Is the US Justice Department About to Criminally Indict Steven Cohen’s Hedge Fund SAC Capital Advisors?

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Steven Cohen / Getty

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/By Clive Minchom/

Last week, the US Securities and Exchange Commission (SEC) indicted Steven Cohen personally on administrative civil charges, claiming he failed to properly supervise the employees of his hedge fund SAC Capital Advisors (SAC) in earlier insider trading scandals – that led to the criminal indictment of two of his employees; indictments which they are resisting.

At the time the Federal Justice department hinted that it might still pursue either him, or SAC itself, on criminal charges, with a five year statute of limitations on some counts expiring at the end of this month (and for some potential charges apparently not for another year).

It seems the US Government believes that a significant amount of his firm’s success may have come from insider trading, but it is reported to so far have been unable to build a case tying Mr. Cohen personally and directly to acts he knew to be illegal. Instead, the buzz on the street is that it is thought it may now try to treat the firm itself as a “person” for legal purposes, and indict the company instead, presumably giving itself an easier time in proving its case.

Today the American press is now awash with talk that the Justice Department may indeed be about to indict his company criminally with the un-stated, but obvious, probable minimum goal of shutting down his business, just as happened with Arthur Andersen in the Enron affair as this newspaper pointed out last week. In this case though, it is possible they might succeed in doing so even if the Government should lose a criminal case.

Much additional speculation today surrounds the big banks that do business with him, who it seems may now face the conundrum of whether to continue with “business as usual”, if the hedge fund should be charged criminally by U.S. prosecutors. All the big banks in New York, and particularly big clearing banks such Deutsche Bank, Goldman Sachs or JP Morgan may now have to weigh the risks to their reputation of continuing to provide lending, trading and prime brokerage services to a long-standing customer in the event criminal charges do indeed ensue.

Jonathan Gasthalter, a spokesman for SAC at strategic corporate communications firm Sard Verbinnen & Co., declined to comment on the banks’ dilemma. Cohen, himself has previously already denied any wrongdoing in trades his firm conducted, saying he acted appropriately. And, just this week the company is understood to have issued a 46-page internal response to its own embattled employees to the SEC proceedings, denying misconduct.

SAC also said in a regulatory filing this week that it still managed about US$13.9 billion of net assets as of July 1st, 2013. This would mean the flight of capital by some of its customers has so far been contained to a comparative trickle, rather than a flood. The firm previously is estimated earlier this year to have been overseeing as much as about US$9 billion for Steven Cohen and the company’s own employees and another US$6 billion for outside clients. That mix has so far helped it maintain a stable continuing operating base for its current total of around 1, 000 employees.

If, as a minimum, SAC should be forced to continue on without outside money it would be a great reputational and moral disaster, but not in itself terminal to its continued corporate existence. Many other hedge funds have closed to outside investors for good business reasons, and then continued as so-called family offices, managing their owners’ and employees’ money. The up to US$9 billion left of SAC’s assets that should remain as Mr. Cohen’s own money and his employees’ is clearly still far from chickenfeed.

Shutting down his outside money capabilities is an outcome that may indeed be the Justice Department’s fallback strategic goal, even if their evidence turns out to be too thin for a criminal conviction as it still sends a very loud message of deterrence to Wall Street. The disappearance of SAC would not lead to reduced competition in the hedge fund world; in this area of the market there are lots of fish in the sea, some of whom would doubtless be quite happy to mop up some of his customers.

It may also be a sound strategic alternative to the government, far preferable to indicting, say, a large bank on the same grounds. If there were more similar such situations out there an indictment of a large bank could be a different story.

In remarks he has probably regretted since making them, Eric J Holder, the Attorney General of the United States Government, seemed to say just that during Senate testimony in March, arguing that some banks were “too big to jail, ” as critics immediately paraphrased.

His exact words were: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. And I think that is a function of the fact that some of these institutions have become too large.”

Well unfortunately for Steven Cohen SAC may, in the words of Goldilocks, be just the right size…