January 24, 2022

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

DealBook: Charmed Life Now Ensnared in a Trading Inquiry

8:55 p.m. | Updated

Friends of Michael S. Steinberg had always marveled at his good fortune.

In his mid-20s, he landed a job a SAC Capital Advisors, then a small hedge fund owned by Steven A. Cohen, who was fast developing a reputation on Wall Street as a stock trading wizard. As SAC posted stupendous returns year-after-year and became one of the world’s largest hedge funds, Mr. Steinberg earned tens of millions of dollars trading as a close associate of Mr. Cohen, and rose within the firm.

When Mr. Steinberg married at the Plaza Hotel a few years after joining SAC, his boss attended the black-tie affair. Mr. Steinberg and his family moved into an $8 million Park Avenue co-op and summered in the Hamptons. He also gave back, helping found Natan, a philanthropy that promotes Israel and Jewish culture.

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Then, his charmed life came undone.

On Friday, Mr. Steinberg became the most senior SAC employee to be ensnared in the government’s multiyear insider trading investigation. F.B.I. agents showed up at his apartment on the Upper East Side of Manhattan and arrested him in the pre-dawn hours. Just the day before, Mr. Steinberg had returned from a vacation in Florida, where he and his family visited relatives and took a trip to Disney World.

Later on Friday, Mr. Steinberg, 40, in a black V-neck sweater and charcoal-gray slacks, appeared in Federal District Court in Manhattan and pleaded not guilty. Judge Richard J. Sullivan freed him on $3 million bail.

“Michael Steinberg did absolutely nothing wrong,” Barry H. Berke, a lawyer for Mr. Steinberg, said in a statement. “Caught in the cross-fire of aggressive investigations of others, there is no basis for even the slightest blemish on his spotless reputation.”

The arrest was the latest in a whirlwind of activity related to the government’s investigation of SAC. For years, federal agents have been building a case against the fund. This month, SAC agreed to pay $616 million to settle two civil insider trading actions brought by the Securities and Exchange Commission. On Thursday, a federal judge refused to approve the larger settlement of $602 million, raising concerns over a provision that lets SAC avoid an admission of wrongdoing.

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Including Mr. Steinberg, nine current or former SAC employees have been linked to insider trading while at the company; four have pleaded guilty. Some of the former employees who have been implicated hardly knew Mr. Cohen, who operates a sprawling $15 billion fund with more than 1,000 employees across the globe.

But Mr. Cohen and Mr. Steinberg were close. Mr. Steinberg is one of SAC’s most veteran employees, though he was recently placed on leave soon after being tied to an earlier case. He joined SAC shortly after graduating from the University of Wisconsin. When he began at SAC, it was just Mr. Cohen and several dozen traders. For years, he sat near Mr. Cohen on the trading floor in the fund’s headquarters in Stamford, Conn., and he was part of a team of tech-stock traders that posted outsize returns during the dot-com boom and bust. Later, he helped start Sigma Capital, an SAC unit in Midtown Manhattan.

While years apart, the two share the same hometown — Great Neck, N.Y., on Long Island, where both attended Great Neck North High School. They also share a love of art; Mr. Steinberg introduced Mr. Cohen to his childhood friend Sandy Heller, who became Mr. Cohen’s longtime art adviser.

In the past, SAC has distanced itself from former employees charged with insider trading, but on Friday, it issued a statement in support of Mr. Steinberg: “Mike has conducted himself professionally and ethically during his long tenure at the firm. We believe him to be a man of integrity.”

Federal investigators have tried to press lower-level SAC employees for information in helping them build a case against Mr. Cohen. In one instance, F.B.I. agents showed a former trader a sheet of paper with headshots of his former colleagues, with Mr. Cohen at the center. The agents compared the SAC founder to an organized-crime boss who sat atop a corrupt organization.

