By Svea Herbst-Bayliss and Katya Wachtel

NEW YORK, Nov 28 (Reuters) - The U.S. government is considering filing civil charges against SAC Capital Advisors over an insider trading case as regulators tighten the screws around Steven A. Cohen, the $14 billion hedge fund's founder and one of the industry's most famous traders.

Cohen and a top SAC executive told investors on a 20-minute conference call on Wednesday that the Securities and Exchange Commission recently had issued a formal warning called a Wells notice to the firm indicating charges are likely, according to two sources, who listened to the call.

The move by the SEC comes a week after federal prosecutors and regulators charged one of SAC Capital's former employees with running one of the most lucrative insider trading schemes ever. Authorities have not charged Cohen with wrongdoing but they contend he signed off on the trades.

For years, Cohen and SAC have been dogged by allegations that the firm has relied on insider information to deliver an average annual return of 30 percent since Cohen founded it in 1992. Until this point, the SEC had taken no steps toward bringing a civil complaint against the hedge fund.

The sources said Cohen, 56, spoke briefly at the beginning of the phone call. Then, he let his top deputy, SAC President Tom Conheeney, handle the remainder, which one of the two people who listened in described as "carefully scripted." Callers were not able to ask questions.

People familiar with the potential civil charges against SAC Capital said the charges appear to be related to last week's arrest of Mathew Martoma, who worked for CR Intrinsic, a SAC Capital division, until 2010.

Last week the SEC filed civil charges against Martoma and sought disgorgement of profits from CR Intrinsic, but did not mention SAC Capital by name. Securities lawyers said regulators may be looking to file civil charges against SAC Capital since it is entity that controls CR Intrinsic.

The possiblity the SEC could now file civil charges against SAC Capital might futher unnerve investors in the hedge fund. Martoma is the fifth person once associated with the hedge fund to be charged with insider trading.

Over the past week, SAC Capital has been reaching out to its biggest investors and held a staff meeting last week to allay fears about the firm's future. The sources on the call said it appears the firm had been aware that the SEC was considering this move for some time.

A SAC Capital spokesman reiterated the statement the firm made last week following Martoma's arrest. In that statement, the firm said: "Mr. Cohen and SAC are confident that they have acted appropriately."

IN THE NAME OF TRANSPARENCY

On the SEC's investment advisory website, where all hedge funds must now register, SAC Capital recently updated its filing to note that the SEC had named CR Intrinsic, the unit where Martoma worked, as a defendant in last week's civil complaint. The firm, however, did not update the online filing to show that it had received a Wells notice.

Authorities charged Martoma with using illegally obtained information from a doctor about poor clinical results at two healthcare companies - Elan Corp Plc and Wyeth, which is now owned by Pfizer Inc - to recommend that SAC eliminate a big position in their stocks. This recommendation kept the firm from incurring millions of dollars in losses, the government said.

Cohen has not been accused of wrongdoing.

Some on Wall Street applauded SAC Capital for saying it had received the notice, a fact not always disclosed by investment firms who get them.

"The best way to run a money management business, especially post-Madoff, is to let your investors know as much as possible, almost as if you're in a glass bowl. The more transparency you can provide, the better," said Jason Ader, a former Wall Street gaming analyst who now runs Ader Investment Management, which invests in hedge funds.

While 60 percent of SAC's $14 billion in assets belong to Cohen and his employees, the fund's strong and steady returns have made it popular with outside investors as well. Blackstone Group LP has been a long-term investor.

With so much of the money in SAC coming from wealthy investors, the firm may not suffer from the kind of redemptions that a fund dependent on pension fund money might.

How investors will react to this news, however, is still far from certain, people familiar with SAC said.

One key may be what Blackstone Group's big fund of funds does, as it once had up to $500 million in SAC and is something of a bellwether in the hedge fund industry. Blackstone's investors include smaller and midsize endowments that might get itchy about SAC's Wells notice and pressure the fund of funds to pull its money from the firm.

A spokesman for Blackstone did not return a call seeking a comment.

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BEARING ALL LEGAL COSTS

On the conference call, Conheeney, SAC's president, again told investors that the firm would bear all costs of defending itself against any legal action, the source said.

Conheeney also said the SEC had questioned Cohen about this matter earlier this year and that he had been responsive to all the government's questions.

The FBI has been investigating SAC on and off since 2007.

Despite SAC's outstanding returns, the firm's reputation as a rough-and-tumble trading shop has sometimes prompted advisers to tell clients to get out or steer clear of the hedge fund.

Todd Petzel, chief investment officer of Offit Capital Advisors, said he had never invested with SAC because of a lack of transparency, even though he knows of the firm's "incredibly demanding culture" through interactions with Cohen and former SAC employees.

"SAC will tell you that they have incredibly rigorous compliance process," Petzel said. "I'm sure if this ever comes to court, they will demonstrate in court all the training that every one of their portfolio managers goes through."

On the other hand, he said Cohen probably protected himself by distancing himself from day-to-day activities.

The SEC usually issues Wells notices to give firms plenty of warning that legal action is coming.

In the last year, hedge fund manager Philip Falcone and his Harbinger Capital Partners said they had received such notices.

"Certainly the Wells process and the public disclosure that there is a Wells process with respect to a hedge fund is something that is very challenging for the management of the hedge fund," said Stephen Crimmins, a partner in law firm K&L Gates in Washington.

Cohen and his top-flight legal team will probably work around the clock to try to negotiate a resolution and avoid a civil lawsuit, Crimmins said.

"It's a period of intense activity," he said. "It's a period that usually doesn't last that long, so we should expect some more news from SAC." 

(Additional reporting by Emily Flitter and Sam Forgione)

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