Many Paths Remain for a Case Against SAC Capital Advisors

Of the multiple threads the government has pursued in its long-running insider trading investigation of Steven A. Cohen and his hedge fund, SAC Capital Advisors, the case against Mathew Martoma had been seen as the most promising.

Federal authorities repeatedly sought the cooperation of Mr. Martoma, a former employee at SAC, in helping to build a case against Mr. Cohen related to suspicious trading in two drug stocks in July 2008.

Yet Mr. Martoma has persistently rebuffed the government’s overtures, including as recently as this spring, when the authorities met with his lawyers at the United States attorney’s office in Manhattan, a person briefed on the meeting said.

After Mr. Martoma declined to implicate his onetime boss, authorities concluded that they lacked sufficient evidence to file a criminal case against Mr. Cohen related to the drug-stock trades before a five-year legal deadline expires in mid-July, according to people with direct knowledge of the investigation.

Mr. Cohen and SAC are hardly out of the woods, however. People close to Mr. Cohen, reluctant to declare victory, note that criminal and civil authorities are still weighing several possibilities as they continue to press their case.

For one, federal prosecutors are considering criminal charges against SAC related to the drug-stock trades and other activity, the people with direct knowledge of the inquiry said. The Securities and Exchange Commission is contemplating a civil lawsuit against Mr. Cohen. And the Federal Bureau of Investigation â€" which has agents in New York, Connecticut and Boston scrutinizing SAC â€" continues to examine more recent trading at the fund.

The authorities, for example, have looked at SAC trading in the shares of Gymboree, the children’s clothing store, the people said. They also face an August deadline to file charges related to trading in Dell shares, a case that produced two indictments of onetime SAC employees, one of whom pleaded guilty.

Prosecutors could even try to get around the five-year legal deadline in the drug-stock trades by including them as part of a broader criminal conspiracy case against Mr. Cohen. Including Mr. Martoma, nine former SAC employees have been tied to insider trading while at the firm; four have pleaded guilty to criminal charges.

Mr. Cohen, 57, has not been accused of any wrongdoing and has told his investors that he has behaved appropriately at all times.

The protracted investigation has angered Mr. Cohen, who has come to believe that the government is obsessed with trying to lock him up and shut down his business, say people close to him.

Based in Stamford, Conn., SAC is one of the world’s largest and most influential hedge funds, with about 1,000 employees and $15 billion in assets at the beginning of the year. It has one of the best investment track records on Wall Street, posting nearly 30 percent annual returns, on average, over two decades.

While many consider Mr. Cohen a preternaturally gifted trader, skeptics have long questioned the legitimacy of his returns. Persistent whispers of insider trading inside SAC have dogged the fund, and in recent years, as numerous employees and alumni have become ensnared in the government’s insider trading crackdown, those whispers have grown louder.

Mr. Cohen, a native of Great Neck, N.Y., on Long Island, has also become a subject of fascination for his mammoth spending habits. He lives with his family in a 35,000-square-foot home in Greenwich, Conn. Last fall, he bought Picasso’s “Le Rêve” for $155 million, adding to an art collection that has included works by Andy Warhol and Van Gogh.

He also collects real estate. In March, Mr. Cohen reached a deal to pay $60 million for an oceanfront property in East Hampton, down the road from one that he already owns. He recently closed on a $23.4 million apartment in the West Village in Manhattan, near a building for which he paid $38.8 million last year. And he recently put up for sale his duplex apartment in the Bloomberg Tower on the East Side, asking $115 million.

Amid the swirl of personal spending and the intensifying government investigation, Mr. Cohen’s investors have pulled billions of dollars from his fund in recent months. SAC, however, is better insulated from the ill effects of investor withdrawals than rivals because Mr. Cohen’s fortune accounts for roughly $8 billion, or more than half the fund.

At the same time, federal prosecutors have not slowed down. In May, they issued subpoenas to Mr. Cohen and five of his senior executives.

