SAC Facing Racketeering Charges?

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SAC Criminal Charges

Source: Reuters

Things just seem to be getting worse for Steven A. Cohen and his SAC Capital Advisors. First, we learned that criminal charges were being filed and that prosecutors considered the collective officers’ crimes were a “pattern of insider trading”.

RICO

Now, though, it looks as though the law most often used against suspected members of the mafia are being considered as well. The law, Racketeer Influenced and Corrupt Organizations Act, or RICO, could be applied to the $15 billion hedge fund. It’s not yet been decided for sure, but it looks as though prosecutors are leaning towards this option as the case moves forward. Not only that, but prosecutors, in their efforts of pushing Cohen into testifying before the grand jury, let it slip of the possible repercussions if he chooses not to testify. In other words, it appears they laid it on the line: testify or else.

RICO is the ultimate heavy hammer in the government’s arsenal,

said Steven Crimmins, a partner at K&L Gates in Washington, who at one time worked with the U.S. Securities and Exchange Commission. He also said the threat could be just a leverage tool with the goal of getting Cohen to plead out to lesser charges; RICO carries jail time and the fines are usually massive. But if prosecutors do use RICO, they could introduce the theory that Cohen was able to keep his distance from the allegations of insider trading, even as he knew some employees were actually engaging in the crime.

It’s Happened Before

And if Cohen’s wondering how this has played out for others, he need look no further than the case against Michael Milken. Federal prosecutors used RICO to go after Milken and his white collar crimes in the late 1980s and early 1990s. Prosecutors claimed his firm, Drexel Burnham Lambert, routinely broke securities laws. Milken pled guilty to lesser charges, was sentenced to two years in jail and paid $1.1 billion, $200 million of which consisted of criminal fines and $900 million of which settled civil suits.

On the other hand, in order to bring the threat full circle, the head honchos at the Justice Department have to give their seal of approval and word is, that kind of support doesn’t exist at this point. Plus, there could be problems with the sheer number of employees – more than 1,000 and less than a dozen have been looked at. The fact is, there are a lot of people – and even some former prosecutors – who can’t figure out why they would want Cohen to testify; odds are, he’d only plead the Fifth (meaning he’d not testify on the grounds of self incrimination).

I don’t know what purpose it serves,

said Michael Bachner, a one-time federal prosecutor who now represents defendants charged with securities crimes.

I think it’s purely an effort to cause him to assert his Fifth Amendment privilege and knowing that will get communicated to the media.

SAC and Bahara

Others say there could be another motive behind this decision. By now, most of us are familiar with Manhattan U.S. Attorney Preet Bharara, who has emerged as a superstar in these types of cases, including those against the nation’s biggest banks. In late 2012, he went after Bank of America and hit with a whopping $1 billion lawsuit. Those accusations include defrauding the government. He was also named as one of Time magazine’s “The World’s 100 Most Influential People” in 2012. There’s a reason Wall Street fears him: he never backs down. And some in the know believe Bharara is more focused on bringing criminal charges against Cohen’s 21-year-old hedge fund in an attempt to punish the billionaire investor in the pocketbook by forcing his fund to fold. It wouldn’t be surprising considering Bharara has no patience for criminals who create companies for the goal of engaging in criminal behavior. He’s already referred to SAC Capital as a “criminal enterprise” – and he did so in open court as he entered into plea agreements with those who’ve already received their punishment.

History Repeats Itself

Still, though, nothing’s been written in stone as of yet. But those who think he’s grabbing at straws might be well served to take a look at his history. He’s calculated, definitive and generally gets what he goes after. Before you begin sympathizing with those in his crosshairs, and especially Cohan, consider this:

Three decades ago, U.S. securities regulators had Cohen in their crosshairs for the first time; and, like this time, insider trading was the core of the probe. And this was before he ever even launched SAC Capital. And, as one might expect, Cohen asserted his Fifth Amendment rights. There have been at least two more investigations involving Cohen. Odds are, it’s likely that Baharara has simply had a bellyful of his being able to skirt the same laws others must abide by. One former judge, Richard Holwell, says it could be the subpoena has everything to do with testimony Cohen already provided.

If you’ve already testified as to a subject matter – for example a particular transaction – the courts would conclude you’ve willingly waived whatever privilege there was,

said Holwell.

Conditional Cooperation

On Monday, after hearing he could be about to receive a subpoena, Cohen announced cooperation with those involved with the investigation would be sharply reined in. There’s no doubt Cohen’s sweating, especially after learning even more subpoenas had been issued. Already, there have been at least nine SAC employees who have been charged with or implicated in insider-trading while working at Cohen’s fund. Five have pleaded guilty just a few weeks ago SAC agreed to pay a $616 million penalty to settle a lawsuit arising from one of the investigations. Still, the unconditional cooperation is still ringing in the ears of those involved.

Finally, there’s a deadline looming for investors, who control 40 percent of the assets. Some have already been asked to redeem around $1.7 billion from the fund and the deadline for others is June 3rd. It’s not known what will ultimately play out in this area of the brouhaha.

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About Author

David is a CPA and has spent the past decade as a financial adviser helping clients meet their fiscal objectives. With an appreciation for journalism, he has spent the past few years overseeing several financial columns as well as writing two previous finance blogs. He resides on the East Coast with his wife and two sons and has guided many through the recent recession while providing a no-nonsense approach to spending and saving.


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