Business

Cohen Is sac(k)ed

DEATH KNELL: Steven Cohen, SAC Capital Advisors chief, has nothing to smile about this week after the feds charged his firm with criminal charges. (
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Last Thursday morning, US Attorney Preet Bharara and his staff essentially put the final nail in the coffin for SAC Capital, without a jury verdict.

The five-count criminal indictment alleges that Steven Cohen’s $14 billion hedge fund has been insider trading for more than a decade.

SAC’s spokesman made a statement on Friday that the prosecutor’s office and SAC hope to be working “on an agreement” to “reasonably protect all parties’ legitimate interests” and permit SAC expressly to conduct ongoing ordinary business.

The only problem is, there’s no such thing as “ordinary business” of a firm when the firm is under federal criminal charges. Presumption of innocence doesn’t matter.

Cohen himself cannot buy and sell financial instruments.

SAC is a registered financial advisory firm, which is privately held by Cohen.

The firm needs Wall Street banks to clear his and his firm’s trades.

Of course, those same banks have shareholders and boards to whom they have to answer.

And it’s likely the board of each clearing firm could be asked to approve the relationship with a firm charged with securities fraud, leaving the board vulnerable to shareholder suits, despite the firm stating on Friday it was not guilty on all charges in court.

If the US attorney’s office were to grant the banks a free pass of sorts, what kind of message would that send?

And it would be a real conundrum if the investment banks maintained their relationship with SAC in order to continue to reap profits, even though virtually all of them have clear rules about not doing business with firms under criminal securities indictments.

So where can SAC go to do business while fighting the charges?

A good comparison to SAC would be Drexel Burnham Lambert.

In 1990, the firm could not survive Michael Milken’s insider trading charges and went bankrupt.

Milken reached a plea agreement and pleaded guilty to securities and reporting violations, but not to racketeering or insider trading.

Milken was sentenced to 10 years in prison, fined $600 million and permanently barred from the securities industry by the Securities and Exchange Commission.

The counts against SAC range from wire fraud to four counts of criminal insider trading — all against the firm — and the feds have a higher bar to clear to prove guilt than the SEC does with the civil charges it brought earlier this month.

So while Bharara and his team have chosen not to prosecute Cohen directly — at least for now — they have essentially done so by targeting the firm of which he is sole owner and by seeking penalties as well as recoupment of all ill-gotten gains and penalties going back to 1999.

With six SAC staffers having already pleaded guilty (as of this writing) and others currently being prosecuted, it’s just hard to see how SAC stays open when the air clears.