Mr. Cohen declined to testify, exercising his constitutional right against self-incrimination, according to the people with direct knowledge of the inquiry. But the five executives, including Thomas J. Conheeney, the firm’s president, and Steven Kessler, its chief compliance officer, met with prosecutors in recent weeks and answered questions about the firm’s compliance procedures and trading practices.

If prosecutors continue to seek their cooperation, the executives are expected to testify before a grand jury, one of the people said.

In interviewing Mr. Cohen’s senior executives, prosecutors are gathering evidence for a possible indictment against SAC under the theory of corporate criminal liability, a move that would effectively destroy the fund.

Under that theory, the government can impute criminal liability to a company based on the benefit it received from an employee’s acts that the authorities say are criminal. The government is loath to bring criminal charges against a corporate entity, fearing job losses and economic damage, but will pursue a case if it believes that the wrongdoing at the company is pervasive or condoned by management.

Representatives for the F.B.I. in New York and the United States attorney’s office in Manhattan declined to comment. An SAC spokesman also declined to comment.

Mr. Cohen had thought that he had put the most serious of his legal problems behind him in March when SAC agreed to pay a record $616 million penalty to the commission to resolve two insider-trading civil actions, the people close to him said.

The larger of the two settlements, for $602 million, related to Mr. Martoma’s trades. The government said Mr. Martoma had caused SAC to sell nearly $1 billion in shares of the drug makers Elan and Wyeth after obtaining secret data from a doctor about clinical trials for a drug being developed by the companies. Those trades allowed SAC to gain profits and avoid losses totaling $276 million, the authorities said.

When the government arrested Mr. Martoma last November, they appeared to be closing in on Mr. Cohen. The complaint highlighted a 20-minute phone call that Mr. Martoma had with Mr. Cohen the day before SAC began dumping its holdings. Prosecutors did not claim that Mr. Martoma told Mr. Cohen about the confidential information.

But what did the two men discuss? Because there is no recording of the call, only Mr. Martoma and Mr. Cohen know the conversation’s contents.

Last year, when Mr. Cohen sat for a civil deposition in the S.E.C. case, he told investigators that Mr. Martoma said he was no longer comfortable with the position.

Prosecutors possess powerful evidence against Mr. Martoma, having secured the testimony of the doctor who is said to have leaked the drug-trial data to SAC. But there appears to be no direct evidence that Mr. Cohen knew of the secret information when he directed the Elan and Wyeth sales.

Additional evidence could yet surface in the Martoma case. Prosecutors have indicated that they would file an amended indictment in the case by the end of July, which could add new details, charges or defendants.

And even without Mr. Cohen’s facing criminal charges tied to Mr. Martoma, he has drawn scrutiny from the S.E.C. The commission is aiming to build a civil insider trading lawsuit against Mr. Cohen, and would have a lower burden for proving its case than criminal authorities.

It could also bring an action against Mr. Cohen for failing to supervise his employees, something akin to the civil lawsuit that regulators brought last month against Jon S. Corzine related to his control of the collapsed brokerage firm MF Global.

The commission could seek to impose additional financial penalties on Mr. Cohen, as well as a ban from the securities industry.
An S.E.C. spokesman declined to comment. But earlier this year, a senior S.E.C. official expressly noted the possibility of a case against Mr. Cohen.

When the commission announced the record civil penalties paid by SAC, George S. Canellos, now its co-head of enforcement, said that the settlement did not “preclude the future filing of additional charges against any person, including Steve Cohen.”

Thomson Reuters to Suspend Early Peeks at Key Index

Over the last several years, an exclusive group of investors has paid a steep premium to receive the results of a closely watched economic survey a full two seconds before its broader release. Those two seconds can mean millions of dollars in profits for the investors, who practice a computer-driven strategy called high-frequency trading.

On Monday, the company providing these investors with that lucrative edge, Thomson Reuters, is expected to announce that it will suspend the practice, yielding to pressure from the New York attorney general, according to a person with direct knowledge of the matter.

