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The Government's Insider Trading Dragnet Has Some Questions for SAC Capital

In what may be today's most titillating—though maddeningly vague—newsflash, SAC Capital Advisors informed investors that they have received a government subpoena.

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The subpoena is presumably in connection with a massive insider trading investigation, which began over three years ago, but culminated yesterday in a series of FBI raids on multiple hedge funds .

According to an article recently posted on MarketWatch, the subpoena received by SAC Capital is identical to the "extraordinarily broad" subpoenas received by other hedge funds.

The market watch article states that SAC Capital's letter to investors made the following points:

  • SAC Capital appears to be denying any wrongdoing: "Neither the subpoena nor any other information of which we are aware suggests that anyone at SAC has engaged in any wrongdoing,"
  • SAC Capital has stated that subpoenas don't "shed much light on whom or what the government may be investigating."—which would seem to imply that SAC Capital is not clear about precisely what aspect of its business the government wishes to investigate. To paraphrase the MarketWatch article, SAC Capital would seem to be asserting that they are currently unaware of any individual securities or strategies which may be under investigation by the government.
  • And finally a generic assertion of cooperation with the investigation, namely that SAC Capital would proceed "in a professional and cooperative manner."

What are we to take from this?

Aside from the few details I have described, it seems extraordinarily little is known about the nature of the SAC Capital investigation.

However, the speculation about SAC Capital and rumors of insider trading goes back several years. In fact, his ex-wife once accused him of insider trading.

Many of the rumors have arisen simply because SAC Capital's results have been almost unbelievably good. People look at them and think, "Well, they must be cheating somehow."

This took on a new life in the wake of the insider trading case against Galleon Group.

Galleon Group CEO Raj Rajaratnamwas arrested in October of 2009, in connection with an allegedly massive insider trading scheme, involving the Galleon Group. Galleon Group was unwound later that month. Rajaratnam is still awaiting trial.

And, in the wake of yesterday's raids, many in the blogosphere were speculating about an impending investigation against SAC. I was among them: "You have to wonder if eyes will now turn to one of the bigger kids on the block: SAC Capital , a group of hedge funds run by Steven A. Cohen—with $12 billion dollars of assets under management. It seems natural to wonder about SAC for two principal reasons: 1) The existing raft of speculation about SAC employee's involvement in the Galleon Group case; and 2) the new attention garnered from today's raid on three hedge funds—two of which employed three former SAC employees."

(In fact, so often was the connection between SAC capital and Galleon Group raised—however implicitly—that I encountered the following sentence last week, prior to the latest round of FBI raids, in a Reuters article about hedge funds and, of all things, golf: "The Galleon investigation also has caused headaches for Cohen because several people charged in the case had once worked at SAC Capital.")

ZeroHedge speculates that the government's insider trading case implicating FrontPoint may actually be a stalking horse aimed at bringing down Steve Cohen and SAC Capital.

Today, in the wake of the SAC Capital subpoena, one of Wall Street's largest and most powerful hedge funds, the analysis, speculation, scrutiny—and worry are almost certain to increase. Dramatically.

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