How The Government Is Targeting a SAC Capital Trader

We got new information today about how the FBI attempted to pursue Steven Cohen at SAC Capital Advisors during its ongoing investigation of insider trading.

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We already knew that the FBI showed up at the home of John Kinnucan, owner the independent research firm Broad Band Research, and asked him to wear a wire — in order 'ensnare' his client: SAC Capital.

Today, found out the name of the FBI's target at SAC: Michael Steinberg.

Steinberg is currently a tech-fund manager at SAC, working for a division called Sigma Capital Management, subsidiary with $1.5 billion AUM. This morning, Satya Wachtel introduced us to Mr. Steinberg, of Park Avenue, about who little had been known.

Steinberg has not been accused of any wrongdoing.

Kinnucan refused the FBI's request to wear a wire —and he did so in rather high style. After his visit from the federal law enforcement, Kinnucan sent an email to clients, including SAC Capital:

"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."

(The Wall Street Journal article cited above also reports that "Mr. Kinnucan's email has become something of a cause célèbre on Wall Street" ever since. And it isn't hard to see why.)

The journal also relates an interesting tale about Richard C.B. Lee.

Lee is a hedge fund manager—and a former employee of the Galleon Group. Lee is currently one of 14 defendants pleaded guilty in the government's insider trading case againt Galleon.

Prior to joining the Galleon Group, Lee had worked at SAC Capital. In 2009, after Lee had begun cooperating with the government in its investigation against Galleon, Mr. Lee attempted to get re-hired by his old employer—SAC Capital.

The Journal reports: "Mr. Cohen was suspicious about Mr. Lee's motives and he rebuffed Mr. Lee's offer, the person said."

Who precisely this 'person' is —and what Mr. Cohen may or may not have found suspicious is not disclosed.

But it might make you wonder about Steve Cohen's mindset in the wake of the Galleon Group case.

Did he believe he was the possible target of an investigation as early as 2009?

On November 19th of this year, I wrote a short piece about a guy at SAC, named Sam Evan, whose job it was, essentially, to play golf with clients. (At the time, it just struck me as a great gig.) My piece was based on a much longer Reuters storythat I happened to come across.

I found something in the Reuter's story intriguing, and quoted it in my piece: "Evans apparently does a lot of schmoozing potential clients. But, according to the Reuters article, that's not all: 'But beyond the need to raise capital, Evans' time spent on the greens also sheds a light on the many often subtle ways that hedge funds use to get access to corporate executives and a potential edge over their competitors.'"

I then observed: "'If that arrangement sounds to you like it might be flirting with the line, SAC Capital may have reached a similar conclusion: According to Reuters, 'In fact, SAC Capital takes steps to make sure that even if some executive let his lips flap a bit too much while waiting to hit a putt, the fund doesn't trade on anything that is said. A former SAC Capital employee familiar with the golf outings said shares of companies whose executives attend a golf outing that Evans has either arranged or co-sponsored are put on a "restricted list" —meaning the stock can't be traded for a set period of time.'"

Also quoted from Reuters: "[Since the Galleon Group incident,] federal authorities have said stamping out the misuse of secret corporate information by hedge funds is a major priority. Authorities are particularly focused on the ways hedge funds gather information to get a so-called trading edge. The Galleon investigation also has caused headaches for Cohen because several people charged in the case had once worked at SAC Capital. But so far no one has been charged with wrongful trading while working at Cohen's fund."

I wrote at the time: "In some way, SAC Capital has been on the leading edge of creating a culture that supports transparency and reduces the likelihood that financial misdeeds will occur. For example, as the Reuters article points out, "'Cohen aggressively started adding compliance people to the payroll to make sure traders at the fund do not cross the line. Other big funds have since followed suit.'"

In retrospect, I might be tempted to rephrase that as "creating the appearance of a culture that supports transparency".

I would hasten to point out that a desire to create the appearance of transparency in no way implies actual wrong doing: One might rightfully be a bit paranoid—even if completely innocent of any crimes.

Especially if you live each day of your life suspecting a government dragnet is being drawn to ensnare you in wrongdoing—real or imagined—by some hypothetical overzealous prosecutor. Even if one had satisfied not only the letter of the law, but the highest standards of ethical conduct, it would still be reasonable to be a bit nervous, under the circumstances. (I believe in the basic fairness of our legal system—in the ability to get a fair trial under the law—but I certainly wouldn't want to be charged with a crime I didn't commit.)

The point is this: It may cast Cohen "aggressively" adding compliance personnel in an entirely new light.

If Cohen reasonably expected an investigation was underway, he might well have believed that shoring up the compliance environment couldn't hurt.

My piece closed with the following observation—then intended unironically: "Cohen was also one of the first hedge fund managers to hire an in-house psychiatrist."

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