(Adds comments from lawyer, industry investors)
By Svea Herbst-Bayliss and Katya Wachtel
NEW YORK, Nov 28 The U.S. government has told
hedge fund titan Steven A. Cohen's SAC Capital Advisors that it
is likely to face civil charges over alleged insider trading at
the $14 billion firm, a source familiar with the matter said on
SAC told investors on a Wednesday conference call that the
Securities and Exchange Commission had issued a so-called Wells
notice to the firm, according to the source, who listened to the
This puts new pressure on Cohen, who is one of the world's
biggest and best-known hedge fund managers. For years, his firm
has been dogged by allegations that it has relied on insider
information to deliver an average annual return of 30 percent
since Cohen founded it in 1992.
These kinds of returns have made Cohen, 56, a billionaire
many times over and drawn large funds of funds and wealthy
individual clients to his firm.
The news of the Wells notice also raises questions about
SAC's future and how investors are likely to react.
SAC told investors of the notice one week after the arrest
of Mathew Martoma, one of its former portfolio managers.
Authorities charged Martoma with using illegally obtained
information from a doctor about poor clinical results at two
healthcare companies - Elan Corp Plc ELN.I and Wyeth, which is
now owned by Pfizer Inc (PFE.N) - to recommend that SAC
eliminate a big position in their stocks. This recommendation
kept the firm from incurring millions of dollars in losses, the
Also last week, the SEC filed a civil securities fraud
charge against CR Intrinsic, the affiliated fund where Martoma
In seeking disgorgement of $276 million in profits and
avoided losses against CR Intrinsic, the SEC did not
specifically name SAC Capital in last week's civil complaint.
With the arrest of Martoma, the government has now charged
five former SAC employees with insider trading while working for
the Stamford, Connecticut-headquartered firm. In addition,
several others who once worked for Cohen also have been charged
with insider trading while working for other hedge funds.
Cohen, who the source said was on the Wednesday morning
conference call, has not been accused of wrongdoing.
While 60 percent of SAC's $14 billion in assets belong to
Cohen and his employees, the fund's strong and steady returns
have made it popular with outside investors as well. Blackstone
Group LP (BX.N) has been a long-term investor.
With so much of the money in SAC coming from wealthy
investors, the firm may not suffer from the kind of redemptions
that a fund dependent on pension fund money might.
The key will be what Blackstone Group’s big fund of funds
does, as it once had up to $500 million in SAC and is something
of a bellwether in the hedge fund industry. Blackstone’s
investors include smaller and midsize endowments that might get
itchy about SAC's Wells notice and pressure the fund of funds to
pull its money from the firm.
A spokesman for Blackstone did not return a call seeking
BEARING ALL LEGAL COSTS
On the conference call, SAC President Tom Conheeney again
told investors that the firm would bear all costs of defending
itself against any legal action, the source said.
Conheeney also said the SEC had questioned Cohen about this
matter earlier this year and that he had been responsive to all
of the government's questions.
SAC spokesman Jonathan Gasthalter said last week: "Mr. Cohen
and SAC are confident that they have acted appropriately and
will continue to cooperate with the government’s inquiry."
The FBI has been investigating SAC on and off since 2007.
Despite SAC's outstanding returns, the firm's reputation as
a rough-and-tumble trading shop has sometimes prompted advisors
to tell clients to get out or steer clear of the hedge fund.
Todd Petzel, chief investment officer of Offit Capital
Advisors, said he had never invested with SAC because of a lack
of transparency, even though he knows of the firm's "incredibly
demanding culture" through interactions with Cohen and former
"SAC will tell you that they have incredibly rigorous
compliance process," Petzel said. "I’m sure if this ever comes
to court they will demonstrate in court all the training that
every one of their portfolio managers goes through."
On the other hand, he said Cohen probably protected himself
by distancing himself from day-to-day activities.
The SEC usually issues Wells notices, which are often not
made public, to give firms plenty of warning that legal action
In the last year, hedge fund manager Philip Falcone and his
Harbinger Capital Partners said they had received such notices.
It is not clear when SAC got its notice.
"Certainly the Wells process and the public disclosure that
there is a Wells process with respect to a hedge fund is
something that is very challenging for the management of the
hedge fund," said Stephen Crimmins, a partner at law firm K&L
Gates in Washington.
Cohen and his top-flight legal team will probably work
around the clock to try to negotiate a resolution and avoid a
civil lawsuit, Crimmins said.
"It's a period of intense activity," he said. "It's a period
that usually doesn't last that long, so we should expect some
more news from SAC."
(Reporting By Svea Herbst-Bayliss and Katya Wachtel with
additional reporting by Emily Flitter and Sam Forgione; Editing
by Matthew Goldstein and Lisa Von Ahn)
((Svea.Herbst@thomsonreuters.com)(+1 617 856 4331))
Keywords: HEDGEFUNDS SAC/INSIDERTRADING
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