Death By A Thousand Cuts: The Law’s Pursuit Of Steven Cohen

Federal regulators have been after SAC Capital for the better part of a decade, slowly chipping away at Steven Cohen’s empire. But will the most recent charges brought against SAC Capital by a federal grand jury finally drive Cohen out of the business of investing public money?

Steve Marcus / Reuters

Steven Cohen is no stranger to federal regulators. The Securities and Exchange Commission has been after his fund SAC Capital for the better part of a decade, and now a federal grand jury has brought charges against SAC alleging wire and securities fraud.

Cohen himself is not named in the indictment — he is referred to repeatedly only as “SAC Owner” — and over the last ten years, the Feds haven’t gathered enough evidence to nail him, despite taking down several of his top lieutenants on insider trading charges, including Richard Lee, who was charged with the crime on Tuesday. The closest they came was in March, when Cohen agreed to pay $616 million to settle insider trading allegations brought against him by the SEC.

Without enough evidence to charge Cohen personally with criminal wrongdoing, regulators appear to be using a death by a thousand cuts approach to bringing him down — first going after several of his portfolio managers, then bringing a civil suit against him, and now taking the rare step of filing criminal charges against his entire firm.

The latter move has drawn comparison’s to the Department of Justice’s indictment of accounting firm Arthur Andersen as part of the Enron accounting scandal. There are several reasons for why bringing charges against an entire company is rare, not the least of which is that once painted with a brush of alleged criminality it is nearly impossible to continue operating, which in turn typically results in massive job losses for both the accused and the innocent.

In SAC’s case, if the objective of regulators isn’t to bring down the entire firm, then it is to at least stop Cohen from investing other people’s money. Indeed, the indictment describes SAC as a company that “systemically” looked for an investing “edge” not just in trading but also in its hiring practices, not so subtly implying that as the founder and “SAC Owner” it was Cohen who turned a blind eye, if not outright encouraged, this type of behavior.

“The SEC has always taken a position that they’re not there to carry out personal vendettas,” said one New York hedge fund attorney. “That said, they seem to have the staff and their commissioners have a collective belief that [Cohen] violated the law.”

Already, a steady stream of redemptions have followed the investigation. The fund was dealt a heavy blow in May, for instance, when private equity giant Blackstone said it would ask for a “significant portion” of the $550 million it had invested in SAC back before its latest redemption request deadline. According to the New York Times, roughly $5 billion of the $6 billion in outside money managed by the company has been redeemed.

As a result, Cohen may have no choice but to close SAC in its current configuration and go the way of the family office model, relinquishing his management of public funds and only investing his personal wealth, estimated at $9 billion. Provided Cohen isn’t barred from trading entirely as a result of the civil action brought against him last week — which is possible — industry observers are already of the opinion that he is done running public money and transitioning to a family office is almost certain.

“Most likely he’s going to go family office,” the hedge fund attorney, who is not related to the SAC case, said. “With the expense of defending this, and who would be willing to give him money going after this? If you’re a fiduciary you certainly can’t.”

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