The pressure on Mr. Cohen, 56, escalated in November, when prosecutors charged Mathew Martoma, a former SAC portfolio manager, with trading in the drug stocks Elan and Wyeth based on confidential drug trial data that a doctor had leaked to him. Mr. Cohen was involved in drug stock trades, but the government has not claimed that he possessed any secret information. Those trades were the subject of the S.E.C. civil action that SAC settled for $602 million. Mr. Martoma has pleaded not guilty and has refused to cooperate with investigators.

Mr. Cohen has not been accused of any wrongdoing and has told his investors that he believes he has acted appropriately at all times.

Amid his legal woes, Mr. Cohen, whose net worth is estimated at about $10 billion, has gone on a shopping binge in recent days, paying $155 million for the Picasso painting “Le Rêve” and $60 million for an oceanfront estate in East Hampton on Long Island.

Mr. Steinberg’s name surfaced last fall, when a former SAC analyst pleaded guilty to being part of an insider-trading ring that illegally traded the technology stocks Dell and Nvidia. As part of his guilty plea, the analyst, Jon Horvath, implicated Mr. Steinberg, saying that he gave the confidential information to Mr. Steinberg and that they traded based on that data. On Friday, federal prosecutors charged Mr. Steinberg with conspiracy and securities fraud, accusing him of participating in the illegal Dell and Nvidia trades. The Securities and Exchange Commission filed a parallel civil lawsuit against Mr. Steinberg.

Last year, a jury convicted two hedge fund managers at other firms related to the Dell and Nvidia trades. E-mails from Mr. Steinberg that emerged in that trial were included in the indictment on Friday.

In one e-mail from August 2008, sent a few days before Dell’s quarterly earnings announcement, Mr. Horvath disclosed secret details about Dell’s financial data to Mr. Steinberg.

Mr. Horvath wrote that he had “a 2nd hand read from someone at the company.” He added, “Please keep to yourself as obviously not well known.”

Mr. Steinberg replied: “Yes normally we would never divulge data like this, so please be discreet.”

In another e-mail from the trial, Mr. Steinberg told Mr. Horvath and another portfolio manager, Gabe Plotkin, about a conversation he had with Mr. Cohen about conflicting views of Dell inside SAC. Mr. Plotkin owned a large Dell position, while Mr. Steinberg was short, meaning that he thought shares of Dell would drop in value.

“Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print” — meaning ahead of the company’s earnings release — “as we are on opposite sides of this one,” Mr. Steinberg wrote.

Since his name surfaced in the investigation, Mr. Steinberg has occasionally spent evenings in New York hotels to avoid being handcuffed at home in front of his two children. Federal agents refused to let Mr. Steinberg surrender of his own volition at F.B.I. headquarters downtown, expressing the view that white-collar defendants should not be given special treatment.

Michael Steinberg entered a plea of not guilty in Federal District Court in Manhattan on Friday and was freed on $3 million bail.John Marshall Mantel for The New York TimesMichael Steinberg entered a plea of not guilty in Federal District Court in Manhattan on Friday and was freed on $3 million bail.


This post has been revised to reflect the following correction:

Correction: March 29, 2013

Because of incorrect information supplied by prosecutors, an earlier version of this article gave the wrong age for Michael Steinberg, the SAC Capital Advisors portfolio manager who was arrested on Friday. He is 40, not 41.

A version of this article appeared in print on 03/30/2013, on page A1 of the NewYork edition with the headline: F.B.I. Arrests Senior Trader At Hedge Fund.

Article source: http://dealbook.nytimes.com/2013/03/29/sac-capital-manager-arrested-on-insider-trading-charges/?partner=rss&emc=rss

DealBook: ‘Historic Penalties’ in Trading Cases Against Hedge Fund

One of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.Spencer Platt/Getty ImagesOne of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.

10:58 p.m. | Updated

The government’s multiyear campaign to ferret out insider trading on Wall Street has yielded multiple prosecutions of former employees of SAC Capital Advisors, the giant hedge fund owned by the billionaire investor Steven A. Cohen.

On Friday, federal authorities took aim at the fund itself.

In what officials called the largest settlement of an insider trading action, SAC agreed to pay securities regulators about $616 million to resolve two civil lawsuits related to improper trading at the fund.

