March 28, 2024

DealBook: Case Reveals Cohen’s Links to Dubious Actions at SAC

Steven Cohen, the founder of the hedge fund SAC Capital Advisors.Steve Marcus/ReutersSteven Cohen, founder of the hedge fund SAC Capital Advisors.

As government investigators closed in on the billionaire hedge fund manager Steven A. Cohen in recent years, his defenders argued that the unusual structure of his firm, SAC Capital Advisors, shielded him from any illegal trading by his employees.

Mr. Cohen, they said, sat atop a sprawling, decentralized operation in which about 140 small teams were each given hundreds of millions of dollars to invest. These teams had almost complete autonomy, so if they were crossing the line, Mr. Cohen would not know about it.

But in a detailed legal filing on Friday, federal regulators made their case that Mr. Cohen was not only well aware of suspicious trading activity at SAC but participated in it. Piecing together phone records, e-mails and instant messages, the Securities and Exchange Commission’s filing painted Mr. Cohen as a boss deeply engaged in his employees’ questionable behavior.

“Faced with red flags of potentially unlawful conduct by employees under his supervision, Cohen allowed his traders to execute the recommended trades and stood by,” the S.E.C. said.

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The information in the S.E.C. filing could provide additional ammunition for federal prosecutors and the F.B.I., who continue to build a criminal case against SAC. Among the actions being contemplated by the Justice Department is bringing a broad conspiracy charge against the fund itself, accusing it of multiple acts of insider trading over a period of years.

The S.E.C. case also adds detail on Mr. Cohen’s role in his firm’s buildup of large stakes in two drug makers, the subject of a separate criminal case, including the first mention of input from a former SAC employee who is now a hedge fund manager.

In an appearance last week at an investment conference sponsored by the cable news channel CNBC, Preet Bharara, the United States attorney in Manhattan, whose office is investigating SAC, refused to answer specific questions about Mr. Cohen and his firm.

But speaking broadly about hedge funds, Mr. Bharara said that some firms paid “lip service” to compliance, adding that those with multiple violations over a period of time must be held accountable. While noting that charging a company with a crime was a “rare use of power,” Mr. Bharara told the interviewer, Jim Cramer, that he was not opposed to doing so.

“I don’t see anyone that’s too big to indict,” Mr. Bharara said. “No one is too big to jail.”

The civil action brought by the S.E.C. does not accuse Mr. Cohen of insider trading or securities fraud, but with failing to supervise his employees. And it was filed not as a lawsuit in federal court, but as an administrative proceeding that will be heard by an administrative law judge at the S.E.C. If the commission prevails, possible penalties against Mr. Cohen include a permanent ban from the financial services industry.

Though the case is the first time the government has personally accused Mr. Cohen of wrongdoing, it adds to a raft of criminal and civil insider trading cases involving SAC over the last three years. Four former SAC employees have pleaded guilty; five others have been tied to illicit activity. The fund agreed this year to pay a record $616 million penalty to settle two S.E.C. lawsuits related to insider trading.

The crush of cases has imperiled SAC, which Mr. Cohen started in 1992 and now has more than 1,000 employees. Many investors in the $15 billion fund have pulled their money since the beginning of the year. They have asked to withdraw roughly two-thirds of the $6 billion in outside funds managed by SAC. The rest of firm’s assets — about $9 billion — are mostly Mr. Cohen’s. The next quarterly deadline to make a withdrawal request is Aug. 15. Losing outside capital costs SAC dearly, because the fund charges its investors among the industry’s highest fees on the strength of its superior performance.

An SAC spokesman said Mr. Cohen, 57, at all times acted appropriately and would fight the charges. He also noted that the commission was ignoring SAC’s “extensive compliance policies and procedures.”

Yet the S.E.C.’s filing depicts Mr. Cohen and his employees operating free of any interference by SAC’s compliance department. The case, which focuses entirely on trading in 2008, the only year SAC lost money, highlights a number of dubious communications between Mr. Cohen and his staff members.

In one instance, Mr. Cohen received an e-mail in which an SAC analyst explicitly said he had received financial information from a person inside the computer maker Dell for three consecutive quarters and then provided detailed numbers about the company in advance of its coming earnings announcement. After receiving the e-mail, Mr. Cohen sold his entire 500,000-share position in Dell, the S.E.C. said.

