After Scandal, SAC Capital Begins to Fade to Black

SAC Capital Advisors, synonymous with an insider trading scandal that has consumed the hedge fund industry, will soon cease to exist as Wall Street has known it.

Steven A. Cohen’s 22-year-old hedge fund â€" once the envy of Wall Street â€" is completing plans to change its name and its corporate structure by mid-March, according to people briefed on the matter, a rebranding effort that comes after SAC pleaded guilty last year to criminal insider trading charges.

In the spirit of the plea deal, which ordered SAC to shut its doors to outside investors, the new firm will condense into fewer legal entities and will not accept any external money. The slimmed-down operation, the people said, will operate as a so-called family office that manages employee money and an estimated $9 billion from the personal fortune of Mr. Cohen, SAC’s owner and founder.

“We have taken to heart the government’s criticisms of our business model, and as we convert to a family office we are making substantive changes,” an SAC spokesman said in a statement, declining to discuss specifics of the new firm.

Still, Mr. Cohen will remain chief executive of the new, yet-to-be-named business. And the firm will simply reshuffle its staff to add a layer of management between Mr. Cohen and the firm’s existing traders, another nod to the plea deal and the government’s apparent fixation with seeking to link Mr. Cohen to illicit trading.

Mr. Cohen’s decision to abandon SAC, the details and timing of which have not been previously reported, comes as Wall Street starts to distance itself somewhat from the firm. Deutsche Bank, one of SAC’s lenders and trading partners, cut ties with the hedge fund in recent weeks, the people briefed on the matter said, citing the “reputational risk” of dealing with SAC.

Together, the new developments provide the most vivid illustration yet of SAC’s steep fall from powerful hedge fund to marginalized player. While SAC has been under investigation for the better part of a decade, its indictment in July and subsequent guilty plea in November put in motion a series of painful setbacks that have now led to its unwinding.

As SAC transitions to a leaner version of its old self, its relevance on Wall Street is likely to wane. And with concerns about reputation and risk at the forefront of Deutsche Bank’s decision, other banks could re-examine their relationships.

For now, it is unclear how the other banks will react to the new-look firm.

SAC’s sheer size and the frequency of its trading for years generated unrivaled commissions for the banks, which have largely stood by its side. Days after SAC’s indictment, Gary D. Cohn, the president of Goldman Sachs, lent public support to the hedge fund, telling CNBC, “They’re an important client to us.”

Even in recent days, SAC has maintained an appearance of business as usual. One American bank, when sending out a schedule to executives this weekend for a series of “pitches” for the initial public offering of a European company, included a visit to SAC’s offices in Manhattan, according to a person who received the schedule.

But as SAC focuses on returning whatever is left of $6 billion of client money and unwinding many of its investments, Wall Street will become less dependent on SAC’s lucrative fees. Some of SAC’s banking relationships overseas have already slowed since the shutdown of its London office.

Months ago, Deutsche Bank laid the groundwork for its decision to cut ties with SAC. In the fall, after SAC repaid a private bank loan that was backed by some of Mr. Cohen’s art collection, Deutsche Bank did not renew the loan.

A spokeswoman for Deutsche Bank declined to comment.

It was not until last week that both sides officially agreed to sever ties. Mr. Cohen was not directly involved in negotiating the resolution of the relationship.

As other companies tainted by scandal have done, SAC may use its new name and structure as vehicles for a new beginning. SAC’s rebranding, playing out under the watchful eye of the government, might send a message to the authorities that the firm is resigned to a smaller and simpler existence. Even before SAC was indicted, Mr. Cohen was pulling back from trading, people close to him say, as he assumed a role more akin to a chief executive than a trader.

“Steve Cohen and the management team  are determined to do what they can to prevent a repeat of the problems we experienced and so we are simplifying our business, increasing management oversight and continuing to strengthen our compliance program,” the SAC spokesman said. “This goes beyond rebranding.”

