Cohen, SAC Capital Sought ‘Edge,’ Prosecutors Say

Photographer: Scott Eells/Bloomberg

SAC Capital Advisors LP Founder and Chairman Steven Cohen. Close

SAC Capital Advisors LP Founder and Chairman Steven Cohen.

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Photographer: Scott Eells/Bloomberg

SAC Capital Advisors LP Founder and Chairman Steven Cohen.

Steven Cohen used to woo potential investors to his hedge fund, SAC Capital Advisors LP, by promising in marketing materials to give them an “edge.”

Now that four-letter word, used 14 times in the insider-trading indictment of the $14 billion hedge fund he founded, has come back to haunt him.

In the 41-page indictment filed yesterday, prosecutors alleged that Cohen and his top managers sought to hire traders and analysts who had the ability to deliver any kind of “edge” over the market.

Take Richard Lee, who joined the Stamford, Connecticut-based hedge fund from Citadel LLC in April 2009 even though prosecutors claim SAC had been warned by one of Lee’s former colleagues that he was suspected of insider trading at Citadel. Lee pleaded guilty on July 23 to two counts of insider trading, both of which occurred at SAC in 2009.

The latter of those took place on Nov. 11, 2009, according to court filings. Three weeks prior to that, Raj Rajaratnam, co-founder of the Galleon Group of hedge funds, was arrested and charged with insider trading, a headline-producing event that put Wall Street on notice that the U.S. attorney’s office had a major effort going to punish insider trading.

Horvath, Martoma

The SAC indictment also cites the examples of Jon Horvath, a former research analyst at SAC who pleaded guilty to insider trading last September, and Mathew Martoma, who has pleaded not guilty to charges that he engaged in insider trading.

In an e-mail cited in the indictment, Horvath justified his recommendation that SAC invest in Sun Microsystems Inc. in October 2007 by saying, “My edge is contacts at the company and their distribution channel.”

As for Martoma, whose trial is scheduled to begin in November, SAC hired him, according to prosecutors, in part because of his “industry contacts beyond management” in the pharmaceutical field.

He’s accused of using tips from a doctor who had access to information on drug trials to recommend Cohen sell his stake in two drug companies, helping SAC make $276 million. It’s the biggest insider trading case in U.S. history, prosecutors said.

“The relentless pursuit of an information ‘edge’ fostered a business culture within SAC in which there was no meaningful commitment to ensure that such ‘edge’ came from legitimate research and not inside information,” the indictment says.

’Over the Edge’

U.S. Attorney Preet Bharara, in announcing the charges, said “SAC deliberately encouraged the no-holds-barred pursuit of an ‘edge’ and literally carried over the edge into corporate criminality.”

SAC said in a statement that it “has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously.”

The way prosecutors saw it, according to the indictment, was that in pursuing that edge, “The predictable and foreseeable result, as charged herein, was systematic insider trading by the SAC entity defendants resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.”

Through 2008, at the least, SAC used to tout its funds to potential investors by promising an “edge” on the marketplace, according to promotional materials.

By 2011, Cohen himself had soured on the word, according to a deposition given in a civil case. Asked whether he used the word “edge” at SAC, Cohen replied: “I hate that word.”

After reading how many times it’s used in his indictment, he may hate it even more.

The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporter on this story: Greg Farrell in New York at gregfarrell@bloomberg.net;

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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