SAC Capital Is Girding Its Gold-Plated Loins for S.E.C. Charges

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Cohen in the crosshairs.
Cohen in the crosshairs. Photo: Scott Eells/Bloomberg via Getty Images

Last week, we theorized that the S.E.C. and federal prosecutors could be preparing formal charges against SAC Capital gazillionaire Steve Cohen, based on the seeming attack on Cohen's plausible deniability in the insider trading case being brought against former SAC Capital trader Mathew Martoma.

Today, the S.E.C. appears to be moving even more quickly than we anticipated to reel in its big fish.

SAC told investors on a conference call this morning that it has gotten a Wells notice from the S.E.C., according to CNBC. A Wells notice is a legal heads-up that is sent to people and companies that the S.E.C. is preparing to bring enforcement actions against. (It's a sort of gentlemanly formalized gesture that gives the soon-to-be-accused a little time to preemptively make their case for innocence, since the mere act of getting formal S.E.C. charges can often harm a firm's reputation irreparably.)

In addition, the firm said it is taking a long, hard look in the mirror:

In a call with concerned investors Wednesday morning, managers at the hedge-fund SAC Capital said that while they are confident that the firm’s selloff of two pharmaceutical positions several years ago was appropriate, they are nonetheless revisiting their compliance protocols to see if further improvements might be needed, according to someone who was briefed on the discussion.

Notably, SAC reportedly notified investors that the S.E.C.'s Wells notice was sent to SAC Capital Advisors, the holding company that contains a bunch of smaller SAC funds. That means that enforcement officials likely believe they have enough evidence Cohen was involved with (or at least knew about) illicit insider trading going on under his watch to implicate him directly in a case, rather than going after traders lower on the food chain.

To reiterate: Cohen has not been charged, and Wells notices can peter out if a firm presents a strong argument for its innocence. And Bloomberg is now reporting that SAC's Wells notice does not name Cohen, instead citing "control person" liability instead. (This is the prosecutorial equivalent of a subtweet.)

But make no mistake — a suit against SAC Capital will implicate Cohen even if he isn't officially named. Cohen has parried past attempts to implicate him in insider trading by throwing his hands up and pointing to his firm's loose, webby structure — like an NBA coach claiming that he can't possibly know what his players do in the off-season — but a set of civil charges against the parent company and/or Cohen directly would cut to the heart of that plausible deniability. And financially, he's likely to suffer either way — Wells notices tend to spook investors, who typically don't want to be anywhere near a hedge fund that is under S.E.C. investigation.

Cohen, for his part, is still staying tight-lipped. “Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry," an SAC spokesman reiterated, recycling an old statement from last week.

But there's going to be a lot of stress-eating and drinking this month in Stamford, Connecticut. The Crab Shell might want to staff up, just in case.