game Over For Steve Cohen’s SAC Capital

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U.S. prosecutors are continuing the crackdown on insider trading, pursuing the hard line that has been their policy for the last ten years and giving a clear message to all professionals that sooner or later, perpetrators will be caught and subjected to hefty fines and possibly also to imprisonment.

A lot of recent cases have ended with arrests and with the respective money management companies being closed. That was the case with Rat Rajaratnam and his Galleon Group, and also with Michael Steinberg, Matthew Martoma and other portfolio managers at Sac Capital although, as yet, SAC Capital has not been closed.

SAC Capital has found its employees at the heart of a number of insider trading cases in the last few years. The US SEC has, it seems, been looking to nail it’s SAC’s head, Steve Cohen, for quite some time. Thus far, the Feds have managed to charge several of its employees over the last five years but the big man has eluded them.

The cases against SAC to date, have centered around the firm’s use of a “network of experts” & where many SAC employees, other companies’ portfolio managers, and specialised experts could share their views and ideas. In the Fed’s eyes, it seems that these ideas were basically non-public valuable information, and which helped SAC keep a record of profits averaging 30% per year since 1992. Dell, Nvidia, Elan, Wyeth etc are just some of the companies SAC traded on insider information with

With more than ten former employees being charged with insider trading, investors have begun to ask questions over SAC’s future prospects. A wave of withdrawals started at the beginning of this year.

In March, prosecutors made an important arrest of a former SAC portfolio manager, Michael Steinberg, and which put an additional thorn in Cohen’s shoe. A few weeks later, SAC agreed to pay a record fine of $616 million in civil penalties to settle two insider trading cases.

According to the WSJ and Bloomberg, game over is now nearing for Cohen and his beloved SAC Capital. It has been said that Cohen is considering a deal with prosecutors that would shut his $15 billion fund to outside investors. It is likely that he will however continue on in the investment management business but just for friends and family as more than $8 billion of the firm’s capital belong to SAC’s employees, including Steve Cohen.

At the same time, Cohen’s lawyers are considering a deferred prosecution agreement, which essentially admits wrongdoing. It seems that Cohen may have been using more than just arbitrage techniques to produce the all important alpha and beat the market…

Even though the Feds are considering criminal charges against SAC, Steve Cohen will certainly not end up in prison as Raj Rajaratnam. SAC will most likely be forced to close its doors and to pay some very heavy fines. The deferred prosecution agreement, under US law, results in criminal charges being filed but settled at the same time. SAC will be subject to onerous operating conditions and also be under outside surveillance

SBM has been covering this case for quite some time now and it appears we were right when we added SAC Capital to the list of the biggest insider traders of all time on our latest mag edition (May edition, page 8

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