By Matthew Goldstein, Katya Wachtel and Emily Flitter
NEW YORK, Sept 25 Steven A. Cohen's SAC Capital
Advisors hedge fund has posted strong returns so far this year
even as it deals with a criminal indictment charging the $14
billion fund with being a breeding ground for insider trading.
A source familiar with the firm said Cohen's fund was up
about 13 percent this year as of last Friday and has had a
particularly good September.
The average hedge fund was up about 4 percent on the year
through August, a period during which the broad S&P 500 stock
market index rose about 15 percent.
U.S. federal prosecutors indicted the billionaire's firm in
July, saying SAC fostered a culture where employees flouted the
law and were encouraged to tap their personal networks of
contacts for inside information about publicly-traded companies.
SAC Capital and prosecutors have since opened preliminary
settlement talks in an attempt to resolve the criminal
indictment, said two sources familiar with the matter.
SAC Capital had no immediate comment.
The plea discussions between prosecutors and SAC Capital are
preliminary, according to a source familiar with the matter, and
are part of the normal course in such cases. The two sides are
not close to a deal, the person said, adding that even though
the sides are talking, it does not mean a deal will be reached.
A criminal defense lawyer, who did not want to be identified
because he has had some involvement in the SAC Capital
litigation, said he would be surprised if the hedge fund's
lawyers agree to any deal short of a global settlement. He also
said he would not approve of any deal that did not rule out the
possibility of prosecutors subsequently charging Cohen.
The start of settlement talks comes as former SAC fund
manager Michael Steinberg is on Nov. 18 scheduled to go on trial
on charges he engaged in insider trading in shares of Dell Inc
and Nvidia Corp.
Steinberg is one of 10 one-time employees of Cohen's hedge
fund to be charged or implicated by the government in the broad
investigation of insider trading.
Sources familiar with Cohen said the hedge fund manager who
was once inclined to fight the government charges against the
firm now wants to put the matter behind him.
Cohen himself, while not charged criminally, is facing an
administrative failure to supervise case from the Securities and
Exchange Commission, filed about a week before the firm was
Earlier this year, SAC paid over $600 million to settle
charges that its employees improperly traded in two stocks.
"If you expect to lose a case, you settle when the situation
becomes dire," said Erik Gordon, a law and business professor at
the University of Michigan. "You try to save face by claiming
that you are a responsible person doing it to avoid anyone else
having to suffer, along with the formulaic 'to avoid the cost
and distraction of a trial.'"
With investors pulling most of the $5 billion in outside
money managed by SAC Capital, the manager is looking at
converting from a hedge fund to a family office sometime next
SAC already let go about a dozen marketing and sales staff
as it became clear the fund would not be attracting outside
capital while it defends itself against government charges. But
so far there has been no mass exodus of investment staff.
To prevent traders from walking out, SAC will pay most
portfolio managers an automatic 3.5 percent bonus next year - if
they commit to staying.
It appears that portfolio managers and analysts are sticking
with SAC for now with bonus season in sight, as well as a belief
among some staff that they could not easily find work at other
big funds, SAC employees and recruiters have said.
One headhunter who declined to be named due to ongoing work
in the industry said his clients, which include multi-billion
dollar brand name funds, have specifically instructed him not to
recruit staff from Cohen's firm.