SAC Could Give the Justice Dept. a High-Value Target

The subpoenas issued to executives at SAC Capital Advisors to testify before a grand jury provide a powerful indication that prosecutors have made the firm the focus of their latest effort to crack down on insider trading. Unfortunately for SAC, it may also be a case of being in the wrong place at the wrong time.

SAC may end up being the poster child for prosecuting companies, if criminal charges are filed against the firm. It would also help the Justice Department counter critics who say it has allowed too many companies to settle cases without facing criminal prosecution.

The Justice Department has tried for months to backtrack from a comment that Attorney General Eric H. Holder Jr. made in March, when he said it can “become difficult” to prosecute large financial institutions because of the potential impact on the economy.

In an effort to ramp up its posturing, Mythili Raman, the acting assistant attorney general for the criminal division, testified before a House subcommittee last week, saying, “No individual or institution is immune from prosecution, and we intend to continue our aggressive pursuit of financial fraud.”

Pursuing a case against SAC would not bring the economy to its knees, nor would it raise concerns about the firm being “too big to prosecute.” SAC does not have interests spread throughout the global financial system that could drag down other banks, and charges would have little effect on investors or markets even if it were required to cease operations.

An added benefit to pursuing the firm is that the action can be a proxy for going after its owner, Steven A. Cohen. Despite being the object of intense scrutiny in the last few years, prosecutors appear to have been unable to build a case directly implicating him in insider trading. Both Mr. Cohen and SAC have asserted they were not involved in wrongdoing.

As reported by DealBook, the subpoenas to appear before the grand jury were issued to Mr. Cohen and Thomas Conheeney, SAC’s president; Solomon Kumin, its chief operating officer; Steven Kessler, chief compliance officer; and Phillip Villhauer, the head of trading. Mr. Cohen is expected to assert his Fifth Amendment privilege against self-incrimination and refuse to respond to questions.

The other executives called to testify do not appear to have any significant connection to the insider trading charges previously leveled against two former SAC portfolio managers, Mathew Martoma and Michael Steinberg. Mr. Villhauer executed the trades in the stocks involved in Mr. Martoma’s case, but there is no indication he had any knowledge of the reasons for the sales.

To prove that a company committed a crime, all the government has to show is that an agent or employee engaged in criminal conduct in the performance of his duties and for the benefit of the organization. Even if the person’s conduct was counter to explicit directions, the organization can be held accountable as long as the employee was motivated at least in part to act for the firm’s benefit.

So why call these men to testify before the grand jury when corporate criminal liability is fairly easy to establish? Pursuing a criminal case against an organization, if it goes to trial, involves more than just showing the bare minimum that an employee like Mr. Martoma or Mr. Steinberg traded on inside information and SAC reaped the benefit. Prosecutors would also want to establish that the culture of the organization tolerated such conduct, and perhaps even encouraged it.

Portraying SAC as a den of thieves - to borrow a phrase from James B. Stewart’s famous book about insider trading in the 1980s - could send a message about how the Justice Department is policing Wall Street. So if prosecutors really want to build a case against SAC, they will need someone from the inside to testify about how it conducted business.

The four SAC executives can be a vehicle for prosecutors to gather evidence about the firm’s operations and management, including how much oversight was exercised over trading by its portfolio managers, including Mr. Cohen. Calling them in front of a grand jury, rather than just interviewing them, signals how serious the government is about pursuing the case.

Individuals subpoenaed to testify can assert the Fifth Amendment if answering questions would pose any threat of implicating themselves in criminal conduct. So the SAC executives could refuse to testify, but if prosecutors are really intent on building a case against the firm then they have a way around that if the witness is not someone they plan to prosecute: a grant of immunity.

Immunity supplants the Fifth Amendment, so the person must testify or risk being held in contempt, which usually means going to jail until the end of the grand jury’s term. The protection afforded to an immunized witness under federal law is that “no testimony or other information compelled under the order (or any information directly or indirectly derived from such testimony or other information) may be used against the witness in any criminal case.”

If the SAC executives were to indicate they planned to follow Mr. Cohen’s lead in responding to the subpoenas, then I think there is a good chance prosecutors would grant them immunity. They are unlikely to be considered targets of the investigation, so calling them to testify and, if necessary, imposing immunity allows the government to get information it might not be able to otherwise.

SAC could still try to negotiate for a deferred or nonprosecution agreement, which would probably entail a significant payment beyond the $616 million it agreed to turn over to settle a civil case with the Securities and Exchange Commission. Last year, the United States attorney’s office in Manhattan, which is leading the SAC investigation, entered into a nonprosecution agreement with the hedge fund firm Diamondback Capital Management over insider trading by one of its portfolio managers that included a $6 million payment.

But SAC’s recent statement that it would no longer provide “unconditional cooperation” to the government makes such a resolution unlikely, at least in the short term.
The Justice Department has clearly been stung by criticism about its lack of charges against companies over financial wrongdoing. SAC is hardly a substitute for the large banks that have worked out settlements with no criminal charges, as HSBC did in a case involving money laundering violations.
Nevertheless, pursuing a case against SAC could be offered as evidence of the government’s willingness to take a hard line against an organization without risking the collateral consequences associated with convicting a big bank.