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Monday, 28 July 2014

Collateral damage

SAC staffers take the bullet meant for Cohen

Staffers at SAC Capital Advisors are taking the bullet meant for their billionaire boss, Steve Cohen. Seemingly unable to nail the hedge fund founder for insider trading, U.S. prosecutors have thrown the book of criminal charges at his firm instead. There’s too much spite mixed in with the justice.

The case on its face seems compelling. SAC and affiliates stand accused of securities and wire fraud, based on alleged insider trading by at least eight employees. Assuming they acted on the firm’s behalf, it is legally responsible for their conduct. Some have already pleaded guilty, so it’s tough to imagine the government losing.

Whether SAC can survive the legal onslaught is unclear. Insider trading cases forced several hedge funds like Diamondback Capital to fold, though the firms themselves weren’t charged. Wall Street may stop some trading with SAC, too. But the roughly $15 billion fund might still operate in some form. Even with most remaining outside investors pulling out their cash, Cohen and his colleagues own more than half the capital.

Then there’s the fate of the staff. The allegedly illegal transactions were conducted at least three years ago by traders now either departed or on leave from the company. The largest deals – like Mathew Martoma’s trades that allegedly netted some $276 million in profit – haven’t yet been proven illegal. Still, about 1,000 SAC employees are now under a black cloud.

With moneymaking skills always in demand, many portfolio managers will probably land on their feet if the firm goes under. The support staff, assistants and others will have a harder time, especially in a still shaky economy.

Prosecutors have typically shown themselves skittish about putting companies out of business since accounting firm Arthur Andersen’s demise in the wake of the Enron fiasco a decade ago. During the financial crisis, the government shied away from indicting big financial institutions for fear of roiling the economy, even in the face of bailouts and potentially criminal behavior.

Yet Uncle Sam seems set on ensuring the much smaller SAC’s demise. After almost seven years pursuing Cohen with nothing to show for it, turning against his hedge fund smacks of vindictiveness. Though the billionaire still faces a Securities and Exchange Commission case that could drive him from the industry, he can fall back on his billions. Many of his minions won’t have that option.

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Context News

U.S. prosecutors in New York announced criminal charges on July 25 against SAC Capital Advisors, the roughly $15 billion hedge fund founded and managed by Steven Cohen. The four counts of securities fraud and one count of wire fraud were based on alleged insider trading by at least eight employees of SAC and various affiliates from 1999 to 2010. The “systematic insider trading” enabled the firm to earn hundreds of millions of dollars in illegal profits and avoided losses, according to the indictment.

The U.S. attorney’s office also filed a civil case seeking money laundering penalties and a freeze on SAC assets.

On July 19, the Securities and Exchange Commission filed a lawsuit accusing Cohen of failing to supervise two portfolio managers, Mathew Martoma and Michael Steinberg, who stand accused of trading illegally in shares of Dell and two pharmaceutical companies, Elan and Wyeth. The case before an administrative law judge could result in a ban on Cohen’s management of outside investors’ money. Cohen has denied any wrongdoing and said he will fight the charges.

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