Eric T. Schneiderman, the attorney general, and his staff have been investigating the unusual arrangement that Thomson Reuters has with the University of Michigan. On two Fridays a month at 10 a.m. Eastern time, the widely cited and often market-moving economic survey known as the consumer confidence index is posted by the university on a Web site.

Thomson Reuters pays the university at least $1 million a year to distribute that data early to its money management customers on an exclusive basis. The company offers clients of its news service the opportunity to pay to receive the information on a conference call at 9:55 a.m.

But an elite group of about a dozen clients, which includes some of the world’s most powerful money managers, pays Thomson Reuters an additional fee to receive it at 9:54:58 â€" two seconds before everyone else. Some of the clients pay the company more than $6,000 a month for this early release.

The company packages the information for these clients in a format that allows their high-speed, computer-driven trading systems to exploit the data, making rapid-fire trades in stocks and futures before others gain access to it.

Mr. Schneiderman’s investigation began in April after a former Thomson Reuters employee filed a whistle-blower complaint about the practice, according to a person briefed on the inquiry. The attorney general’s investor protection bureau is specifically examining the 9:54:58 disclosure and, more broadly, whether preferential disclosure of data is a fair and appropriate business practice.

A spokesman for Thomson Reuters defended the practice and said the company was fully cooperating with the attorney general’s review.

“Thomson Reuters strongly believes that news and information companies can legally distribute nongovernmental data and exclusive news through services provided to fee-paying subscribers,” said the spokesman, Lemuel Brewster. “It is widely understood that news and information companies compete for exclusive news and differentiated content to help their customers make better informed trading and investment decisions.”

Legal experts have said the tiered pricing arrangement Thomson Reuters has with its customers does not violate federal insider trading laws. As a nongovernment entity, the company can disseminate the information as it pleases, as long as it fully discloses the practice, they say. And trading on the early data release is also legal because no one is breaching any duty in leaking the information, as is the case in a classic insider trading crime when a company executive divulges corporate secrets.

But Mr. Schneiderman’s office is exploring whether the advanced look at the consumer data is a violation of the Martin Act, a state securities-fraud law that gives the attorney general broad powers to pursue either criminal or civil actions against companies. The nearly century-old law does not require the government to show proof that a company intended to defraud anyone. It also allows investigators to seek an enormous amount of information from businesses.

Regardless of the legality of the practice, it has raised questions among state officials about fairness in the financial markets. Regulators are concerned that elite investors are being provided privileged access to important data, according to a person briefed on the matter. A mission of the attorney general’s investor protection bureau, which is overseeing the investigation, is to help create a level playing field on Wall Street.

The controversy over the Thomson Reuters practice highlights the prevalence of high-speed trading in the nation’s financial markets. More than half of all American stock trades are now executed by firms that rely on computer algorithms to execute thousands of orders a second. These traders can get an edge by obtaining market data even milliseconds before their rivals.

Most market data providers, including the major exchanges, now charge premiums for faster delivery of information. Regulators have been criticized for being slow to address this seismic change in the market, and are just now examining the issues surrounding the selective disclosure of data to people who pay a premium for it.

One piece of coveted data is the University of Michigan consumer confidence number, a survey that measures the country’s opinion about the state of the economy. Investors consider it a bellwether of economic sentiment and a possible indicator of the direction of the stock market.

Mr. Schneiderman’s investigation of Thomson Reuters evokes the investor-protection campaign waged a decade ago by a former attorney general, Eliot Spitzer, who aggressively wielded the Martin Act to change Wall Street practices that smacked of unfairness. He used the law, for example, to expose Merrill Lynch’s hyping of Internet stocks, and then secured a global settlement involving 10 banks and $1.4 billion in fines.

It appears Mr. Schneiderman is using similar hardball tactics.

