SAC Capital Advisors LP, in a sign it’s bracing for new developments in the federal insider-trading investigation of the $15 billion hedge-fund firm, told clients it will no longer cooperate unconditionally with the government.
SAC, in a letter sent to investors yesterday, said for reasons of confidentially there would be limited disclosure on the progress of the civil and criminal probes. The firm, run by billionaire Steven Cohen, expects “substantially more clarity” in coming months, according to the letter, portions of which were provided to Bloomberg News.
“You stop cooperating when you are unhappy with the way things are going or are afraid of where things might be going,” said Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor.
SAC reached a $602 million settlement in March with the U.S. Securities and Exchange Commission over claims the firm and one of its units profited from illegal tips about a drug trial received by former portfolio manager Mathew Martoma. The SEC said at the time its investigation of the Stamford, Connecticut-based firm was continuing.
The Martoma case, which centered on trades in drugmakers Elan Corp. and Wyeth Inc., was the first to link Cohen, 56, directly to alleged inside information. Cohen hasn’t been accused of any wrongdoing. The statute of limitations to indict anyone involved in the trades expires in July.
Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment on the letter. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, and John Nester, an SEC spokesman in Washington, also declined to comment on SAC’s disclosure.
The letter could indicate that either the SEC or the U.S. attorney may be preparing to sue or indict Cohen, said lawyers who asked not to be named because of the sensitive nature of the case. Before yesterday, SAC had said it was cooperating with the investigation.
Prosecutors issued new subpoenas to SAC this week, the New York Times reported yesterday, citing lawyers briefed on the case. The government is seeking trading records and other documents, the newspaper said.
SAC’s letter could also be a sign that the firm is fed up with the length, demands and costs of the multiyear investigation that has already linked at least nine current or former employees to insider trading while working at the firm.
“More often than not, hedge-fund managers feel that the SEC demands more information than it is entitled to, or is not sensitive to the costs related to providing the information” in the course of an investigation, said Ron Geffner, a partner at Sadis & Goldberg in New York who was previously an enforcement lawyer with the SEC.
Some of those costs include fleeing clients. In February, investors asked to pull $1.68 billion from the fund. About $660 million was returned at the end of March, with the remainder coming out by the end of the year. Last week, SAC told clients it was extending the deadline to ask for withdrawals for the second quarter to June 3 from mid-May. It also recently told them it was beefing up its compliance.
SAC is also under pressure from shareholders in Elan and Wyeth, now a unit of Pfizer Inc., who are seeking damages related to the Martoma trades. Elan shareholders have said SAC owes them at least $685.6 million. SAC has argued that its SEC settlement means the Elan shareholders aren’t entitled to any money for the alleged insider trading.
Last month, U.S. District Judge Victor Marrero conditionally approved SAC’s settlement with the SEC. Marrero ruled April 15 that the settlement can go forward, while saying it remains subject to a ruling by the U.S. Circuit Court of Appeals in New York in a case involving an earlier SEC settlement with Citigroup Inc.