The battle lines in the investigation of a billionaire hedge fund manager are growing starker by the day.
SAC Capital Advisors LP, the hedge fund firm run by Steven Cohen, has told its investors that it is no longer fully co-operating with U.S. authorities in their probe of illegal insider trading by the company and its employees.
Meanwhile, prosecutors are contemplating criminal charges against the firm, according to a report in The New York Times. They have also issued subpoenas for Mr. Cohen and other SAC employees, the newspaper said, to provide testimony before a grand jury, which determines whether there is evidence to issue a criminal indictment.
The moves by prosecutors strongly suggest that U.S. authorities are ratcheting up the pressure as the probe of SAC and Mr. Cohen, one of the world's most famous hedge-fund managers, moves into a new – and possibly final – stage. If charges were to be laid against the firm or its founder, it would represent one of the most significant cases involving a Wall Street figure since the financial crisis.
A spokesperson for SAC declined to comment on the report. Ellen Davis, a spokesperson for Preet Bharara, the top federal prosecutor in Manhattan, also declined to comment.
The government is facing a deadline at the end of July over whether to file charges against Mr. Cohen or SAC in relation to a key episode of alleged insider trading. Prosecutors claim that in 2008, an SAC trader conferred with Mr. Cohen before using a confidential tip about a drug trial to reap $276-million (U.S.).
There is five-year statute of limitations on that alleged conduct. Prosecutors have not accused Mr. Cohen of knowing the information was gleaned illegally.
In a letter to investors on Friday, SAC Capital said that it expected to have more clarity on the status of the investigation in the coming months. It also said that it wasn't co-operating unconditionally with U.S. authorities, as it had previously.
"It's signalling that you're circling the wagons to fight the government and the Department of Justice," said C. Evan Stewart, a partner at Zuckerman Spaeder LLP in New York. "Whether you're a public company or a hedge fund, that's a dangerous business."
Since 2009, the federal prosecutor's office in Manhattan has overseen an unprecedented crackdown on insider trading that has resulted in more than 70 convictions. SAC and its employees have featured prominently. At least nine current or former traders have been tied to insider trading at the firm; four of them have pleaded guilty.
Mr. Cohen, who has not been accused of any wrongdoing, is by far the largest target in the government's investigation. He is a legend in the hedge fund world for his history of outsized returns and his immense personal wealth, estimated at $9-billion.
Under questioning by a grand jury, Mr. Cohen would probably invoke his right to remain silent under the Fifth Amendment to the U.S. Constitution, The Wall Street Journal reported, citing lawyers familiar with the case.
If that does occur, it could present a new business challenge for him, said Mr. Stewart of Zuckerman Spaeder. He noted that regulators take a dim view of money managers who exercise their right against self-incrimination under the Fifth Amendment, and have revoked their trading licences in the past.
Mr. Cohen is already trying to stem an outflow of money from his firm, which manages approximately $15-billion (outside investors account for about $6-billion while the rest belongs to Mr. Cohen and SAC employees). The firm has received requests to withdraw $1.7-billion and it extended a deadline to early June to submit further such requests.
Last year, SAC agreed to pay more than $600-million to settle civil charges of insider trading brought by the U.S. Securities and Exchange Commission. At the time, the firm expressed confidence that it was putting its legal troubles behind it.
By considering criminal charges against Mr. Cohen's firm, prosecutors are "either looking to gain leverage against him, or it may give them a greater opportunity to go after assets," said Dennis Lormel, a former head of the financial crimes unit at the U.S. Federal Bureau of Investigation.
"It certainly would be a tremendously tough case" for U.S. authorities, said Solomon Wisenberg, a former federal prosecutor who is a defence attorney for white-collar cases at Barnes & Thornburg LLP in Washington. "They know they'd be in for the fight of their lives."