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.