Noose Tightens: Prosecutors Focus On Core SAC Fund Managed Personally By Cohen

Tyler Durden's picture

Following all the recent busts of former SAC and related portfolio managers, it was only a matter of time before prosecutors zeroed in on the guy at the top. The WSJ writes: Prosecutors are examining trades made in an account overseen by hedge-fund titan Steven Cohen that were suggested by two of his former fund managers who have pleaded guilty to insider trading. The development surfaced in court filings submitted in connection with a sweeping insider-trading investigation, which focuses on ways traders can receive nonpublic information from experts connected to industries or firms. At issue is trading in a $3 billion stock portfolio personally overseen by Mr. Cohen at SAC Capital Advisors and referred to by the government in the filings as the "Cohen Account" and internally at SAC as "The Big Book."  SAC portfolio managers funnel their best trading ideas to Mr. Cohen for this account and are paid a bonus if they generate big returns for Mr. Cohen, according to people familiar with the matter." As a silo-based hedge fund, where every PM is given freedom to win or lose small amounts of money on their own, but make big amounts of money on the high conviction ideas, or, in other words, those in which the PM has a lot of inside information, it was only a matter of time before prosecutors realized that even teflon Stevie would eventually have commingled insider-information based trades. The only question now is how he weasles his way out. And unless the government totally screws up its case, it may be not that easy any more.

More from the WSJ:

As part of the broad insider-trading probe, the U.S. is examining trades in the Cohen Account suggested by the two former portfolio managers, Noah Freeman and Donald Longueuil, according to the court filings; both have pleaded guilty to securities-fraud charges for trading on inside information. Among prosecutors' evidence, they said in documents filed in a New York federal court, were records of trades suggested by Messrs. Freeman and Longueuil "into the Cohen Account."

There have been no accusations of wrongdoing against either Mr. Cohen or SAC. The filings don't say that the trades suggested by Messrs. Freeman and Longueuil were based on inside information, nor that Mr. Cohen had any knowledge of the portfolio managers' rationale for recommending the trades.

Mr. Cohen, through a spokesman, declined to comment. The spokesman for SAC, which manages $12 billion in assets, said the firm is cooperating with the investigation. A Manhattan U.S. Attorney spokeswoman declined to comment.

SAC has been subpoenaed two times in connection with the investigation, last fall and again in February when Messrs. Freeman and Longueuil were charged.

For more than two years, federal agents have sought trading information about SAC as part of the broader probe, people close to the situation say.

As Zero Hedge first broke and speculated, at the core of everything is the use of expert networks by the likes of SAC and other hedge funds: a process which is basically legalized inside information transfer.

In February and April, respectively, Mr. Freeman and Mr. Longueuil pleaded guilty to securities fraud and conspiracy in a scheme that Manhattan U.S. Attorney Preet Bharara had said, early on, involved paying "entire networks of corrupt insiders at public companies for blatantly illegal insider information."

Expert network firms are permitted to arrange discussions between public-company employees and investment firms seeking insight into companies and industries, as long as the expert consultants don't divulge material nonpublic information.

Like other hedge funds, SAC foots the bill for use of expert networks by its employees. The costs of particular calls to the experts sometimes are ultimately borne by portfolio managers.

Mr. Longueuil, after reading a Wall Street Journal exposé of the probe late last year, and fearing he might be caught, destroyed his computer drives with pliers and dumped the pieces in four garbage trucks, according to documents filed by the U.S.

An SAC spokesman has said that Messrs. Freeman and Longueuil were dismissed earlier in 2010 for "poor performance." It said SAC was "outraged by the alleged actions of two former employees, which required active circumvention of our compliance policies."

Ah yes, Cohen was outraged, OUTRAGED! to find that there has been inside information trading going on at SAC.

The thing is, on every trade ticket initiated by a PM, there is a split allocaction indicating to which fund under the broader umbrella allocation should go.

The court filings indicate that prosecutors are examining the compensation
SAC paid to Messrs. Freeman and Longueuil. Among documents gathered by
prosecutors are the two fund managers' pay stubs and tax forms, as well as
information on SAC's net rate of return, management fees and incentive fees,
according to the filings.

And if Freeman and Longueuil apportioned an allocation to the core fund, welcome to the "explain your way out of hell" club. At least until one manages to bribe all the relevant regulators and prosecutors.

Just as the days of the teflon market are coming to an end, so slowly prosecutors are finally discovering all the grizly details of how one make billions of dollar year after year without fail. And when they put the full picture together, teflon Stevie is next.

