SEC vs. SAC give rise to many legal theories

July 22, 2013

It seems everyone has their own pet theory about why the SEC chose now to move against hedge fund titan Steven A. Cohen after years of being part of the hunt along with the FBI and federal prosecutors.

Here are few of them that I got from talking to a number of legal eagles: including former prosecutors and regulators.

The most obvious one is that securities regulators, unlike federal prosecutors, are bumping up against  a pretty hard and fast five-year deadline for filing charges against Cohen and it was pretty much now or never. In pursuing a failure to supervise  charge against Cohen in an administrative proceeding, the Securities and Exchange Commission is gunning to put Cohen out of business without actually charging he has done any insider trading himself.

Yet if the SEC is successful in barring Cohen from managing other people’s money it may be enough of a victory after nearly 10 years of on-and-off investigation which has failed to produce sufficient evidence that Cohen knowingly engaged in insider trader,  encouraged others at his SAC Capital to do so, or was actually even aware improper trading was taking place.

In this view, the SEC is playing tough guy—something it is often accused of not doing—and trying to make the most out of what is a fairly weak hand.

Of course many are taking the SEC administrative proceeding as a sign that prosecutors, despite continuing to investigate Cohen, will come up empty when it comes to finding any criminal liability they can tag on the 57-year-old billionaire. The thought is that prosecutors and the FBI are reluctant to admit they can’t find evidence of wrongdoing, especially after committing so much resources to the pursuit of Wall Street’s own version of Moby Dick.

So rather than admit they are closing up shop, prosecutors and the FBI will continue to investigate but let the SEC take care of barring Cohen from the industry he helped build. Under this theory everyone gets to save face: the SEC acts tough, prosecutors can act as if they are still on the prowl and Cohen never need admit he did anything wrong and can argue he was drummed out of the business on a trumped up charge.

Another theory is the SEC is moving to save face because it is worried about the outcome of the civil trial of former Goldman Sachs bond sales Fabrice “the Fab” Tourre, who is the lone defendant in the case arising out the alleged sale of a faulty subprime mortgage-backed security just before the bursting of the housing bubble. The thinking here is the SEC needs to act tough in advance of a possible defeat, so it is moving now against Cohen, slapping down a proposed settlement with hedge funder Phil Falcone that many saw as too weak and suing the city of Miami in a bond case. This is the getting out front of potentially bad news theory.

But there is yet another theory and this is one that could be far more dangerous to Cohen and that is the SEC had to act now because it wanted to get a piece of Cohen before federal prosecutors acted later this year, or next year with some criminal conspiracy charge.

Under this scenario, the SEC is not just making the most out of weak hand, it is moving now to make sure it will be seen as moving aggressively against Cohen so it won’t look feckless if federal prosecutors ultimately charge Cohen. Since securities regulators can’t charge a person with conspiracy, they can’t wait for the federal prosecutors to go forward with their case and time their actions together—as often happens. So maybe the SEC was given the greenlight by prosecutors to file now but keep the failure to supervise case with a minimum of facts.

There’s some support for this theory that there is still another shoe to drop in the SAC case. It’s been reported by Reuters and others that the statute of limitations for filing charges against alleged offenses that took place in 2008 or even earlier is not really an obstacle to federal prosecutors if it is part of some ongoing criminal conspiracy or racketeering charge against Cohen. Manhattan U.S. Attorney Preet Bharara strongly hinted at a CNBC hedge fund conference that his office wasn’t done looking at Cohen and his firm, even though he refused to specifically talk about the hedge fund billionaire.

A Cohen spokesman declined comment. On Friday, he said the SEC case was without merit.

Now the conventional wisdom is that it will be tough for prosecutors to mount any kind of criminal case against Cohen if they haven’t done so this point. But it’s possible the lawyers at the SEC know federal authorities are further on down that road than anyone expects and they don’t want to be caught looking like they did nothing a year or so from now.

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