Case Against SAC Leader Hinges on E-Mail Habits

If you thought your e-mail in-box was flooded, try sitting at Steven A. Cohen’s desk.

To locate an incoming message, Mr. Cohen, a hedge fund billionaire, would have to look at the only one of his seven computer screens that displays e-mail, a monitor that happened to be “to the far left” of the others, his lawyers argue in a new document responding to a recent civil charge against him. Then he would have to “minimize one or two computer programs” to call up his Microsoft Outlook window, which was “reduced” so that Mr. Cohen could see, at most, only five messages at once.

Finally, with a scroll of the mouse and a “double click,” he could read an e-mail.
While the setup â€" installed at Mr. Cohen’s summer home in the Hamptons in 2008 â€" might seem trivial, the e-mail habits of the hedge fund tycoon are at the heart of the government’s case.

The Securities and Exchange Commission filed a civil action last week that accused Mr. Cohen, the owner of SAC Capital Advisors, of failing to supervise employees suspected of insider trading. Those employees, Mathew Martoma and Michael S. Steinberg, were previously charged with criminal wrongdoing.

In its order, the S.E.C. cited a 2008 e-mail forwarded to Mr. Cohen in which an SAC analyst explicitly stated that he had a “2nd hand read from someone at” the computer maker Dell, a source who provided financial information about the company before its earnings announcement. Minutes after receiving the e-mail, Mr. Cohen sold his entire position in Dell, the S.E.C. said.

In the 46-page document responding to the S.E.C.’s charges, Mr. Cohen’s lawyers said there was an innocent explanation for his not reacting to the suspicious e-mail: he did not read it.

“Cohen has no memory of having seen it and no witness will testify that they discussed it with him,” the lawyers said in the document, circulated internally at SAC and reviewed by The New York Times and referenced earlier in The Wall Street Journal.

Mr. Cohen, the lawyers argued, received an average of 1,000 e-mails each day in 2008. At the time, he apparently opened only 11 percent of the e-mails, though the lawyers did not disclose how they arrived at that figure.

The document, people briefed on the matter said, was adapted from the lawyers’ response to the S.E.C.’s so-called Wells notice that warned of potential charges. It also outlines the arguments SAC will most likely present in an attempt to persuade the Justice Department not to bring a criminal indictment of the fund, which remains a possibility.

While the document makes a strong case that Mr. Cohen was not knowingly trading on inside information, it is unclear whether it will rebut the S.E.C.’s claims that he did not prevent employees from doing so. The S.E.C. must show that Mr. Cohen did not “reasonably” supervise them.

Mr. Cohen has not been accused of any criminal wrongdoing. Mr. Martoma, 39, and Mr. Steinberg, 40, have each pleaded not guilty to criminal insider trading charges and face separate trials in November.

Mr. Cohen’s civil case will play out before an administrative law judge at the S.E.C. rather than in a federal court. On Tuesday, Chief Judge Brenda P. Murray was assigned to the case, and a hearing was scheduled for Aug. 26.

The Dell e-mails are expected to play a central role in the case.

Even if he was a vigilant e-mail consumer, the lawyers say, Mr. Cohen could argue that the 2008 dispatch did not identify the source of the information about Dell, suggesting that it could have “lawfully” come from an authorized person at the company. The source, the lawyers note, did in fact turn out to be someone from the investor relations department, who has not been accused of any wrongdoing. The lawyers also note that the information in the e-mail “turned out to be wrong.”

Still, SAC made profits and avoided losses of $1.7 million. And once Dell released its earnings, Mr. Cohen sent an e-mail to Mr. Steinberg that said, “Nice job on Dell.”

Mr. Cohen sold his stake in Dell, the lawyers argue, with “good reason.” Mr. Cohen, they said, took the position based on the recommendation of a portfolio manager at SAC, whom people briefed on the matter identified as Gabe Plotkin. Minutes after Mr. Plotkin started selling, so did Mr. Cohen. Although Mr. Plotkin has not been accused of any wrongdoing, the S.E.C. said in a court filing that he once possessed inside information.

“Steve has no emotion in this stuff,” Mr. Plotkin said in a deposition. “Stocks mean nothing to him. They’re just ideas, they’re not even his ideas, and he buys stuff, sells stuff.”