Are the Feds Gunning for Civil RICO against Steven Cohen or SAC Capital?

The DOJ has a hard on for famed hedgie Stevie Cohen and the rest of the financial press has suddenly just figured this out. Cohen, a stock trader who founded Stamford-based SAC Capital, runs a trading company that is facing a pending SEC lawsuit. What the SEC would sue for we don’t actually know yet but my fellow journalist are speculating it’s for insider trading because six other people who once worked for Cohen have been arrested for such securities crimes.

I’ve covered Stevie Cohen since 2007 for Trader Monthly when we put him on a pedestal as a top 100 trader simply for the amount of money he made in a year. Cohen-ites (his loyal band of testosterone fueled stock jockey traders) live all around me in lower Fairfield County and I’ve interviewed countless people who have worked for him or are family related. The man has created a cult like mafia club who even when he kicks your rear out of his firm for one bad trade are still ultra loyal to him. I’m consistently told “No trader is ever going to try to cross Stevie Cohen”. So getting a trader like Mathew Martoma, who was arrested last week for one of the largest inside trading profits the DOJ has figure out yet,is going to be really tough for Federal prosecutors. I know as a fact Stevie became aware of the FBI investigating him personally for insider trading as far back as 2006 – based on conversations Stevie had with people I spoke with. That’s why we are seeing press reports about the number of compliance people he has at SAC because he amped up that division of the firm once he knew the feds were on to him.

The DOJ is playing a game of chicken with Cohen by throwing in a paragraph in their recent criminal case against a trader who worked from him saying ‘the hedge fund owner’ was on a call discussing getting out of the stock the Feds think was traded with inside info. There was really no legal reason to put that detail into the complaint since they haven’t charged Cohen but it’s clear they wanted the public to hear they are coming after him. Now nearly every one of the SAC traders I have spoken with simply think there is no way Stevie is that dumb to have a 20 minute conversation with Martoma that would included Stevie hearing Martoma say he wanted to get out of the trade because he was just leaked material non public information about a drug trial. In fact the person they think would be dumb enough to have that convo is the man who ran and partial owned CR Intrinsic Matt Grossman. Stevie is really slick about moving risk away from his direct line of fire and since the DOJ complaint doesn’t actually name who Martoma spoke with all we can do is speculate and hope the DOJ who is leaking a ton of info to reporters is telling the truth.

I only know of one sloppy practice Stevie has done in the past which could set him up for a co-conspirator in securities fraud – he would have weekly calls with traders who held large positions on Sunday nights to get a status of why they are in the trade. Cohen knew his traders used expert networks and according to firms that worked with SAC he encouraged his traders to use them. Still using an expert network isn’t illegal as long as you don’t get secret material non public info from them. That’s why I’m hearing from people who have been interviewed by the Feds about Stevie that a one time criminal charge for insider trading isn’t their goal. Instead it’s a non criminal suit–they want to charge him with Civil RICO.

Think about it – we know there is a pattern of behavior coming out of SAC Cap to get inside info to boost their trading gains. So if they want to get the leader of this pact why not try a suit that doesn’t need a full burden of proof jury to convict but just a majority who thinks he did this. They also need a pattern of about three crimes that followed the same amo and they basically already have that. With Civil RICO the DOJ can also go after Stevie’s personal assets if they can prove he bought them with money earned at SAC Capital. Given about half of the $14 billion in assets the firm manages are Stevie’s that sure gives the DOJ a big bucket of money to go after. The DOJ’s goal isn’t to get an inside trading charge on him with maybe a few years of jail time; they want to totally obliterate Cohen, shut down any chance of his trading again, and then take away his 36,000 sq ft palace in Greenwich and leave his wife Alex and daughters with nothing to live on.

Now this might be a pipe dream to the guys and gals running the DOJ financial fraud unit but I am quite confident after over six years of time and money spent on chasing Stevie Cohen they won’t give up with out a down and dirty fight. The problem is proving liability and their under paid lawyers and investigators have an uphill battle against the mind of Cohen and his cartel of other hedgies he’s helped turn into millionaires.

I hear of office bets at Wall Street firms setting up pools on if Cohen gets arrested and most are betting indicted but not convicted. That’s how much power and smarts they think this trading titan has. I have no doubt that Stevie started his career at Gruntal using inside info to make money — in court filings with his ex-wife’s lawsuit his attorney never argues Stevie didn’t inside trade on RCA they just claim she can’t sue for it because it’s past the statute of limitations. (Patricia Cohen’s suit against her ex-husband Stevie Cohen is still ongoing in NY State Appellate Court) But what I have doubt in is the DOJ’s ability to get the mafiosi informant type of evidence they’d need to nail him…and that’s just a sad fact of our justice system.

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Comments

  1. Thanks Teri for your research. I look forward to your next post.

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