Without Cohen, the Case Against SAC Is Lacking

The U.S. government has spent seven years and spared no effort investigating allegations of insider trading at SAC Capital Advisors LP. This week’s announcement that the company will be prosecuted on fraud charges, together with a new civil action by the Securities and Exchange Commission against the company’s owner, Steven A. Cohen, sends the message that the crime won’t be tolerated.

That’s a good message to send, but the authorities are gambling nonetheless. It hasn’t escaped Wall Street’s attention that Preet Bharara, the U.S. attorney bringing the action, hasn’t charged Cohen himself -- not yet, anyway -- which suggests a failure to find evidence directly implicating the man at the top. Moreover, the 41-page criminal indictment isn’t as impressive as the prosecutor could have wished.

The best evidence that the company tolerated and encouraged insider trading is that six of SAC’s former employees have already pleaded guilty to it; two others deny it and are awaiting trial. That’s enough, Bharara will argue, to prove a pattern of corruption. The trouble is, people who plead guilty in exchange for leniency lack credibility and don’t always make the best prosecution witnesses.

And some of the other material in the indictment looks a bit thin. For instance, there is an e-mail to Cohen praising a possible hire for having excellent contacts in his industry, noting that the recruit has “a share house in the Hamptons” with a senior executive. At trial, the government will surely have to do better than that. Portfolio managers, the company will argue, need to understand their industries, and frequent contact with executives serves that legitimate purpose.

Perhaps the government’s strategy is still unfolding -- maybe a criminal prosecution of the company will persuade other SAC managers (one in particular, who’s accused of a very large fraud) to plead guilty and help the authorities pursue Cohen himself.

For now, it’s good that charges are headed for a court that will address the question of guilt, rather than toward a settlement in which that issue is glided over in return for cash -- which is how a previous action against SAC was resolved. The usual reservation about a corporate prosecution, that it causes too much collateral damage to innocent parties (the collapse of Arthur Andersen LLP stands as the classic example), doesn’t really apply in the case of a company with a relatively small and conspicuously well-remunerated staff.

Ultimately, it can’t be ideal to leave Cohen out of the prosecution. If his company is guilty as charged, an outcome that leaves him to manage his billions in peace while subordinates go to jail won’t look like justice.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.