The filing seeks to show that Mr. Cohen was aware that his staff was possibly gleaning secrets from classic inside sources like an executive at a publicly traded company and doctors involved with clinical trials for a promising new drug. S.E.C. lawyers say such information would have caused any reasonable hedge fund manager to investigate possible wrongdoing and take reasonable steps to prevent it, which is what the government must show to prove its case.

“The standard of proof is substantially lower here than with an insider trading charge, which would require showing knowledge or recklessness,” said Paul Huey-Burns, a former S.E.C. lawyer now in private practice. “A failure-to-supervise case requires only a showing of negligence, that Mr. Cohen was essentially careless in his oversight of the firm.”

In the past, Mr. Cohen, who owns 100 percent of SAC, has acknowledged a lack of familiarity with the firm’s compliance and ethics policies on insider trading. In a deposition he gave in 2011 connected with a lawsuit unrelated to the S.E.C.’s case, Mr. Cohen said, “I’ve read the compliance manual, but I don’t remember exactly what it says.” He also called the rules on what constituted inside information “very vague.”

As the investigation escalated earlier this year, Mr. Cohen tried to send a message to investors and regulators that he and his firm took compliance seriously. He announced changes to bolster SAC’s compliance practices, including holding back the pay of those accused of wrongdoing and increasing the compliance department by 25 percent, to about 40 employees. In 2008, by contrast, the firm had just 10 people in its compliance department.

The S.E.C. filing details how Mr. Cohen encouraged employees to elicit information from a doctor involved in clinical trials. It also rounds out information concerning SAC’s controversial positions in the stocks of the drug makers Elan and Wyeth.

Mathew Martoma, a former SAC portfolio manager, was charged last year with securities fraud for illegally selling Elan and Wyeth shares in advance of negative news about a promising Alzheimer’s drug that was being developed by the two companies. Prosecutors said he had obtained confidential information about the drug from a doctor involved in its clinical trials. The government said Mr. Martoma traded on the information, helping SAC earn profits and avoid losses totaling $276 million.

Mr. Martoma has pleaded not guilty and is set to stand trial in November. The doctor, Sidney Gilman, has agreed to testify against Mr. Martoma in exchange for not being prosecuted.

The S.E.C.’s case provides additional information on Mr. Cohen’s role in SAC’s accumulation of large positions in Elan and Wyeth. In addition to relying on Mr. Martoma’s advice, Mr. Cohen, according to the S.E.C., received input on the companies from a former SAC employee referred to only as “Hedge Fund Manager A.”

The hedge fund manager is Wayne Holman, according to people briefed on the case. Mr. Holman, a health care stock specialist, was one of SAC’s highest-paid employees, earning more than $100 million before leaving in 2006 to start his own hedge fund, Ridgeback Capital Management, these people said.

Inside SAC, there was much internal debate over the soundness of holding such big, risky positions in Elan and Wyeth in advance of the impending announcement of the clinical trial’s results. After an analyst sent Mr. Cohen an instant message questioning the holdings, Mr. Cohen responded that he was following the advice of Mr. Martoma and Mr. Holman because “they are closer to it than you,” according to the court filing.

The analyst then replied to Mr. Cohen, “[I] don’t know if [Hedge Fund Manager A] or mat [Martoma] will answer, but do you think they know something or do they have a very strong feeling.”

Mr. Cohen replied: “[T]ough one … i think mat [Martoma] is the closest to it.”

Mr. Holman has not been accused of any wrongdoing. Bud G. Holman, Mr. Holman’s father and Ridgeback’s general counsel, did not return requests for comment.

A version of this article appeared in print on 07/22/2013, on page B1 of the NewYork edition with the headline: Case Reveals Cohen’s Links to Dubious Actions at SAC.

Article source: http://dealbook.nytimes.com/2013/07/21/s-e-c-case-reveals-cohens-links-to-dubious-actions-at-sac/?partner=rss&emc=rss

The Media Equation: Reporter on British Phone Hacking Is Entangled in Story

In the wake of that revelation came these results: both Rupert and James Murdoch, the chief executive and deputy chief operating officer of News Corporation, which owned The News of the World, were called before Parliament; the company decided immediately to close the 168-year-old newspaper; more than a dozen former employees have been arrested; the article about Milly Dowler by Mr. Davies and Ms. Hill won top honors from the Foreign Press Association in London last week; and a broad investigation by the Metropolitan Police of London called Operation Weeting yielded more than 5,800 victims.

