HOW STRONG ARE THE CASES AGAINST STEVE COHEN AND SAC?
In a federal court on Friday morning, a lawyer for SAC Capital, the big hedge fund owned by Steve Cohen, entered on the firm’s behalf pleas of not guilty to five counts of securities fraud related to alleged insider dealing. Preet Bharara, the U.S. Attorney for the Southern District of New York, unveiled the charges on Thursday, and Antonia Apps, a prosecutor in Bharara’s office, told the court that there was “a tremendous volume of evidence” against the firm, including court-authorized wiretaps, e-mails, and instant messages.
Still, the government didn’t file any criminal charges against Cohen himself. He founded the firm, remains its sole owner, and is widely believed to be the ultimate target of an investigation that has been going on for more than a decade. It’s perfectly possible that more charges could be brought at a later date, but, if there were an open-and-shut case, Cohen would already be in the dock. Instead, it is his firm that has been indicted. Should it be found guilty, Cohen would obviously be affected by the cost of any fines, but he wouldn’t face jail time.
Evidently, the government’s intent is to put SAC out of business on the grounds that it is an enterprise based on unlawful activity—namely, insider trading—and to punish Cohen where it hurts: in his pocket. But it is notable that Bharara didn’t invoke racketeering laws, which one of his predecessors, Rudolph Giuliani, used during his insider-dealing investigation in the nineteen-eighties. On Wall Street, the conventional wisdom is that no financial business can withstand a racketeering indictment, because, once charges are filed, other firms will refuse to do business with it, and its funding will dry up. (Even the threat of a racketeering indictment was enough to sink Drexel Burnham Lambert, Michael Milken’s firm.) Whether a hedge fund such as SAC can withstand a non-racketeering indictment remains to be seen. Obviously, a lot depends on how the firm’s remaining outside investors and its Wall Street counterparties—the latter include JPMorgan Chase, Goldman Sachs, and Morgan Stanley—react to the filing of charges.
SAC has responded, as it tends to, with aggression. The firm said it would keep trading during the court proceedings and assembled a gaggle of high-priced defense lawyers. But even if SAC were to beat the rap in the criminal case, the Securities and Exchange Commission could still bar Cohen from the financial industry should it succeed with a civil case it filed against him last week. In such cases, the burden of proof is substantially lower than in criminal cases.
Based on a perusal of the two complaints (the S.E.C. one is technically an administrative order), my initial take is that the civil case is strong, and the criminal case is also substantial but somewhat less than a slam dunk. In the civil case, the government is accusing Cohen of failing to supervise the firm adequately and prevent unlawful acts from taking place. Given the large number of insider-dealing cases that SAC and its subsidiaries have been involved in—six of the firm’s former traders and analysts have pleaded guilty, and two more are facing charges—and given Cohen’s tight grip on the business, the charges against him don’t seem like much of a stretch.
The way SAC operated, its employees were required to share their “high-conviction trades” with Cohen—personally—some of which were based on information acquired from corporate insiders. Cohen often placed trades on the basis of these tip-offs, and he rewarded those who sent him profitable ideas. In a 2008 trade involving stock in Dell, which was based on information that turned out to have come from an insider, Cohen sent the employee involved a note saying “Nice job on Dell.” Over the years, he did beef up SAC’s compliance department, but its staff appears to have adopted a stance of “See no evil, hear no evil.” In all of the firm’s history, it isolated only one case of suspected insider dealing, and the traders involved were allowed to keep their jobs.
At the very least, that sounds like inadequate supervision. But it’s another thing to prove, as the U.S. Attorney’s Office alleges in the criminal indictment, that SAC deliberately adopted “institutional practices that encouraged the widespread solicitation and use of illegal inside information.” In detailing this allegation, the indictment focusses on SAC’s hiring practices, which prioritized good contacts in the industry that the trader or analyst would be specializing in, and the firm’s employees’ active pursuit of “an edge over other investors.”
Some of the e-mails and other internal documents contained in the indictment are certainly suggestive of a corrupt business culture. They include a message noting that a potential hire “has a share house in the Hamptons with the CFO” of a big industrial company, and another, a note to Cohen, in which an SAC employee says, “I am very comfortable that this quarter is going to be solid. I am getting coffee on Tuesday afternoon with the guy who runs North American generics business.” (Cohen replied: “Let’s talk later.”)
When and if the case comes to court, though, such snatches won’t necessarily be sufficient to secure a conviction. The government will likely need actual witnesses, people who worked at SAC and are willing to back up the assertion that the firm encouraged them to break the law. So far, it’s not clear how many such witnesses the government has lined up. Some of the people named in the case have already been sentenced and don’t have much of an incentive to coöperate. Others, notably Mathew Martoma, a former analyst who was charged last December, have so far refused to work with the government. In the coming days, attention is sure to focus on a new name that came up in the indictment, an SAC portfolio manager called Richard Lee, who, earlier this week, pleaded guilty to insider dealing and is reportedly coöperating with the prosecution. Depending on his level of knowledge, Lee, who has worked for SAC twice since 2009, could be a key figure in the case.
At Friday’s hearing, Ted Wells, a well-known criminal-defense lawyer who is representing SAC, was understandably keen to find out what, if anything, the prosecutors are holding in reserve. According to a court report, he told the judge he was “most concerned” with obtaining statements that former SAC employees have given the government, which he claimed the defense is entitled to see. Once Wells and his colleagues on Cohen’s legal team possess everything that the judge forces the prosecutors to turn over, they will reach a judgment on how to proceed and how likely they are to win. At this stage, though, they will not be too downhearted.
Above: SAC Capital defense attorneys, including Ted Wells (left), leave the courthouse on Friday. Photograph by Eric Thayer/Reuters.