But the new look is not a panacea for the firm’s problems. So long as it involves SAC’s top executives and Mr. Cohen, known as the driving force behind the firm that currently bears his initials, the firm by any name will be a magnet for federal scrutiny.

While Mr. Cohen has not been charged criminally, he remains under investigation by the F.B.I. And he still faces a civil administrative case from the Securities and Exchange Commission, which accused him of failing to supervise his employees who were criminally charged with insider trading. All told, eight current or former SAC employees have been charged.

SAC’s rebranding effort comes as some of those employees remain in the legal spotlight. In December, a federal jury found Michael S. Steinberg, the highest ranking SAC portfolio manager to face charges, guilty of insider trading. And in recent days, prosecutors wrapped up their insider trading case against another SAC portfolio manager, Mathew Martoma. That case is expected to go to the jury this week.

The cases underpinned the indictment of SAC, with federal prosecutors in Manhattan accusing the firm of being a “veritable magnet of market cheaters.” The law of corporate liability allows the government to attribute the bad acts of employees to a company as long as the employees acted “on behalf of and for the benefit of” the company.

In November, the prosecutors announced a plea deal with SAC, the first large Wall Street firm in a quarter century to confess to criminal conduct. Under the terms of the deal, the hedge fund agreed to plead guilty to all five counts, pay $1.2 billion to the government and terminate its business of managing money for outside investors.

Although a judge is still weighing whether to approve the deal, SAC has wasted no time retrenching.

In the wake of the indictment, the hedge fund slimmed down its work force, struck a deal to sell its reinsurance unit and shuttered some offices. SAC also laid off around two dozen investor relations and marketing employees and a half-dozen analysts and traders in the United States.

Solomon Kumin, the firm’s chief operating officer and one of Mr. Cohen’s trusted lieutenants, recently announced plans to leave the firm. In a letter to employees announcing the departure, Mr. Cohen said that as SAC transformed into a smaller firm, “we will not need the same degree of business development activity or investor relations as before.”

The SAC spokesman declined to comment on the firm’s rebranding plans. But the people briefed on the matter, who spoke on the condition of anonymity because they were not authorized to discuss the private plans, offered a look inside the rebuilding process.

Under the new family office structure, SAC will condense its three stock trading units â€" SAC Capital, CR Intrinsic and Sigma Capital â€" into two new legal entities. One of the entities will also act as the parent company, employing the firm’s corporate staff and Mr. Cohen, who will sit atop the operation.

For day-to-day management of the trading units, the people said, Mr. Cohen is turning to two top lieutenants.

Phillipp Villhauer, SAC’s head of trading, will run one of the entities, while Michael Ferrucci will return from his position as head of SAC’s London office to oversee the other. They will report to a new layer of management, which in turn will answer to Mr. Cohen and Thomas J. Conheeney, SAC’s president.

A third unit will house the quantitative trading business. Ross Garon, who currently oversees that arm of SAC’s business, will continue to manage the unit.

At first, SAC will continue to exist alongside Mr. Cohen’s new family office. SAC will draw on minimal resources while it unwinds its so-called side pockets, segregated accounts that contain various illiquid investments.

Eventually, Mr. Cohen will retire the SAC name for good.

Matthew Goldstein contributed reporting.

Unlikely Allies Seek to Check Power of Activist Hedge Funds

Relations between big public companies and their largest shareholders can at times take on the qualities of a long, unsatisfactory marriage. Complaints from the shareholders are many, but they go mostly unspoken, leading to simmering resentment.

In the age of activist investing, this often leaves companies blindsided when traditionally passive investors suddenly side with an insurgent hedge fund pressing management for change.

But now, an unlikely alliance of investors, board members and advisers has formed in an effort to counter the disproportionate influence of activist hedge funds on corporate America.

The group, calling itself the Shareholder-Director Exchange, wants to provide companies, boards and investors with the self-help tools they need to avoid sudden blowups, soothing these sometimes strained relations.

