Stevie Cohen's hedge fund SAC Capital faces regulatory investigations and lawsuits alleging insider trading after Cohen made large trades ahead of negative clinical trial results for a Alzheimer's drug, saving the fund $276 million. The trades were based on advice from portfolio manager Mathew Martoma, who received illegal tips from a doctor involved in the trial. As a result of multiple guilty pleas and ongoing cases, SAC has lost outside investors and will likely become a single-family office run solely by Cohen, who could settle the civil suit by agreeing to pay fines and be barred from the industry.

1. Stevie Cohen’s Big Bad Betby Stephen A. Bornstein
Risks his $15 billion hedge fund to avoid a huge loss
They wereSAC Capital’s largest equity positionswhenStevie Cohen sold $700 million and
shorted $260 million of Elan and Wyeth stock in July 2008, just before the two
pharmaceuticalcompanies announced disappointing results in the Phase II clinical trial of
bapineuzumab,their jointly-developed Alzheimer’s drug.
Cohen had been accumulating Elan and Wyethstock for several months on the advice of his top
health care portfolio manager, Mathew Martoma, who suddenly and radically changed his view
of the Phase II trial outlook the week before its results were to be announced. Martoma then
persuaded Cohen to immediately unload his entire position in both stocks which, for SAC, was a
bold and dangerous move sinceits salesconstituted 20% of Elan’s trading volume that weekand
11% of Wyeth’s.
When the Phase II trial results were publicly announced, Elanand Wyeth shares fell 42% and
12%, respectively. SAC saved and made a combined total of $276 million on its trades.
Given their size and timing, Cohen must have known that his Elan/Wyeth trades would
undoubtedly catch the attention of the regulators and he alsoknew that Martoma had been
receiving advance intelligence on bapineuzumab.Cohen, however,didn’t hesitate for a minute
dismissing thatregulatory risk in order to avoid a potentially huge loss, probably not realizing
that his big bet could have fatal consequences.
As it turns out, Martoma’s bearishreversal on bapineuzumabwas based on confidential
information he elicited from a doctor – Sidney Gilman at the University of Michigan – who was
monitoring the drug trial for Elan/Wyeth. Dr. Gilman, 80, was paid a total of $108,000 by SAC
for 49 expert consultations with Martoma, in at least one of which heconcededly tipped
Martoma that the Phase II trial results were going to disappoint the market.
Thanks to hisElan/Wyeth trades,Cohen, 57, now faces a civil lawsuit
(http://www.sec.gov/litigation/admin/2013/ia-3634.pdf) brought by the SEC against him
personallyfor failing to properly supervise Martoma and certain other investment staff.Based
on a long list of equally suspicious transactions, SAC now also faces a criminal prosecution
(http://www.justice.gov/usao/nys/pressreleases/July13/SACChargingAndSupportingDocuments/SAC%2
0Indictment%20(Stamped).pdf)for allegedly fostering aculture of insider trading.

2. The Civil Suit
In the civil suit, Cohen is accused of intentionally ignoring ‘red flags’ that Martoma1
and other
portfolio managers were basing their investment decisions and recommendations to him on
confidential information on which neither they nor he should have traded2
. Cohen’s lawyers
have defended him on the ground that none of the e-mails or deposition testimony against him
in regard to the Elan/Wyeth and Dell trades on which the SEC’s case is based support his
encouraging or tolerating trading by himself or his staff on the basis of material non-public
information.
In a white paper (http://www.scribd.com/doc/155545615/SAC-White-Paper ) submitted to the SEC,
defense counsel assert that Cohen had more than ample justification from price movements
and public research sources to sell Elan/Wyeth and Dell stock when he did and that, as a
practical matter, he was so busy tradingevery day that he could not possibly have delved into
the information sources relied on by his staff in making their investment recommendations3
. If
Cohen loses the case, he could be barred from managing other people’s money forever.
The Criminal Case
The allegation in the criminal prosecution against SAC is that, from 1999 through 2010,itsought
out portfolio managers and research analysts who had inside connections at public companies
and then rewarded themhandsomely for successfully ascertaining and exploiting
confidentialcorporate informationin advance of public announcements.Such inside dopewas
dubbed ‘black edge’ by SAC staffers,fiveof whom have already pled guilty to its illegal use and
three more are currently under indictment.
Thecriminal prosecution against SAC could result in Cohen’s losing a good portion of his entire
personal fortune. The U.S. Attorney, PreetBhahara, is asking for SAC to forfeit as much as $10
billion of illicit gains, which is roughly what Cohen (and his employees) would have left in SAC
after outside investors redeem their capital.
Single Family Office
1
Mathew Martoma, 39, has been criminally charged by the U.S. Attorney for securities fraud to which he has
pleaded innocent and for which he is scheduled to stand trial in November of this year.
2
The SEC complaint also highlights the 2008 sale of $12.5 million and shorting of 167,000 shares of Dell stock
allegedly based on an illegal tip from a Dell investor relations insider regarding a disappointing quarterly earnings
announcement that knocked the price of the stock down by 13% and netted SAC a combined $2.7 million in
avoided losses and profits.
3
In their white paper, Cohen’s counsel actually claim that he did not even readkey e-mails from Martoma and
other SAC staffers on which the SEC case is largely based.

3. In addition to the felony convictions, new indictments and recent lawsuits, SAC has lost the
early investment magic that earned it its stellar reputation. Founded in 1993, SAC averaged
returns of almost 50% a year through 2000, almost tripling the average annual return of the
S&P 500. From 2001-08, its average annual performance plummeted to 14.8%, which still
outstripped the S&P by 15.5 percentage points. Since 2009, however, SAC has actually
underperformed the S&P’s average annual returns of 14.9% by 600 basis points.
Because of its regulatory troubles, SAC is likely to lose most if not all of its outside capital by the
end of this year and, by default, become a single family office. If things do turn out that way,
Stevie Cohen maydecide it’s not worth mounting a technical defense to clear his name in the
civil suit which he should be able to settlebyagreeing to disbarment anda hefty fine, thus
bringing another illustrious Wall Street career to an ignominious end.
TAGS: STEVEN COHEN, SAC CAPITAL, HEDGE FUND, ELAN, WYETH, BAPINEUZUMAB, MATHEW
MARTOMA, SIDNEY GILMAN, SEC, JUSTICE DEPARTMENT, INSIDER TRADING, DELL, MATERIAL
NON-PUBLIC INFORMATION, BLACK EDGE, PREET BHAHARA, SINGLE FAMILY OFFICE, WALL
STREET