The landmark penalty exceeds, at least before adjustment for inflation, the fines meted out in the 1980s-era scandals involving Ivan F. Boesky and Michael R. Milken, records at the time. It also underscores SAC’s central role in the government’s recent push to prosecute illegal conduct on trading desks and in executive suites, an effort that has yielded about 180 civil actions and more than 75 criminal prosecutions.

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“These settlements call for the imposition of historic penalties,” said George S. Canellos, the Securities and Exchange Commission’s acting enforcement director.

Mr. Canellos said the resolutions did not prevent the future filing of additional charges against any person, specifically citing Mr. Cohen, who was not named as a defendant in the civil actions on Friday. Mr. Cohen has not been charged with any wrongdoing and has told his clients that he believes he has behaved properly.

In one case, the agency said a SAC unit would forfeit $600 million to settle claims that it sold nearly $1 billion in shares of two pharmaceutical companies after a former portfolio manager at the fund received secret information from a doctor about problems with a new drug for Alzheimer’s disease. Separately, another SAC affiliate agreed to pay $14 million to resolve its role in an insider trading ring that illegally traded technology stocks, including Dell.

For SAC, which is based in Stamford, Conn., manages $15 billion and holds one of the best investment records on Wall Street, the settlements, while a humbling blow to its reputation, resolve a matter that caused some of its investors to withdraw their money. Investors became skittish last fall after regulators warned SAC that they planned to sue the fund.

“These settlements are a substantial step toward resolving all outstanding regulatory matters and allow the firm to move forward with confidence,” said Jonathan Gasthalter, a spokesman for SAC.

The settlements still need to be approved by Judge Victor Marrero of Federal District Court in Manhattan, the presiding judge in the case. As part of its agreement with regulators, SAC neither admitted nor denied wrongdoing. That entrenched S.E.C. practice — permitting defendants to settle federal regulatory charges without acknowledging that they actually did anything wrong — has come under increased scrutiny by the courts.

The cases brought on Friday echo earlier prosecutions of former SAC employees. In December, prosecutors indicted Mathew Martoma, a former SAC portfolio manager at the center of the questionable drug-stock trades tied to a new Alzheimer’s drug. And Jon Horvath, a former SAC analyst, pleaded guilty last year to participating in the Dell insider trading ring. In its legal filing on Friday, the S.E.C. said that Mr. Horvath had leaked secret information to two colleagues; previously, the commission said that only one former SAC employee had received tips.

A lawyer for Mr. Martoma said SAC’s resolution of the two lawsuits had no bearing on his client, who has denied the charges.

“SAC’s business decision to settle with the S.E.C. in no way changes the fact that Mathew Martoma is an innocent man,” said Charles A. Stillman, the lawyer. “We will never give up our fight for his vindication.”

On a conference call with reporters, government officials bragged that the $616 million amount dwarfed other prominent insider trading settlements. Raj Rajaratnam, the former hedge fund manager convicted in 2011, paid $156 million in combined criminal and civil penalties. Mr. Boesky, a central figure in the 1980s trading scandals, paid $100 million then.

The sum also exceeds the amounts of older enforcement actions, including a $550 million settlement with Goldman Sachs in 2010 related to fraud accusations tied to the sale of mortgage investments, and a $400 million settlement with Mr. Milken, the junk bond financier, in 1990.

The larger of the two cases settled on Friday was based on powerful evidence against Mr. Martoma, the former SAC portfolio manager. The government said Mr. Martoma had caused SAC to sell nearly $1 billion in shares of Elan and Wyeth because he obtained secret information from a doctor about clinical trials for a drug being developed by the companies. Prosecutors have secured the testimony of the doctor who reportedly leaked Mr. Martoma the drug trial data.

In bringing the criminal charge against Mr. Martoma, prosecutors appeared to be moving closer to building a case against Mr. Cohen. The complaint noted that Mr. Cohen had a 20-minute telephone call with Mr. Martoma the night before SAC began dumping its holdings. Prosecutors, though, have not contended that Mr. Cohen knew that Mr. Martoma had confidential data about the drug’s prospects.

