The beleaguered hedge fund SAC Capital Advisors is bracing for investors to pull virtually all of their remaining money, a humbling blow to a once-powerful firm hobbled by criminal insider trading charges.
With an expected new wave of withdrawal requests before a deadline next Friday, SAC’s owner, Steven A. Cohen, and his senior executives are discussing possible layoffs at the fund, said a person with direct knowledge of those talks.
At the same time, SAC’s lawyers have negotiated a deal with the government that will allow it to operate while under indictment. On Friday, a federal judge approved an agreement between prosecutors and SAC that requires the firm to keep billions of dollars in its fund.
The agreement serves a dual purpose, preserving the government’s interest in any financial penalties that it might seek from SAC, while also allowing the firm to continue running its money management business.
That business has been severely diminished. In recent months, investors have asked to withdraw about $5 billion from the fund, leaving only about $1 billion of outside capital in the $14 billion fund. (The withdrawn money is being returned in installments every three months, under an SAC policy that protects the fund from a mass liquidation.)
Given the already substantial outflows, Mr. Cohen and SAC officials have already discussed the possibility of returning all outside capital and transforming SAC into a “family office” that manages Mr. Cohen’s wealth. About $8 billion of the fund’s money is Mr. Cohen’s, with about $1 billion belonging to employees.
For now, SAC can continue operating under the terms of the deal struck this week with prosecutors. Called a protective order, the deal says that SAC must maintain a certain percentage of its assets across its various funds, an amount that equals about $5 billion, according to a person briefed on the case. If assets fall below that threshold, SAC must replenish them by the next month.
Judge Richard J. Sullivan of Federal District Court in Manhattan signed off on the order, which was intensely negotiated by SAC’s legal team and government lawyers since the indictment.
Federal prosecutors, after a lengthy investigation, brought a criminal case against SAC on July 25, charging the firm with carrying out a vast insider trading conspiracy. Though not named in the indictment, Mr. Cohen was accused of fostering an unethical culture that, prosecutors said, was “a veritable magnet for market cheaters.”
A spokesman for SAC, which employs about 1,000 people, said that the firm had never encouraged, promoted or tolerated insider trading. Mr. Cohen has said he behaved appropriately at all times.
Alongside the criminal charges, prosecutors filed a civil forfeiture complaint in Federal District Court in Manhattan relating to monetary fines that it is pursuing against SAC. The complaint said that the firm commingled illegal insider trading profits with the rest of its money, tainting all of its funds. It seeks “any and all” of SAC’s assets, meaning that it believes it could, theoretically, pursue all of the firm’s money.
Prosecutors, however, are expected to demand that SAC forfeit money that is tied to any illicit trading, a sum that could reach several billion dollars, a person briefed on the case said. Still, the protective order gives the government the flexibility to pursue a larger amount if new insider trading activity surfaces while the case wends its way through the courts.
Preet Bharara, the United States attorney in Manhattan who brought the charges, did not seek to freeze SAC’s assets when bringing the indictment. He and his team of prosecutors wanted to avoid hurting SAC’s investors and trading partners, said people briefed on the case.
There was also some concern that freezing the firm’s assets — SAC has about $50 billion invested, including borrowed money — could disrupt the financial markets.
Indicting a company is an unusual and aggressive step for the government. In the case of SAC, however, the government said it believed that the action was justified because of vast misconduct at the firm and a shoddy compliance regime.
Ten former SAC employees have either been charged with or implicated in illegal trading while at the fund; of those, five have admitted guilt. The indictment said that Mr. Cohen hired a portfolio manager over the objections of his lawyers, despite warnings that the manager had engaged in insider trading at another hedge fund.
On Tuesday, Mr. Bharara appeared on “CBS This Morning” to discuss the case.
“The scope and the pervasiveness of the insider trading that went on at this particular place is unprecedented in the history of hedge funds,” Mr. Bharara said.
Even without the security of a protective order being struck with the government, banks have continued to trade with SAC since the indictment. And at least one top Wall Street executive has issued a public statement of support for the firm.
“They’re an important client to us; they have been an important client to us,” Gary D. Cohn, president of Goldman Sachs, said in a television interview last month. “We continue to trade with them, and they’re a great counterparty.
Despite the support from Mr. Cohn, nerves are frayed inside SAC.
Still, many of the firm’s portfolio managers and traders are staying put through year-end to get their bonuses, which often make up the bulk of their pay and can reach into the tens of millions of dollars.
Earlier this year, Mr. Cohen increased the size of bonuses to stem defections. But now, with dark clouds hanging over the firm, SAC employees may be forced to leave.