SAC Capital trader Michael Steinberg's conviction on multiple counts of criminal insider trading on Wednesday was a crushing blow. But in addition to the prison sentence he now faces, Steinberg could also be hit with millions of dollars in unexpected legal fees.
The reason: SAC founder Steve Cohen's legal policies, which insulate both investors and employees of his $13 billion hedge fund from most regulatory or litigation fees and penalties—unless an employee is found guilty of misconduct at trial. That means that Steinberg, who is represented by top defense litigator Barry Berke, could now be facing costs the legal experts estimate to be at least $10 million.
Officials at SAC Capital declined to comment on the details of the matter, as did a spokesman for Steinberg.
But in a meeting with portfolio managers within the last year or so, Cohen made his approach to employee legal expenses clear, according to someone was present: "the firm will support you unless you are found guilty." That viewpoint was reiterated at a subsequent meeting of SAC's stock traders shortly thereafter.
How Cohen's will play out in practice, however, isn't entirely clear. Under Delaware corporate law, which is the standard for many corporations, a company is obligated to provide employees with legal defense, say two lawyers familiar with the industry's practices, and typically, that support will last at least until a defendant's conviction is reiterated on appeal. That means that Steinberg, who is scheduled to be sentenced on April 25 and plans to appeal shortly after that, won't likely be on the hook immediately.
Moreover, Cohen may choose not to ask Steinberg for repayment, said one of these lawyers. Although a trial and appeal handled by an experienced Manhattan litigator could eventually run in to the tens of millions of dollars, the SAC founder has so far made a habit of covering regulatory fees, legal bills, and penalties, notes one of the lawyers.
And Cohen may decide that Steinberg, a longtime employee with whom he is friendly, should be spared the burden of a huge legal bill as he endures a prison sentence that separates him from his wife and children. (The maximum possible sentence attached to Steinberg's conviction is 85 years, but other similar cases from the recent past have yielded prison terms of between five and ten years.) "Cohen has certainly done a lot of things in terms of kind of absorbing the financial aspect of all this mess that he didn't necessarily need to do personally," the lawyer said.
For now, Steinberg awaits his sentencing, says someone familiar with the matter, and is technically still an employee of SAC, according to another.
SAC, which recently settled corporate insider-trading charges with the same prosecutors who convicted Steinberg for $1.8 billion, is preparing to return all its outside assets and convert to a so-called family office, managing solely Cohen, his family, and certain senior employees' money. The firm will adopt a new name, which it plans to announce in January, according to someone familiar with the matter, and expects to manage between $9 billion and $10 billion.
For the moment, however, Cohen is preparing for an end-of-year boat trip, said someone familiar with the matter, and is ending 2013 with an impressive market performance of more than 16 percent returns, according to someone familiar with the figures, despite the legal maelstrom.
He was in his office Wednesday, watching Federal Reserve Chairman Ben Bernanke on CNBC, when Steinberg's verdict was returned. "Guilty," Cohen muttered in the midst of Bernanke's televised press conference, a pronouncement that was picked up on SAC's internal intercom system for traders who hadn't yet learned the outcome to hear. It was an eerie experience, said someone who was there.
(Read more: SAC Capital to fight civil case against founder)
—By CNBC's Kate Kelly. Follow her on Twitter: @KateKellyCNBC