SAC Capital investors are set to stew alongside Steve Cohen. The U.S. Securities and Exchange Commission may take civil action against the $14-billion (U.S.) hedge fund firm that bears Cohen's initials. Those with money at SAC need to weigh the risk. The law moves slowly, but so does the redemption process – it would take investors months to withdraw cash.
The so-called Wells notice received by SAC and revealed to its investors on Wednesday relates to the insider trading allegations already levelled at Mathew Martoma, formerly a portfolio manager affiliated with the firm. The SEC and the Justice Department said he and the firm profited and avoided losses to the tune of $276-million after Mr. Martoma received confidential information about a drug trial.
Smoke has swirled around SAC as the U.S. government's pursuit of insider trading suspects has ensnared former employees. Some hedge funds with shorter, less impressive track records and lacking loyal investors have closed their doors in the face of even that level of attention. And any skittish investors would surely have taken their money elsewhere long ago.
But last week's charges against Mr. Martoma are the first to allege involvement in the trades concerned by Mr. Cohen, although he has not been accused of wrongdoing. And the Wells notice is the first concrete threat of action against the firm. That makes sticking with SAC much more difficult. Investors with fiduciary responsibilities could easily conclude that they can't afford to risk entanglement in any possible scandal or, more prosaically, lose out financially as their fellows rush for the exit.
Mr. Cohen's investors – at least those responsible for the 40 per cent or so of the fund firm's assets that aren't his or his colleagues' money – have shown grit so far. Some may even worry that if they redeem and SAC ends up avoiding charges or otherwise clears its name, they might not get back into the currently closed and historically desirable fund.
That ought to be a trivial concern at this point. Either way, though, investors will have time to think about it. The SAC standard is quarterly liquidity, meaning there's one opportunity to take money out every three months. The deadline for requesting cash at the end of December has passed. For good or ill, the fund firm's legal position could be a lot clearer before investors have to make their financial choice.