The Law Moves Slowly; So Does the Redemption Process for Limited Partners.

[ by Howard Haykin ]

SAC Capital investors are getting set to accompany Steven A. Cohen through his regulatory odyssey.  On the basis of the Wells notice delivered on Wednesday, the SEC is poised to take civil action against the $14 billion hedge fund firm that bears Mr. Cohen's initials.  It should be a busy time for everyone involved with the firm.  It will be a lengthy time if the Commission rejects the arguments that SAC Advisors and Mr. Cohen offer in defense of the allegations contained in the Wells notice and legal.

The so-called Wells notice received by SAC and revealed to its investors on Wednesday during a conference call.  While the conference call was held to reduce investor anxieties about the exposure of SAC Advisors and its founder to the insider trading case filed last week against former SAC trader Mathew Martoma, today's receipt of the Wells notice likely dampened any good tidings.

A Wells notice is serious and the SEC does not usually issue one unless they believe that they have creditable evidence upon which to prosecute the defendant in a court of law. 

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.

First Time Involvement Suspected.   While several former traders and portfolio managers have been charged with trading on insider information - and most, if not all, have copped a guilty plea.  Yet, last week's charges against Martoma are the first to allege involvement in trades by Cohen - though no charges have been made.  The Wells notice also is the first concrete threat of action against the firm. 

Impact on Investors.   The seriousness of the Wells notice creates enormous concerns for investors.  Many have large sums, which makes sticking with SAC much more difficult.  And those institutional 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.

Cohen's investors - at least those responsible for the 40% or so of the fund firm's assets that aren't his or his employees' money - have shown grit so far.  Some may even worry that if they redeem they can never return - which would be the case if SAC ends up avoiding these charges or, in some other way, is able to clear its name.  Few funds can report such high, consistent earnings as have been achieved by SAC Capital over the past 20 years.

For further details, go to:   [Reuters Breakingviews, 11/28/12].