Hedge fund titan Steven A. Cohen, whose $15 billion firm has been under fire for alleged insider trading, took an unprecedented step when he said on Thursday SAC Capital Advisors would begin clawing back compensation from employees who are found to use illegally obtained information.
The claw-back policy, which will go into effect next year, is among several initiatives Cohen is taking to bolster compliance at his hedge fund.
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To date, nine current or former SAC employees have been charged with or implicated in insider-trading while working at Cohen's fund.
The billionaire investor, in a letter to clients reviewed by Reuters, said the firm also was barring its more than 900-employees from having any direct contact with anyone but upper management at publicly traded companies.
"These reforms send an unmistakable message: we have zero tolerance for wrongdoing and if you are caught breaking the rules, it will cost you," Cohen wrote in the letter.
The moves comes at a time Cohen and his firm are drawing increased scrutiny in the federal government's long-running investigation into insider trading and the number of people once associated with SAC Capital who have been implicated with wrongful trading grows.
The probe has begun to take a toll on Cohen's firm. In March, the firm agreed to pay a $616 million penalty to U.S. securities regulators to settle a lawsuit arising from an investigation into wrongful trading by two former employees. Also this year, outside investors submitted requests to pull $1.7 billion from the Stamford, Conn.-based fund.
Some outside observers, while applauding the steps to stiffen compliance at Cohen's two-decade-old fund, questioned the timing given that authorities have been looking into allegations of insider trading at SAC Capital on and off since at least 2007.
"This zero tolerance policy is very commendable, however Cohen should reacquaint himself with the old saying that this is like closing the barn door after the horse has already left," said Anthony Sabino, a professor of business law professor at St. John's University.
"It is a bit disingenuous to say that after various members of his firm have been charged that you are going to boost compliance by 25 percent this year," he said, adding, "Maybe if you had boosted it by 10 percent a little bit earlier it would have never come to this.
For years Cohen's firm, whose average annual returns of 30 percent were among the industry's best, ranked among the most exclusive with investors waiting a long time to get in.
Now it appears that Cohen is doing everything he can to keep these clients from running for the exits as the government's investigation has focused so closely on SAC.
The deadline for outside investors, who account for roughly 40 percent of the firm's capital, to submit redemption requests for the second quarter is May 15.
SAC's compliance department, which had only 10 employees five years ago, will grow by 25 percent this year to about 45 employees. And SAC analysts and portfolio managers, who want to use expert networks, the nerve center for much of the recent alleged cheating by hedge funds, must get permission from the compliance unit if they make more than four calls a year.
"This problem is our problem to solve. It's my name on the door and we will solve it," Cohen said about his plans.
Some outside analysts noted that the claw-back will not take effect immediately and will be tough to implement.
"You are changing the direction of the organization, and that takes some time to implement. It's not just a legal matter. There is a culture within the firm that needs to accept these changes," said Ron Geffner, a partner at law firm Sadis & Goldberg.
But Cohen said his lieutenants know their pay will be cut if there are more sanctions against the firm.
While Cohen and his employees are the biggest investors in the firm, making up some 60 percent of assets, the billionaire investor clearly wants the outsiders stick with him.
There was little immediate reaction from clients to the latest moves. Blackstone Group, one of the biggest outside investors with $550 million, declined to comment.
(Reporting by Svea Herbst-Bayliss in Boston and Katya Wachtel in New York; Editing by Gerald E. McCormick, Dale Hudson and Leslie Gevirtz)