February 20, 2010 / 4:23 AM / 10 years ago

Hedge fund SAC was accused rabbi's extortion target: source

BOSTON/NEW YORK (Reuters) - U.S. prosecutors this week charged a New York rabbi with trying to extort $4 million from a prominent U.S.-based hedge fund by threatening to tell authorities about alleged insider trading at the fund.

The government did not name the hedge fund in its complaint but a source familiar with the matter said that Orthodox rabbi Milton Balkany tried to blackmail SAC Capital Advisors, one of the world’s biggest and most successful hedge funds.

According to the complaint, Balkany threatened representatives of the hedge fund that he would advise a person in prison who allegedly knew about the insider trading to tell the U.S. government about it. Balkany was charged with extortion, blackmail and wire fraud.

Stamford, Connecticut-based SAC, which manages roughly $12 billion and is run by Steven A. Cohen, declined to comment on Friday.

According to the government’s allegations against Balkany, the rabbi was trying to take advantage of numerous media reports, including ones published by Reuters, that prosecutors might be targeting Cohen’s fund firm.

A spokeswoman for the U.S. Attorney’s Office in Manhattan declined to comment on the case.

Kelly Sharkey, the attorney who represented Balkany at his arraignment, also declined to comment on the case, saying that Balkany was in the process of hiring a new lawyer to represent him.

The case shines fresh light on a hedge fund firm that ranks as one of Wall Street’s biggest traders but works hard to stay out of sight. Its founder, Steven A. Cohen, does not give interviews and is rarely photographed.

Since government agents cracked an insider trading ring in October involving hedge fund Galleon Group’s founder Raj Rajaratnam, the government has also been probing whether some current or former SAC employees might have been involved in improper trading.

The rabbi claimed that he had information on insider trading used to trade six securities between 2004 and 2005, the complaint alleges.

The complaint quotes Balkany, whose telephone conversations were recorded by the hedge fund’s lawyers, as telling them “subpoenas” could go out very soon and were targeting the hedge fund manager.

Balkany promised a federal agent who was posing as the hedge fund manager that he would be able “to sleep at night completely comfortably” if the money were paid, according to a conversation cited in the 26-page complaint.

The money Balkany was demanding was supposedly to support two schools, one of them Bais Yaakov, a Hebrew day school in Brooklyn, New York, where he is the dean.

This is not his first brush with federal prosecutors. Seven years ago, Balkany was charged in another case that ended with him getting a deferred prosecution agreement on the condition that he comply “with good behavior” for six months, court documents show.

The government also did not identify the prisoner Balkany said he was speaking with, but the complaint says the person was serving time at the Otisville Correctional Facility.

This is not the first time that someone has tried to shake down Cohen and his hedge fund.

In 2006, Michael Lair, a Montana man, approached a lawyer defending SAC in a lawsuit filed against the hedge fund by Canadian drug company Biovail Corp. The man had offered to provide SAC’s lawyer with allegedly incriminating information about Biovail’s attorneys for a fee.

SAC’s lawyer alerted the government and Lair was arrested and charged with trying to defraud SAC, Biovail and several other companies. In April 2007, Lair pleaded guilty and was sentenced to 27 months in prison. He was also ordered to forfeit some $300,000 in fees he had extracted from a dozen companies he had fleeced in the scheme.

Lair was released from federal prison in October 2008.

Reporting by Matthew Goldstein and Svea Herbst-Bayliss; Editing by Gary Hill

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