The Justice Department did not file criminal charges accusing Steven A. Cohen of insider trading, but it did the next best thing by indicting his firm, SAC Capital Advisors. While the criminal case is likely to result in a conviction of SAC on at least some charges, a companion civil asset forfeiture action filed the same day gives the government a means to try to take a sizeable chunk of his fortune if the criminal case does not do so.
Whether prosecutors can succeed in forcing Mr. Cohen to give up billions of dollars of assets will depend on showing that insider trading so infected SAC that much of its money should be forfeited as the tainted proceeds of money laundering.
The Justice Department charged SAC with committing wire and securities fraud for insider trading by a number of its analysts and traders. Under the principle of corporate criminal liability, the acts of an agent are attributed to the organization when it comes in the course of the person’s employment and was intended to benefit it. As I discussed in an earlier post, the fact that six former employees pleaded guilty to insider trading means the firm will most likely be convicted based on their crimes.
The potential penalties for those violations are unlikely to be significant compared with the approximately $9 billion Mr. Cohen and other SAC employees have invested in its hedge funds. The fines are capped at $25 million for the four securities fraud cases and twice the benefits from the wire fraud violations, a total that is unlikely to go much above $500 million at the high end.
The indictment also includes a request that the firm forfeit its profits from the insider trading, but SAC has turned over approximately $280 million to the Securities and Exchange Commission as disgorgement of its profits as part of a settlement of civil insider trading charges in March. So any forfeiture order in the criminal case will not include amounts already paid in the S.E.C. case.
Thus, the civil asset forfeiture case is the vehicle by which the government can seek to take more money from SAC, the bulk of which would come from Mr. Cohen because he has about $8 billion of his own invested in the firm. The question is whether the government can use this tactic to get at his money even though it has not charged him directly with any criminal conduct.
Asset forfeiture has a long history, dating back to biblical times. The claim is against the property that caused harm, and the object or its equivalent value would be forfeited to the Crown as a “deodand,†which is something “given to God.†Even now, the proceeding is against the property, not an individual, so that there are cases with odd sounding names like One 1958 Plymouth Sedan v. Pennsylvania.
The Justice Department’s complaint accuses SAC of using money that was the proceeds of money-laundering violations to finance insider trading at the firm’s various captive hedge funds. Under the civil asset forfeiture law, 18 U.S.C. § 981(a)(1)(A) , the government can seek the forfeiture of property involved in a transaction that violated the money-laundering laws, including “any property traceable to such property.â€
This statute authorizes a court to order the forfeiture of money that is the proceeds of criminal activity used in a way that constitutes money laundering, like investing the money in a business to promote future crimes. Although the SAC indictment does not include money-laundering charges, the wire and securities fraud counts can serve as the basis for proving money laundering for a civil asset forfeiture case.
The benefit of pursuing a civil forfeiture case is that the government’s burden of proof is much lighter because it only has to show by a preponderance of the evidence that the funds are traceable to money-laundering violations, not beyond a reasonable doubt.
Civil asset forfeiture is limited to amounts traceable to the money laundering, and so-called “substitute assets†â€" other money held by a defendant â€" cannot be seized to satisfy a judgment.
The theory the government is using to seize assets from SAC beyond just what it received from insider trading is broad enough that it could take a sizeable amount from the firm. In effect, the Justice Department is claiming that gains from insider trading were reinvested in the hedge funds to generate additional profits, so that much of its net worth is tainted by the criminal violations of its employees.
It is certainly questionable whether the government will be able to prove the proceeds of any insider trading generated significant assets held by SAC. Apart from the trades conducted by Matthew Martoma, who reportedly generated approximately $275 million in gains and losses avoided in 2008, most of the transactions resulted in benefits of a few million dollars.
For example, Richard Lee, who pleaded guilty this week to insider trading charges during his time as an a SAC portfolio manager, generated profits for SAC of more than $1.5 million from trading Yahoo and 3Com. Trading on tips receive by Jon Horvath, a former SAC analyst, totaled approximately $14 million in gains.
It is difficult to see how those figures could support a claim for billions of dollars, even if one applies a generous rate of return in calculating future profits. The government’s complaint does not give a dollar figure for what should be forfeited, although it seeks “any and all assets†of SAC and its hedge funds.
Mr. Cohen can fight the claim for his money invested in SAC by asserting the “innocent owner†defense, which precludes forfeiture if it can be established. He would bear the burden of proving that he “did not know of the conduct giving rise to forfeiture†or that he did all that could reasonably be expected to stop his property from being used improperly.
The complaint identifies him as the “SAC owner,†and like the criminal indictment it goes into great detail about his involvement in the trading and failure to prevent violations by other employees. The government is trying to cut off the innocent owner defense by pointing to evidence undermining a claim that Mr. Cohen acted reasonably or that he did not know about the violations.
And filing the civil case does not put the prosecution at risk that SAC might try to use the tools for civil discovery to gather evidence that would not otherwise be available in the criminal case. The asset forfeiture statute specifically provides that the judge “shall stay the civil forfeiture proceeding if the court determines that civil discovery will adversely affect the ability of the government to conduct a related criminal investigation or the prosecution of a related criminal case.â€
By filing an aggressive civil asset forfeiture case, the Justice Department is sending a clear message that it intends to use every weapon in its arsenal to attack SAC and Mr. Cohen by seeking his money. It can hold this case in reserve as a means to seek additional assets once it sees how the criminal prosecution unfolds.
