May 25 (Bloomberg) -- Steven A. Cohen, the founder of SAC Capital Advisors LP, has been subpoenaed to testify before a grand jury in New York as part of the U.S. government’s five-year crackdown on insider trading.
Here are five things you should know about the government case against the billionaire trader as he faces the threat of being questioned under oath.
*The Government Hasn’t Revealed Any Evidence So Far That Directly Implicates Cohen in Insider Trading.
The U.S. attorney in Manhattan has charged 83 people and secured 73 convictions of those who used material, nonpublic information to make their firms or themselves millions of dollars in profits or to avoid similar amounts in losses. Nine former or current SAC employees have been linked to insider trading. The closest prosecutors have come to tying Cohen, 56, to illegal trades came in an indictment last year against Mathew Martoma, a former SAC portfolio manager accused of using material, nonpublic information about the failure of a promising new drug treatment. That data helped SAC net $276 million in profits or losses avoided in July 2008, according to the indictment.
Martoma had a call with Cohen on July 20, 2008, in which he recommended selling SAC’s investments in two drug companies, Wyeth LLC and Elan Corp., according to the indictment. Before the news of the drug treatment’s failure was announced July 29, SAC unloaded a large chunk of its investments in the two companies over several days and also bet against the stocks. After the drug-trial news was announced the stocks plummeted in value.
Martoma has refused to say whether he told Cohen that his sell recommendation was based on getting advance notice about the drug trial. He pleaded not guilty to charges of insider trading, and Cohen wasn’t charged in the case. Cohen has said he acted appropriately.
In other cases against SAC employees, prosecutors said e-mails used as evidence show a trader at the $15 billion hedge fund firm got a second-hand tip from an individual at Dell Inc. about negative financial results that were eventually reported in August 2008, shortly after SAC units sold shares in the computer maker.
Cohen wasn’t charged in the Dell matter either. While one e-mail that suggests Cohen was made aware there was disagreement among his traders about Dell’s probable earnings, there is no evidence in the public domain to indicate he knew Dell assessments stemmed from illegal tips or that he sold shares based on such information.
In any case brought against Cohen, prosecutors would have to establish that he used material, nonpublic information to trade securities and was aware that the data came from a person who violated a duty to keep the matter confidential, such as a chief financial officer who leaked earnings results before they were made public.
*U.S. Prosecutors Face Various Deadlines in Deciding Whether to Charge Cohen With Insider Trading.
Insider-trading charges have to be made within five years of the conduct in question. The best and biggest potential insider-trading case prosecutors have is that involving Wyeth, now a unit of Pfizer Inc., and Dublin, Ireland-based Elan. In that one, they face a deadline of late July, when the trades took place. Prosecutors have to determine by then whether they believe Cohen knew he was illegally using nonpublic information about the computer maker’s earnings. The Dell trades took place at the end of August 2008. Some other trades being investigated would give the government until 2015 to make a case.
Depending on when illegal profits were withdrawn from the fund, prosecutors might be able to stretch the five-year deadline for filing some insider-trading charges if they allege that SAC, under Cohen, was a “criminal enterprise” both before and after the deadline. The Racketeer Influenced and Corrupt Organizations Act, or RICO, allows charges to be brought against the head of an organization for criminal acts carried out by subordinates as part of a plan to enrich the entire organization.
Prosecutors would still have to show Cohen knew he was acting illegally by trading on the advice of subordinates rather than just taking the advice of employees who got the data illegally and never informed him of their sources.
*Cohen May Choose to Invoke His Constitutional Right Not to Incriminate Himself and Not Testify Before the Grand Jury.
The date of Cohen’s session with the grand jury hasn’t been disclosed by prosecutors or Cohen, nor has the government indicated if it’s interested in Cohen’s testimony for a case against him or only against his firm.
Typically prosecutors don’t bring a target of a criminal investigation before a grand jury because their questions will tip off a defendant and his lawyers as to the details of the case they have against him, giving the accused an advantage in defending himself at any trial.
Should Cohen invoke his Fifth Amendment right not to answer questions, he wouldn’t necessarily have to appear in the grand jury room in Lower Manhattan.
