SAC’s Secret Phone Call: Are Corporate Criminal Liability Charges Next?July 8, 2013
Of the multiple threads the government has pursued in its long-running insider trading investigation of Steven A. Cohen and his hedge fund, SAC Capital Advisors, the case against Mathew Martoma had been seen as the most promising.
Federal authorities repeatedly sought the cooperation of Mr. Martoma, a former employee at SAC, in helping to build a case against Mr. Cohen related to suspicious trading in two drug stocks in July 2008.
Yet Mr. Martoma has persistently rebuffed the government’s overtures, including as recently as this spring, when the authorities met with his lawyers at the United States attorney’s office in Manhattan, a person briefed on the meeting said.
After Mr. Martoma declined to implicate his onetime boss, authorities concluded that they lacked sufficient evidence to file a criminal case against Mr. Cohen related to the drug-stock trades before a five-year legal deadline expires in mid-July, according to people with direct knowledge of the investigation.
In interviewing Mr. Cohen’s senior executives, prosecutors are gathering evidence for a possible indictment against SAC under the theory of corporate criminal liability, a move that would effectively destroy the fund.
Under that theory, the government can impute criminal liability to a company based on the benefit it received from an employee’s acts that the authorities say are criminal. The government is loath to bring criminal charges against a corporate entity, fearing job losses and economic damage, but will pursue a case if it believes that the wrongdoing at the company is pervasive or condoned by management.
When the government arrested Mr. Martoma last November, they appeared to be closing in on Mr. Cohen. The complaint highlighted a 20-minute phone call that Mr. Martoma had with Mr. Cohen the day before SAC began dumping its holdings. Prosecutors did not claim that Mr. Martoma told Mr. Cohen about the confidential information.
But what did the two men discuss? Because there is no recording of the call, only Mr. Martoma and Mr. Cohen know the conversation’s contents.
Last year, when Mr. Cohen sat for a civil deposition in the S.E.C. case, he told investigators that Mr. Martoma said he was no longer comfortable with the position.
Prosecutors possess powerful evidence against Mr. Martoma, having secured the testimony of the doctor who is said to have leaked the drug-trial data to SAC. But there appears to be no direct evidence that Mr. Cohen knew of the secret information when he directed the Elan and Wyeth sales.
Additional evidence could yet surface in the Martoma case. Prosecutors have indicated that they would file an amended indictment in the case by the end of July, which could add new details, charges or defendants.
And even without Mr. Cohen’s facing criminal charges tied to Mr. Martoma, he has drawn scrutiny from the S.E.C. The commission is aiming to build a civil insider trading lawsuit against Mr. Cohen, and would have a lower burden for proving its case than criminal authorities.
It could also bring an action against Mr. Cohen for failing to supervise his employees, something akin to the civil lawsuit that regulators brought last month against Jon S. Corzine related to his control of the collapsed brokerage firm MF Global.
The commission could seek to impose additional financial penalties on Mr. Cohen, as well as a ban from the securities industry.
An S.E.C. spokesman declined to comment. But earlier this year, a senior S.E.C. official expressly noted the possibility of a case against Mr. Cohen.
When the commission announced the record civil penalties paid by SAC, George S. Canellos, now its co-head of enforcement, said that the settlement did not “preclude the future filing of additional charges against any person, including Steve Cohen.”
Source: NY Times