The F.B.I. has tried unsuccessfully several times to persuade Mr. Martoma to plead guilty and cooperate against Mr. Cohen.

While a prodigious sum, the settlement is less than the maximum amount the S.E.C. could have extracted from the hedge fund. The agreement required SAC to pay about $275 million in disgorged illegal gains and $52 million in interest. In addition, SAC agreed to pay a $275 million penalty, an amount equal to the illicit gains. Under law, however, the S.E.C. could have secured a penalty of three times that amount, or $825 million.

The forfeited money will come from SAC, meaning that the firm will write the government a check. SAC’s investors will not pay anything or absorb any losses. The $616 million will go into a general revenue fund of the United States Treasury.

Representing SAC in its talks with the S.E.C. were Martin Klotz of Willkie Farr Gallagher and Daniel J. Kramer of Paul Weiss Rifkind Wharton Garrison.

While the resolution of these two cases provides a measure of relief to SAC and its clients, the hedge fund’s legal problems have already damaged its business. Though SAC has returned about 30 percent annually to its investors over the last two decades — a virtually peerless track record — many of its clients have parted ways with the fund.

Last month, SAC investors asked to withdraw $1.7 billion, more than a quarter of the $6 billion that the fund manages for outside clients. The balance of SAC’s $15 billion belongs to Mr. Cohen and his employees. The next regularly scheduled deadline for SAC clients to ask for their money back is mid-May.

SAC’s performance has been solid in the opening months of 2013, with its fund up 3.4 percent through the end of February. In calls with concerned clients, SAC has highlighted its stepped-up efforts in building its legal staff and compliance procedures — an initiative that Mr. Gasthalter, the spokesman, reiterated on Friday.

“We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm,” he said.

On a conference call discussing the case, Mr. Canellos, the S.E.C. enforcement director, was asked whether the commission felt that SAC was committed to keeping a strong culture of compliance.

“I sure hope they are,” Mr. Canellos said.


This post has been revised to reflect the following correction:

Correction: March 16, 2013

An earlier version of this article incorrectly reported the amount of the settlement because rounded numbers were added. Adding the exact numbers and then rounding, the total is $616 million, not $614 million.

Article source: http://dealbook.nytimes.com/2013/03/15/sac-settles-insider-trading-cases-for-616-million/?partner=rss&emc=rss

DealBook: SAC Settles Insider Trading Cases for $614 Million

One of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.Spencer Platt/Getty ImagesOne of the cases involves a former SAC employee Mathew Martoma, who still faces S.E.C. and criminal charges on trades involving two drug makers.

2:16 p.m. | Updated

Two affiliates of SAC Capital, the giant hedge fund, settled insider trading charges with the Securities and Exchange Commission for $614 million on Friday, in what the agency was the biggest ever settlement for such cases.

The settlements spare SAC’s founder, the billionaire Steven A. Cohen, who hasn’t been charged with wrongdoing. Mr. Cohen, one of the most successful hedge fund managers in the world, has long been considered a target of federal investigators.

But the settlements represent one of the biggest financial coups by the S.E.C. in insider trading cases yet. The amounts paid by SAC surpass the $400 million that Michael Milken paid to settle charges by the agency in 1990.

One affiliate of SAC, CR Intrinsic, agreed to pay over $600 million over charges tied to one of its employees, who is accused of trading on illicitly obtained confidential information about the drug makers Elan and Wyeth.

That employee, Mathew Martoma, still faces both civil charges from the S.E.C. and criminal charges from the Justice Department.

A lawyer for Mr. Martoma, Charles Stillman of Stillman Friedman, said in a statement: “SAC’s business decision to settle with the S.E.C. in no way changes the fact that Mathew Martoma is an innocent man. We will never give up our fight for his vindication.”

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The other affiliate, Sigma Capital Management, agreed to pay $14 million to settle charges that it engaged in insider trading in the stocks of Dell and Nvidia.

