“The discovery will be voluminous, including a large number of electronic recordings, including electronic messages, instant messages, court-authorized wiretaps and consensual recordings,” Assistant U.S. Attorney Antonia Apps told U.S. District Judge Laura Taylor Swain yesterday about the pretrial evidence-gathering process. “In short, a tremendous volume.”
Prosecutors didn’t specify whether the wiretaps were directed at SAC founder and owner Steven A. Cohen or any other SAC employee. Cohen wasn’t in court yesterday for the hearing that lasted about 15 minutes.
Inside the crowded courtroom, the defense table was lined with six criminal lawyers for SAC. Peter Addison Nussbaum, SAC’s general counsel, entered a not guilty plea on behalf of each of the four SAC business entities.
The U.S. alleges that the four units are culpable for allowing insider trading to become institutionalized as a way of doing business at the Stamford, Connecticut-based hedge fund.
Manhattan U.S. Attorney Preet Bharara, who announced the charges July 25, called SAC “a veritable magnet for market cheaters” and said the fund was being held responsible for insider trading by seven portfolio managers and analysts who worked there. He said that since the firm was founded in 1992, it has never reported criminal wrongdoing to regulators or authorities.
“A company reaps what it sows, and as alleged, SAC seeded itself with corrupt traders empowered to engage in criminal acts by a culture that looked the other way, despite red flags all around,” Bharara said.
SAC allegedly perpetrated what prosecutors called an unprecedented insider-trading scheme that spanned more than a decade. The indictment was the most high-profile case to be brought since former Goldman Sachs Group Inc. (GS) director Rajat Gupta was charged in 2011, and it’s the latest insider trading case in the government’s six-year crackdown on Wall Street crime.
SAC was charged with four counts of securities fraud and one count of wire fraud. The scheme, which involved more than 20 companies and went back as far as 1999, helped reap hundreds of millions of dollars in illicit profits, the U.S. said.
Jonathan Gasthalter, a spokesman for SAC, declined to comment on the prosecutor’s remarks yesterday in court.
Swain set the next hearing for Sept. 24 after defense lawyers told her they may seek her intervention if disputes erupt about access to evidence. The judge will also preside over the trial of five former employees of Bernard Madoff who are accused of helping the convicted con man carry off the largest Ponzi scheme in U.S. history. That trial is set to begin Oct. 7.
The prosecutors in the SAC case are seasoned trial lawyers with insider-trading convictions in an office that has a 100 percent conviction rate. Apps, along with Assistant U.S. Attorney John Zach, in December won the convictions of Level Global Investors LP co-founder Anthony Chiasson and former Diamondback Capital Management LLC portfolio manager Todd Newman, who were part of a $72 million insider-trading scheme.
The third prosecutor, Arlo Devlin-Brown, is handling the office’s case against former SAC fund manager Mathew Martoma, who was charged in November with being part of the most lucrative insider trading scheme in U.S. history. Martoma, who’s pleaded not guilty, is scheduled to go to trial Nov. 4.
Theodore “Ted” Wells, a lawyer for SAC, has his share of victories in the Lower Manhattan courthouse. In November 2010, he successfully represented Citigroup Inc. (C) in a multi-billion dollar lawsuit brought by Terra Firma Capital Partners Ltd. and its Chairman Guy Hands. Hands had claimed he was tricked by the bank into overpaying for EMI Group Ltd. in a 2007 auction. After the verdict, jurors shook Wells’s hand and congratulated him. An appeals court in Manhattan in May overturned the verdict.
Bharara said July 25 that SAC “trafficked in inside information on a scale without any known precedent in the history of hedge funds.”
Five of six former SAC employees have pleaded guilty and are cooperating with the U.S., while two, including Martoma, have pleaded not guilty and are set to go to trial in November.
Wells told the judge yesterday that the defense is talking to prosecutors to obtain statements made by the SAC employees who are cooperating with the government.
The defense was “most concerned about the statements we are entitled to receive,” Wells said. “That’s the most important evidence we want to review.”
He declined to comment after the hearing, as did Martin Klotz, another SAC lawyer.
Under the criminal case, each of the SAC units charged faces a maximum of at least $25 million or twice the profits made or losses avoided on each of the alleged crimes.
A separate civil forfeiture action filed by Bharara’s office July 25 alleges SAC engaged in money-laundering by commingling insider trading profits with other assets and using the money “to promote additional insider trading.”
If it obtains a conviction, the U.S. could seek to recover not only the hundreds of millions of dollars generated by the insider trading, but also the entire pool because the funds are tainted and subject to forfeiture. The court action could result in the firm’s dissolution.
Prosecuting an entity will pose challenges for the government, a lawyer said.
“On the one hand, the government will be prosecuting an empty chair that can’t respond to the allegations like a person would,” said John J. Carney, a former federal securities fraud prosecutor and U.S. Securities and Exchange Commission attorney now at Baker Hostetler LLP who isn’t involved in the SAC case. “On the other hand, the government may be prosecuting an empty chair that the jury may not care about.”
When the hearing concluded, SAC’s defense team crowded into an elevator and silently rode to the main floor. Wells left the building with colleagues from Paul Weiss Rifkind Wharton & Garrison LLP. Klotz departed with fellow Willkie Farr & Gallagher LLP partner, Michael Schachter. Schachter prosecuted Martha Stewart for conspiring to obstruct justice by lying to the U.S. in 2004, when he was a U.S. attorney for the Southern District of New York.
Confusion erupted as car services hired to ferry the defense team away from the courthouse failed to appear on nearby Worth Street. As lawyers crossed the street, they were encircled by television cameramen, reporters and photographers.
“Who’s that?” a court visitor asked reporters.
“That’s a hedge fund walking out of court after pleading not guilty to insider trading,” one responded.
The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S. District Court, Southern District of New York (Manhattan).
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