BREAKINGVIEWS-Loyalty even to Steven Cohen has its limits

Tue May 21, 2013 1:02am IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Richard Beales

NEW YORK, May 20 (Reuters Breakingviews) - SAC Capital Advisors may have exhausted its reserves of investor loyalty. The U.S. government's intensifying legal onslaught at the $15 billion hedge fund firm probably will force the remaining outside investors, responsible for about $6 billion of the assets, to run. Even Cohen's legendary 25 pct annual returns at some point aren't worth the risk.

The latest developments include news that Cohen and colleagues have been subpoenaed to testify before a grand jury and SAC's decision late last week that it would no longer cooperate "unconditionally" with a federal insider trading investigation. The government's efforts have already ensnared a clutch of former SAC employees, though neither Cohen nor his firm has been accused of wrongdoing.

SAC previously tweaked its rules to give investors more time to decide whether to withdraw money. It couldn't have been an easy decision. On the back of his trading prowess, Cohen has for years been able to charge investors at least double the archetypal industry fees of 2 percent of assets and 20 percent of gains. Blackstone Group's (BX.N) fund of funds unit, for one, has taken a "wait and see" approach. The mounting legal distractions make it difficult to see how Blackstone and others can allow themselves to wait for much longer.

Prosecutors have been scrutinizing SAC's activities for almost seven years. A huge $616 million settlement with the Securities and Exchange Commission in March resolved a batch of civil allegations, but as it turns out the criminal authorities didn't back down. It now looks increasingly as though SAC is squarely in their sights – and Cohen himself may end up there, too.

Stellar returns, high fees, massive trading volumes, the accumulation of billions of dollars in personal wealth and an appetite for eye-catching expenditures have all probably contributed to Cohen's allure as a target. In fact, two big purchases – a $155 million Picasso and a $60 million Hamptons estate – were widely reported right after the SEC settlement was announced. The pugnacious fund boss may yet escape further legal trouble. Even if he does, though, SAC's most optimistic future looks to be as a family office.

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CONTEXT NEWS

- Steven Cohen has received a subpoena to testify before a grand jury in a U.S. government insider trading investigation into his hedge fund firm, SAC Capital Advisors, the New York Times reported on May 19, citing lawyers and executives briefed on the case.

- The $15 billion hedge fund told investors on May 17 it would no longer cooperate "unconditionally" with the U.S. government's insider trading investigation.

- The government's investigation into allegations of insider trading at Cohen's fund has been heating up over the past several months. SAC and the U.S. Securities and Exchange Commission in March reached settlements relating to some of the allegations for a record sum of $616 million, but the judge on the case did not grant unconditional approval to the deal.

- To date, nine current or former SAC employees have been charged with or implicated in insider trading while working at Cohen's fund.

- Reuters:

SAC Capital won't fully cooperate with govt -letter [ID:nL2N0DY231]

SAC Capital's Cohen gets subpoena to testify - NY Times [ID:nL3N0E10MM]

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- For previous columns by the author, Reuters customers can click on [BEALES/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

((richard.beales@thomsonreuters.com)(Reuters messaging richard.beales.thomsonreuters.com@reuters.net)) Keywords: BREAKINGVIEWS SAC/COHEN

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