Oh yes, and the police have zeroed in on one more reporter: Ms. Hill.

Last August, after the Milly Dowler story broke, Ms. Hill wrote an article about the arrest of James Desborough, the former Hollywood reporter for The News of the World. The police decided that their investigation had been leaked, a detective from Operation Weeting was arrested and Ms. Hill was brought in for questioning “under caution,” which means she was read her rights and any answers she gave could be used against her in a criminal case.

Ms. Hill was initially questioned on a charge that she had induced a police official to illegally share information. Then in September, word came that she might be charged under Britain’s Official Secrets Act. The police backed off that charge after a huge outcry in the British press, but she remained at risk of being prosecuted on the original charge.

After the investigation into her reporting was announced, Ms. Hill suddenly found herself hunted, with reporters from the tabloid press camped out at her doorstep, digging into her personal life and following her with cameras when she went shopping for groceries.

“I am amazed, given that what I was doing was good old-fashioned journalism,” she said in an interview at a coffee shop in Midtown Manhattan. “I have done nothing more than speak to a source, without confirming or denying who that source is, and to criminalize that is utterly shocking. It is beyond ‘Alice in Wonderland’ territory.”

To be clear, Ms. Hill is not being pursued on the grounds that she paid bribes to the police or used anything more technologically advanced than shoe leather to obtain her story.

“Amelia paid no one, hacked no one and just did her job as a journalist,” Mr. Davies, whose reporting broke open the scandal to begin with, said in an e-mail.

With all of the targets of opportunity — 28 journalists have been named so far in the investigation of bribes and hacking — Ms. Hill remains surprised that reporting that helped uncover the illegal conduct in the first place has made her a target.

“It shows how emotional the police have become,” she said, tugging at her big multicolored scarf. “They have let their fury and embarrassment caused by my reporting distract them from the heinous crimes that repeated investigations had failed to uncover and sought to criminalize my work as a reporter. I showed the inner machinery of their investigation, which is what journalists do.”

Perhaps, but the results were not typical. In a matter of days after the article she wrote with Mr. Davies on the Dowler affair appeared, The News of the World was closed.

“I’m not proud of that,” she said. “I don’t think that we need fewer papers, we need more. The reporters there were just collateral damage, sacrificed to save Rebekah Brooks, and she arguably was being used to protect James Murdoch.” Ms. Brooks, the chief of News International, the British newspaper arm of News Corporation, eventually resigned.

Britain is now in the midst of hearings that are broadly looking into the conduct of the press. Last week, the so-called Leveson hearings included a red carpet full of celebrities who testified that their private lives had been kidnapped by tabloid aggression.

Ms. Hill believes the inquiry has value, but she says that most of the British press was far too quiet when it came to the allegations raised by Mr. Davies’s reporting back in 2009.

“All of the organs of truth were in this complicit silence after Nick’s stories,” she said. “People were terrified of Murdoch and they have every right to be terrified. With the politicians he is friendly with, the newspapers and television stations, he was able to punish his enemies. Remember that he was within days of getting his hands on BSkyB when this story finally took hold.

“This is not like ‘The Wizard of Oz’ when they pulled back the curtain and it was just a little man sitting there. He has serious weaponry at his disposal in Britain,” she said.

There are fewer arrows in that quiver. Just as News Corporation was about to swallow the majority share of the satellite service BSkyB that it did not own, it found an enraged public and government at its throat. The News of the World is gone and word came last week that James Murdoch had stepped down as a director of two subsidiaries that publish Murdoch-owned newspapers in Britain.

Ms. Hill, who came to The Guardian from The Observer a year and a half ago and has a broad range of interests as a reporter, does not want to spend years chasing the fallout from the hacking story, but for the time being she is very much in the middle of it. The police have concluded their investigation into her reporting and she anxiously awaits word on whether the Crown Prosecution Service will proceed with the case.

It’s a predicament she does not find amusing.

“I’m trying not to be on tenterhooks and think about what happens if the Crown Prosecution Service takes on the case, but if I am honest, it’s gnawing away at me,” she said. “It is upsetting and destabilizing. I can’t ever quite forget the nightmare could explode again. And this time, it would be really serious.”

E-mail: carr@nytimes.com;

Twitter.com/carr2n

Article source: http://feeds.nytimes.com/click.phdo?i=8b7ef22798924322d94198af1e84b949