Bank of America Corp., JPMorgan (JPM) Chase & Co. and Morgan Stanley are among Wall Street banks continuing to trade with SAC Capital Advisors LP after U.S. prosecutors indicted the hedge fund for insider trading, according to four people briefed on the matter.
The firms are still providing trading and prime brokerage services to the hedge fund founded by Steven A. Cohen, said the people, who asked not to be identified talking about a specific client. The government has no plan to freeze fund assets, prevent redemptions or affect interests of SAC counterparties, Stamford, Connecticut-based SAC said yesterday after the government’s criminal charges were made public.
Banks have been grappling with the reputational and financial consequences of continuing their dealings with SAC, one of Wall Street’s largest trading clients. The $14 billion hedge fund was indicted for perpetrating what prosecutors called an unprecedented insider-trading scheme.
“You’re always between a rock and a hard place when you’re the credit guy trying to decide to what to do,” said James Rickards, senior managing director at Tangent Capital Partners LLC and former general counsel at Long-Term Capital Management LP, which was one of the world’s biggest hedge funds before losing $4 billion in 1998.
Banks have to ask themselves “what is the risk that I lose money? What is the risk that they get into stress and I don’t get paid? What is the risk that the regulator criticizes me or my reputation is tarnished?” Rickards said. “The other side is I like the commissions and I want to be a stand-up guy, and I don’t want to be perceived as a guy who cut and run.”
It’s unclear whether other lenders including Goldman Sachs (GS) Group Inc., Deutsche Bank AG (DBK) and Citigroup Inc. (C) had changed any of their dealings with SAC. Spokesmen for the banks declined to comment.
Banks may continue to deal with the hedge-fund firm while protecting themselves by reducing credit limits, requiring more collateral and halting trades in over-the-counter products, said Rickards, who was a credit officer at Greenwich Capital Markets when junk-bond powerhouse Drexel Burnham Lambert Inc. collapsed in 1990.
“There’s a lot of things you can do between doing nothing and cutting them off completely to improve your position,” said Rickards. “If everyone hangs together, and everyone does some common-sense things, it’s business as usual. But if one domino falls, the rest of them will fall very quickly, and that’s why everyone is on eggshells.”
SAC denied it encouraged or tolerated insider trading and said it will continue to operate as it works through the allegations. The Securities and Exchange Commission filed an administrative complaint against Cohen last week, seeking to ban him from overseeing investor funds for allegedly failing to supervise employees and prevent them from engaging in insider trading.
No major financial-services firm has survived a criminal indictment in the U.S. While Cohen has vowed to keep open the most successful equity hedge-fund manager, clients have already pulled billions from its funds. SAC Capital said in a regulatory filing this week that it managed $13.9 billion of net assets as of July 1.
The hedge fund has been among the largest trading clients for New York-based Morgan Stanley (MS) and Goldman Sachs, according to people with knowledge of the relationships. SAC has used those firms, along with JPMorgan, Credit Suisse Group AG (CSGN) and Barclays Plc (BARC), as prime brokers, Reuters reported in 2011.
Some of the world’s biggest banks have been emphasizing their efforts to behave ethically, put clients first, cooperate with regulators and temper risk-taking after reputations were damaged during the credit crisis, government-funded bailouts and scandals throughout the financial industry.
“There is definitely reputational risk at this point that didn’t exist before as a result of the indictment,” Rickards said. “I know we’re innocent until proven guilty, and I respect that, but there’s no requirement that a counterparty be good to the last drop. You’re allowed to make sensible business decisions.”