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scratch_and_sniff's picture

Longueuil looks like a real grasping psycho, the sleaze just oozes from that guy, its remarkable.

Bananamerican's picture

how will Cohen wriggle out of his wrist slap??

Sophist Economicus's picture

About time! Everybody in the industry knew this guy stunk

squid_pro_quo's picture

Allow me to fix that for you:

About time! Everybody in the industry knew this guy stunk

Everybody knew this industry stunk.

topcallingtroll's picture

Just a little window dressing.

I remain completely distrustful of the sec and justice department until i see serious and well-funded investigations of goldman sachs et all and their municipal swaps trades and constant hft frontrunning, and dont forget the comingling of propriertary trading with order taking, their helping countries and companies engage in enron style accounting, and mbs/cdo fraud.

buzzsaw99's picture

And the constant extortion of CONgreff. I want a plane fueled and waiting at the airport, a bag with $140B in small bills, and an international pilot. When I saw the name "Cohen" Abby Jo flashed to mind. No hope of that.


One wrong move and the stock market gets it!

dizzyfingers's picture

1 BN % correct.

Corruption ignored is justice denied.

dizzyfingers's picture

System duplication of comment.

Texas Gunslinger's picture

Knowing that Cohen paid $12M for Hirst's shark in formaldehyde, one must assume that Mr. Cohen-Costanza has shipped his junior analysts to the Indian Ocean in search of Osama.  

I would imagine Osama In Formaldehyde would be the talk of the Hamptons this summer, and quite a fitting metaphor for Mr. Catch Me if You Can. 


Hephasteus's picture

You keep using the wrong id. You're way out of character.

Cdad's picture

Nice.  Again, I do believe this stuff matters, and prosecutions will go forward.  Some will succeed.  Some have to.  The American citizenry has left the market.  Something must be done to restore confidence.  Politicians, equally hated, will throw these guys under the bus.  

It is a close call at the bottom of the popularity contest, DC politicians and criminal syndicate Wall Street bankers.  

dizzyfingers's picture

Attention span of sheeple is about .10 of a second. Sheeple won't remember any of this in 10 seconds.

edmondantes's picture

I find this faith in bought and paid for 'prosecutors' employed by the syndicate to be quite touching... if he is this big then he will not be touched...

smlbizman's picture

i have a real problem with the biggest thieves ever, offering  these "bones" to the sheep to show them they are taking care of the integrity of their system

Dollar Bill Hiccup's picture

We should all shed a tear for poor Mr. Cohen. What's the time value of money if you're doing time?

buzzsaw99's picture

SAC, another minnow. meh

Downtoolong's picture

It's springtime for lawyers everywhere.


Extremist Tan's picture

It is indeed springtime for lawyers, and about time.  Cohen is a huge target relative to the typical penny-stock prey of the DOJ and SEC.  The absence of loyalty on Wall Street means that everyone is vulnerable.  Insider-trading itself has negligible economic impact compared to systemic fraud, but the voters understand it better than QE2, CDOs, or conflicts of interest in corporate governance.  The voters are fully capable of turning on the big banks, and the mounting insider-trading convictions can ignite them.

Welfareisfraud's picture

Not like insider trading is a real crime anyway.

Welfareisfraud's picture

Pity that this is all on the basis of a non-crime, i.e. "insider trading".

dizzyfingers's picture

It's easy (easier) to convict when there's a paper trail, but how about when there isn't one? Like when they're nothing but electronic blips?

Many attorneys now tell clients NOT to save paperwork but to burn it.



kragsquest's picture

How to avoid the narrowing noose: Create so much positive energy through charitable giving and "humble" actions that the DOJ will mistake you for the mammalian whale and not a cold-blooded shark.

Hire image consultants and positivity gurus to make you look and feel like Mr. Wonderful, even though people who know you best have unprintable opinions of your character.

Have your tough lawyers defend you while the best gumshoes dig up sleaze on those trying to take you down.  Remember how the "church" of Scientology was able to blackmail the IRS into granting them phenomenal tax exempt status?

If you have an in with those in power do your best to support a global diversionary crisis. Remember how after "W"s former good buddies at Enron, etc. did their perp walks we went from 9-11 to bogus wars? Any coincidence? And how LBJ was about to be exposed to his crimes something totally unexpected happened in Dallas?

SAC is not the biggest fish in the corrupt Wall Street culture, Goldman is.  Expect diversionary crisis if their heads and former heads have to face the DOJ music.