The exchange is made up of representatives from big investors like BlackRock and Vanguard; board members from companies including Home Depot, Coca-Cola and Hertz; and corporate advisers from JPMorgan Chase and the law firm Cadwalader, Wickersham & Taft, who typically defend against activists rather than work for them.

The group began discussions last year to try to develop a protocol for institutional investors and board members to follow when either side wants to talk to the other.

Activists were not part of the working group that developed the protocol, however.

Still, when the endeavor is announced on Monday, the participants hope it will provide a template for healthy relations between investors and directors around the country.

“There’s an unfortunate gap in dialogue that has developed,” said James C. Woolery, the chairman-elect of Cadwalader, who conceived of the Shareholder-Director Exchange and oversaw its development. “Shareholders and the boards that serve them need to be closer, they need to be more integrated, and there need to be real relationships.”

Under the protocol, which is a voluntary set of standards that companies and investors can adopt, boards will be encouraged to meet with longtime shareholders to discuss issues of corporate governance, management performance and deal activity, as needed.

The purpose is not for board members and shareholders to discuss operations, financial results or return-of-capital plans â€" topics that are more appropriate for management. This should keep companies from falling afoul of the Securities and Exchange Commission’s fair disclosure regulations, which require that material nonpublic information is made available to all investors at the same time.

“For many things â€" financial results, the strategy, how execution is going, return-of-capital programs â€" it really is the purview of management to talk to shareholders,” said Linda Fayne Levinson, a director at Hertz and Western Union, among other companies, who was part of the group that developed the protocol.

But for corporate governance issues, management changes and long-term plans, the group recommends that boards and investors get together and talk.

“When shareholders want to talk to directors, it’s because they hate the pay program, they don’t like the C.E.O. or they want to know how directors are thinking about other governance issues, such as destaggering the board,” Ms. Levinson said.

The protocol states that when either a company or an investor wants to engage with the other, they will approach designated contacts, like a corporate secretary, and request a meeting. The other party will acknowledge the request as soon as possible, and agree to meet within 20 business days.

When the sides do meet, the goal is to create an environment where frank discussions can occur. The protocol calls for the independent nonexecutive chairman or other lead directors to attend, and for senior members of the institutional investment group to participate.

Management, lawyers and bankers are discouraged from attending the meetings.

The protocol suggests that meetings be between a company and one investor, but it allows for flexibility, so that several investors could approach directors about similar concerns. It also suggests that shareholders might attend board committee meetings or strategy retreats, or special investor days.

Once both parties air their grievances, the boards and investors are encouraged to commit to next steps resulting from the meeting, and to share the information about the engagement with other board members, management and other investor colleagues.

Though companies need not commit to specific changes for the meeting to be deemed a success, “an important element of engagement is each party’s willingness to listen carefully to one another and to take action in response to valid concerns,” the protocol states.

“These meetings have to have a purpose,” said Michelle Edkins, global head of corporate governance at BlackRock and a member of the group that developed the Shareholder-Director Exchange. “It isn’t just about everyone getting to know one another.”

The protocol has been developed as activist investors have upended relations between companies and institutional investors in recent years. Led by brash investors like William A. Ackman, Daniel S. Loeb and Carl C. Icahn, activists are pouncing on underperforming companies, demanding management and board changes, return-of-capital programs, and even spinoffs and disposals.

Increasingly, activists are enlisting the support of institutional shareholders, who often feel disconnected from a company’s board and management because dialogue is rare.

“When Carl Icahn shows up in Apple and sends a tweet, Apple stock goes into turmoil,” said Declan Kelly, chief executive of Teneo, a consulting firm that helped organize the exchange. “That means shareholders are disconnected enough from the board’s message that they are responding to a 140-character message and not trusting Apple’s directors. It’s not healthy for the financial system.”

