Feds Circling Stevie Cohen And SAC?

As the massive insider trading case that is sweeping across Wall Street continues to unfold, it is becoming more and more apparent that the Feds are keenly interested in ensnaring Steve Cohen and his hedge fund, SAC Capital. The genesis of the ongoing investigation appears to be the arrest of billionaire hedge fund manager Raj Rajaratnam on October 16, 2009. Rajaratnam, who founded New York based hedge fund the Galleon Group, was charged with insider trading. Numerous other high level traders, executives, and consultants were named in the indictment. One of these people was Richard Choo-Beng Lee who co-founded Spherix Capital after leaving Cohen's SAC Capital. He has pled guilty to insider trading. Reports indicate that he is cooperating with the Feds, and may be offering up information regarding his time at SAC. The arrest of Choo-Beng Lee fits in with the modus operandi of the Federal Government. The general idea is to arrest lower level participants in a conspiracy first, flip them, and use the information to further an investigation into higher level targets. In this insider trading probe, the evidence suggests that SAC founder and multi-billionaire trader Steve Cohen is at the top of the government's list. The next chapter of the ongoing trading probe, which began with the Galleon takedown, began on Monday, when three hedge funds were raided by the FBI. Two of these hedge funds, Diamondback Capital and Level Global Investors, were started by ex-SAC traders. Bloomberg is reporting that these raids may be related to testimony by a former UBS AG investment banker at a criminal trial in September that he "provided confidential information" to a friend who worked as an analyst at SAC. On Tuesday, it was reported that SAC Capital, among others, had received an "extraordinarily broad" subpoena. In a letter to investors, the firm maintained that "neither the subpoena nor any other information of which we are aware suggests that anyone at SAC has engaged in any wrongdoing.” On Wednesday, Don Ching Trang Chu, an analyst at a private research consulting firm, was arrested at his Somerset, New Jersey home. Chu has been accused of conspiracy for allegedly putting hedge fund operators in contact with corporate executives who would subsequently provide inside information about their companies. While a direct link between Chu and SAC Capital is not yet evident, the charges stem from Richard Choo-Beng Lee's cooperation with the government. This latest development suggests that the net may be tightening around Cohen. Secretive and ultra-successful, Mr. Cohen has been the subject of intense speculation, rumor, and innuendo for years on Wall Street - the perception being that he had an "edge" that was not 100% legitimate. Part of this stems from SAC Capital's strategy. The firm is a rapid fire trader of stocks, often holding them for between two and thirty days, and Mr. Cohen himself has described his strategy as "information arbitrage." It is widely believed that Cohen has been able to return an average of 30% per year (after fees of 3% of assets and 35% of profits) for almost two decades, because he has developed the best network of contacts on the Street by paying enormous brokerage commissions and promoting an aggressive information-gathering culture within his firm. Further adding to suspicions surrounding him and his firm was a lawsuit filed in 2009 by his ex-wife which accused Cohen of insider trading going back to 1985. Specifically, he was alleged to have traded ahead of General Electric's acquisition of RCA using privileged insider information. The final piece to the puzzle which suggests that the ultimate target of this investigation is Cohen is the fact that FBI Special Investigator B.J. Kang has been looking into SAC Capital's trading for a number of years. Kang was a top investigator in the Galleon case and also arrested Bernie Madoff. If we are to believe that Steve Cohen is the big fish that the Federal Government is trying to catch, a number of questions immediately come to the forefront. First and foremost, how far back are they looking? It has been widely reported that in recent years SAC Capital's compliance procedures have been incredibly robust. The firm has at least 20 employees who monitor analysts' and traders' emails, instant messages, and other forms of correspondence. This includes Mr. Cohen's correspondence. The firm also has a restricted list of stocks which SAC employees are not allowed to trade for a certain period of time if the firm possesses pertinent information about them that would fall into a gray area. The thought that Steve Cohen himself has engaged in any illegal trading activity in the recent past would appear to be, on the surface, unlikely. In 2009, Forbes magazine estimated his net worth at $10.5 billion, ranking him as the 87th richest person in the world. This is a man who has an awful lot to lose, and next to nothing to gain by breaking the law at this point in his career. Furthermore, at this juncture there appears to be absolutely nothing to substantiate the rumor and innuendo that has dogged him. The most concrete accusation, detailed in his ex-wife's lawsuit, dates back to 1985, when he was working for Gruntal & Co. The other troubling thing to consider is the possibility that the Feds are going to try to pin a tenuous case on Cohen as the result of improper activity engaged in by some of his employees. SAC Capital has 800 employees, and many of them have considerable autonomy in their trading activities. While this investigation is likely nowhere near its concluding phase, something just does not seem to be adding up here. The information that has come to light thus far suggests that the Feds are on a giant fishing expedition in an effort to catch a hedge fund shark whose success has understandably generated envy on Wall Street, and subsequently, rumors of impropriety. Could this potentially be an effort to save face in light of the epic failures of the SEC, Justice Department, and FBI in detecting Bernie Madoff's Ponzi scheme despite repeated opportunities to do so? The tone and tenor of this investigation suggests that someone within the Federal Government found a picture of Stevie Cohen and tacked it to a bulletin board and said "get this guy" - the goal being to make up for past failures and assuage the public's anger at Wall Street. Hopefully this is not the case. If it is, however, we should all be worried. The goal of law enforcement should not be to pick a high profile investigative target and then go to any length to make a case against them, but rather to evaluate the evidence and then build a case against the people which the evidence suggests engaged in illegal conduct. Which one of these two scenarios appears to be more likely in this situation?