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SAC Said to Get Document Request as U.S. Probe Widens

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Ex-SAC Capital Traders Implicated in U.S. Insider Trading
The offices of Diamondback Capital Management LLC stand during a raid by the Federal Bureau of Investigation in Stamford, Connecticut. Photographer: Douglas Healey/Bloomberg

Nov. 23 (Bloomberg) -- Steven A. Cohen’s SAC Capital Advisors LP got a government subpoena for documents as the U.S. widens a probe of Wall Street insider trading that has implicated former traders at the firm.

The subpoena came from U.S. officials, said a person familiar with the matter who declined to be identified because the matter is private. No allegation of wrongdoing has been made against SAC, which manages $12 billion. Jonathan Gasthalter, a firm spokesman, declined to comment.

“It could be that they’re just looking at individuals who used to work there,” said Andrew Hruska, a former federal prosecutor at King & Spalding LLP. “You can’t rule out the possibility that they’re trying to build a case against SAC.”

Federal Bureau of Investigation agents, probing possible illegal trading by hedge funds, yesterday searched the offices of Level Global Investors LP and Diamondback Capital Management LLC. Both firms were founded by former employees of Stamford, Connecticut-based SAC. A third hedge fund, Boston-based Loch Capital Management, was also searched by agents yesterday, according to a person familiar with that matter.

Level Global was founded in 2003 by SAC veteran David Ganek. Diamondback was started in 2005 by Rich Schimel, Lawrence Sapanski and Chad Loweth, all former SAC traders.

Wellington Management

Wellington Management Co., the Boston-based money manager that oversees $598 billion, got a U.S. request for documents, a person familiar with that firm said today. Wellington said on an internal conference call yesterday that it is reviewing its records and didn’t engage in illegal trading, according to the person, who asked not to be named because the firm is private. Sara Lou Sherman, a firm spokeswoman, declined to comment.

Janus Capital Group Inc. said today in an e-mailed statement that it got a request for general information and will cooperate with the inquiry. The Denver-based firm didn’t identify what agency made the inquiry or comment further.

In typical insider trading cases, the Securities and Exchange Commission issues administrative subpoenas for trading records or the Justice Department seeks grand jury subpoenas, said John J. Carney, a former U.S. prosecutor and SEC attorney. The use of search warrants indicates a more aggressive approach by federal authorities, he said.

“The execution of a search warrant can have a tremendous shock-and-awe effect,” said Carney, now at Baker Hostetler LLP. “To use a search warrant, prosecutors have to convince a magistrate judge that they have probable cause that inside the place to be searched is evidence of a crime.”

Logical Step

Hruska said that if prosecutors are “coming to the end of the surreptitious investigation stage, it would make sense that they would send a grand jury subpoena to SAC. That would be a logical next step to make sure that they get any information that eluded them in the searches.”

The raids yesterday follow testimony by a former UBS AG investment banker at a criminal trial in September that he “provided confidential information” to a friend who worked as an analyst at SAC. Separately, Richard Choo-Beng Lee, the co-founder of Spherix Capital LLC and another SAC alumnus, has pleaded guilty and is cooperating with prosecutors in its probe of the Galleon Group hedge fund.

Portfolio manager Richard Grodin, who left SAC to start Stratix Asset Management LLC in 2004, also has received a subpoena, according to a person familiar with the investigation.

‘Now Trembling’

“Everyone in the hedge-fund industry is now trembling, wondering whether anything they said over the phone could be seen as incriminating,” said John Coffee, a securities law professor at Columbia University in New York.

At least one FBI agent, B.J. Kang, has been inquiring about SAC’s trading for several years, according to a person who has been interviewed by him, Bloomberg Markets reported in February. Jessie Erwin, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment for this story.

Bharara has been leading a crackdown on what he said in a speech this month was “rampant” insider trading on Wall Street and is devoting “significant resources” to the investigations.

To make insider-trading cases, prosecutors must show people bought or sold stock using material, non-public information and had the intent to defraud, Carney said.

To attorney Ralph Ferrara of Dewey & LeBoeuf LLP, the search warrants were “truly unbelievable” because the government doesn’t have a clear standard for insider trading.

‘It Is Outrageous’

“It is outrageous that the U.S. government has decided to treat something that they can’t define as if it were a dope cartel,” Ferrara said. “The issue is to what extent do the people they’re sweeping up really think they’re violating the law, or are they using top investigative techniques to fill in pieces of a mosaic, which is not against the law.”