Because of activists’ willingness to broadcast their opinions about companies in their cross hairs â€" over Twitter, on CNBC and in public letters â€" they are often granted unusual access to management and directors. Mr. Icahn, for example, recently had Apple’s chief executive, Timothy D. Cook, over to his Manhattan apartment for dinner. Many companies, by contrast, speak to their largest shareholders a couple of times a year.

The Shareholder-Director Exchange protocol is intended to establish more open lines of communication between companies and institutional investors, allowing companies to get their message out, and investors to express concerns, more frequently.

So far, the project is little more than an idea. But executives at big shareholders like BlackRock, Vanguard, Calvert Investments, State Street Global Advisors, and directors at big companies such as Yum Brands, Archer Daniels Midland and Six Flags Entertainment, are all committing to doing business this way. “It’s long been thought that talking to shareholders is only the C.E.O.’s job,” Ms. Levinson said. “We’re trying to open it up a little bit.”

Hoping to Stay Independent, Jos. A. Bank Is Said to Hold Merger Talks With Eddie Bauer

As Jos. A. Bank continues to rebuff a hostile takeover bid by Men’s Wearhouse, the clothier is exploring at least one alternative deal that would keep it independent.

The company is in talks to buy Eddie Bauer, the outdoor clothing retailer, according to people briefed on the matter.

Meanwhile, Jos. A. Bank publicly released a letter to Men’s Wearhouse on Sunday accusing its bigger rival of failing to properly disclose the antitrust risks in its takeover bid. (The letter made no mention of the talks with Eddie Bauer.)

Both Sunday’s letter and the discussions with Eddie Bauer represent the latest twists in a monthslong drama over two of the country’s biggest men’s wear sellers.

Jos. A. Bank moved first by bidding $2.3 billion for its bigger rival last fall, hoping to create a powerhouse that could better compete with the likes of Macy’s and Dillard’s.

Men’s Wearhouse rebuffed the attempts and later turned the tables, offering to buy its onetime suitor. At the moment, it has bid $1.6 billion while threatening to nominate two candidates for the target company’s board, who if elected would replace its chairman and chief executive.

Egging Men’s Wearhouse on is Eminence Capital, a hedge fund with substantial stakes in both retailers. In recent weeks, Eminence said that it was considering naming its own candidates for the Jos. A. Bank board to put pressure on the company to consider its rival’s takeover entreaty. It also sued the company in Delaware court, arguing that any alternative mergers would deprive shareholders of the benefits of a deal with Jos. A. Bank.

Jos. A. Bank has stood firm. In Sunday’s letter, the company said that it would not form an independent board committee to explore the takeover bid, arguing that Men’s Wearhouse had been cavalier in disclosing that it expects a second request for information from the Federal Trade Commission.

Jos. A. Bank noted that when it sought to buy Men’s Wearhouse, the bigger retailer argued that such a deal would raise antitrust concerns.

It also called Eminence’s motives into question, suggesting that the hedge fund was pushing for a merger because it stood to lose money if no deal happened. The company already has moved to dismiss the investor’s lawsuit in Delaware, arguing that it unfairly limited its options.

“Plaintiff is seeking to force the Jos. A. Bank board to negotiate and enter a deal with the first company that walks through the door with an offer, and at the same time, interfere with the board’s ability to explore alternatives and engage in discussions with other potential suitors,” lawyers for Jos. A. Bank wrote in the filing last month.

One of those companies is Eddie Bauer, the 94-year-old retailer best known for selling goose-down jackets and other outdoor gear.

The combination of a men’s suiting retailer and a rugged outdoor specialist may seem unusual. But Eddie Bauer is owned by Golden Gate Capital, a private equity firm that originally agreed to back Jos. A. Bank’s bid for Men’s Wearhouse with a $250 million equity investment.

Based in Bellevue, Wash., Eddie Bauer runs about 370 stores, compared to its suitor’s roughly 600-store footprint.

One of the people briefed on the matter said that talks may still fall apart. It is unclear whether Jos. A. Bank is seriously pursuing a transaction, or merely angling to elicit a higher price from its unwanted suitor.

