The government has told hedge fund titan Steven A. Cohen's SAC Capital Advisors that it is likely to face civil charges over alleged insider trading at the $14 billion firm, a source familiar with the matter said on Wednesday.
The Securities and Exchange Commission issued a so-called Wells notice to SAC, the firm told investors on a Wednesday telephone conference call, said the source, who listened to the call.
This marks a dramatic turn in the government's investigation into how hedge funds may rely on illegally obtained information to create an edge for themselves and their wealthy clients. SAC is one of the world's biggest and best known hedge funds, and Cohen, a billionaire many times over, is one of the industry's most best-known managers.
SAC told investors of the notice, which is often not made public, one week after the arrest of Mathew Martoma, one of its former portfolio managers.
Authorities charged Martoma with using illegally obtained information from a doctor about poor clinical results at two healthcare companies - Elan Corp Plc and Wyeth, which is now owned by Pfizer Inc - to recommend that SAC Capital eliminate a big position in their stocks. This recommendation prevented the firm from suffering millions of dollars in losses, the government said.
The warning from the SEC that it may file civil charges against SAC Capital comes after a civil securities fraud charge filed last week by the agency against CR Intrinsic, the affiliated fund where Martoma worked.
In seeking disgorgement of $276 million in profits and avoided losses against CR Intrinsic, the SEC did not specifically name SAC Capital in last week's civil complaint.
With the arrest of Martoma, the government has now charged five former SAC employees with insider trading while working for the Stamford, Connecticut-headquartered firm. In addition, several others who once worked for Cohen also have been charged with insider trading while working for other hedge funds.
Cohen, who founded the firm in 1992, has not been accused of wrongdoing. He was on the telephone call on Wednesday morning, the source said.
While 60 percent of SAC's $14 billion in assets belong to Cohen and his employees, the fund's strong and steady returns have made it popular with outside investors as well. Blackstone Group LP has been a long-term investor.
On the call, SAC President Tom Conheeney again told investors that the firm would bear all legal costs of defending itself against any legal action, the source said.
Conheeney also said the SEC had questioned Cohen about this matter earlier this year and that he had been responsive to all of the government's questions.
SAC Capital spokesman Jonathan Gasthalter said last week: "Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry."
The SEC usually issues Wells notices to give firms plenty of warning that legal action is coming. It is not clear when SAC Capital received its notice.
The FBI has been investigating SAC Capital on and off since 2007.
(Reporting By Svea Herbst-Bayliss and Katya Wachtel; Editing by Matthew Goldstein and Lisa Von Ahn)