DealBook: Insider Inquiry Sends a Recluse Into the Public Eye

Steve Marcus/ReutersSteven A. Cohen, the founder and chairman of SAC Capital Advisors, a $14 billion hedge fund.

9:26 p.m. | Updated

In recent years, Steven A. Cohen, the once-reclusive money manager, has carved out a public profile straddling a number of fields: a prodigious art collector, an investor in the New York Mets, a supporter of Mitt Romney’s presidential campaign.

Now he has been thrust into an unwanted role: defending SAC Capital Advisors, his $14 billion hedge fund, against an intensifying government investigation into insider trading.

At 8 a.m. on Wednesday, an hour when Mr. Cohen is normally at the center of SAC’s cavernous trading floor in Stamford, Conn., he sat in his office to hold a hastily arranged conference call with his clients.

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Wealthy investors dialing in from as far away as Europe and Asia listened to soothing classical music before the call started. Then they received some grim news: Federal securities regulators were preparing to file a civil fraud lawsuit against the fund.

The move, which stems from a criminal insider trading prosecution brought last week against a former SAC employee, is the most significant action yet by the government in a long-running investigation of Mr. Cohen, who has not been accused of any wrongdoing, and his firm.

Having for the first time been tied to the questionable trades at the center of the criminal case, Mr. Cohen, 56, began Wednesday’s call with a one-minute defense of his conduct.

Brendan McDermid/ReutersMathew Martoma as he left court on Monday. A former SAC portfolio manager, Mr. Martoma is accused of insider trading.

“We take these matters very seriously, and I am confident that I acted appropriately,” he said, adding that he was grateful for the support of his investors, who were not allowed to ask questions.

Shoring up investor support is something that Mr. Cohen has rarely had to do over a career that has reached mythic status on Wall Street. Over the last 20 years, Mr. Cohen has amassed a multibillion-dollar fortune by posting returns averaging 30 percent a year. SAC has grown into a firm with about 1,000 employees around the world.

Yet the criminal case against the former employee and the news of a possible civil case against the firm may have unnerved investors, coming as it has after years of headlines about current and former SAC employees and whispers about the hedge fund’s trading practices.

Criminal prosecutors have already linked six former employees to insider trading while at SAC, securing three convictions.

In the latest case, Mathew Martoma, a former SAC portfolio manager, stands accused of corrupting a doctor who had provided him with confidential data on a drug trial. The secret information, authorities say, allowed SAC to earn profits and avoid losses totaling $276 million, which prosecutors call the most lucrative insider trading ever uncovered.

And for the first time in the government’s years of investigating SAC over improper trading, charges connect Mr. Cohen to questionable trades, without saying that he knew the information behind them was confidential.

Charles A. Stillman, a lawyer for Mr. Martoma, has said he expects his client to be “fully exonerated.”

The notice of a possible enforcement action by the Securities and Exchange Commission, which SAC received on Nov. 20 (the day that Mr. Martoma was arrested), involves civil charges and does not imply that the Justice Department is preparing to indict. Such a notification, known as a Wells notice, gives a defendant an opportunity to persuade the S.E.C. not to bring a case.

But the S.E.C.’s warning is the boldest regulatory shot yet across SAC’s bow. The commission filed a parallel civil suit last week alongside the Justice Department’s criminal charges that named Mr. Martoma and CR Intrinsic, the SAC unit that employed Mr. Martoma, as defendants.

A person briefed on the investigation said that an additional action against SAC, or even Mr. Cohen, could involve accusations of fraud based on the so-called control-person liability theory, meaning that it was in “control” of Mr. Martoma when he engaged in insider trading.

If the S.E.C. files a lawsuit against SAC, the hedge fund could defend itself or strike a settlement that could involve substantial financial penalties, including the disgorgement of supposed illegal trading profits. While the fund could survive such a punishment, the blow to its reputation could cause some investors to flee and prompt some banks to avoid doing business with it.

SAC has been under a cloud since a former employee, Richard Choo-Beng Lee, pleaded guilty to insider trading in 2009 and began cooperating with the government. Mr. Lee’s crimes were committed after leaving SAC, but he worked for Mr. Cohen for about five years and shared his insights with investigators.

But it was last week’s charges against Mr. Martoma that significantly ratcheted up the pressure on Mr. Cohen because they connect him to the trades that the government contends were illegal.

Mr. Martoma obtained secret data from a doctor about clinical trials for an Alzheimer’s drug being developed by the companies Elan and Wyeth, the government said. Just before SAC executed the trades in question, Mr. Martoma e-mailed Mr. Cohen and said he needed to discuss something important, and the two then had a 20-minute phone conversation.

The doctor, Sidney Gilman, who was a professor of neurology at University of Michigan Medical School, has struck a nonprosecution agreement with the Justice Department, meaning it will not bring criminal charges against him. He has also agreed to testify against Mr. Martoma, said a person briefed on the case. Dr. Gilman retired from the university as of Tuesday, his lawyer, Marc L. Mukasey, said.

On Wednesday’s 20-minute call with investors, Thomas Conheeney, the president of SAC, said that the fund’s rapid-fire buying and selling in Elan and Wyeth was consistent with Mr. Cohen’s aggressive trading style, said a person who listened in. Mr. Conheeney also said that Mr. Cohen, who trades stocks across multiple industries, was not a specialist in drug companies, so it was perfectly normal for him to rely upon one of his underlings for guidance.

SAC told investors on Wednesday that it would bear any costs involved with defending itself in the case. The fund has continued to strengthen its compliance procedures, Mr. Conheeney said, including routine examinations of employees’ e-mails and the monitoring of communications with experts like Dr. Gilman who might possess confidential information.

The fund is less reliant on money from outside investors than its competitors. Only about 40 percent of SAC’s $14 billion is from outside clients; the rest belongs to Mr. Cohen and his colleagues. Investors, which include wealthy families and large institutions like the Blackstone Group, also have limits on how much money they can withdraw from the fund.

The harsh spotlight Mr. Cohen now finds himself under comes at a moment when he has grown more comfortable with his public persona. Having amassed an eclectic, world-class art collection that includes van Gogh paintings and Jeff Koons sculptures, Mr. Cohen regularly attends auctions and events like last summer’s Art Basel in Switzerland.

After shunning Wall Street conferences for years, he now appears to discuss his views on the market and financial regulation. Earlier this year, he purchased a minority stake in the Mets and lost a bid to buy the Los Angeles Dodgers. He has also stepped up his philanthropy; a children’s hospital on Long Island, near Mr. Cohen’s childhood home in Great Neck, N.Y., bears his name.

Mr. Cohen, who now lives in a 35,000-square foot mansion in Greenwich, Conn., emerged this year as a financial supporter of Mitt Romney — and a vocal opponent of President Obama — during the presidential race.

On election night, Mr. Cohen and other hedge fund billionaires were in Boston at Mr. Romney’s campaign headquarters in anticipation of a victory celebration.

Carol Vogel contributed reporting.

This post has been revised to reflect the following correction:

Correction: November 29, 2012

A version of this article appeared in print on 11/29/2012, on page A1 of the NewYork edition with the headline: Insider Inquiry Pushes Recluse Into Public Eye.

Article source: http://dealbook.nytimes.com/2012/11/28/securities-and-exchange-commission-weighs-suing-sac-capital/?partner=rss&emc=rss