The hedge fund operated by embattled billionaire Steven A. Cohen was hit with white-collar criminal charges Thursday, less than a week after federal regulators accused him in a related civil case of failing to prevent insider trading at his firm.
SAC Capital Advisors is charged with wire fraud and four counts of securities fraud; prosecutors allege the crimes were carried out from 1999 through at least 2010.
Cohen himself wasn't named as a defendant in the criminal case, but the charges could threaten to topple a firm he founded and that once managed $15 billion in assets.
Last week, an SAC Capital spokesman said that the related allegations brought by the Securities and Exchange Commission have "no merit" and that "Steve Cohen acted appropriately at all times."
SAC Capital has been at the center of one of the biggest insider-trading fraud cases in history. Four employees have already been criminally charged with insider trading, and two of them have pleaded guilty. And an SAC affiliate has agreed to pay $615 million to settle SEC charges.
Cohen, who lives in Greenwich, Conn., is one of the highest profile figures in American finance and one of the richest men in America. He is among the handful of upper-tier hedge fund managers on Wall Street who pull in about $1 billion a year in compensation.
The SEC alleged that Cohen received "highly suspicious information that should have caused any reasonable hedge fund manager in Cohen's position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws."
An SAC portfolio manager, Mathew Martoma, has pleaded not guilty to insider-trading charges accusing him of earning $9 million in bonuses after persuading a medical professor to leak secret data from an Alzheimer's disease trial between 2006 and 2008. Authorities haven't disputed reports that Cohen is the "Hedge Fund Owner" repeatedly referenced in a criminal complaint against Martoma.
The papers describe how Cohen rejected the advice of his own analysts and instead bet heavily on Martoma's tips about secret data from a study of an experimental drug. After learning through Martoma in 2008 that experiments weren't going well, Cohen instructed his top trader to begin dumping stock, "and to do so in a way to not alert anyone else," the papers say.
In the past, the Justice Department has been wary of bringing criminal prosecutions against entire organizations out of fear of the "collateral consequences" — that going further than fining a company could completely shut it down. The accounting firm Arthur Anderson went under after its conviction in 2002 of destroying Enron-related documents before the energy giant's collapse — an outcome that cost tens of thousands of jobs.
U.S. Attorney Preet Bharara, in remarks last week not specific to the SAC Capital probe, alluded to the Arthur Anderson episode.
"We have a lot of power to bring cases like that and we don't do it a lot in part because of Arthur Andersen, and part because we care about what the interest of justice requires and we care about collateral consequences," Bharara said. "But there are circumstances in which it is appropriate to do, particularly when you have continued malfeasance over time among a large number of people."
There are already reports that SAC's clients are pulling their money from the Stamford, Conn.-based firm. It's not always an easy process: Clients usually have to give notice of at least 30 days. Hedge funds, to protect themselves from such metaphorical runs on the bank, can write into their contracts that they'll deny withdrawal requests if too many clients want to pull out money at the same time.
In the face of mounting legal woes, Cohen has kept up his philanthropic efforts. The Steven and Alexandra Cohen Foundation, named for Cohen and his wife, recently helped sponsor a $10,000-per-table poker tournament in Manhattan that raised money for an education advocacy group.