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Is The SAC Indictment The First Shot in a War Against Outsize Hedge Funds?

imagesNew York (HedgeCo.Net) – Steve Cohen is getting squeezed from both ends. A federal grand jury just handed down a criminal indictment against Cohen’s hedge fund SAC Capital – on counts of wire fraud and securities fraud conspiracy. This follows the administration action taken by the SEC that Cohen should have spotted potential insider trading red flags going up among his traders.

Both actions have the potential to put one of the country’s most successful fund managers out of business.

Despite $14 billion in assets still under management at SAC: “Forfeiture, restitution and heavy fines are the real worry for SAC. If the government can establish alleged fraudulent profits with precision, they may have the ability to wipe out the firm’s net capital – which would make bankruptcy or receivership a real threat.” John Carney, a former federal prosecutor and senior counsel with the SEC, said. “Indicting a company rarely makes sense because you can’t put the corporation in jail. So what is that the Justice Department hopes to achieve that the SEC can’t do civilly?”

He also spots the bigger picture behind the government’s move. “The real worry for the hedge fund industry as a whole is whether the SAC indictment is an isolated incident or the latest shot in a long war about to be waged by the government against fund managers with outsized returns,” he says.

Mr. Carney adds that SAC was clearly not blindsided by the indictment. “This could not have come as a surprise,” he says. “There had to have been discussions in the days and weeks leading up to this event. Clearly, SAC wanted to fight rather than work out a non-prosecution or deferred prosecution agreement with DOJ.”

His ultimate assessment is bleak: “The grand jury ax is effectively a death knell for any corporation, no matter what the government says,” he notes. “The Justice Department may have the determination that there were so many corrupt employees that they outweighed other honest employees.” He adds, however, that the indictment doesn’t necessarily impact the individual cases brought against SAC traders Michael Steinberg and Matthew Martoma.

Carney is co-leader of the national White Collar Defense and Corporate Investigations group at BakerHostetler.

Editing by Alex Akesson
For HedgeCo.net
alex@hedgeco.net
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