U.S. Prosecutors Build Case Against Steve Cohen, Hedge Fund Billionaire

SAC Capital is one of the most profitable hedge funds in history with $15 billion in assets averaging 30 percent in annual profits for 20 years running. Today Wall Street is watching nervously as U.S. government lawyers work on a case against billionaire founder Steven Cohen for insider trading.

I first became aware of the company in October 2010 when Anish Jina and Jonathan Siegel, two analysts at CR Intrinsic Investors - a subsidiary of SAC Capital - called me shortly after I wrote a column in the Guardian newspaper about a company called Biothrax that had made $1 billion in profits out of an anthrax vaccine of contested quality despite the fact that the company neither invented the product nor built the production facilities.

Jina's approach was friendly at first. "I have done some work myself on BioThrax and was wondering if I could have a few minutes with you to get some context and to discuss the article" he wrote in an initial query. He quickly turned aggressive in his questioning, attempting to ferret out any unpublished list of companies that might be subject to similar investigations.

It now turns out that other CR Intrinsic Investors analysts were working all possible sources to figure out which companies were about to collapse (or take off) so that they could either buy or sell their stocks to make a quick million. For example, last November the U.S. Securities and Exchange Commission charged Mathew Martoma of CR Intrinsic Investors who approached Dr. Sidney Gilman, then a 73 year old professor at the University of Michigan, for information on a clinical trial for an Alzheimer's drug being jointly developed by two pharmaceutical companies.

At the time Gilman was chairman of a board monitoring trials of the drug. He was persuaded to sell SAC inside information ahead of time that allowed the investors to avoid $276 million in losses by selling stock as soon as they learned that the drug trials were going badly.

Martoma is one of eight individuals to be named for trading on inside information at SAC Capital (see below for a list) and the media has speculated that the government is now seeking to nab the head of SAC Capital who has "emerged as the Justice Department's great white whale in its insider trading investigation - a Wall Street version of Moby-Dick being pursued by Captain Ahab" according to the New York Times.

Preet Bharara, U.S. Attorney for the Southern District of New York, is leading the pursuit. The man he is tracking is not hidden from view. Although Steve Cohen rarely gives interviews and lives in a gated 35,000 square feet mansion in Greenwich, Connecticut - he appears in public often such as at the recent Hurricane Sandy benefit concert in Madison Square Gardens in December where he was spotted close to the stage during the Bon Jovi and Billy Joel performances as well as at the World Economic Forum in Davos in Switzerland in January.

SAC Capital - the company Cohen founded in 1992 - has been described as a "high-stress, pressure-packed culture" where staff "relentlessly (dig) for information about publicly traded companies to form a 'mosaic' building a complete picture of the company's prospects" so that they can buy or sell stock in advance of dramatic changes in the share prices.

Bloomberg speculated last week that Cohen might have given inadvertently given evidence about how he turned a blind eye to less than scrupulous ways of gathering information at a court trial in 2011 when he talked about his oversight of CR Intrinsic Investors: "The way I understand the rules on trading on inside information, it's very vague," Cohen said. "I've read the compliance manual, but I don't remember exactly what it says." At the time SAC Capital was trying to get out of a lawsuit brought by Canadian insurer Fairfax Financial alleging that SAC Capital and another hedge fund - Kynikos Associates Limited - took part in a "short conspiracy" to spread negative stories about Fairfax after betting that it would lose value. (the full transcript is available here)

The slow motion government investigation of Cohen and SAC Capital that has been discussed publicly for four years has made some Wall Street investors worried about the hedge fund. Wealthy investors in places like Citibank have asked SAC Capital to return as much as $1.7 billion by the end of 2013. (Hedge funds often have rules that do not allow money to be withdrawn overnight as one might from a bank)

But Cohen has his cheerleaders who say that the federal investigation is a waste of time and money. "It's worth asking whether relentlessly hunting insider-trading suspects like Cohen is a wise use of the government's resources - especially considering that the people responsible for the worst financial crisis since the Great Depression continue to get off scot-free," writes William D Cohan at Bloomberg BusinessWeek.

Cohan has a point - bankers on Wall Street profited from knowingly ignoring warning signs about the collapse of the sub-prime mortgage industry and few have been charged. But that's no reason to let up on tracking potential criminal activity in the hedge fund industry.

Former SAC staff pursued by the U.S. authorities for insider trading:

* Anthony Chiasson; former SAC trader found guilty.

* Noah Freeman: worked at SAC from 2008 to 2010, now a witness for the government.

* Jonathan Hollander: worked for CR Intrinsic Investors. A case against him has been dropped.

* Jon Horvath: worked at Sigma Capital Management, another SAC Capital subsidiary. Pled guilty and is cooperating with the government.

* Richard Choo-Beng Lee: worked at SAC from 1999 to 2004. Pled guilty to two counts of insider trading.

* Donald Longueuil: worked at CR Intrinsic Investors from 2008 to 2010, has pled guilty after Freeman testified against him.

* Mathew Martoma: worked at CR Intrinsic Investors.

* Michael Steinberg: on paid leave from Sigma Capital Management where he was Horvath's boss.

• 185 Corruption