The federal investigation of insider trading by SAC Capital Advisors LP and its founder, Steven A. Cohen, has been hampered by a lack of extensive e-mail evidence. One reason: During the period of time at the heart of the probe, July 2008, SAC automatically deleted its e-mails.
Unluckily for the U.S. government, SAC changed its policy just months later, requiring preservation of electronic communications. By then, most messages relevant to the $700 million in alleged illegal trades had been erased, according to a person familiar with the matter.
Until the fall of 2008, SAC e-mails were deleted from employee electronic mailboxes every 30 or 60 days, according to SAC General Counsel Peter Nussbaum. He was questioned in a deposition two years ago by lawyers for Fairfax Financial Holdings Ltd., which had sued SAC and other hedge funds over damage caused by short sales. SAC, a $14 billion fund, was ultimately dismissed from that case. Bloomberg News reviewed a transcript of the deposition.
Federal regulators don’t regard SAC’s lack of a formal e-mail retention policy before the fall of 2008 as evidence of any intent to hide details about the trades under investigation, according to two people familiar with the matter. The policy was in place before the government investigated the trades.
On Nov. 20, the U.S. charged Mathew Martoma, a former portfolio manager at CR Intrinsic, an SAC unit, with using material, non-public information to persuade Cohen to sell shares of two drug companies just days before negative news caused both stocks to plummet.
The U.S. Securities and Exchange Commission sued Martoma, 38, and the unit over the same conduct. Cohen, 56, might be added to the lawsuit, a person familiar with the matter said at the time.
U.S. Attorney Preet Bharara in Manhattan said in announcing the Martoma charges that Stamford, Connecticut-based SAC had netted $276 million in profit and avoided losses on the trades.
“This is certainly the most lucrative insider-trading scheme ever charged,” he said that day.
Martoma has pleaded not guilty and isn’t cooperating with U.S. investigators in their continuing investigation of SAC.
SAC Capital and Cohen haven’t been charged with any wrongdoing regarding the trades. Cohen has said he acted appropriately in selling his $700 million stakes in Wyeth LLC and Elan Corp.
The indictment of Martoma and the SEC complaint against him and CR Intrinsic contain only snippets from e-mails or instant messages to support government claims of insider trading. By contrast, the case against Raj Rajaratnam, co-founder of the Galleon Group LLC hedge fund, was based on detailed e-mails and transcripts of secretly recorded phone conversations.
In building their case against Martoma, prosecutors and investigators from the SEC received only episodic batches of instant SAC messages dated in the weeks and months before the trades under investigation, the first person familiar with the matter said.
Other SAC e-mails, which regulators relied on to support their case, were preserved because some of the recipients moved them out of their electronic mailboxes into personal folders, said another person briefed on the matter. Communications from the fall of 2008 and later were also obtained by prosecutors and regulators.
SAC turned over the electronic communications in response to subpoenas and voluntary document requests, the people said. There was no attempt by prosecutors to impound SAC computers to conduct a forensic search for deleted files, according to the two people familiar with the matter.
Seizing computers requires a search warrant and demands a higher degree of evidence of wrongdoing, said John Moscow, former deputy chief of investigations for the New York District Attorney’s Office and now in private practice with Baker Hostetler LLP in New York.
“You go with subpoenas when you can,” he said. “Generally a prosecutor needs reasonable cause to believe that property constitutes evidence of crime, that the property is located in a particular location, and that a crime was committed to obtain a search warrant.”
The SEC isn’t authorized to seize computers for civil litigation.
The change of SAC’s e-mail policy in the fall of 2008 was voluntary. Before 2012, preserving such communications was optional for hedge funds not registered with the SEC as investment advisers. As of March 2012, all hedge funds had to register as investment advisers and were required to adopt record-retention policies.
Jonathan Gasthalter, a spokesman for SAC, declined to comment on why the policy change was voluntarily initiated. Ellen Davis, a spokeswoman for Bharara, declined to comment, as did SEC spokesman John Nester.
Prosecutors have told the federal judge presiding over the Martoma case that they don’t plan to rely on recorded phone conversations as evidence against him.
If Cohen were charged, he would replace Rajaratnam as the most prominent hedge fund figure implicated in the government’s six-year probe into insider trading on Wall Street.
Rajaratnam, accused of being the mastermind of a network of insider traders, was convicted in 2011 and sentenced to 11 years in prison. Prosecutors claim he made more than $50 million in profits from the trades, one-fifth that claimed in the Martoma/CR Intrinsic case.
The criminal case is U.S. v. Martoma, 12-02985, and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).