The government’s insider-trading investigation into SAC Capital Advisors, a Connecticut-based hedge fund that manages in excess of $15 billion, has been the subject of many press articles. But since neither the company, nor its leader Steven A. Cohen, has been indicted, it is impossible to know the limits of the government’s investigation. In April 2013, firm’s $602 million settlement with the SEC for insider trading was approved, and the firm neither admitted nor denied wrongdoing. But the firm’s woes are far from over: the Department of Justice has been investigating the firm as well and seems to be systematically working its way up the food chain. Will it make its way to the top?
Since late 2009, at least nine former SAC employees have been tied to insider trading and four have pleaded guilty. Most likely, some or all of the four who have pleaded guilty are cooperating with the government. One of those charged was Mathew Martoma, a portfolio manager charged with insider trading. A second is Michael Steinberg, who was arrested by the FBI in late January. Steinberg was a longtime portfolio manager at SAC Capital and, so far, is the most senior employee indicted. He was charged with conspiracy to commit securities fraud and securities fraud. Neither Martoma nor Steinberg have pleaded guilty.
The question then becomes, how high will the government try to go? Will it amass enough evidence to indict Steven A. Cohen, the famed leader of the firm? That may be the government’s ultimate goal, and one can certainly imagine the feather in a prosecutor’s cap should he or she lead a successful case against the billionaire executive or his ridiculously successful company.
Until recently, SAC Capital had been cooperating with the government, which usually means providing documents voluntarily, answering questions from agents and making employees available for interviews. It’s the usual tack of companies under investigation—cooperate in the hopes that the government will not bring charges against the company itself. On May 19, 2013, SAC Capital’s cooperation apparently came to an end.
Mr. Cohen and other executives reportedly received subpoenas from the government to testify before the grand jury. SAC Capital also received requests for more information. It is not clear whether Mr. Cohen has been notified that he is a target of the grand jury or whether the firm itself has been notified. Section 9-11.150 of the US Attorney’s Manual discourages–but allows–prosecutors to subpoena the target of a grand jury. In light of those subpoenas, SAC Capital appears to have drawn some sort of line in the sand. According to reports, it told investors in a letter this week that
While we have in the past told you of our cooperation with the government’s investigation, our cooperation is no longer unconditional.
This, in short, takes some cojones. Telling the government you will no longer cooperate is akin to waving the red flag in front of the bull. Though the government could have already concluded that there is not enough evidence to charge the company or Mr. Cohen individually, it seems more likely that the government intends to continue its investigation. Whether SAC Capital’s decision turns out to be a wise one remains to be seen, but it’s pretty refreshing to see a company decide not to help the government build the case against it. While such cooperation is understandable in light of shareholder pressures and the threat of penalties against the company, it’s always struck me as unseemly to strong-arm a company into spending millions of dollars in legal fees so that its outside counsel can do the work of the prosecutors and then hand over a roadmap to indictment. The folks who pay the price for all that cooperation? Usually it’s the corporate executives whose decisions become the prosecutors’ focus.
So, bravo, SAC Capital!