By Emily Flitter
NEW YORK, May 21 (Reuters) – 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.
