For years, federal investigators have been pursuing Steven A. Cohen, the head of SAC Capital, over suspicions that his hedge fund was a hive of illegal insider trading. Cohen is a renowned art collector who has an estimated net worth of $9.5 billion. One of the most successful hedge-fund managers, with average annual returns of 30 percent since he started in 1992, he has repeatedly landed in the cross hairs of a U.S. government crackdown on insider trading that burst into public view three years ago with the arrest of Raj Rajaratnam, founder of Galleon Group LLC.
Six of SAC’s current or former employees have been directly tied to insider trading, but Cohen himself has avoided becoming directly enmeshed in the scandal. It appears that the webby structure of SAC Capital has made it very difficult for investigators to pin the tail on Cohen because SAC functions as a loose affiliation of hedge funds, all overseen by Cohen but directly managed by others.
It appears that Cohen’s plausible deniability window is shrinking. Prosecutors are accusing him of direct involvement in an illicit trading scheme — a scheme allegedly run by former SAC Capital trader Mathew Martoma that netted $276 million for the firm, which the SEC is calling “the most lucrative insider trading scheme ever.” Prosecutors claim Cohen had talked with Martona about the stocks in the complaint, pulling him deeper into one of the biggest investigations of securities fraud in history.
Martoma was indicted last week for using inside information from a clinical trial of an Alzheimer’s drug to help the firm reap as much as $276 million in profits and averted losses on shares of Elan Corp. and Wyeth LLC. Cohen allegedly bought the pharmaceutical stocks on recommendations from Martoma and sold them after Martoma was told of disappointing results from the companies’ tests, prosecutors said.
According to prosecutors, after Martoma got inside information in July 2008 that the trial wasn’t going well, he messaged Cohen. “Is there a good time to catch up with you this morning? It’s important,” Martoma said in an e-mail to Cohen on a Sunday, after he was briefed by Gilman on the negative trial results of the drug, according to the complaint. An hour later, Martoma apparently had a 20-minute phone call with Cohen. The complaint didn’t say what the two men discussed. The next day, Cohen instructed a head trader at SAC Capital to begin selling positions it owned in Elan and “to do so in a way as to not alert anyone else, inside or outside of the hedge fund,” according to the complaint.
So, the question of the day is whether Martoma will take a plea and essentially spill the beans on Cohen, thereby avoiding potentially years of jail time, or will he keep quiet, stand trial and face the consequences. A betting man would wager that Martoma will turn against Cohen to protect himself and his family, but, to date, he has not done so. We will soon know the answer.