NEW YORK (Reuters) - Federal prosecutors are continuing to look for ways to build a criminal case against billionaire trader Steven A. Cohen at the same time as they prepare to announce criminal charges against his hedge fund on Thursday, people familiar with the investigation said.
Charges of securities fraud and wire fraud expected to be filed against the company, according to a source familiar with the investigation.
The charges against Cohen’s $15 billion SAC Capital Advisors come after nearly seven years of investigations of his firm on allegations of insider trading.
Authorities do not plan to charge Cohen with any criminal wrongdoing, said the source.
A spokeswoman for Manhattan U.S. Attorney Preet Bharara declined to comment as did a spokesman for the Federal Bureau of Investigation.
A spokesman for SAC Capital also declined to comment.
The filing of a criminal charge against SAC Capital could be a death-knell for the Stamford, Conn.-based firm that employs nearly 1,000 people and made billions for the 57-year-old Cohen.
It is likely that Wall Street firms that lend money and trade with SAC Capital would stop doing so after a criminal charge is filed. However, since more than $15 billion of the firm’s assets represents money for Cohen and his employees, SAC Capital has substantial resources to continue functioning.
But even as federal authorities plan to move against Cohen’s business, they are continuing to investigate the activities of some of his former employees, including former technology stock trader Dipak Patel, said the source familiar with the matter.
Patel, who once managed up to $1 billion for Cohen and left SAC Capital in 2011, was implicated in potentially improper trading by former SAC Capital analyst Wesley Wang, who pleaded guilty last July and became a cooperating witness for federal authorities.
Federal authorities have wiretapped communications involving Patel and have been considering criminal charges against the Merrick, N.Y. resident, said another person who has been briefed on the investigation. Neither Patel nor his attorney, Tai Park, returned phone calls seeking comment.
Federal prosecutors have debated filing a criminal charge against Cohen’s 21-year-old hedge fund, one of the industry’s most successful, for many months. The fund is one of the largest payers of commissions on Wall Street, generating more than $300 million a year in trading fees alone for Wall Street brokerages.
Several legal experts, including former federal prosecutors, said the decision to charge the hedge fund, but not Cohen, with wrongdoing would be a tacit admission that the nearly seven-year investigation failed to find sufficient evidence of trading on illicit inside information by Cohen.
A criminal charge against SAC Capital would be one of the most high-profile corporate cases since U.S. prosecutors indicted accounting firm Arthur Andersen for its role in the Enron scandal, a move that effectively forced the audit firm to go out of business.
Some legal experts have questioned whether it is appropriate for prosecutors to charge SAC Capital with criminal wrongdoing but not charge the firm’s founder and leader.
“It’s part of an overall level of frustration about this whole enterprise, and so they’re trying to come at it from every possible angle to destroy this guy’s business,” said C. Evan Stewart, a defense lawyer and a partner Zuckerman Spaeder. “When the government gets an individual or company in its sights and decides that person’s not worth doing business, it’s going to use every tool.”
If prosecutors do criminally charge SAC Capital, it will come after the U.S. Securities and Exchange Commission similarly decided it had insufficient evidence to file civil fraud charges against Cohen.
Instead, the SEC on July 19 filed an administrative order against Cohen charging him with failing to supervise his employees and spotting potential “red flags” involving allegations of insider trading by two of his employees.
An SAC spokesman said on Friday Cohen will vigorously defend the failure to supervise charge. A 46-page “white paper” prepared by SAC Capital’s lawyer says Cohen is often too busy to read emails and never saw an email that regulators contend included a reference to inside information about computer company Dell Inc.’s earnings in summer 2008.
Federal authorities began looking into the possibility of filing a criminal charge against SAC Capital after former portfolio manager Jon Horvath pleaded guilty to passing on inside information about Dell during the summer of 2008 to his supervisor Michael Steinberg and traders at other hedge funds.
Earlier this year, prosecutors charged Steinberg with insider trading involving shares of Dell. Steinberg has pleaded not guilty.
To date, nine former and current SAC Capital employees have been implicated or charged with wrongful trading while at the firm.
For now, Wall Street appears to be shrugging at news reports that federal prosecutors are getting closer to filing criminal charges against SAC Capital.
Wall Street firms are continuing to trade with the fund as usual, according to several market sources.
A headhunter said in the past several weeks she had gotten more resumes from employees of SAC Capital, but “not a flood” of resumes.
Several investment firms that have money with SAC Capital, but submitted redemption notices in June to pull their dollars by year’s end declined to comment. SAC Capital has said it plans to return more than $4 billion in outside investor money by year’s end.
One outside investor voiced support for Cohen and SAC Capital, despite the firm’s growing regulatory woes.
Ed Butowsky, managing director at Chapwood Capital Investment Management, which has several million dollars invested with SAC Capital, said: “I don’t believe that criminal charges against the firm would impact Steve Cohen’s traders and their ability to make money.”
Reporting by Matthew Goldstein and Emily Flitter, additional reporting by Katya Wachtel, Jennifer Ablan and Svea Herbst-Bayliss; Editing by Leslie Gevirtz