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Is Goldman Sachs Supporting an End to Too Big to Jail?

Updated from 5:26 p.m. ET to reflect new SAC Capital statement.

NEW YORK
(TheStreet) -- Wall Street investment banks will continue to do business with Steven A. Cohen's hedge fund SAC Capital Advisors, even after the firm agreed on Monday to plead guilty to federal charges that it violated insider trading laws.

Broker-dealers that are among SAC Capital's biggest counterparties -- including Goldman Sachs (GS - Get Report) and JPMorgan (JPM - Get Report) -- will continue to trade with the embattled fund, according to sources familiar with the situation. A continued trading relationship is consistent with the nature of SAC's guilty pleas and settlement on Monday, those sources said.

Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America and Barclays declined to comment.

At issue could be the protection of outside SAC Capital investor funds and market stability. In unveiling SAC's guilty plea and a record $1.8 billion in total forfeitures and fines, U.S. Attorney Preet Bharara made a point to state that the hedge fund's investors will bear none of the settlement's costs.  And the fines also aren't tax deductible.

Top executives at Goldman Sachs have already said in media appearances they have been supportive of SAC Capital even after the fund was criminally indicted for one count of wire fraud and four counts of securities fraud, in an insider trading conspiracy prosecutors alleged lasted over a decade and led to hundreds of millions of dollars in illegal profits and avoided losses.

"They have been indicted, they haven't been convicted," Lloyd Blankfein, Goldman Sach's CEO said in an interview with The New York Times in September. 

But now SAC Capital has admitted criminal wrongdoing.

SAC Capital will plead guilty to every charge brought against the firm and its affiliates in July, however, individuals at the company will not receive immunity from future prosecutions, according to a letter unsealed in a U.S. District Court in New York.

In aggregate, the firm will pay a total of $1.8 billion when counting forfeitures and fines. That total amount will credit SAC Capital for a previous $616 million settlement with the Securities and Exchange Commission.

The plea agreement, which is pending approval from a New York court, will also require SAC Capital to terminate its investment advisory businesses, effectively closing the hedge fund to outside investors. 

So if firms like Goldman were waiting for a conviction to make a judgment on their support of SAC Capital as a counterpart, why do they continue to trade with the hedge fund?

According to Blankfein's logic, it is to enable prosecutors like the U.S. attorney's office to conduct criminal indictments without creating undue investor losses or destabilizing the broader market.

"The government did come back and encourage us to continue to deal with firms like SAC," Blankfein said in his September interview with the New York Times. Referencing the quick failures of investment bank Drexel, Burnham & Lambert and accounting firm Arthur Andersen upon their criminal indictments, Blankfein added that those cases created a situation where "the government could never prosecute a financial firm."

By continuing to trade with SAC Capital, Blankfein said "you have something in between doing nothing and the nuclear option."

A scenario where investment banks continue to trade with SAC, even as it pleads guilty to criminal charges, may leave some Wall Street watchers scratching their heads. A cynic might even say that's the treatment a good customer should expect.

Goldman Sachs and its peers, however, may feel they are playing a role in ending a situation where financial services firms are "too big to jail," or prosecute.

Such a scenario may, in fact, be consistent with the U.S. attorney's settlement terms. SAC's outside investment activity, after all, will end within a few days of the plea becoming effective. U.S. attorney Bharara also referenced an orderly closure of SAC's outside businesses when announcing the pleas on Monday.

SAC Capital's billionaire head Steven A. Cohen also has not been criminally charged. Additionally, the hedgie may continue to fight the Securities and Exchange Commission on a charge leveled against him that he failed to supervise traders at the SAC Capital who have subsequently been charged with insider trading violations.

"We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC's liability, SAC Capital said in a statement on Monday. The fund, however, continued to maintain that illegal activity was limited to a handful of individuals.

"The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years," SAC said.

"Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred."

If Wall Street continues to trade with SAC Capital in a manner consistent with Monday's pleas, that all could change if Cohen is charged criminally. Meanwhile, prosecutors appear to be gaining momentum in building their multi-year case against SAC Capital.

Currently, the U.S. attorney is poised to try insider trading cases against former SAC portfolio managers Matthew Martoma and Michael Steinberg, who both maintain their innocence.

Bharara said on Monday SAC Capital's guilty plea should not be construed as having any bearing on individual prosecutions. Moreover, Bharara said "the investigation, at least on the criminal side, remains ongoing."

-- Written by Antoine Gara in New York

Follow @antoinegara

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