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By Matthew Goldstein
NEW YORK, May 20 (Reuters) - The decision by U.S.prosecutors to compel Steven A. Cohen to testify before afederal grand jury about allegations of insider trading at his$15 billion hedge fund is leaving many criminal defense lawyersscratching their heads.
In the past week, federal authorities have issued grand jurysubpoenas seeking testimony from Cohen and others at SACCapital, The New York Times first reported. Two people familiarwith the matter confirmed to Reuters that subpoenas had beenissued and Cohen was among those served.
A SAC Capital spokesman declined to comment on thesituation as did the firm's longtime outside lawyer MartinKlotz. Federal authorities also declined to comment.
Several defense lawyers, including some who are formerfederal prosecutors, said the move to subpoena Cohen was curiousas he would likely assert his Fifth Amendment constitutionalright against self-incrimination.
"I don't know what purpose it serves," said Michael Bachner,a former federal prosecutor, who now represents defendantscharged with securities crimes. "I think it's purely an effortto cause him to assert his Fifth Amendment privilege and knowingthat will get communicated to the media."
Others said the move indicated federal authorities may notbe prepared to criminally charge the SAC Capital Advisorsfounder with insider trading because it is unusual to seektestimony from someone under investigation.
Instead, Manhattan U.S. Attorney Preet Bharara may be morefocused on trying to bring a criminal case against Cohen's21-year-old hedge fund in an attempt to punish the billionaireinvestor in the pocketbook by forcing his fund to shut-down,they said.
During the course of the six-year investigation, agents havesometimes referred to SAC Capital as a "criminal enterprise"during plea negotiations with former employees of Cohen's, thelawyers said.
It was unclear how the situation would play out and entirelypossible that neither Cohen nor his fund would be charged withcriminal wrongdoing, lawyers said. Some defense lawyers said theprosecutors' attempt to subpoena the 56-year-old Cohen smackedof desperation given the length of time that SAC Capital hasbeen a focus of the insider-trading investigation.
The decision by the grand jury may turn out to be the endgame in a long-time probe of insider-trading allegations at thefirm, which has produced some of the industry's best returns.
It is also unclear how the latest development will play withSAC Capital's outside investors, who control roughly 40 percentof the firm's assets. Investors, who have already asked toredeem $1.7 billion from the fund, have until June 3 to submitanother withdrawal request.
But representatives for funds managed by HSBC,Morgan Stanley and Blackstone Group, all of whichhave client money with SAC Capital, declined to comment on howthey will proceed. Blackstone is Cohen's largest outsideinvestor with $500 million invested, according to peoplefamiliar with the hedge fund.
The sources said the new flurry of subpoenas went out afterlawyers for SAC Capital met with prosecutors in late April anddiscussed ways of resolving the criminal investigation withoutany charges being filed in a settlement.
To date, nine current or former SAC employees have beencharged with or implicated in insider-trading while working atCohen's fund. Five have pleaded guilty. In March, the firmagreed to pay a $616 million penalty to settle a lawsuit arisingfrom one of the investigations.
SAC Capital told investors on Friday that it would no longercooperate "unconditionally" with the U.S. government'sinsider-trading investigation. The next few months would becritical in the investigation, the fund told investors but didnot elaborate.
While the subpoenas pressure outside investors to withdrawmoney, the risks of sticking with SAC Capital are relatively lowbecause Cohen has agreed to cover any fines and penalties. Hispersonal wealth is estimated to be between $8 billion and $10billion. SAC has $15 billion in assets most of which areinvested in relatively liquid stocks and bonds, so the fundshould have no problem unwinding its positions if forced to shutdown.
The decision by prosecutors to seek Cohen's testimony hasthe feel of deja vu.
Roughly 30 years ago, U.S. securities regulators did muchthe same thing with Cohen in a civil insider-tradinginvestigation, some six years before he launched SAC Capitalwith just $25 million. Cohen asserted his Fifth Amendment rightagainst self-incrimination during that 1986 deposition with theU.S. Securities and Exchange Commission.
But last summer, the SEC questioned Cohen under oath as partof its civil investigation into insider-trading allegations. Anda few years ago, in a private lawsuit, Cohen was questioned by aplaintiff's lawyer about his views on insider-trading laws.
Former federal judge Richard Holwell, now in privatepractice, said federal prosecutors may have decided to subpoenaCohen because he already testified last year before the SEC onsome aspects of the investigation.
"If you've already testified as to a subject matter - forexample a particular transaction - the courts would concludeyou've willingly waived whatever privilege there was," saidHolwell.