In response to the attorney general’s inquiry, Thomson Reuters took the position that its tiered pricing system was legal, said the person briefed on the investigation. But Mr. Schneiderman’s office demanded that Thomson Reuters suspend the selective disclosure of the survey at 9:54:58 to its highest-paying customers.

After Thomson Reuters resisted making the change, the attorney general’s office threatened to seek a court order to stop it from prereleasing the data, this person said. Rather than wage a court battle, Thomson Reuters capitulated and agreed to temporarily suspend the practice for the duration of the investigation.

When Thomson Reuters releases the University of Michigan consumer confidence survey this Friday morning, no one will receive the information before 9:55.

Thomson Reuters has recently had other problems with its release of market-moving data. Last month, the company accidentally released a manufacturing survey from the Institute of Supply Management to a small group of traders milliseconds before others received it. Those traders used computer models to process and trade on the data.

A Thomson Reuters spokesman blamed the problem on a “clock synchronization issue.” The Securities and Exchange Commission has opened an inquiry into the premature release.

Mobileye, a Maker of Automated Driving Systems, Raises $400 Million

For a handful of investors, the future of mostly automated cars looks increasingly attractive.

Mobileye, a provider of driver-assistance technology systems, said on Sunday that it has raised $400 million in financing, valuing the company at about $1.5 billion.

The money, raised in an oversubscribed financing round, is coming from five new investors, according to a person briefed on the matter: the money management firms BlackRock, Fidelity Management and Wellington Management; a Chinese investment firm, Sailing Capital; and Enterprise Rent-A-Car, the privately held rental car company.

The investment, the biggest yet in Mobileye’s 14-year history, will help the technology company strengthen and expand its offerings and its global reach. It also comes ahead of what Ziv Aviram, a co-founder and the company’s chief executive, said is an expected initial public offering in perhaps a year and a half’s time.

Some of the money will be used to cash out existing investors, Mr. Aviram added.

Headquartered in the Netherlands, the company currently focuses on helping cars avoid collisions and pedestrians, as well as drifting out of lanes. The longer-term goal, Mr. Aviram said in a telephone interview, is more ambitious: a semi-autonomous vehicle that can handle many, but not all, driving functions without driver input.

The goal is not dissimilar in some ways to Google‘s already famous driverless cars, though the technology giant’s systems allow for completely hands-off driving. But Mobileye is aiming to get most of the functionality in cars for much less, with fewer cameras and computer equipment that cost hundreds of dollars, rather than the tens of thousand of dollars that Google’s array of sensors is estimated to cost at the moment.

“It’s a camera and a chip, with no exotic technology,” Mr. Aviram said of his company’s current technology. “It’s the most cost-efficient system that’s out there.”

He added that he didn’t necessarily mind comparisons to Google’s systems, which have raised awareness of automated driving worldwide. But Mobileye’s goal was getting into more cars at a lower price.

The company began working with three major car makers â€" General Motors, BMW and Volvo â€" in 2007 and has since added a number of others. Mr. Aviram said that by the end of this year, over 3 million cars will have used its technology.

The biggest goal is yet to come: Mobileye is currently working on producing a vehicle that can run largely on autopilot around 2016, with four partners on board. The company is anticipating the rollout of new rules in Europe that will allow for more fully automated driving, with other countries like the United States and China to follow.

Mr. Aviram said that he believes full-on driverless systems won’t be practical for another 15 to 20 years. But systems that help out tired drivers, or let users check e-mail on the road, have potential. One possible use that could roll out in the near term, he said, is Mobileye taking over driving in stop-and-go traffic.

“With a traffic jam, you can completely relax,” he said.

Beyond car manufacturers, insurance companies have also shown interest in Mobileye’s offerings. One insurer in Israel, where the company’s research and development is based, has pushed for the use of the crash-avoidance systems in the cars for teen drivers.

Mobileye was advised on its financing round by Goldman Sachs, itself an existing investor in the company; Morgan Stanley; and the law firm Morrison & Foerster. The deal is expected to close next month.