After months of fighting the government’s insider trading case tooth and nail, the hedge fund SAC Capital Advisors is leaning toward admitting criminal wrongdoing and agreeing to pay a record financial penalty to resolve the charges, according to two people briefed on the deliberations.
Federal prosecutors, led by Preet Bharara, the United States attorney in Manhattan, have taken an aggressive stance in settlement talks with SAC, said these people, who were not authorized to discuss the negotiations publicly.
Prosecutors have offered the fund a deal to resolve the case by pleading guilty and paying a penalty of about $ 2 billion. If SAC does not accept the deal in the coming weeks, the government has threatened to pursue a much larger fine against the fund.
In agreeing to have SAC plead guilty and pay the hefty fine, SAC’s owner, Steven A. Cohen, would be seeking to put his legal woes behind him in the hopes of salvaging his business. Once he resolved the government’s case, Mr. Cohen would look to transform SAC into a “family office” that would manage Mr. Cohen’s own wealth.
Prosecutors have applied financial pressure on SAC using civil forfeiture laws. Alongside its criminal insider-trading case against the fund, the government filed a lawsuit that accused SAC of mixing its illegally obtained insider-trading profits with the rest of its money, thus tainting all of its funds.
The lawsuit seeks “any and all” of SAC’s assets, meaning that the government believes it can pursue all of the company’s money. SAC managed about $ 15 billion at the beginning of the year, but virtually all of its outside investors have asked for their money back. After returning that money in installments over the coming months, SAC would be left managing about $ 9 billion of Mr. Cohen’s own money.
SAC has already agreed to a protective order that requires it to keep most of its money in the fund, a deal that allows it to continue operations while under indictment while preserving the government’s interest in any money that it might seize.
In July, the government brought criminal charges against SAC, citing the many prosecutions of SAC’s former employees and calling the fund “a magnet for market cheaters.” Six former SAC employees have pleaded guilty to insider trading while at the fund. Two others, Michael S. Steinberg and Mathew Martoma, are fighting the charges and have trials scheduled.
Legal experts say it would be nearly impossible for SAC to defend itself in a trial. Under the law of corporate criminal liability, an entity like SAC would be held responsible for the acts of its employees. And the employees who have admitted to insider trading are cooperating with prosecutors and would probably testify at a trial, providing powerful evidence for the government.
Mr. Cohen, 57, also has to resolve a separate lawsuit brought against him individually by the Securities and Exchange Commission that accused him of failing to reasonably supervise his employees. The S.E.C. could seek a variety of penalties in that case, including banning him from the business.
In settling with the government, Mr. Cohen would probably seek to resolve both the criminal case against SAC and the lawsuit against him. It is unclear whether a resolution would insulate Mr. Cohen from any criminal charges, and the government continues to examine SAC’s trading activity. Mr. Cohen has said he acted appropriately at all times.
Leading the defense team for SAC and Mr. Cohen are Theodore V. Wells Jr. and Daniel J. Kramer at Paul, Weiss, Rifkind, Wharton & Garrison, and Martin Klotz of Willkie Farr & Gallagher. News of the government’s ultimatum was reported earlier by The Financial Times.
SAC has already agreed to pay a $ 616 million penalty to the S.E.C. related to the civil insider trading cases brought against Mr. Martoma and Mr. Steinberg. That money would come out of Mr. Cohen’s pocket.
Mr. Cohen gained acclaim on Wall Street by producing a nearly unparalleled investment track record, posting returns that have averaged nearly 30 percent a year over the last two decades.
Those returns, and market rumors about questionable conduct inside the fund, drew the attention of federal authorities. Investigators have examined Mr. Cohen’s business on and off over the last 10 years. He has privately expressed the view to friends and colleagues that the government has long had a bull’s-eye on his back.
Mr. Cohen has begun to reorganize his business during the settlement talks with the government.
Among other moves, the firm has put on the block SAC Re, a reinsurance company that it started last year with $ 500 million. SAC joined a number of prominent hedge funds in forming these businesses, which provide the firms with permanent sources of capital from the premiums paid on reinsurance policies.