US Federal prosecutors and the investment firm SAC Capital Advisors agreed on Thursday to a protective order that requires the firm to keep most of its money in its fund while operating under a criminal indictment, according to a person briefed on the case.
The order serves a dual purpose, preserving the government's interest in any money that it might seize from SAC in a forfeiture action, while also allowing the firm to continue running its money management business.
Under the terms of the agreement, SAC must maintain at least 85 per cent of its assets owned by the firm and its various entities. The firm had about $14 billion under management as of July 1. If assets fall below the 85 per cent threshold, SAC has to replenish them in order to maintain that level, this person said.
Judge Richard J Sullivan of Federal District Court in Manhattan must approve the protective order, which, though expected, was intensely negotiated by SAC's legal team and government lawyers over the last two weeks.
Federal prosecutors, after a lengthy investigation, brought a criminal case against SAC on July 25, charging the firm with carrying out a vast insider trading conspiracy. Though not named in the indictment, Steven A Cohen, the billionaire owner of SAC, was accused of fostering an unethical culture that, prosecutors said, was "a veritable magnet for market cheaters".
A spokesman for SAC said that the firm has never encouraged, promoted or tolerated insider trading. Cohen has said he behaved appropriately at all times. The Wall Street Journal earlier reported online on the terms of the protective order.
Alongside the criminal charges, prosecutors filed a civil forfeiture complaint in Federal District Court in Manhattan that said the firm commingled illegal insider-trading profits with the rest of its money, tainting all of its funds. The complaint seeks "any and all" of SAC's assets, meaning that it believes it could, theoretically, pursue all of the firm's money.
Prosecutors, however, are expected to demand that SAC forfeit money that tied to any illicit trading, a sum that could reach several billion dollars, a person briefed on the case said. Still, the protective order gives the government the flexibility to pursue a larger amount if new insider trading activity surfaced while the case wends its way through the courts.
Preet Bharara, the US attorney in Manhattan who brought the charges, did not seek to freeze SAC's assets when bringing the indictment. He and his team of prosecutors wanted to avoid hurting SAC's investors and trading partners, said people briefed on the case. There was also some concern that freezing the firm's assets - including borrowed money, SAC has about $50 billion invested - could disrupt the financial markets.
Indicting a company is an unusual and aggressive step for the government. In the case of SAC, however, the government believed that the action was justified because of vast misconduct at the firm and a shoddy compliance regime.
Ten former SAC employees have either been charged or implicated with illegal trading while at the fund; of those, five of have admitted guilt. The indictment said that Cohen hired a portfolio manager despite warnings about his engaging in insider trading at another hedge fund, and overruling objections from his lawyers.
On Tuesday, Bharara appeared on CBS This Morning to discuss the case. "The scope and the pervasiveness of the insider trading that went on at this particular place is unprecedented in the history of hedge funds," Bharara said.
Even without the security of a protective order being struck with the government, banks have continued to trade with SAC since the indictment. And at least one top Wall Street executive has issued a public statement of support for the firm.
"They're an important client to us, they have been an important client to us," said Gary D Cohn, president of Goldman Sachs, in an interview on CNBC last month. "We continue to trade with them, and they're a great counterparty."
At the start of 2013, SAC had about $15 billion under management, with about $9 billion of that amount belonging to Cohen and his employees. In recent months, amid the intensifying government investigation, outside investors have asked to withdraw about $5 billion from the fund.
That money is being returned in instalments every three months, an SAC policy that protects the fund from being forced to sell its positions at unfavourable prices.
Also on Thursday, an administrative law judge in Washington approved a request by federal prosecutors to delay the civil case brought last month against Cohen by the Securities and Exchange Commission (SEC) pending the outcome of the criminal proceedings against SAC and two former employees of the fund. It is common for SEC actions to be halted until the criminal prosecution is resolved.
The SEC's lawsuit accuses Cohen of failing to supervise the two former employees, Michael S Steinberg and Mathew Martoma. Both Steinberg and Martoma have pleaded not guilty and have trials schedule to begin in November.
Copyright 2013 The New York Times News Service