The tactic has appeared during the takeover battle once before. Several months ago, Men’s Wearhouse held talks to buy Allen Edmonds, a men’s shoemaker, people briefed on the matter said previously. But the shoe company was eventually sold to a different buyer.

News of the talks with Eddie Bauer was reported earlier by The Wall Street Journal.

David Gelles contributed reporting.

Hoping to Stay Independent, Jos. A. Bank Is Said to Hold Merger Talks With Eddie Bauer

As Jos. A. Bank continues to rebuff a hostile takeover bid by Men’s Wearhouse, the clothier is exploring at least one alternative deal that would keep it independent.

The company is in talks to buy Eddie Bauer, the outdoor clothing retailer, according to people briefed on the matter.

Meanwhile, Jos. A. Bank publicly released a letter to Men’s Wearhouse on Sunday accusing its bigger rival of failing to properly disclose the antitrust risks in its takeover bid. (The letter made no mention of the talks with Eddie Bauer.)

Both Sunday’s letter and the discussions with Eddie Bauer represent the latest twists in a monthslong drama over two of the country’s biggest men’s wear sellers.

Jos. A. Bank moved first by bidding $2.3 billion for its bigger rival last fall, hoping to create a powerhouse that could better compete with the likes of Macy’s and Dillard’s.

Men’s Wearhouse rebuffed the attempts and later turned the tables, offering to buy its onetime suitor. At the moment, it has bid $1.6 billion while threatening to nominate two candidates for the target company’s board, who if elected would replace its chairman and chief executive.

Egging Men’s Wearhouse on is Eminence Capital, a hedge fund with substantial stakes in both retailers. In recent weeks, Eminence said that it was considering naming its own candidates for the Jos. A. Bank board to put pressure on the company to consider its rival’s takeover entreaty. It also sued the company in Delaware court, arguing that any alternative mergers would deprive shareholders of the benefits of a deal with Jos. A. Bank.

Jos. A. Bank has stood firm. In Sunday’s letter, the company said that it would not form an independent board committee to explore the takeover bid, arguing that Men’s Wearhouse had been cavalier in disclosing that it expects a second request for information from the Federal Trade Commission.

Jos. A. Bank noted that when it sought to buy Men’s Wearhouse, the bigger retailer argued that such a deal would raise antitrust concerns.

It also called Eminence’s motives into question, suggesting that the hedge fund was pushing for a merger because it stood to lose money if no deal happened. The company already has moved to dismiss the investor’s lawsuit in Delaware, arguing that it unfairly limited its options.

“Plaintiff is seeking to force the Jos. A. Bank board to negotiate and enter a deal with the first company that walks through the door with an offer, and at the same time, interfere with the board’s ability to explore alternatives and engage in discussions with other potential suitors,” lawyers for Jos. A. Bank wrote in the filing last month.

One of those companies is Eddie Bauer, the 94-year-old retailer best known for selling goose-down jackets and other outdoor gear.

The combination of a men’s suiting retailer and a rugged outdoor specialist may seem unusual. But Eddie Bauer is owned by Golden Gate Capital, a private equity firm that originally agreed to back Jos. A. Bank’s bid for Men’s Wearhouse with a $250 million equity investment.

Based in Bellevue, Wash., Eddie Bauer runs about 370 stores, compared to its suitor’s roughly 600-store footprint.

One of the people briefed on the matter said that talks may still fall apart. It is unclear whether Jos. A. Bank is seriously pursuing a transaction, or merely angling to elicit a higher price from its unwanted suitor.

The tactic has appeared during the takeover battle once before. Several months ago, Men’s Wearhouse held talks to buy Allen Edmonds, a men’s shoemaker, people briefed on the matter said previously. But the shoe company was eventually sold to a different buyer.

News of the talks with Eddie Bauer was reported earlier by The Wall Street Journal.

David Gelles contributed reporting.