SAC Withdrawals Exceed Expectations Due to Insider Trading Probe

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New York, NY – Valentine’s Day 2013 was not filled with love for hedge fund SAC Capital as the government’s ongoing insider trading investigation prompted investors to request withdrawals of $1.68 bln in assets by the end of the year – considerably more than the level expected by SAC management.


SAC Manages Redemption Requests

$15 bln hedge fund SAC Capital received $1.68 bln in redemption requests by their most recent deadline for these requests on the close of business on February 14th.  Based on SAC’s redemption rules, approximately $660 million in redemptions will be paid out on March 31st, an amount that includes prior redemption requests received in 2012. The remaining $1 billion of new redemption requests will be paid in out over the next three quarters.

Most don’t think the redemption requests will dramatically impact the hedge fund’s day-to-day operations as approximately 60% or $9.0 bln of the fund’s assets are invested by employees or by founder, Steven A. Cohen.  In fact, a few feel the fund could continue to operate even if 100% of the roughly $6 billion in outside money was withdrawn from SAC Capital.

SAC management was able to convince Blackstone Group, one of the hedge fund’s largest outside investors with close to $550 mln invested in SAC to keep most of its money in the fund – at least for now.  However, to do so Blackstone negotiated more favorable liquidity terms to leave most of its money in the fund.  In the end, Blackstone requested $100 mln in withdrawals from the fund.

As a quid pro quo for keeping their money in the fund, SAC told investors like Blackstone that if they kept their money with the firm this quarter, they could still get all of it out by year-end if they later decided to pull their assets from the fund.  This convinced some investors to either decrease or to eliminate their planned redemptions, enabling them to wait and see what happens over the next three months with the government’s insider-trading investigation.

Besides this effort to convince investors to keep their money with the fund, SAC has previously said that outside investors wouldn’t be subject to any of the legal costs or fines related to regulatory action. In addition, SAC also offered investors reassurances that Mr. Cohen would keep the majority of his personal money invested in SAC funds.

Last month, SAC also announced a one-time increase in bonuses for portfolio managers in order to retain talent in the midst of this investigation.


Insider Trading Investigation Generates Client Fears

Investors’ $1.68 bln in redemption requests at SAC reveals the growing concern that many clients have about the government’s continued insider trading investigation.  Initially, SAC management told employees that they expected $1.0 bln in redemption requests as a result of the investigation.  In the past, SAC’s investors were extremely loyal to the hedge fund due to the firm’s 25% annualized returns since the funds opening in 1992.

Currently, at least six former SAC employees have either been convicted or pleaded guilty to insider trading charges since late 2009.  Four of these employees are now cooperating with the government in its investigation.   These former SAC employees include Richard Choo-Beng Lee, Noah Freeman, Anthony Chiasson, Todd Newman, Jon Horvath, and Wesley Wang.

A seventh employee, Mathew Martoma, was recently indicted by federal authorities in the largest ever insider-trading case, allegedly worth $276 mln in trading profits or averted losses. Martoma pleaded not guilty to the charges.  Although unidentified in the Martoma complaint, Mr. Cohen has been widely acknowledged to be the hedge-fund owner referenced in the criminal and civil court documents.

Another former SAC employee, Dipak Patel, who has yet to be accused of any wrong doing, has been widely mentioned in the press as someone else who could be caught up in this federal insider trading investigation as the FBI and government prosecutors try to bring down SAC and its elusive founder Steve Cohen.

However, the pressure on SAC Capital rose even further in late November, 2012 when the SEC issued a Wells notice to the firm.  While it is unclear whether an indictment of any kind is coming, most market watchers suggest that the government is seriously considering bringing a civil “failure to supervise” case against the firm.


Next Few Months Could Be Telling

Given the more favorable liquidity terms that SAC has recently negotiated with investors to keep their assets in the hedge fund, many will be watching the government’s insider trading investigation carefully over the next few months to determine whether or not they wish to withdraw even more of their assets from the fund.

Based on the large number of insider trading leads that federal authorities are currently working on, and the obvious focus that the government is giving to SAC and founder Steve Cohen, we would not be surprised to see even more insider trading cases being brought against current or former SAC employees.

The bigger question is whether federal authorities plan to bring an actual insider trading or “failure to supervise” case against SAC Capital in the next few months.  If so, we could see a real exodus of external investors as redemptions spur redemptions.

 

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