Photograph by Scott Eells/Bloomberg; Photo illustration by 731
(An earlier version of this story ran online.)
The next few months are likely to be ones that Steven Cohen never forgets. After five years at the center of a government investigation into insider trading on Wall Street, Cohen faces legal deadlines and negotiations that may transform SAC Capital Advisors, his $15 billion hedge fund firm, into something vastly different. Prosecutors are scrambling against a five-year statute of limitations on trades that took place in July and August of 2008. By the end of the summer, SAC could function solely as a family office managing Cohen’s personal wealth. If it exists at all.
In a letter sent to investors on March 17, SAC said that “our cooperation is no longer unconditional,” referring to the government inquiry that has linked at least nine current or former employees to insider trading while at SAC. Cohen wrote that the fund would stop updating investors about the investigation, adding that its new hunkered-down position would not have any impact on its funds or investments.
Cohen has received a subpoena to testify before a grand jury, according to a person with knowledge of the matter who was not authorized to speak publicly. One possibility is that prosecutors are considering a case against SAC, the company, rather than Cohen individually. “The government may have decided that they don’t have the goods on Mr. Cohen, but they’re persuaded that SAC has become an illegal enterprise,” says Richard Holwell, a former federal judge who presided over the trial of Galleon Group’s Raj Rajaratnam before co-founding law firm Holwell Shuster & Goldberg. “Taking that position to its natural conclusion, they might have said, ‘We can’t indict Mr. Cohen, but given the pattern of illegal conduct here we certainly have enough to go after the corporation,’ which they know would then shut the corporation down.”
A person familiar with Cohen’s thinking says that he is considering proposing a settlement to prosecutors under which he would turn his hedge fund into a private office that only manages his own money. About $7 billion of SAC’s funds belong to Cohen, according to data compiled by Bloomberg. Under that scenario, said the person, who asked not to be named because the talks are private, the firm would admit wrongdoing and pay a fine, and it would stop taking money from outside investors.
SAC recently relaxed its redemption policy. Investors who want to take their money out this year can withdraw it in thirds over the remaining three quarters if they notify SAC of their intentions by June 3. Or they can take 50 percent out by the end of September and the rest by yearend, if they notify the firm by mid-August. Investors asked to pull $1.68 billion from SAC during the first quarter.
One current investor, who asked not to be named because of the sensitive nature of the situation, said that the 50-50 option is helpful because it keeps the exit window open through July. That’s when the five-year statute of limitations expires on trades in Elan and Wyeth that form the basis of an insider trading case filed in November against former SAC portfolio manager Mathew Martoma. Cohen, the government alleges, participated in the Martoma trades, which occurred in July 2008. (The government has not alleged that Cohen knew the source of Martoma’s information.) If the U.S. Attorney’s Office for the Southern District of New York, the FBI, or the Securities and Exchange Commission can build a case against him based on those trades, they have to do so by the end of July.
Cohen’s biggest problem, though, may be trades he made in Dell (DELL) a few weeks later in 2008. Cohen traded Dell shares after he was sent an e-mail exchange in which some SAC traders discussed the computer maker’s impending results, according to a person familiar with the inquiry. In the absence of testimony from Martoma, said this person, who asked not to be identified because the information is private, Cohen may be more vulnerable to charges over trades in Dell than in Elan or Wyeth.
On Aug. 26, 2008, Jon Horvath, an analyst then employed at Sigma Capital, a unit of SAC, sent an e-mail to Gabriel Plotkin, a portfolio manager at SAC’s $2 billion Sigma Capital Fund: “I have a 2nd hand read from someone at the company—this is 3rd quarter I have gotten this read from them and it has been very good in the last quarters,” read the e-mail, according to an SEC complaint. After running through performance numbers indicating disappointing results, the e-mail said: “Please keep to yourself as obviously not well known.”
Horvath, the government alleges, was discussing Dell’s earnings gleaned from a company insider before they were public, which would make trading on the information illegal. Another Sigma portfolio manager, Michael Steinberg, who has since been charged with insider trading over the Dell trades, was copied on the e-mail and responded: “yes, normally we would never divulge data like this, so please be discreet.” Shortly after getting Horvath’s message, Plotkin began dumping Dell shares held by the Sigma Capital Fund, according to the complaint. Steinberg and Plotkin also sold shares on behalf of the SAC Select Fund, also in the SAC family. The Dell trades have already taken down at least half a dozen traders at SAC and other firms.
Horvath pleaded guilty and has been cooperating with the government. Martoma and Steinberg pleaded not guilty. Cohen and Plotkin haven’t been charged. SAC spokesman Jonathan Gasthalter declined to comment on Cohen and Dell. “Gabe Plotkin has not been accused of wrongdoing and has done nothing wrong,” says Gasthalter. “He has built a successful career on a commitment to sound fundamental research. Plotkin lost over $6 million that day on a large Dell long position. He owned 1.8 million shares and 3,000 of October 24 call options.”
In an e-mail to Horvath and Plotkin around the same time, Steinberg wrote: “Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print, as we are on opposite sides of this one.” The e-mail was introduced into evidence during the trial of Anthony Chiasson, formerly of SAC and Level Global Investors, and Todd Newman of Diamondback Capital Management, which ended with their conviction in December. The “Steve” refers to Cohen. By the time August arrives, he may wish he’d never heard of Dell.