NEW YORK (
) -- Anyone with money in Steven Cohen's
SAC Capital Advisors
would be foolish to keep it there, even if they are sure the company will beat the Justice Department's indictment.
That's because those funds could become subject to a forfeiture action.
The issue here is the very use of the indictment, not the veracity of the allegations. The Justice Department knows that the use of indictment process itself is likely to shut down the hedge fund company.
The allegations themselves are packed with emotion, with U.S. Attorney Preet Bharara accusing SAC of being "a veritable magnet of market cheaters."
The Justice Department is charging SAC of hiring employees who had
to people who
possess inside information, or of paying incentives for trading ideas that turned out to be profitable, as if these activities, in and of themselves, were crimes.
One allegation, that the firm failed to use effective compliance procedures to prevent the use of inside information, may be valid, as there have been several confirmed insider trading incidents, and the firm has agreed to a substantial $616 million fine as a result.
But, doesn't the fine settle the issue? Isn't that what a settlement agreement is all about? Is there sufficient provocation to wield power which, when used, is almost certain to shut the company down without real due process"
Let's go back to the
accounting scandal. In 2002, the Justic Department indicted accounting firm
for obstruction of justice and obtained a conviction because Arthur Andersen had destroyed Enron documents at the conclusion of its audit.
The indictment itself effectively put Andersen out of business, and 28,000 jobs were lost.
In 2005, however, in an unusual unanimous decision, the Supreme Court overturned the "obstruction" conviction, indicating that Andersen was operating within its document-retention policy and that it could not be concluded that obstruction had occurred just because documents had been destroyed.
Because the Justice Department recognized that its indictment process alone had unintended consequences, it has since used something called a "deferred prosecution agreement" which suspends an indictment as long as the company works diligently to comply with laws or regulations.