Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Investors in Steven Cohen’s SAC May Face Clawbacks

At one time, investors tripped over themselves to become one of the “extractive elite” in SAC. Stevie Cohen could do no wrong, at least if you read mainstream financial news. But that may be due to weak-kneed management in main stream financial media, instead of lack of news of alleged wrongdoing.

After Cohen’s ex-wife filed a lawsuit including allegations that Cohen engaged in insider trading in the 1980’s, investigative journalist Matthew Goldstein dug further. In late 2009, he wrote a document-based expose that Reuters’ lawyers approved. According to an exclusive story by Chris Roush at Talking Biz News, “Cohen repeatedly called Devin Wenig, CEO of the Thomson Reuters Markets Division and the No. 2 executive at Thomson Reuters, to complain.” The multi-billionaire claimed he was being persecuted. Editors at Reuters killed the story.

The SEC wants Cohen’s “Assets”

Around 60% of the $15 billion SAC managed belonged to Cohen and his managers. That’s what a 3-and-50 fee structure will do for a fellow. Of course, now, all of those assets are up for grabs by the S.E.C. That’s what insider trading allegations will do.

Last week, the SEC brought civil charges against Cohen for “failure to supervise,” and Cohen may face additional future charges.

Cohen’s Investors: Blackstone, Funds of Funds, and Individuals.

Matt Goldstein followed the saga of Cohen’s investors as they abandoned ship. Cohen’s largest outside investor was The Blackstone Group with around $550 million invested. Other investors included Citi’s private bank, a fund of funds managed at Morgan Stanley, HSBC, Skybridge Capital, and high net worth individuals.

Fund managers that invested with SAC must be quaking in their Gucci’s. Investors paid them high fees and expected them to perform first-class due diligence before placing funds under Cohen’s management. Yet serious questions have swirled around Cohen’s trading practices for more than a decade.

SEC Slaps SAC with Insider Trading Charges: Investor Clawbacks Likely

Now that Stevie Cohen’s “No. 1 goal is not getting personally indicted” for insider trading, where does that leave his investors?

If the SEC can prove its case and find that SAC’s gains were the result of a criminal activity, investors will likely face clawbacks. If investors accessed SAC through a fund of funds or a multi-advisor fund, they will likely sue the managers of those funds.

The SEC alleges that insider trading resulted in “hundreds of millions” of dollars in illegal profits.

SEC: Where are the Other Indictments?

Unfortunately for SAC investors, the SEC’s lawyers seem to vigorously pursue insider trading, because they can grasp it. But the SEC still has to prove its case. If the allegations are true, there’s still a chance of acquittal due to incompetent lawyering: trial by email instead of doing the hard work of investigating and explaining facts to a jury, until it can grasp the essentials. The game’s not over.

But the “smart money” made illegal gains by committing crimes that are difficult for the SEC’s lawyers to understand: crimes related to credit derivatives, commodities trading, collateralized debt obligations, and much more. The SEC has yet to effectively investigate, much less prosecute, widespread massive fraud in the financial system.


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