Cohen testified under oath in a civil RICO case accusing SAC and other hedge funds of conspiring to drive down the share price of Fairfax Financial Holdings Ltd., a Canadian insurance company.
In a 2011 deposition in that case, Cohen was interrogated about how he operates his firm and how he managed his own fund within SAC Capital, the Cohen account. He also disclosed that he personally managed CR Intrinsic Investors LLC, the fund that Martoma worked for during the Wyeth and Elan trades.
The U.S. Securities and Exchange Commission and prosecutors investigating Cohen subpoenaed transcripts of that deposition, a person familiar with the matter has said.
A year ago the SEC deposed Cohen in preparation for the insider-trading lawsuit they filed against CR Intrinsic and Martoma. The SEC sued Martoma the same day he was charged criminally.
*Prosecutors Have No One Who Has Publicly Said He Knows Cohen Was Aware of the Illegal Nature of the SAC Trades in Question. They Do Have a List of Possible Cooperators.
Martoma knows what he said on that 20-minute call but isn’t saying. He has declined a plea bargain involving testifying against Cohen, whose firm is paying his legal bills per SAC policy. Likewise SAC employees, such as analyst Jon Horvath, or portfolio manager Michael Steinberg, who sent or received the Dell e-mails, might have knowledge about what Cohen knew and said. Horvath and Steinberg were charged over the Dell trades. Portfolio manager Gabriel Plotkin, who prosecutors said sold some Dell shares before the negative results were announced, hasn’t been charged. SAC has said he did nothing wrong.
Horvath pleaded guilty to the charges and is cooperating with the investigation. Steinberg has pleaded not guilty. Prosecutors are looking at other trades, so people involved with them might be able to finger Cohen if he did anything wrong.
Prosecutors also sent grand jury subpoenas to Tom Conheeney, president of SAC; Steve Kessler, head of compliance; Phillipp Villhauer, head trader; and Chief Operating Officer Solomon Kumin, according to a person familiar with the matter. Cohen ordered Villhauer to carry out the Wyeth and Elan trades, according to the Martoma indictment.
Anthony Vaccarino, an SAC portfolio manager, also received a subpoena, another person familiar with the matter said.
It is unknown if any of the five is aware of criminal conduct on Cohen’s part. None has been publicly charged in the case. Should any of the five refuse to testify on self-incrimination grounds, prosecutors might grant them immunity and force them to say what they know about Cohen.
*The Government Has a Fall-Back Option That Could Close Down SAC and Ban Cohen From the Securities Industry If They Fail to Find Enough Evidence for a Criminal Case.
On Nov. 20, SAC received a Wells Notice from the SEC. It warned that the agency planned to sue the firm for securities fraud and control-person liability unless the hedge fund could persuade it not to. A person familiar with the matter said Cohen himself might be added to the notice at some point. Usually the notice is acted on within 180 days from its sending. That time has passed. The agency can extend the deadline, which is regarded as an internal scheduling matter, not a bar to litigation.
SAC in March agreed to pay a record $616 million to settle U.S. regulatory claims that two of its units engaged in insider trading. SAC and its affiliates settled the SEC’s claims without admitting or denying wrongdoing. SAC’s CR Intrinsic agreed to pay almost $602 million and Sigma Capital will forfeit about $14 million, the SEC said. They settled for a penalty about equal to the disgorgement amount.
With nine SAC employees linked to illegal insider trading, Cohen could be sued for negligent supervision of his staff regarding securities fraud. Penalties in a settlement or after a trial could include Cohen’s being barred from the securities industry and a shuttering of his firm.
Cohen may try to negotiate a deferred prosecution agreement with the government that might also close his firm, a person familiar with his thinking said this month. The firm would admit to wrongdoing and be charged criminally under such an agreement. Charges would be dismissed after a set time if the firm committed no further crimes.
The firm wouldn’t be able to deny a statement of facts about its wrongdoing even if it violated the agreement and was charged formally. Cohen, according to the person, would be willing to discuss shutting SAC and managing only his own money, estimated at about $7 billion of the firm’s assets. In such a deal, Cohen wouldn’t be personally charged.
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