SAC Said to Get Notice From SEC on Insider Trading The U.S. Securities and Exchange Commission told SAC Capital Advisors LP that it is considering suing the $14 billion hedge fund run by Steven Cohen for fraud involving alleged insider trading by a former portfolio manager who was arrested last week, according to three people with knowledge of the matter. The Wells notice sent to SAC Capital cited fraud and control-person liability over its management of CR Intrinsic Investors LLC, a unit of SAC, according one of the people. Investigators are considering extending the claims to Cohen, who wasn't named in the Wells notice, said the person, who like the others asked not to be named because the information is private. SAC received the warning last week, Tom Conheeney, the firm's president, told investors on a conference call today during which the firm discussed the Nov. 20 arrest of the former SAC portfolio manager, Mathew Martoma, on criminal charges of insider trading while at the firm. Cohen, who spoke briefly at the start of the call, said he acted appropriately when he traded shares of two drugmakers four years ago on recommendations from Martoma, according to two of the people. Trades in the shares by SAC are at the center of what prosecutors call the biggest insider-trading scheme that generated $276 million in gain and averted losses. Conheeney said the firm, based in Stamford, Connecticut, will pay any penalties rather than investors, according to one of the people. Martoma's Charges Jonathan Gasthalter, a spokesman for SAC, declined to comment on the call and the Wells notice. The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed. The notice gives the recipient a chance to try to dissuade the SEC from taking action. In some cases, the SEC has decided to refrain from filing a complaint after sending a Wells notice. SAC received the Wells notice on Nov. 20, the day Martoma was arrested, according to one of the people. The SEC, which is a civil enforcement agency, typically coordinates with federal prosecutors who pursue criminal claims in insider-trading cases. While the SEC often brings insider-trading claims on circumstantial evidence, criminal prosecutors face a higher burden of proof, which can prolong investigations as they seek to pin down corroborating witnesses. Elan, Wyeth Prosecutors say SAC, one of the best-performing hedge funds, reaped the gains and averted losses by trading stocks of Elan Corp. and Wyeth LLC in 2008 based on inside information Martoma received, and that Cohen traded those shares in his own portfolio and discussed the stocks with Martoma. "Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain," his lawyer Charles Stillman said last week in an e-mailed statement, adding that he expected Martoma to be fully exonerated. In insider-trading cases, the SEC can seek disgorgement of illegal profits, as well as three times that amount in penalties. The agency can also file administrative actions to bar offenders from the securities industry. James Cox, a professor at Duke University School of Law in Durham, North Carolina, said the control-person liability provision that Congress created in 1988 meant managers who fail to maintain a system to discourage and detect insider trading by subordinates could be sued by the SEC. The provision wouldn't require the SEC to prove Cohen knew about the trades, just that the compliance system broke down, Cox said. CR Intrinsic CR Intrinsic, the unit where Martoma worked at the time, was named last week as a defendant in a civil complaint by the SEC, along with Martoma and the doctor who allegedly provided the inside information. SAC Capital first was linked to a now five-year government investigation of insider trading on Wall Street shortly after the October 2009 arrest of hedge-fund manager Raj Rajaratnam when former employee Richard Choo-Beng Lee was among those charged with insider trading at another firm. Six former or current SAC Capital employees have been tied to insider trading while working at the firm, including three who have pleaded guilty. Neither Cohen nor SAC have been accused of wrongdoing in last week's criminal complaints. While Cohen wasn't mentioned by name in the complaint, he is the hedge-fund owner referred to in the criminal complaint, according to people familiar with the matter. Redemption Notice Previous insider cases involving former SAC employees haven't deterred investors. Cohen's main fund saw net deposits last year before he closed it to new money, people with knowledge of the matter said at the time. One investor, who asked not to be named because the fund is private, said he wouldn't be compelled to pull out his money unless there was a criminal indictment against Cohen. Clients can only pull 25 percent of their investment every quarter after giving 45 days notice, meaning it would take them a year to redeem in full. The next deadline for putting in a redemption notice is mid-February. If enough people wanted to pull their money, Cohen could turn SAC into a family office, said Brad Balter, head of Boston- based Balter Capital Management LLC, which invests client money in hedge funds. About $8.4 billion, or 60 percent, of SAC's assets belong to Cohen and his employees. "If the owner gets sued by the SEC, what's the rationale to stay?" said Balter, who has never invested in SAC or in any of its spinoffs. You know your investors will ask you why you have that in your portfolio.