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Should SAC Capital’s Steve Cohen Face Criminal Charges?

Should SAC Capital’s Steve Cohen Face Criminal Charges?

$615 million doesn't go as far as it used to. That is how much SAC Capital Advisors paid to settle a civil case with the SEC in March. As part of the settlement, SAC neither admitted nor denied wrongdoing. Apparently that wasn't good enough. Over the weekend SAC founder and billionaire Steven A. Cohen received a subpoena to testify before a grand jury as part of a different investigation into insider trading.

The fact that the government has been trying to build a case against Cohen is hardly news. Cohen has been playing Moby Dick to a series of would-be Ahabs in the government. The chase has been well documented, most recently in an exhaustive Vanity Fair piece, which cast U.S. Attorney Preet Bharara as the current harpoon thrower.

If Cohen is charged and convicted it would be the most significant blow against the Wall Street Insider Club since the 80s, when Rudy Giuliani took down Michael Milken. There have been high-profile cases since, but none of the targets were as central to the day-to-day business of trading as in the case against Cohen. Bernie Madoff was a one-off Ponzi scheme, massive in scale but relatively obscure. After Madoff's fraud was exposed, the collapse was swift and conviction was a foregone conclusion.

SAC is different because it is of the Wall Street system. The firm reportedly pays more total brokerage commissions every year than any other group on earth. Cohen isn't just a Moby Dick to ambitious politicians like Bharara; he's also a whale to every firm on Wall Street. Instead of spears, brokerages and analysts bombard SAC with ideas, edges, speedy fills and every other micro-advantage that comes with being a target customer.

"His advantage over those many years has been some kind of trading savvy but also just minute advantages of information," says Yahoo! senior columnist Michael Santoli. "It seems as if that's been exactly the ethos of the firm, to stretch for the last piece of information."

What the government has been interested in is how extreme that stretch was. Structurally, Cohen sits at the hub of a group of offshoot funds. Successful in-house SAC traders would be given seed money for their own hedge funds. If these funds outperformed, and possibly shared their best ideas with Cohen, the rewards for the managers could be enormous. Fund managers who failed to generate returns in this system were forced to walk the plank.

So far the government has been able to build cases against many of SAC's offshoot funds. Scores of associates of these offshoot operations have been convicted of or have confessed to various forms of trading off insider information. SAC's defense has been to say, in effect, "all we did was tell these guys to outperform; how they did it was, for the most part, their own business."

Without evidence that Cohen himself was knowingly profiting off information he knew to be material and non-public, a conviction on insider trading charges is a reach. Unless there is a smoking gun, U.S. attorneys will need to either take Cohen down on relatively minor but related charges (think Al Capone getting busted for tax evasion) or prove SAC is an ongoing criminal organization headed by a single individual.

As Santoli points out, the government hasn't laid out its strategy against Cohen and no one anywhere is comparing SAC to a mob family — yet. All we know for now is that the government is continuing to commit massive time and energy to bringing down the most successful hedge fund in history.

For cynics who thought this case was just another example of a rich guy buying his way out of prison, things just got much more interesting.