Insider trades may mean $1.2b penalty for SAC

Hedge fund giant said ready to plead guilty to crimes

NEW YORK — The criminal case against SAC Capital Advisors, the hedge fund giant, has reached a conclusion, people briefed on the matter said, with the government set to announce as soon as Monday that SAC will plead guilty to insider-trading charges and pay a fine of roughly $1.2 billion.

But the plea deal would hardly remove SAC and its owner, the billionaire money manager Steven A. Cohen, from the legal spotlight.

For one thing, the people said, the agreement does not resolve a separate civil lawsuit that the Securities and Exchange Commission brought against Cohen in July, accusing him of failing to supervise his employees. Six former SAC traders have pleaded guilty to insider-trading crimes.


The firm and Cohen will also remain under scrutiny during the coming criminal trials of two other employees, one whose case begins in federal court in Manhattan this month.

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The trials of the employees, Michael S. Steinberg and Mathew Martoma, are expected to provide the first detailed witness testimony about inner workings of SAC and Cohen’s role in the trades at the center of those cases.

And although Cohen has not been charged criminally or even accused of insider trading, the people briefed on the matter said, federal authorities continue to view him and other SAC employees as targets of the continuing insider-trading investigation.

In recent weeks, the people said, the FBI has been poring over SAC’s trading records and increasingly pursuing the cooperation of potential witnesses. With the help of one person who is cooperating, authorities have scrutinized SAC trading in shares of Gymboree, the children’s clothing and music chain, said these people, who spoke on condition of anonymity because the guilty plea had not been announced. Authorities suspect the trading activity might involve Cohen.

The flurry of investigative work shows that even after a guilty plea and a decade of digging, the government continues to press its case relentlessly against SAC.


Cohen, 57, a collector of art and real estate, has assured his investors that he has acted appropriately at all times.

As the investigations drag on, Cohen has come to believe that the government is fixated on trying to shut down his business, people close to him say.

A plea deal — the latest but not the last development in the case — would come more than three months after the US attorney’s office in Manhattan announced a criminal indictment of SAC, a rare action against a Wall Street firm.

The indictment cited the guilty pleas of SAC’s former employees as evidence that the firm permitted a systematic insider-trading scheme for more than a decade.

The $1.2 billion penalty for SAC, which at the beginning of the year managed $15 billion, would be a record fine for insider trading.


It would come on top of a $616 million penalty that the fund already paid to the SEC, which previously filed civil charges against the firm.

As part of its agreement with prosecutors, SAC, based in Stamford, Conn., would also wind down its business of managing money for outside investors, the people briefed on the matter said. It would still allow Cohen and SAC to invest his own wealth, which is estimated at about $9 billion.

The SEC, in its civil “failure to supervise” case against Cohen, is looking to go a step further than federal prosecutors. The commission, the people briefed on the matter said, is expected to demand that Cohen himself never manage outside money at SAC or anywhere else.

That civil action, which has been delayed pending the outcome of the criminal case against SAC, contends Cohen ignored “red flags” that should have led him to investigate suspicious trading activity at his fund.

Cohen has denied the accusations. “Steve Cohen acted appropriately at all times and will fight this charge vigorously,” a spokesman said when the civil action was brought in July.

The SEC’s case stems from charges against former SAC employees like Martoma and Steinberg.

Prosecutors have accused Martoma of corrupting two doctors to obtain confidential data about an Alzheimer’s drug being developed by the pharmaceutical companies Elan and Wyeth. When one of the doctors told Martoma that the trial results were not as good as expected, SAC dumped its shares, netting gains and avoiding losses totaling $276 million, the government said.

With the arrest of Martoma a year ago, the government appeared to be zeroing in on Cohen. Prosecutors said Cohen was intimately involved with the Elan and Wyeth trades. The day before SAC began aggressively selling its shares, Martoma spent 20 minutes on the telephone with Cohen.

But the government stopped short of saying that Martoma told Cohen about the secret clinical trials.

In a sworn deposition with the SEC, Cohen said he sold the drug stocks after Martoma told him that he had lost conviction about the investments, said a person briefed on the case. There was little else he remembered about the conversation.

Government investigators sought to turn Martoma into a witness against SAC and Cohen. Although he rebuffed the government’s multiple overtures, and his trial is scheduled for January, some investigators are holding out hope that he will plead guilty and cooperate.

Steinberg faces charges that he traded shares of the technology companies Dell and Nvidia while in possession of secret information about their quarterly earnings results.