NEW YORK (Reuters) - Steven A. Cohen’s lawyers made their best case argument a month ago to federal prosecutors about why the hedge fund billionaire and his SAC Capital Advisors should not be charged with criminal wrongdoing in a long-running insider trading investigation.
But people familiar with the late April meeting said the lengthy presentation did not impress federal prosecutors, who are now considering whether to use a law aimed at prosecuting the Mafia and drug gangs to pursue a criminal case against Cohen’s $15 billion hedge fund.
Cohen’s lawyers had asked for the meeting with federal prosecutors after agreeing in March to pay $616 million to U.S. securities regulators to settle allegations the firm’s employees had used inside information to make trades in four stocks. The sources said Cohen’s lawyers wanted to meet with prosecutors to bring to a conclusion a criminal investigation that has dogged his hedge fund for nearly seven years.
Cohen has not been charged with wrongdoing.
Lawyers for the 21-year-old hedge fund made an “aggressive presentation,” according to the sources, reviewing the government’s investigation in detail to support their claim that the government did not have enough evidence to charge Cohen with either insider trading or any other securities law violation.
A lawyer for SAC Capital did not respond to a request for comment. Representatives of the FBI declined to comment.
In the meeting, Cohen’s legal team, led by Martin Klotz of Willkie Farr & Gallagher, spent several hours with top prosecutors for Manhattan U.S. Attorney Preet Bharara, including Deputy U.S. Attorney Richard Zabel and Lorin Reisner, chief of the criminal division.
A representative from the FBI also attended the meeting, the sources said on condition of anonymity.
Cohen’s lawyers prepared a stock by stock, trade by trade analysis for prosecutors in an attempt to dispel any notion that Cohen had done anything wrong.
The lawyers also argued that prosecutors should not file criminal charges against SAC Capital, which has $15 billion under management, because doing so would effectively force the hedge fund to shut down and result in the loss of 1,000 jobs.
A move by the government that could either force SAC Capital to shut down or dramatically scale back its operations would have an impact on Wall Street which counts on the big hedge fund to generate hundreds of millions in trading commission each year.
“They believe that the best defense is an offense, which is a way to deal with this,” said C. Evan Stewart, a partner at law firm Zuckerman Spaeder in New York who is not connected to the case. “If you have this much scrutiny and this much attention from not just one government agency but multiple government agencies, just sitting back and waiting for it to go away isn’t the right strategy.”
Prosecutors did not agree to drop the case, however; in fact, they have since done the opposite. Last week, a few weeks after the meeting, prosecutors served a subpoena on Cohen seeking his testimony before a grand jury.
Prosecutors are considering charging SAC using the Racketeer Influenced and Corrupt Organizations Act, most commonly associated with cases against the mafia. Federal prosecutors have used the 40-year-old RICO statute to go after white collar crimes before. Through RICO, prosecutors could allege Cohen managed to stay away from specific incidents of insider trading but generally knew his employees were engaging in the practice to the benefit of the firm, legal experts said.
Federal prosecutors are stepping up the pressure on Cohen’s firm at a time the statute of limitations for bringing charges on some of the trades being investigated by authorities is about to expire. Cohen and his hedge fund have emerged as the most prominent subjects of the long-running investigation into insider trading in the hedge fund industry.
So far, nine one-time employees of the firm have been charged or implicated in insider trading schemes. The latest two are Mathew Martoma, a former portfolio manager for SAC’s fund CR Intrinsic Investors, who was charged last November with trading on non-public information about two drug stocks. The dollar value of the trades makes Martoma’s case the largest in the history of insider trading cases.
In late March, the FBI arrested Michael Steinberg, one of Cohen’s top portfolio managers. He was charged with insider trading in shares of Dell DELL.O and Nvidia (NVDA.O).
Both men have pleaded not guilty.
Sources said several other executives at the hedge fund were served with subpoenas along with Cohen, seeking their testimony before the grand jury.
The Wall Street Journal reported on Thursday that subpoenas were sent to SAC’s head trader Phillipp Villhauer, the firm’s president Thomas Conheeney and Steven Kessler, SAC’s chief compliance officer.
Reporting by Emily Flitter and Matthew Goldstein; Editing by Gerald E. McCormick, Doina Chiacu and Claudia Parsons