Federal prosecutors and the investment firm SAC Capital Advisors
agreed on Thursday to a protective order that requires the firm to
keep most of its money in its fund while operating under a criminal
indictment, according to a person briefed on the case.
The order serves a dual purpose, preserving the government’s interest
in any money that it might seize from SAC in a forfeiture action, while
also allowing the firm to continue running its money management
business.
Under the terms of the agreement, SAC must maintain at least 85
percent of its assets owned the firm and its various entities. The
firm had about $14 billion under management as of July 1. If assets
fall below the 85 percent threshold, SAC has to replenish them in order to
maintain that level, this person said.
Judge Richard J. Sullivan of Federal District Court in Manhattan must
approve the protective order, which, though expected, was intensely
negotiated by SAC’s legal team and government lawyers over the past two
weeks.
Federal prosecutors, after a lengthy investigation, brought a criminal case
against SAC on July 25, charging the firm with carrying out a vast insider
trading conspiracy. Though not named in the indictment, Steven A. Cohen, the
billionaire owner of SAC, was accused of fostering an unethical culture
that, prosecutors said, was “a veritable magnet for market cheaters.â€
A spokesman for SAC said that the firm has never encouraged, promoted or
tolerated insider trading. Mr. Cohen has said he behaved appropriately at
all times. The Wall Street Journal online earlier reported on the terms of the
protective order.
Alongside the criminal charges, prosecutors filed a civil
forfeiture complaint in Federal District Court in Manhattan that said
the firm commingled illegal insider-trading profits with the rest of
its money, tainting all of its funds. The complaint seeks “any and
all†of SAC’s assets, meaning that it believes it could, theoretically,
pursue all of the firm’s money.
Prosecutors, however, are expected to demand that SAC forfeit money
that tied to any illicit trading, a sum that could reach several billion
dollars, a person briefed on the case said. Still, the protective order
gives the government the flexibility to pursue a larger amount if new
insider trading activity surfaced while the case wends its way through the
courts.
Preet Bharara, the United States attorney in Manhattan who brought the
charges, did not seek to freeze SAC’s assets when bringing the
indictment. He and his team of prosecutors wanted to avoid hurting
SAC’s investors and trading partners, said people briefed on the case.
There was also some concern that freezing the firm’s assets -
including borrowed money, SAC has about $50 billion invested â€" could
disrupt the financial markets.
Indicting a company is an unusual and aggressive step for the
government. In the case of SAC, however, the government believed that the
action was justified because of vast misconduct at the firm and a
shoddy compliance regime.
Ten former SAC employees have either been charged or implicated with illegal
trading while at the fund; of those, five of have admitted guilt. The
indictment said that Mr. Cohen hired a portfolio manager despite warnings
about his engaging in insider trading at another hedge fund, and overruling
objections from his lawyers.
Last Tuesday, Mr. Bharara appeared on “CBS This Morning†to discuss the
case. “The scope and the pervasiveness of the insider trading that went on
at this particular place is unprecedented in the history of hedge funds,â€
Mr. Bharara said.
Even without the security of a protective order being struck with the
government, banks have continued to trade with SAC since the
indictment. And at least one top Wall Street executive has issued a
public statement of support for the firm.
“They’re an important client to us, they have been an important client
to us,†said Gary Cohn, president of Goldman Sachs, in an interview on
CNBC last month. “We continue to trade with them, and they’re a great
counterparty.â€
At the start of 2013, SAC had about $15 billion under management, with
about $9 billion of that amount belonging to Mr. Cohen and his
employees. In recent months, amid the intensifying government
investigation, outside investors have asked to withdraw about $5
billion from the fund. That money is being returned in installments
every three months, an SAC policy that protects the fund from being
forced to sell its positions at unfavorable prices.
Also on Thursday, an administrative law judge in Washington approved a
request by federal prosecutors to delay the civil case brought last month
against Mr. Cohen by the Securities and Exchange Commission pending the
outcome of the criminal proceedings against SAC and two former employees of
the fund. It is common for S.E.C. actions to be halted until the criminal
prosecution is resolved.
The S.E.C.’s lawsuit accuses Mr. Cohen of failing to supervise the
two former employees, Michael S. Steinberg and Mathew Martoma. Both Mr.
Steinberg and Mr. Martoma have pleaded not guilty and have trials schedule
to begin in November.