Fourteen people pleaded guilty in the Galleon case, and at least nine others are charged. Galleon founder Raj Rajaratnam is slated for trial next year for insider trading, which he denies.

SAC hadn’t been subpoenaed as of Nov. 4 in relation to the government’s probe of insider trading at Galleon, the firm’s lawyer, Martin Klotz, said that day. Klotz had been summoned as a government witness in the criminal trial of Milton Balkany, a Brooklyn rabbi who was convicted six days later of trying to extort $4 million from SAC.

Asked by a prosecutor whether “SAC or Mr. Cohen himself was under investigation in the Galleon case,” Klotz said no. “We did not receive subpoenas,” Klotz testified in Manhattan federal court. “We did not receive inquiries from anybody in the government in connection with that investigation.”

Searches Confirmed

Steve Bruce, a spokesman for Diamondback, and Andy Merrill, a spokesman for Level Global, confirmed that the FBI searched their offices and said their firms are cooperating.

Diamondback returned three times as much as peers since it was founded in 2005, according to an investor letter. It gained 73 percent from mid-2005 through this July, compared with 22 percent for funds with a similar approach, according to Chicago-based Hedge Fund Research Inc. It beat so-called multistrategy funds in 2006, 2007 and 2008, skirting losses from the credit crisis. It has lagged behind the strategy average since then.

Cohen started SAC in 1992 after leaving Gruntal & Co., a New York brokerage firm. His track record at SAC -- a 30 percent average annual return for 18 years -- is one of the best in the hedge fund business. SAC has had one annual loss since it was founded in 1992: a 19 percent drop for the flagship SAC Capital International Ltd. in 2008.

SAC Returns

The fund jumped 29 percent in 2009 and is up again this year, gaining 11 percent through Oct. 31, according to a person familiar with its performance. SAC delivers those returns in large part by trading stocks quickly, usually holding them for two to 30 days, according to a document sent to potential investors in early 2009.

Schimel, a co-founder of Stamford, Connecticut-based Diamondback, is Cohen’s brother-in-law and a former SAC portfolio manager. Sapanski joined SAC in 1998 and traded financial services, energy and retail stocks, according to Diamondback’s marketing documents.

Allegations that SAC or its former traders have used illegal stock tips have surfaced in court cases.

In the Galleon Group case, Lee pleaded guilty last year and agreed to cooperate. He was an analyst at SAC from 1999 to 2004 before joining Grodin’s Stratix Asset Management. Lee unsuccessfully sought to return to SAC after Stratix closed. Grodin didn’t return a call seeking comment yesterday.

Leaks to Six

Separately, in the Manhattan federal court trial of Joseph Contorinis in September and October, the government’s star witness, Nicos Stephanou, a former associate director of mergers and acquisitions at UBS, listed six people to whom he leaked stock tips. Those people included his friend Jonathan Hollander, who was an analyst at SAC, Stephanou said.

Hollander hasn’t been accused of wrongdoing. His lawyer, Aitan Goelman, declined to comment.

Chip Skowron, a co-portfolio manager at FrontPoint Partners LLC who previously worked at SAC, was put on leave following the arrest this month of a Human Genome Sciences Inc. consultant, Yves Benhamou. Skowron was the recipient of Benhamou’s tips, according to a person familiar with the matter. Skowron didn’t immediately return a call seeking comment yesterday.

Patricia Cohen, who separated from Steven Cohen in 1988 and sued him last year for racketeering, said in her complaint that he told her “he had received inside information in advance of the purchase of RCA Corp. by General Electric Co.”

‘Ludicrous’ Lawsuit

At the time, Gasthalter called the lawsuit by Cohen’s ex-wife “ludicrous.” A judge is considering Steven Cohen’s request that the suit be dismissed.

SAC was also at the center of a criminal trial of Balkany, who was convicted on charges that he tried to extort $4 million from the firm by claiming he could prevent a federal inmate from telling authorities about alleged insider trades.

According to court records, Balkany told an investigator with the U.S. Attorney’s office in New York in a conversation that prosecutors secretly taped that SAC had inside tips about medical device makers Cyberonics Inc. and Respironics Inc. and Myriad Genetics Inc., which makes molecular diagnostic products.

An SAC lawyer alerted prosecutors to the extortion attempt, and a prosecutor said during the trial that Balkany “lied” and that there was no evidence of illegal trades.

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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