SAC Said to Get Wells Notice From SEC on Insider Trading
The U.S. Securities and Exchange Commission told SAC Capital Advisors LP that it is considering suing the $14 billion hedge fund run by Steven Cohen for fraud involving alleged insider trading by a former portfolio manager who was arrested last week, according to three people with knowledge of the matter.
The Wells notice sent to SAC Capital cited fraud and control-person liability over its management of CR Intrinsic Investors LLC, a unit of SAC, according one of the people. Investigators are considering extending the claims to Cohen, who wasn’t named in the Wells notice, said the person, who like the others asked not to be named because the information is private.
SAC received the warning last week, Tom Conheeney, the firm’s president, told investors on a conference call today during which the firm discussed the Nov. 20 arrest of the former SAC portfolio manager, Mathew Martoma, on criminal charges of insider trading while at the firm. Cohen, who spoke briefly at the start of the call, said he acted appropriately when he traded shares of two drugmakers four years ago on recommendations from Martoma, according to two of the people. Trades in the shares by SAC are at the center of what prosecutors call the biggest insider-trading scheme that generated $276 million in gain and averted losses.
Conheeney said the firm, based in Stamford, Connecticut, will pay any penalties rather than investors, according to one of the people.
Martoma’s Charges
Jonathan Gasthalter, a spokesman for SAC, declined to comment on the call and the Wells notice.
The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed. The notice gives the recipient a chance to try to dissuade the SEC from taking action. In some cases, the SEC has decided to refrain from filing a complaint after sending a Wells notice.
SAC received the Wells notice on Nov. 20, the day Martoma was arrested, according to one of the people. The SEC, which is a civil enforcement agency, typically coordinates with federal prosecutors who pursue criminal claims in insider-trading cases. While the SEC often brings insider-trading claims on circumstantial evidence, criminal prosecutors face a higher burden of proof, which can prolong investigations as they seek to pin down corroborating witnesses.
Elan, Wyeth
Prosecutors say SAC, one of the best-performing hedge funds, reaped the gains and averted losses by trading stocks of Elan Corp. and Wyeth LLC in 2008 based on inside information Martoma received, and that Cohen traded those shares in his own portfolio and discussed the stocks with Martoma.
“Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain,” his lawyer Charles Stillman said last week in an e-mailed statement, adding that he expected Martoma to be fully exonerated.
In insider-trading cases, the SEC can seek disgorgement of illegal profits, as well as three times that amount in penalties. The agency can also file administrative actions to bar offenders from the securities industry.
James Cox, a professor at Duke University School of Law in Durham, North Carolina, said the control-person liability provision that Congress created in 1988 meant managers who fail to maintain a system to discourage and detect insider trading by subordinates could be sued by the SEC. The provision wouldn’t require the SEC to prove Cohen knew about the trades, just that the compliance system broke down, Cox said.
CR Intrinsic
CR Intrinsic, the unit where Martoma worked at the time, was named last week as a defendant in a civil complaint by the SEC, along with Martoma and the doctor who allegedly provided the inside information.
SAC Capital first was linked to a now five-year government investigation of insider trading on Wall Street shortly after the October 2009 arrest of hedge-fund manager Raj Rajaratnam when former employee Richard Choo-Beng Lee was among those charged with insider trading at another firm. Six former or current SAC Capital employees have been tied to insider trading while working at the firm, including three who have pleaded guilty.
Neither Cohen nor SAC have been accused of wrongdoing in last week’s criminal complaints. While Cohen wasn’t mentioned by name in the complaint, he is the hedge-fund owner referred to in the criminal complaint, according to people familiar with the matter.
Redemption Notice
Previous insider cases involving former SAC employees haven’t deterred investors. Cohen’s main fund saw net deposits last year before he closed it to new money, people with knowledge of the matter said at the time.
One investor, who asked not to be named because the fund is private, said he wouldn’t be compelled to pull out his money unless there was a criminal indictment against Cohen.
Clients can only pull 25 percent of their investment every quarter after giving 45 days notice, meaning it would take them a year to redeem in full. The next deadline for putting in a redemption notice is mid-February.
If enough people wanted to pull their money, Cohen could turn SAC into a family office, said Brad Balter, head of Boston- based Balter Capital Management LLC, which invests client money in hedge funds. About $8.4 billion, or 60 percent, of SAC’s assets belong to Cohen and his employees.
“If the owner gets sued by the SEC, what’s the rationale to stay?” said Balter, who has never invested in SAC or in any of its spinoffs. “You know your investors will ask you why you have that in your portfolio.”
The criminal case is U.S. v. Martoma, 12-mj-02985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Kelly Bit in New York at kbit@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net
SEC Said to Consider Claims Against Cohen After SAC Wells Notice
Scott Eells/Bloomberg
Steven Cohen, founder of SAC Capital Advisors LP.
Steven Cohen, founder of SAC Capital Advisors LP. Photographer: Scott Eells/Bloomberg
Nov. 28 (Bloomberg) -- SAC Capital Advisors LP, the $14 billion hedge fund run by Steven Cohen, told clients on a conference call today that it received a Wells Notice from the U.S. Securities and Exchange Commission, according to a person who listened to the call. Betty Liu and Dominic Chu report on Bloomberg Television's "In the Loop." (Source: Bloomberg)
Nov. 20 (Bloomberg) -- Manhattan U.S. Attorney Preet Bharara, Robert Khuzami, director of the Securities and Exchange Commission's Division of Enforcement and other officials speak at a news conference in New York to review charges against Mathew Martoma, a former portfolio manager for Steven A. Cohen’s SAC Capital Advisors LP, for an insider-trading scheme that netted as much as $276 million for the hedge fund. Prosecutors charged Martoma with trading on insider tips about clinical trials of bapineuzumab, a drug to treat Alzheimer’s diesease. Martoma, 38, is accused of advising Cohen to sell shares of Wyeth LLC and Elan Corp. before bad news about the drug’s prospects was announced. (Source: Bloomberg)
Nov. 21 (Bloomberg) -- Douglas Burns, a former federal prosecutor, talks about the U.S. government insider-trading charges against Mathew Martoma, a former health-care portfolio manager at a unit of Steven A. Cohen’s SAC Capital Advisors. U.S. prosecutors allege that Martoma traded on inside tips about clinical trials of an Alzheimer’s drug and netted the firm as much as $276 million. Burns speaks with Pimm Fox and Stephanie Ruhle on Bloomberg Television's "Market Makers." Bloomberg’s Katherine Burton also speaks. (Source: Bloomberg)
Nov. 28 (Bloomberg) -- Seth Berenzweig, managing partner at Berenzweig Leonard, talks about SAC Capital Advisors LP. The U.S. Securities and Exchange Commission told SAC that it is considering suing the hedge fund run by Steven Cohen for fraud involving alleged insider trading by a former portfolio manager, according to people with knowledge of the matter. Berenzweig speaks with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)
SAC Said to Tell Investors It Received Wells Notice From SEC
Jin Lee/Bloomberg
Mathew Martoma, a former portfolio manager at a unit of SAC Capital Advisors LP, center, exits federal court with defense lawyer Charles Stillman, left, in New York, on Nov. 26, 2012.
Mathew Martoma, a former portfolio manager at a unit of SAC Capital Advisors LP, center, exits federal court with defense lawyer Charles Stillman, left, in New York, on Nov. 26, 2012. Photographer: Jin Lee/Bloomberg
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