The Securities and Exchange Commission has spent the last 5 years trying to build a case against SAC Capital’s legendary billionaire manager Steve Cohen.
But with a statute of limitations set to expire before this past Friday, July 19th, and a careful and painstaking investigation that led, almost, all the way up the chain of command at SAC, the Commission found itself lacking the evidentiary silver bullet that would put Cohen away on serious charges of insider trading.
And thus it is that the SEC is instead charging Cohen with failing to adequately supervise his employees, in particular Matthew Martoma and Michael Steinberg, from whom he received and is alleged to have ignored “highly suspicious” information regarding certain of the fund’s positions in different companies.
In March, Steinberg was indicted by a Manhattan federal grand jury for allegedly trading on insider information about Dell Inc. (DELL), and Nvidia Corp. (NVDA). Martoma, whose trial is set to begin November 4, is accused of trading on insider information from a doctor who was privy to the unreleased results of drug-trials for an Alzheimer’s treatment then in development by Elan Corp. (ELN) and Wyeth Inc. This case is of particular significance due to the fact that it was the first to reveal direct links between Cohen himself and the insider trading of which his employees are accused. The information helped SAC Capital to a $276 million dollar benefit from a combination of profits and losses-avoided.
In all, the investigation has led over 80 charges and a total of 73 convictions against employees who worked for SAC.
The SEC voted unanimously to proceed with their case against Cohen last Friday, in a sign that has been interpreted by some as the commission’s attempt to make a display of force, and by others as a sign of weakness, a desperate attempt to nail Cohen in any possible way given the absence of more damning evidence.
Indeed, a conviction on securities fraud could land Cohen in jail for up to 20 years, while the charges filed this past Friday are based on a “failure to supervise” claim. The commission is arguing that Cohen had received enough substantially suspicious information that he should, as a manager, have followed up on what his employees were up to. While such a claim can only be brought in an administrative court, if the proceedings work out in favor of the SEC Cohen could be barred for life from managing money for third parties.
Steve Cohen has a net worth of approximately $9 billion, and his track-record in the business is quasi-mythical. Since the establishment of SAC Capital in 1992, the fund has consistently boasted a 25 percent return rate to its investors, and that is after taking its profits in the form of fees.
The SEC has already managed to extract a record $615 million dollar settlement from the fund last March, and Cohen was mulling a further settlement that would see him turn SAC into a private family business in exchange for a deferred prosecution agreement that would have limited his and SAC’s liability in the affair. Any hope of that deal was scuttled when Cohen was served a subpoena on May 17th to testify before a grand jury, after which he discontinued his unconditional cooperation with the commission’s investigation and doubled down on keeping SAC running as normal.
The Securities and Exchange Commission’s Friday charges against Cohen have been more or less ridiculed, from some quarters at least, as a sign of desperation or a last-ditch attempt to make something stick before the statute of limitations deadline had been passed. Since last Friday, there have been the perhaps mandatory and countless comparisons to how the federal government eventually caught up with the notorious Al Capone, whom they could not convict for his many violent crimes and thus opted to charge with tax evasion.
But as Felix Salmon has pointed out in a column for Reuters, the SEC’s charge is a “serious” one, “which goes straight to the main way in which Cohen makes his money.” Indeed, Cohen’s profits have been made precisely as a result of the actions of his employees, whom he had presumably encouraged to behave as they did. Thus the charges if proven, and even though they are not criminal in nature, would at least take away SAC’s and Cohen’s ability to continue making astronomical returns, and perhaps set an example for hedge fund managers in the future.
Of course, it is also likely that insider trading will be little-affected even if Cohen suffers the consequences of the charges being successfully proven, perhaps even if those charges were criminal ones. Cynicism also tells us that there are other, perhaps far more egregious financial crimes out there that have received a fraction of the attention of the SAC case.
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