UPDATE 2-U.S. charges SAC Capital with insider trading crimes
* "Systematic insider trading" - criminal case by prosecutors
* Companion civil case seeks asset forfeiture and fines
* Allegations cover period roughly from 1999 to 2010
NEW YORK, July 25 (Reuters) - Federal prosecutors came down hard on billionaire hedge fund manager Steven A. Cohen on Thursday, unveiling criminal fraud charges against his SAC Capital Advisors LP that could put an end to his investment career.
An indictment and a civil case seeking an asset freeze and criminal money laundering penalties, cap a seven year-long investigation of one of Wall Street's most renowned firms amid a crackdown on insider trading that led to scores of convictions.
The charges against the firm could imperil the future of SAC, a roughly $15 billion hedge fund that has posted some of its industry's best returns and established Cohen as one of his generation's best traders.
Cohen, 57, was not personally charged in either the criminal case or the civil case filed in U.S. District Court in New York.
But the very rare move by the U.S. Department of Justice to indict a powerful financial firm could end his career managing outside money, and reflects what prosecutors and the FBI found to be pervasive wrongdoing at SAC that cheated investors generally.
SAC representatives were not immediately available for comment. When Cohen was civilly charged on July 19 by the U.S. Securities and Exchange Commission of failing to supervise two employees who face criminal charges of insider trading, he said he would fight the allegations. Both employees, Mathew Martoma and Michael Steinberg, have pleaded not guilty and go on trial in November.
Many Wall Street firms that lend money to and trade with Stamford, Connecticut-based SAC are likely to stop because of the criminal case, although the firm might still be able to operate because more than half of its assets belong to Cohen and employees.
SECURITIES FRAUD, WIRE FRAUD
The indictment accused SAC and various affiliates of four criminal counts of securities fraud and one count of wire fraud.
It accused SAC of "systematic insider trading" that enabled the hedge fund to generate hundreds of millions of dollars of illegal profits and avoided losses.
Prosecutors said the scheme ran from roughly 1999 to 2010, and was designed to boost SAC's returns and fees. The fees are among the highest in the hedge fund industry.
The government said Cohen "financially incentivized" portfolio managers to share their very best ideas, but that SAC did not question trading recommendations that appeared to be based on inside information.
It said this was part of the firm's drive to encourage workers to relentlessly pursue an "information edge," which overwhelmed the firm's "limited" compliance systems.
"There was no meaningful commitment to ensure that such 'edge' came from legitimate research and not inside information," the indictment said. "The predictable and foreseeable result ... was systematic insider trading."
The indictment also suggested that the government probe into insider trading is far from over, alluding to Cohen's having hired an employee from a fund despite a warning that the person was part of that fund's "insider trading group."
That employee was Richard Lee, according to two people familiar with the matter. The fund is Citadel Investment Group, according to a person familiar with the matter. Citadel spokeswoman Katie Spring said Lee was fired in 2008.
Prosecutors built their case with help from several former SAC employees who pleaded guilty to criminal insider trading charges, including Noah Freeman, Jon Horvath, Donald Longueuil and Wesley Wang.
Lee, meanwhile, pleaded guilty on July 23 to securities fraud and conspiracy related to trades in Yahoo Inc and 3Com Corp. His plea was disclosed in the SAC indictment.
Other suspect SAC trading included nearly $1 billion of stock sales and short sales by Martoma and Cohen in 2008 in Ireland's Elan Corp and Wyeth, which is now owned by Pfizer Inc.
Prosecutors said these transactions were based on tips about a trial for a drug to treat Alzheimer's disease, and generated about $276 million of illegal profits and avoided losses.
Another transaction was Cohen's decision in late August 2008 to begin selling a $12.5 million stake Dell Inc within 10 minutes after he was forwarded an email in which Horvath told Steinberg, based on a "2nd hand read from someone at the company," that the computer maker's earnings would disappoint.
Lawyers for Cohen earlier this week said their client never read that email.
It is unclear how much SAC will need to retrench following the indictment, or how many of its nearly 1,000 employees might be affected.
Cohen charges a 3 percent management fee and keeps 50 percent of SAC's investment profits, making him far pricier than typical hedge fund managers who collect a 2 percent fee and 20 percent of the profits.
SAC also generates more than $300 million annually in trading fees for Wall Street brokerages. It deals with many Wall Street firms large and small, including JPMorgan Chase & Co and Jefferies & Co.
Three trading counterparties on Thursday said their dealings with SAC remain normal for now.
SAC is sitting on $6 billion to $8 billion of idle cash, according to people familiar with its finances, easing potential concern about its ability to post needed collateral.
Concerns remain, though. "Just having them as a counterparty when you don't know that they're going to be there tomorrow is a problem," said an executive at one counterparty.
"That's what people worry about. It's an ugly situation."
Federal prosecutors had long debated whether to criminally charge SAC. Several lawyers, including former federal prosecutors, said the decision might signal an admission that there was a lack of evidence to charge Cohen personally.
Still, by reaching back to activities dating from 1999, the government signaled it has found a way to sidestep the usual five-year deadline to bring insider trading charges.
One recent example of the government indicting an entire firm was the 2002 case against Enron Corp's accounting firm Arthur Andersen. That firm was forced to close shortly after the indictment, although it had lost much of its business even before that occurred. The case was later thrown out.
The criminal case is U.S. v. SAC Capital Advisors LP, U.S. District Court, Southern District of New York, No. 13-00541. The civil case is U.S. v. SAC Capital Advisors LP in the same court, No. 13-05182.