By Emily Flitter
NEW YORK, Nov 28 (Reuters) - It could be weeks, maybe
months, before U.S. securities regulators move on their threat
of filing civil fraud charges against Steven A. Cohen's SAC
The $14 billion hedge fund now faces a period of meetings
with SEC lawyers that could stretch on for some time, said
lawyers familiar with the process.
At the end, SAC Capital could be dealing with a number of
legal problems, the most serious of which would be insider
trading allegations in civil court.
Cohen and SAC President Tom Conheeney told investors on a
call on Wednesday that the SEC had sent the hedge fund a written
warning, known as a Wells notice, according to two sources who
listened to the call.
Wells notices describe the specific rule violations the SEC
is planning to cite if it takes action. This gives target of an
investigation a chance to respond with arguments or evidence
that could affect the SEC's decision about whether or not to
The announcement by the hedge fund came a week after the SEC
and federal prosecutors charged a former portfolio manager at an
SAC affiliate with operating a $276 million insider trading
"It suggests that the SEC has something more," said Stephen
Plotnick, litigation partner at Carter Ledyard & Milburn in New
The SEC and federal prosecutors accused Mathew Martoma, who
worked at SAC's CR Intrinsic unit, with selling shares in two
drug companies based on information he obtained from Sidney
Gilman, a doctor involved in a clinical trial for a drug the two
companies were developing.
Both the criminal and civil complaints against Martoma
describe a person who, though unnamed in either complaint, is
widely understood by those following the case to be Cohen
himself, personally signing off on trades in the stocks of
drugmakers Elan and Wyeth, now owned by Pfizer.
"The missing link has been the connection between the
discussions Martoma had with Gilman and Cohen knowing that that
is where Martoma obtained the information," Plotnick said.
"That's really key to bringing any kind of insider trading
charges against Cohen or SAC. So if that's the direction that
this is going in, it could be something like that - that they do
have some sort of linkage or believe they have some sort of
Insider trading is not the only violation for which the SEC
could bring action. If the agency can prove a breakdown in the
internal controls at SAC that should have prevented insider
trading from occurring, the hedge fund could also face fines and
an order to fix its systems. Some legal experts think the SEC
could accuse Cohen of "failure to supervise" under a provision
in the Dodd-Frank act.
Legal experts say to expect more news about the case in the
"It's a period of intense activity," said Stephen Crimmins,
a partner at K&L Gates in Washington.
"When we see a financial services entity getting a Wells
notice, often what happens next is we see an announcement of a
negotiated resolution where the entity consents to remedies that
the staff felt it could obtain if it did actually litigate the
case - often without the entity admitting or denying liability."
Crimmins said entities like hedge funds find it easier to
settle with the SEC than individuals do.
For years, Cohen's firm has been dogged by allegations that
it has relied on insider information to deliver an average
annual return of 30 percent since it was founded in 1992. The
charges against Martoma are the closest authorities have ever
come to implicating Cohen himself in the illegal activity.
Martoma is not the first ex-SAC employee to be accused of
insider trading; he is the fifth. A sixth SAC employee was
implicated but has not been charged.
The investigation of potential insider trading at SAC has
been so wide-ranging that it is far from certain the SEC's Wells
notice pertained specifically and exclusively to the Martoma
Cohen's stature on Wall Street makes it more unlikely that
the SEC will try to bring a minor action against him, one legal
"I tend to think that if they're going to bring an
enforcement action against SAC Capital and Steve Cohen that
they're going to try to find something more substantial than
failure to supervise," said Thomas Gorman, a partner at Dorsey &
Whitney in Washington.
"If you're going to take on a target like SAC Capital and
Steven Cohen, you're probably going to look for the insider
(Additional reporting by Svea Herbst-Bayliss and Katya Wachtel)
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