Is FBI Special Agent King Set To Take Down Stevie Cohen?

The man who brought down Galleon is not finished, and if the report by Reuters' Matt Goldstein is correct, FBI special agent B.J. Kang may well have his sights set on the top of the hedge fund pantheon: SAC Capital itself. This is not a surprise to Zero Hedge, and is something we have speculated on in the past, however the intricacies of such a spectacular take down would have to be refined beyond any reasonable doubt as any allegations against Mr. Cohen will likely see the involvement of every single $1,000/hour billing lawyer in the world, taking on any DOJ case.

The background on the chase:

When Bernie Madoff, who engineered history's biggest Ponzi scheme, was arrested, FBI Special Agent Kang was right at his side. And less than a year later, there was Kang again, in a "perp walk," shuffling alongside a handcuffed Raj Rajaratnam, the former hedge fund star at Galleon accused of earning millions off illegally obtained stock tips.

The question on the minds of investors, managers and lawyers inside and outside the hedge fund industry today is, who's next?

Of course, no one knows for sure. But court documents and interviews with many industry sources familiar with the case show that agent Kang may be focusing in on Steven A. Cohen and his $12.9 billion SAC Capital Advisors, L.P.

Mr. Cohen is not a new pet-peeve of the FBI agent:

Reuters has learned that Kang investigated allegations of trading irregularities at SAC two years ago, though the inquiry concluded with no charges being filed against the firm.

Who is Agent Kang:

Just like Cohen, Kang avoids the limelight and refused to be interviewed for this story. The FBI wouldn't even disclose biographical information about him, including his age.

Known simply as B.J. to lawyers and others who have worked with him, Kang, who is Korean-American, once joked that he prefers using initials because his full name is too hard for most people to pronounce. With his accounting background he is able to delve deeply into the minutiae of financial crimes.

But Kang's toughest challenge may lie ahead of him. Lawyers, hedge fund traders and others with knowledge of the ongoing investigation say the agent and federal prosecutors are now focused on a number of former SAC employees whose names have cropped up during the Galleon phase of the inquiry and who also may have engaged in insider trading.

Lee, one of five cooperating witnesses in the Galleon case, is prepared to tell authorities about any insider trading he may have engaged in while working as a technology analyst at SAC from 1999 to 2004, according to a court filing. Most legal experts say prosecutors will have a hard time using any evidence Lee may provide given that it is relatively old.

The government's interest in SAC and Cohen shouldn't surprise anyone. Cohen's firm stands at the pinnacle of the $1.5 trillion hedge fund industry. Critics have often complained that SAC gets better access to information from Wall Street firms because of its sheer size and the hundreds of millions in commissions it pays out.

Amusingly, the FBI case veers into the story of one Andrew Tong who made tabloid fodder several years ago in relation to a very peculiar lawsuit he filed against his supervisor:

In 2007, Kang was assigned to work on a previously undisclosed investigation involving alleged trading irregularities at Cohen's hedge fund, said people familiar with that matter. That inquiry, opened by federal prosecutors in Brooklyn, New York, concluded with authorities declining to take action against Cohen or anyone else associated with SAC.

But before the probe by Brooklyn prosecutors was closed, Kang interviewed former SAC analyst Andrew Tong, who had already become a tabloid sensation -- not to mention an embarrassment to SAC.

In a lawsuit earlier that year Tong had charged that his male supervisor, Ping Jiang, then a top SAC trader, forced him to perform oral sex on him before completing a trade, according to people familiar with the investigation and court papers. Tong also alleged Jiang ordered him to take female hormones to turn him into "the ideal analyst/trader," combining both male and female characteristics, the court documents note.

Courtesy of filings in that litigation being finally unsealed we get a glimpse of one reason why SAC could be so, allegedly, very profitable:

In early 2006, according to the court papers, Jiang directed Tong and at least two other SAC employees to take part in a manipulative trading scheme involving shares of China Yuchai International Ltd., a Chinese-based diesel engine manufacturing company. The court papers suggest the hedge fund took a short position in shares of China Yuchai; betting the stock would fall in price. The papers say Tong and others then began "manufacturing false negative analytical reports about CYD to facilitate this manipulation."

The strategy didn't work and SAC took a $3 million hit, which Tong claims Jiang ultimately blamed on him. Tong alleged that Jiang used the loss as a justification to fire him and that the real reason for his dismissal was his decision to stop taking the female hormones and engaging in "sexual conduct with Mr. Jiang," the documents say.

The treatment of the Tong case highlights why Kang needs to have a bulletproof case against the multi-billionaire:

But the court filings in the Tong lawsuit hint at the difficulties Kang and others in law enforcement may face in pursuing a case against SAC if any wrongdoing is ever uncovered. In one filing, Tong recalls Jiang telling him that SAC places a premium on secrecy and guarding its trading strategies -- even from some of the fund's top officers.

"Steven Cohen only wants us to make money, he doesn't care or want to know our secrets to make money -- SAC doesn't need to know and doesn't want to know," Tong said in the filing, quoting one of Jiang's instructions to him.

Yet with new possible cooperating witnesses coming out of the Galleon case, the prosecution's case may just have gotten that extra push it needed

Former SAC employees, however, have already started to talk. Lee's cooperation was secured in part because of incriminating evidence that federal authorities had captured from a government wiretap on his cell phone while working at San Jose, California-based Spherix Capital. (Kang oversaw the tap on Lee's phone.)

In pleading guilty on October 13, Lee signed a cooperation agreement that requires him not only to testify about his misdeeds at Spherix, but also provide prosecutors with any evidence of alleged insider trading over an eight-year period starting in 1999. He worked at SAC for five of them, and the rest of the time was at Stratix Capital Management.

The Wall Street Journal previously has reported that after Spherix closed its doors in February, federal authorities encouraged Lee -- who had begun cooperating with the investigation -- to try to return to SAC. But Cohen refused, the Journal reported, because he was suspicious of the reasons behind Spherix's closing.

Lee is also expected to testify about any improper trading he may have done at Stratix, a hedge fund founded by two more SAC alumni, Richard Grodin and Ian Goodman. That fund, which counted SAC among its investors, closed in 2007. Grodin launched another fund, Quadrum Capital, and it too abruptly shut down this year. A few months ago, federal authorities asked Quadrum to turn over some trading records, but the government hasn't asked for anything since, said a person close to the fund.

While we doubt Mr. Cohen is losing any sleep at this time, the storm clouds may be gathering. Because as every hedge fund knows all too well, all it takes is one disgruntled employee who may have left on less than stellar terms to wait for the expiration of his/her "non-disparage" clause and to end up destroying their former employer. This goes doubly so with the FBI running around, and presumably recording every single hedge fund conversation. Which reminds us that it is time to take a look at how the revenue stream for Gerson Lehrman Group is doing these days.