Counterparties: SEC vs SAC, episode 6

By Felix Salmon
November 23, 2012

Steve Cohen has never appreciated the implication that his hedge fund, SAC Capital, made some part of its stellar returns from inside information. Now that the SEC has brought what it says is the largest insider trading case in history against one of Cohen’s former employees, that reputation is becoming harder to shake. The NYT’s Peter Lattman and Peter Henning write that Cohen is in a precarious legal position:

For the first time, the evidence suggests that Mr. Cohen participated in trades that the government says illegally used insider information — though prosecutors have not said that Mr. Cohen himself knew the information was confidential.

Any prosecution of Mr. Cohen would most likely hinge on the cooperation of Mathew Martoma, the former SAC employee charged in the case.

The WSJ’s Michael Rothfeld and Chad Bray report that the FBI tried unsuccessfully to flip Martoma against Cohen a year ago. It may have been fruitless thus far with respect to Cohen, but the same tactic does appear to have worked in building the case against Martoma (aka “the Elan guy”). Bess Levin points out that the doctor who divulged Elan’s trial results, Sid Gilman, is prepared to testify and has a non-prosecution agreement.

Martoma’s position at SAC was well within Cohen’s orbit. He worked for the CR Intrinsic fund, which Reuters’ Svea Herbst-Bayliss and Katya Wachtel note is the unit that manages most of Cohen’s billions in wealth. The FT’s Kara Scannell and Sam Jones add further color to SAC’s structure, highlighting how Cohen puts himself at the center of a complex constellation of individual traders and separate funds.

This is the sixth time an SAC employee has been linked to insider trading — but Cohen still has his defenders. On CNBC, Anthony Scaramucci offered this analogy about why Cohen shouldn’t be on the hook for his employee’s alleged scheme: “OK, so there’s a Teamster employee driving drunk on an interstate highway, we’re going to take down the president of the Teamsters union?” — Ben Walsh

On to today’s links:

An equity analyst’s take on the “reasonable doubt” over Autonomy’s numbers – Uneasy Empires

Nassim Taleb’s Twitter fight with FT Alphaville – FT Alphaville

Inside the Obama administration’s paralysis on housing policy – Zachary Goldfarb

Attention Walmart Shoppers
Black Friday deals are often available at other times during the year – WSJ

Long Reads
Why can’t India feed its people? – Businessweek

EU Crisis
The never-ending EU crisis in one chart – David Einhorn

Sad Declines
Japan is running out of Ninjas – BBC

Chinese official fired after giving new meaning to the term ‘party boss’ – Reuters

A modular nuclear power plant you can order pre-built – WSJ

Sandy rebuilding could boost GDP by 0.5% next year – Bloomberg

“Pigeon code baffles British cryptographers” – NYT

Says Science
“Sandy Island” proven not to exist – BBC

Twitter and libel law – Economist

Stuff We Are Not Linking To
10 ways to make Black Friday a workout – Huffington Post Healthy Living


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Re: Scaramucci comment. If the driver is a union employee, depending on the facts the employer can be held civilly and in some cases even criminally liable. If the driver is a non-employee union member, the answer is likely different but that scenario is irrelevant to the Cohen defense and is a smokescreen. Since Martoma was charged by a complaint rather than an indictment he may yet sing for Preet Bharara to avoid being Raj Rajaratnam’s cellmate. Keep watching.

Posted by StuartG | Report as abusive

For “Stuff We Are Not Linking To”, you should probably use a nofollow tag (if you aren’t already – a quick inspection of your source didn’t show one).

Posted by absinthe | Report as abusive

Almost the entire profit of Wall Street is built out of insider trading. You going to imprison all of them?

Posted by QCIC | Report as abusive