Published May 21, 2013
NEW YORK – U.S. prosecutors are considering charging Steven A. Cohen's SAC Capital Advisors as a criminal enterprise engaged in a long pattern of insider trading in stocks, according to a person familiar with the matter.
Prosecutors may use the Racketeer Influenced and Corrupt Organizations Act, most commonly associated with prosecutions against the mafia, to move against Cohen's $15 billion hedge fund company, said the person, who spoke on condition of anonymity.
While this is one option under consideration, no final decision has been made, the source added. Indeed, the approach carries its own set of risks and would require approval from top Department of Justice officials, legal experts said.
A spokeswoman for Manhattan U.S. Attorney Preet Bharara declined to comment, as did a spokesman for the Justice Department.
SAC Capital has previously denied any wrongdoing and a spokesman for the $15 billion firm declined to comment on the potential use of RICO against it.
Federal prosecutors have used the 40-year-old RICO statute to go after white collar crimes before. In 1989, junk bond king Michael Milken was indicted under RICO, with prosecutors claiming his firm Drexel Burnham Lambert routinely broke securities laws. Milken, who pleaded guilty to lesser charges, was sentenced to two years in jail and paid $1.1 billion in fines and settlement fees.
So far, prosecutors have charged or implicated nine current or former SAC employees in insider trading schemes, including former portfolio manager Mathew Martoma, who was charged last November, and Michael Steinberg, a top Cohen deputy who was arrested and charged in late March. Both Martoma and Steinberg have pleaded not guilty.
Some legal experts say that if prosecutors had enough evidence to charge Cohen with a specific insider trading violation, they would have done so by now. The government has been investigating SAC for about six years.
A RICO prosecution would allow the government an avenue for pursuing criminal charges against SAC Capital as an entity, as well as potentially Cohen as the head of it, they said.
Michael Bowe, a partner at Kasowitz Benson Torres & Friedman in New York, who has done legal battle with Cohen in the past, said the benefit of a RICO case is prosecutors need not prove Cohen "knew the details of any particular act."
Instead, he said, prosecutors would have to prove several instances of insider trading first, and then they would have to prove that Cohen generally knew the practice was occurring.
Bowe represented Canadian insurance company Fairfax Financial in a lawsuit claiming SAC Capital and other hedge funds spread negative rumors between 2003 and 2006 about the company to drive down its stock price. A New Jersey judge eventually threw out the case against SAC Capital and most of the hedge funds.
Speculation about a potential RICO case grew after prosecutors took the rare step last week of trying to compel Cohen to testify before a grand jury. Normally, prosecutors do not subpoena someone who is the subject of the investigation.
"RICO is the ultimate heavy hammer in the government's arsenal," said Steven Crimmins, a partner at K&L Gates in Washington, who used to work for the U.S. Securities and Exchange Commission.
He said the government could use RICO charges as leverage in negotiations to get Cohen to plead guilty to lesser charges. A RICO conviction carries the potential for jail time and penalties three times the actual damages.
Through RICO, prosecutors could allege Cohen managed to stay away from specific incidents of insider trading but generally knew his employees were engaging in the practice to the benefit of the firm, legal experts said.
But a RICO prosecution presents its own set of challenges. The use of it as a prosecution strategy needs to be signed off by top officials at the Department of Justice, and some lawyers said it could be a stretch since SAC has nearly 1,000 employees and prosecutors have charged or implicated only nine so far.
Tom Gorman, a partner at Dorsey & Whitney in Washington, said it might make more sense for prosecutors to bring a charge against the hedge fund firm for failing to properly control its employees or a charge for conspiracy to commit insider trading.
The conspiracy charge would help the government stave off the five-year statute of limitations on insider trading cases, a cutoff that is fast approaching in the Steinberg and Martoma matters.
(Reporting by Emily Flitter; Editing by Matthew Goldstein, Tiffany Wu and Tim Dobbyn)