Criminal charges loom for SAC

Steven Cohen’s hedge fund is being attacked on another front as regulators get ready to file criminal charges against SAC Capital Advisors.

Here’s the lead of the New York Times story:

Federal authorities are poised to level a criminal indictment against SAC Capital Advisors, the hedge fund run by the billionaire Steven A. Cohen, capping a nearly decade-long insider trading investigation into one of Wall Street’s most prominent firms.

Prosecutors and the F.B.I. in Manhattan are expected to announce the charges in the coming days, according to people briefed on the matter, who spoke only on the condition of anonymity. The move, a rare aggressive action against a big company, could cripple SAC.

It is unclear whether SAC’s lawyers will try to settle at the last minute, though that is an unlikely option at this point. Mr. Cohen is not expected to be charged criminally, though authorities are still contemplating bringing charges against other employees at SAC.

While the legal deadline for filing some insider trading charges may have already passed, authorities are planning to navigate around that requirement by filing a broader criminal conspiracy case against SAC, these people said. As long as one of the trades cited in the case took place in the last five years – and some did – then the government has the power to sweep in older trades to highlight a continuing scheme.

The Wall Street Journal offered this context on the power of criminal charges saying no major financial firm has survived them:

The action is anticipated barring any last-minute pact with SAC or other reversal of government strategy, according to people familiar with the matter.

There are no signs of settlement talks that would avert the charges. In May, SAC said it was no longer cooperating unconditionally with the probe by the Federal Bureau of Investigation and the Manhattan U.S. attorney’s office.

No major financial firm has survived a criminal indictment.

SAC had roughly $15 billion in assets as of the beginning of 2013 and around 1,000 employees.

While criminal charges against the firm would deal a huge blow to the firm’s founder and namesake, Steven A. Cohen, prosecutors aren’t planning charges against him personally, the people said.

Bloomberg’s Jonathan Weil wrote in an opinion piece, however, saying it might be difficult for the government to make the charges stick:

In a memo to employees this week, Cohen’s lawyers said Cohen didn’t read the e-mail, one of about 1,000 he received daily. Plus, the information was wrong. When Dell released its quarterly results two days later, its gross margins fell short of analysts’ estimates by 110 basis points (a fact that I was able to corroborate from news articles that day). Even if Cohen had read the e-mail, it was far from obvious that the source had breached any fiduciary duty to the company.

If the Justice Department goes through with an indictment and takes SAC to trial, it will have a lot of explaining to do as well. At a conference last week, Preet Bharara, the U.S. attorney for the Southern District of New York, told CNBC’s Jim Cramer that “I don’t think anyone is too big to indict” and that “no one is too big to jail.”

An indictment of SAC Capital, which has about $15 billion of assets under management, would do nothing to buttress this assertion. The Justice Department will need to clearly explain once and for all how it justifies giving deferred-prosecution or non-prosecution agreements to large financial institutions such as JPMorgan Chase & Co., UBS AG and Deutsche Bank AG — but not SAC Capital, especially when it couldn’t find a criminal case to bring against its owner.

Reuters pointed out how long prosecutors had been targeting SAC and quoted an expert as saying the government was frustrated with the whole enterprise:

Federal prosecutors have debated filing a criminal charge against Cohen’s 21-year-old hedge fund, one of the industry’s most successful, for many months. The fund is one of the largest payers of commissions on Wall Street, generating more than $300 million a year in trading fees alone for Wall Street brokerages.

Several legal experts, including former federal prosecutors, said the decision to charge the hedge fund, but not Cohen, with wrongdoing would be a tacit admission that the nearly seven-year investigation failed to find sufficient evidence of trading on illicit inside information by Cohen.

A criminal charge against SAC Capital would be one of the most high-profile corporate cases since U.S. prosecutors indicted accounting firm Arthur Andersen for its role in the Enron scandal, a move that effectively forced the audit firm to go out of business.

Some legal experts have questioned whether it is appropriate for prosecutors to charge SAC Capital with criminal wrongdoing but not charge the firm’s founder and leader.

“It’s part of an overall level of frustration about this whole enterprise, and so they’re trying to come at it from every possible angle to destroy this guy’s business,” said C. Evan Stewart, a defense lawyer and a partner Zuckerman Spaeder. “When the government gets an individual or company in its sights and decides that person’s not worth doing business, it’s going to use every tool.”

It will be interesting to see how long Cohen can fight and what exactly will happen to his fund. I’m also curious to see how the government charges the firm and Cohen himself will avoid criminal complaints. Next comes the fun part of reading the indictment – stay tuned.