Steven A. Cohen, founder of a $14 billion hedge fund indicted in what the U.S. calls an unprecedented insider trading scheme, faces a future without a fund or a multibillion-dollar fortune. On the other hand, he won’t be behind bars.
The U.S. wants to recover hundreds of millions of dollars from Cohen’s fund, SAC Capital Advisors LP, representing the money it made from its alleged illegal trading, and may try to get billions more from Cohen and the company.
Cohen himself wasn’t charged, unlike at least eight former SAC fund managers and analysts who have faced or are facing fraud charges for their roles in a scheme which allegedly involved more than 20 companies and went back as far as 1999.
The government has also filed civil money-laundering charges against the firm, which call for fines and penalties to be determined at a trial, the date of which hasn’t been set. Those civil charges pose the greatest threat to Cohen’s fortune because prosecutors allege that if the fund reinvested the proceeds of illegal insider trading into its capital pool, then the entire pool is tainted and subject to forfeiture.
“Forfeiture, restitution and fines are the real worry for SAC,” said John J. Carney, a former federal securities fraud prosecutor and SEC attorney now at Baker Hostetler LLP. “If the government can establish the alleged fraudulent profits with precision, then they may have the ability to wipe out the firm’s net capital, making bankruptcy or a receivership a real threat.”
In its civil suit, the U.S. alleges that SAC engaged in money laundering, “commingling the illegal profits from insider trading with other assets, using the profits to promote additional insider trading.”
The government also filed criminal charges against SAC, allowing it to seek forfeiture of ill-gotten gains obtained as a result of the crime, if the firm is convicted.
That might allow the government to make a sizable dent in Cohen’s own wealth: with $9 billion, he’s ranked 121st among the world’s billionaires, data compiled by Bloomberg show.
Citing laws that say it has the right to seek the forfeiture of any property involved in money laundering transactions, the government says it is seeking “any and all assets” of SAC Capital Advisors LP, SAC Capital Advisors LLC, CR Intrinsic Investors LLC, Sigma Capital Management LLC, and more than 20 other affiliated investment funds, according to the complaint.
Michael Shapiro, the co-chair of the white-collar defense practice at Carter Ledyard & Milburn in New York, said a conviction of SAC may lead to “enormous fines and potentially ruinous amounts of restitution” from the firm.
Prosecutors may seek billions of dollars from Cohen’s personal fortune by claiming in the criminal case and their civil forfeiture lawsuit that he “co-mingled” illegal profits from insider trading with other assets he legitimately earned, Shapiro said.
“His house, his art -- they can go after that,” Shapiro said.
Cohen is one of the world’s biggest art collectors, with works by Van Gogh, Manet, de Kooning, Picasso, Cezanne, Warhol, Johns and Richter.
Determining whether Cohen’s own assets include proceeds of SAC’s insider trading will be “a battle for the forensic accountants” that may take years, said Jacob Frenkel, a former SEC lawyer now with Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
The government has presented a case that it’s likely to win, given the success rate Manhattan U.S. Attorney Preet Bharara’s office has had against insider traders. The office has won convictions at trial or in guilty pleas in 100 percent of the cases brought. That could herald the demise of Cohen’s fund, which has about $13.9 billion under management, of which about $7.5 billion is part of Cohen’s own $9 billion fortune.
“This is effectively a death knell” for SAC, Carney said. “Clearly, the Justice Department must have made the determination that there were so many corrupt employees that they outweighed the other honest employees.”
It's not the first time Bharara has sought charges against a business. In February 2012, his office charged Wegelin & Co., Switzerland’s oldest private bank, for helping U.S. taxpayers hide assets from the Internal Revenue Service. Wegelin pleaded guilty and was ordered to pay almost $58 million.
While he declined to comment on the possibility of charges against Cohen, Bharara said the investigation was “ongoing,” and that the government isn’t “restraining” SAC assets.
“I’m not going to say what tomorrow may or may not bring,” he said.
“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Bharara said. “Today’s indictment is not just a narrative of names and numbers, it is more broadly an account of a firm with zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct,” he said. “So SAC, over time, became a veritable magnet for market cheaters.”
Some SAC investors have already indicated they want to take their money out. SAC may shed investors who lose confidence in the well-performing firm or the government may shut it down after a conviction or lawsuit loss or a settlement. Diehards may stay giving Cohen enough capital to continue, unless the government ends his hedge fund career.
Banks including Deutsche Bank AG and Goldman Sachs Group Inc. were debating whether to suspend doing business with SAC, which has been one of Wall Street’s biggest trading clients, according to two people briefed on the matter. Spokespeople for the biggest Wall Street banks declined to comment on whether they had come to a decision.
Institutional investors have already redeemed their money in the fund. Some SAC clients will probably keep their money where it is, said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors.
“Each new allegation from the SEC will cause some investors to withdraw, however, there will be investors that stay with Steve Cohen to the bitter end,” he said. “Those investors who stay with Cohen have built strong loyalty toward him over time and also don’t see much downside.”
SAC oversaw $6 billion for outsiders at the start of this year. Cohen has about $7.5 billion in SAC’s funds and employees account for $1.5 billion of assets, according to data compiled by Bloomberg.
Cohen, 57, wasn't named in the criminal indictment, and faces no threat of time in a federal prison.
Bharara has said he’s not aiming to put the firm out of business but that federal laws allow for monetary penalties for companies that break the law. SAC was charged with four counts of securities fraud and one count of wire fraud.
Giving prosecutors a head start in proving their criminal case, the U.S. described separate insider trading schemes by at least eight former SAC fund managers and analysts, including Noah Freeman, Donald Longueuil, Jon Horvath, Wesley Wang, Mathew Martoma, Richard Choo-Beng Lee and Michael Steinberg.
“This is a case about corporate conduct and corporate responsibility,” Federal Bureau of Investigation Assistant Director George Venizelos said in a statement. “SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it. Our aim all along has been to root out the wrongdoers, and send a message to anyone else inclined to break the law. If your information ’edge’ is inside information, you can’t trade on it.”
An initial hearing in the case is scheduled for today before U.S. District Judge Laura Taylor Swain in Manhattan.
The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S. District Court for the Southern District of New York (Manhattan).