(
)
Steve Cohen’s sworn testimony in another legal skirmish could come back to haunt his $14 billion hedge-fund empire.
Cohen, whose SAC Capital Advisors is facing civil charges amid allegations of insider trading, testified last year that insider-trading laws are “vague” and that compliance rules at his firm are merely “guidelines.”
Legal experts said those insights may be used against SAC in its current skirmish with regulators. Last week, SAC disclosed that the Securities and Exchange Commission may sue it for alleged fraud and lax oversight of a former trader who was arrested and charged with insider trading.
Mathew Martoma, who worked at SAC’s CR Intrinsic unit, was accused of helping SAC and CR earn a whopping $276 million by trading on confidential information about a clinical drug trial.
Cohen has not been charged with wrongdoing, but he was referenced in the complaint for participating in the trade, which prosecutors say yielded the largest illegal profits in history.
The SEC sent a so-called Wells notice to SAC warning that it could be charged with fraud and “control-person liability” for failing to stop the alleged scheme, or turning a blind eye to it.
“The accusation is you let it happen and you didn’t operate in good faith in making sure it didn’t happen,” said Henry Klem, a former SEC official and a partner at Jones Day.
That’s where Cohen’s testimony in an unrelated and since dismissed case tied to Toronto insurer Fairfax Financial comes into play.
In 2011, Cohen gave several days of deposition testimony in the civil fraud case, in which Fairfax sued SAC and other firms for allegedly conspiring to drive down its share price. The case was dismissed due to a lack of evidence, but the testimony offers a rare look into Cohen’s views on illegal trading.
In his testimony, Cohen called SEC rules on insider trading “vague” and said he doesn’t expect his employees to follow the company’s internal compliance manual to the letter.
When asked whether it was “legal or illegal to trade on material nonpublic information,” Cohen said: “It depends on the circumstance.”
“So there are circumstances, in your view, in which it is legal . . . to trade on the basis of material, nonpublic information?” asked Fairfax ’s lawyer, Michael Bowe.
“Yes,” Cohen said.
Among them, he said, is when employees trade in the opposite direction of the nonpublic information they receive.
He also said he didn’t expect employees to adhere to the company’s compliance manual in every situation.
“See, we don’t operate our firm in absolutes,” he said. “When I look at this manual, I see guidelines.”
Cohen said he is generally opposed to employees sharing nonpublic information with people outside the firm but that he sees more wiggle room when it comes to sharing within the firm.
He also gave his employees an out when it comes to reporting inside information they receive while on the job.
“Because these are guidelines, I can think of situations where one would be in possession of material nonpublic information, act correctly and not have to involve compliance or general counsel,” he said.
Experts said while his comments are not evidence of wrongdoing, they could still be used by regulators attempting to show that Cohen and SAC allowed Martoma’s alleged misdeeds to fall through the cracks.
“I guarantee the SEC will be licking its chops” over the testimony, said Andrew Stoltmann, a securities lawyer in Chicago.
He added: “It’s a huge problem for SAC and Steve [Cohen]. They will use it against him and the firm.”
An SAC spokesman said Cohen and SAC are “confident they have acted appropriately and will continue to cooperate with the government’s inquiry.”