Hedge Fund Inquiry

SAC’s management company will pay the settlements, meaning that investors of the hedge fund aren’t on the hook.

The settlements, especially that of CR Intrinsic, represent more successes by the federal government in its campaign against insider trading.

“The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the S.E.C. will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” George S. Canellos, the acting director of the S.E.C.’s enforcement division, said in a statement.

A spokesman for SAC said in a statement, ““We are happy to put the Elan and Dell matters with the S.E.C. behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

Article source: http://dealbook.nytimes.com/2013/03/15/sac-settles-insider-trading-cases-for-614-million/?partner=rss&emc=rss

DealBook: Insider Inquiry Sends a Recluse Into the Public Eye

Steven A. Cohen, the founder and chairman of SAC Capital Advisors, a $14 billion hedge fund.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.

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

An earlier version of this article misstated the size of Steven A. Cohen’s mansion in Greenwich, Conn. It is 35,000 square feet, not 14,000.

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

DealBook: Starting Up, Funds Turn to ‘Seeders’

Far from Wall Street, few have ever heard of Robert T. Discolo. But in the world of hedge funds, Mr. Discolo is one popular guy.

He oversees a seeding fund at PineBridge Investments, which means he provides cash for hedge fund start-ups whose managers harbor dreams of becoming the next Steven A. Cohen or John A. Paulson.

While seeding funds have been around for the better part of two decades, they are staging a recovery as more prospective fund managers spill into the market but struggle to attract investors.

Executives at seeding funds say it has never been easier to find talented hedge fund managers eager for cash.

“This is probably the best environment I’ve seen since I started in the business back in 1988,” said Mark Jurish of Larch Lane Advisors, which is PineBridge’s seeding partner.

DESCRIPTIONChester Higgins Jr./The New York Times Robert T. Discolo, right, of PineBridge Investments, with Mark Jurish of Larch Lane Advisors. Together, the two firms are now creating a $1 billion seeding vehicle.

The hard part, however, is finding great investment strategies and backing funds that will not wilt and die.

Just a few years ago, analysts, traders and others on Wall Street who wanted to open up their own hedge fund shops practically had money raining from the skies. The joke inside Goldman Sachs was that if you couldn’t raise more than $1 billion to open up your hedge fund, don’t even bother.

What has changed is that many investors, including pension funds and university endowments, now are more inclined to put money into established hedge funds with proven track records rather than bet on start-up managers.

Also, the start-ups are turning to seeders with back-office resources as costs rise to comply with new hedge fund regulations that require compliance officers, audits and more disclosures.

As a result, a number of firms — including the Blackstone Group, Goldman Sachs, Reservoir Capital and upstart seeder firms like NewAlpha Asset Management — have been raising money from investors to place with new managers.

An investment in a hedge fund that becomes a sensation can be lucrative for the seeders, who typically take equity stakes in the hedge funds or a portion of the fees the hedge funds generate, typically 2 percent of total assets and 20 percent of any profits.

Industry titans David E. Shaw of D.E. Shaw and Daniel S. Och of Och-Ziff Capital Management, whose firms oversee a combined $50 billion, both started with money from seeding funds in the late 1980s and early 1990s.

Of course, for every Shaw or Och there are dozens or even hundreds of hedge fund managers who flamed out or simply never attracted enough cash from outside investors.

Despite lackluster returns in recent years, the hedge fund industry has rebounded sharply. Its assets have surpassed the 2008 peak and now stand at more than $2 trillion, according to Hedge Fund Research, based in Chicago.

Seeders are raising more cash too. The amount of capital expected to be invested with emerging managers in the first half of this year is expected to total around $2.5 billion, according to the results of a survey of about 40 global hedge fund seeders conducted by the Acceleration Capital Group, a New York-based firm. While that amount is double what a similar survey showed in 2009, it is well off the $7.5 billion that emerging managers expected in the industry’s heyday in late 2008, according to data from the firm.

Even with the revival, it can be tough to get the attention of a top seeding executive.

