Cohen Subpoena Puts SAC Settlement Talks on Ice
Settlement talks between SAC Capital and the federal government, which could have led to a pact preventing criminal charges against founder Steven Cohen, are off after Cohen was issued a subpoena by prosecutors last week. That news may prompt outside investors in the embattled hedge fund, including the Blackstone Group, to accelerate yanking additional capital.
As recently as May 13, SAC officials were expressing confidence that a satisfactory resolution of the federal probe was soon to come, a person with knowledge of a potential pact said. A settlement package would have ended a multi-year probe into alleged insider trading of various stocks in exchange for a fine, among other concessions. But during the course of the last week, a surprise grand jury subpoena was issued to Cohen, truncating those deal talks abruptly.
Spokesmen for SAC have refused to confirm or deny that Cohen last week received a subpoena asking him to testify before a grand jury—a move that would essentially ask him to provide evidence against the firm he founded two decades ago and still runs. A spokesman for the Manhattan U.S. Attorney's office, which has been handling the SAC cases, declined comment.The subpoena was first reported by the New York Times late Sunday.
During a noontime conference call with investors on Monday, SAC officials remained mum, according to a listener, saying that media reports on the subpoena and related matters were pure speculation. SAC officials, who took no questions during the call, added that a resolution to the prosecutorial probe would occur within the next two months, this person added. Justice Department lawyers face a statute of limitations on bringing fresh charges on Cohen or the firm in connection with two particularly suspicious trades from 2008 that would force them to either indict the parties or stand down entirely by the end of July.
Monday's revelations ratcheted up the pressure on SAC that has been building slowly this year amid the indictment of a long-tenured firm trader, Michael Steinberg, and ongoing concerns over Cohen's implication in the case dating from 2008.
During the first quarter, SAC's outside investors requested the return of $1.7 billion, taking a substantial chunk of the $6 billion in external capital that SAC manages. Now, in light of the reported subpoena, the Blackstone Group, whose alternative-assets division pulled a portion of its SAC investment during the first quarter, is planning to withdraw at least part of the roughly $410 million that remains, said someone familiar with the matter. That decision, this person added, is based on concerns that Blackstone's own investors have raised.
(Read More: SAC Capital Won't Cooperate Unconditionally: Letter)
In recent months, SAC has also been hampered by lackluster performance figures. The fund's flagship was up about 1 percent for the first two weeks of May, said two people who have been briefed on the numbers, leaving it up roughly 6 percent year-to-date. That's a far cry from the broader stock market, which was up about 16 percent through the same period, and roughly in line with competing hedge funds—a group that SAC has historically beaten.
On Friday, SAC told investors that the coming months would bring "substantially more clarity" to the legal picture and that it did not believe its hardening stance with prosecutors would have "a financial impact" on its funds. Nonetheless, even some of the firm's more stalwart supporters now appear to be having second thoughts. If a Cohen indictment becomes a more distinct possibility, SAC's outside investors "may have no choice" but to pull money, especially if they have their own clients to consider, said one money manager with money in the hedge fund.
_BY CNBC's Kate Kelly. Follow her on Twitter at @KateKellyCNBC.