New York, NY – According to a Wall Street Journal report published last week, US prosecutors are likely to forgo bringing criminal insider trading charges against SAC Capital’s founder, Steven A. Cohen, before a mid-July deadline due to a lack of evidence.
Background of Insider Trading Case
The government was expected to bring charges against Cohen as a result of trades he purportedly made in July 2008 in the shares of drug makers Elan Corporation, plc and Wyeth Ltd. Federal prosecutors alleged that Mathew Martoma, a former portfolio manager at CR Intrinsic Investors, a unit of SAC Capital, received inside information about the negative results of an Alzheimer’s drug trial, thereby allowing the hedge fund to record more than $275 million in profits and avoided losses.
Prosecutors brought criminal charges against Martoma last November, expecting to be able to convince him to turn against Cohen. However, Martoma has refused to cooperate with the government. Martoma has pleaded not guilty to the charges and is expected to go to trial on November 4th.
Without testimony from Martoma, criminal investigators lack direct evidence about what he specifically told Cohen, and the clock is running out on federal prosecutors as the 5 year statute of limitations runs out at the end of this month. Direct evidence of criminal activity often is considered crucial to establishing proof beyond a reasonable doubt, the legal standard needed to win a criminal conviction.
Consequently, many believe that federal prosecutors will decide not bring insider trading charges against Cohen, at least not related to the trading in Elan and Wyeth.
Loss for the Government?
If government prosecutors decide to take a pass in this case, many will see this as a significant setback for the Justice Department and a big win for SAC. Clearly, Cohen and SAC have been one of the primary targets of the government in its insider trading investigation over the past few years.
However, the government’s crackdown on insider trading has been extremely successful by any measure. Since August 2009, the government has brought insider trading charges against 81 people, with 73 convictions and guilty pleas so far. Six of these cases have been against former SAC employees who have either pleaded guilty to, or been convicted of, federal insider-trading charges, and two more employees are still headed to trial.
Win for Cohen?
Despite all this, a decision by the Justice Department not to bring criminal insider trading charges against Steve Cohen because they don’t have enough evidence must be seen to be a victory by Cohen and his team given all the effort the government has put into this case.
However, the government’s insider trading investigation has taken its toll on SAC Capital. Not only did the SEC win a landmark $601.7 million fine in its civil case against SAC to settle allegations arising from the Elan and Wyeth trades, but consistent government allegations of insider trading has prompted several SAC clients to request withdrawals of more than $5 billion from Cohen’s hedge fund.
And of course, the government has not given up on trying to bring a criminal insider trading case against Cohen. In fact, some market participants suggest that federal prosecutors and the FBI are focusing their investigations into new allegations of insider trading at SAC in at least two other stocks, a development which would extend the government’s deadline to file insider trading charges for a few more years.
Given all this, one might ask, “What price the victory?” We will have to wait and see how this battle between SAC and the government plays out.