
Martoma is the sixth person connected to SAC to be linked to insider trading. Federal authorities have been investigating Cohen for years, but thus far have not filed any charges against the billionaire. According to the SEC, the $276 million Martoma case is the most lucrative insider trading case ever charged in U.S. history.