“You call them, you call them again and then you call them again,” said Steven R. Gerbel, the founder of one hedge fund firm, Chicago Capital Management. “Finally you get through and you’re told 12 bogus reasons why you’re not getting a seed. It is incredibly frustrating and horrifically painful.”

Mr. Gerbel says he has spent years searching for someone to provide capital to increase the size of his fund, which manages about $36 million and says in its marketing materials that it averages yearly returns of around 19 percent.

Recently, Mr. Gerbel said, one potential seeder told him his firm had too much infrastructure — investor support and regulatory compliance — while another said he didn’t have enough.

“I’ve come to the conclusion that my infrastructure is properly sized,” he grumbled.

While Mr. Gerbel would welcome the money, he is less than thrilled with the onerous terms of the seeding deal itself.

“The seed capital providers own it all: the stadium, the bats, the balls, the bases, your uniform, your cleats, the field and the concessions,” said Mr. Gerbel. “And if you want to play you just have to live with it.”

More managers are in the market in part because Wall Street shed certain businesses like proprietary trading in the wake of the financial crisis. Not all of them have a compelling investment strategy.

“In today’s world, you have a more attractive world of partnering with the talent and less attractive world of strategies,” said Daniel H. Stern, the chief executive of Reservoir, who has seeded a number of successful hedge funds, including Och-Ziff, across Wall Street over the years.

Mr. Discolo at PineBridge said that recently managers had been knocking on doors with funds looking to invest overseas, particularly in Asia. And then there are the truly unusual strategies, Mr. Discolo said, noting that he had seen funds that were planning to invest in leveraged life insurance settlements, receipts for televisions stored in warehouses and Pakistani equities.

The Larch Lane-PineBridge partnership is in the midst of raising a $1 billion seeding vehicle that will invest in about a dozen hedge funds. The seeder fund has already backed an equity fund managed by Stonerise Capital of San Francisco and a United States bank-loan fund managed by the Boston-based Feingold O’Keeffe Capital, according to a report on Hedge Fund Alert.

PineBridge is the renamed former asset-management arm of the American International Group, which sold it to the Asia-based Pacific Century Group in 2010.

PineBridge’s press relations firm declined to comment on the fund, citing Securities and Exchange Commission restrictions on hedge fund marketing activities.

In general terms, however, Mr. Discolo said a selective seed manager might invest in about one out of every 100 hedge fund managers.

“Everybody thinks they’re going to be the next Marc Lasry,” Mr. Discolo said, referring to the manager of Avenue Capital, which oversees $13.7 billion. “He’s a great manager, but there are not that many Marc Lasrys out there.”

Article source: http://feeds.nytimes.com/click.phdo?i=f622bff7c4054e9a096dd0adf42a597a

DealBook: Guilty Plea Expected in Hedge Fund Case

11:46 a.m. | Updated
Samir Barai, a former Citigroup executive who ran Barai Capital Management, is expected to plead guilty on Friday afternoon to insider trading before a magistrate at the Federal District Court in Manhattan, a person briefed on the matter told DealBook.

The government charged Mr. Barai in February with swapping illegal stock tips with two portfolio managers at SAC Capital, the hedge fund run by the billionaire investor Steven A. Cohen. The two SAC managers, Noah Freeman and Donald Longueuil, have already pleaded guilty. A fourth person, Jason Pflaum, an employee of Mr. Barai’s, has also pleaded guilty.

When Mr. Longueuil pleaded guilty last month, he said that he had bought shares in Marvell Technology Group after receiving a tip about the chipmaker’s financial information from Mr. Barai.

Evan Barr, a lawyer for Mr. Barai, declined to comment. A spokeswoman for the United States attorney in Manhattan declined to comment.

The case is connected to the government’s investigation of expert-network firms that facilitate meetings between money managers and industry experts, including employees of public companies. A number of consultants at Primary Global Research, an expert-network firm at the center of the government’s investigation, have already pleaded guilty to providing traders with confidential information about publicly traded companies.

“Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual,” said Preet Bharara, the United States attorney in Manhattan, at an earlier news conference discussing expert-network firms. “We are talking about something verging on a corrupt business model.”

Mr. Barai, 39, was a former client of Primary Global. He has been cooperating with federal prosecutors and providing them with information about his illegal trading, according to court filings. The government has charged him with trading on secret corporate information provided to him by Winifred Jiau, a consultant at Primary Global.

Ms. Jiau, who has pleaded not guilty, is scheduled to go to trial on Wednesday.

Also Friday, Sonny Nguyen, a former employee at Nvidia, a graphics chipmaker, is expected to plead guilty to providing Ms. Jiau with confidential information about his company. He is expected to testify at Ms. Jiau’s trial.

Mr. Nguyen’s lawyer could not immediately be identified.

“Nvidia placed Mr. Nguyen on administrative leave immediately upon our being informed of his intent to plead guilty, and he has now resigned,” said the company in a statement provided to DealBook. “This was a clear violation of law and our company policies. We continue to cooperate fully with the New York U.S. attorney’s office and the F.B.I.”

Article source: http://feeds.nytimes.com/click.phdo?i=68d44187a992553cbc84f1c3ccf9f7ff

DealBook: Grassley Investigating Trades Made by SAC Capital

Senator Charles E. Grassley, Republican of Iowa, is examining 20 stock trades by the hedge fund SAC Capital Advisors, a spokesman for the lawmaker said Saturday.

The inquiry is the result of a letter sent by Mr. Grassley on April 26 to the Financial Industry Regulatory Authority asking it to provide information on the “potential scope of suspicious trading activity” at SAC, the hedge fund run by the billionaire investor Steven A. Cohen.

Mr. Cohen’s firm, one of the largest hedge funds in the world, has become ensnared by the government’s vast investigation into insider trading at hedge funds. The investigation resulted in the conviction earlier this month of Raj Rajaratnam, the head of the Galleon Group.

As part of an investigation separate from the one involving Mr. Rajaratnam, two SAC portfolio managers have pleaded guilty to making illegal trades based on secret corporate information. Neither SAC nor Mr. Cohen has been charged with any wrongdoing. A firm spokesman has said that SAC was “outraged” by the conduct of the two portfolio managers, Noah Freeman and Donald Longueuil.

Steven A. CohenSteve Marcus/Reuters SAC Capital Advisors, run by Steven A. Cohen, is one of the largest hedge funds in the world.

In his letter to the financial authority, known as Finra, Mr. Grassley, the ranking Republican on the Senate Judiciary Committee, said that “while SAC Capital itself has not been charged, these allegations raise serious questions about the corporate culture at SAC Capital and undercut investor confidence in a fair and balanced playing field.”

Finra provided Mr. Grassley with details of SAC’s trading last week. The stock transactions were made over the last decade and previously were referred to the Securities and Exchange Commission. They included trades made around the time of merger announcements or other market-moving events.

News of the SAC trades that Finra provided to Mr. Grassley was first reported by The Wall Street Journal.
Earlier this month, SAC executives, including Peter Nussbaum, the firm’s top lawyer, and its outside counsel met with staff members in Mr. Grassley’s office to discuss his inquiry.

“We welcomed the opportunity to meet with the staff to educate them about the firm and our compliance efforts, and had an entirely appropriate, professional and cordial meeting. We will continue to cooperate in any way we can,” SAC said in a statement provided Saturday by a firm spokesman.

Mr. Grassley’s aggressive stance toward SAC follows the senator’s past criticism of the S.E.C. for not being vigilant enough in its pursuit of illegal activity on Wall Street, including its failure to uncover frauds including Bernard L. Madoff’s Ponzi scheme. Now Mr. Grassley’s attention has turned to insider trading.

“The use of nonpublic information for insider trading purposes is sadly alive and well in our nation’s financial markets,” Mr. Grassley wrote in his letter to Finra. “More must be done to investigate and bring these criminals to justice.”

Article source: http://feeds.nytimes.com/click.phdo?i=db0db0306c233454d1df7f8460641096