Why Wall Street Won't Let Cohen's SAC Capital Hang: Street Whispers

NEW YORK ( TheStreet) - New charges against a former SAC Capital Advisors employee indicate that insider trading allegations may reach the prominent hedge fund's namesake, Steven A. Cohen, and are reportedly unnerving investors to a degree not seen since a multi-year probe by the Securities and Exchange Commission and the U.S. Attorney ensnarled a half dozen former employees of the fund.

Still, even if investors in the $14 billion hedge fund are getting flighty as they read through the U.S. Attorney's complaint, don't expect SAC Capital's Wall Street trading partners to cut and run from the once mighty and still strong-performing fund.

Top hedge funds like SAC Capital are big business for Wall Street investment banks and, if history is any guide, the fund will continue to get preferential treatment to trade in the Wall Street casino even if their luck runs dry.

Already, large hedge funds wield power in negotiating the best terms available on trading lines, prime brokerage agreements and contracts to trade complex financial products such as swaps. After giving hedge funds financial terms unavailable to traditional money managers, history has shown investment banks are reluctant to use the letter of the law to pull out from hedge fund clients in times of distress.

See why SAC Capital's alleged insider trade hid in dark pools.

In the late 1990's Long Term Capital Management was able to secure unheard of trading agreements from Wall Street dealers like Merrill Lynch and Bear Stearns. As the fund neared collapse, many of its trading partners like Goldman Sachs ( GS), JPMorgan ( JPM), Deutsche Bank ( DB), UBS ( UBS) and Morgan Stanley ( MS) put hundreds of millions of dollars into the funds bailout.

The other option would have been to call in trading lines, trigger terminations on derivative trades and call for much higher amounts of collateral, which would have spelled the fund's quick demise.

During the 2008 financial crisis, hedge fund titan Citadel was seen as being helped to survival, in part, by the fund's Wall Street counterparties as ratings downgrades and a near 50% drop in investment portfolios threatened two of the firm's main funds.

The key, in both instances, is that while agreements to trade complex financial products and open prime brokerage accounts normally contain the legalese that gives Wall Street investment banks the upper hand if a fund falls on hard times, they're unlikely to wield that power against a hedge fund like SAC or Citadel that's brought in hundreds of millions in fees and commissions over the years.

SAC's Cohen is reported to have held a conference call this morning to reassure clients about SAC Capital's business. Bloomberg reports that Cohen said on the call the SEC has filed a 'Wells Notice' against the fund, but not himself personally.

For SAC, the call was likely also a move to stem any possible outflow of client money from the fund.

Normally outflows and a drop in a fund's so-called net asset value are the quickest way for Wall Street banks to cut and run from a fund. However, while SAC's investors may very well be flighty, its unlikely the firm's trading counterparts are preparing to hang Cohen out to dry anytime soon.

Bloomberg reports the funds investors see a Nov. 20 charges against a former portfolio manager, Matthew Martoma and his trading of Elan ( ELN) and Wyeth shares as concerning because they indicate Cohen may have been a participant in the alleged insider trading.

Earlier in November, U.S. Attorney Preet Bharara may have hooked his biggest insider trade, after unveiling new allegations against a SAC Capital Management trader that raises the prospect the worst is yet to come for the hedge fund and its founder Steven A. Cohen.

The U.S. attorney's charge alleges that former SAC trader Mathew Martoma was able to make $276 million in profit and avoided losses on the shares of Elan ( ELN) and Wyeth by way of trading on illegal knowledge of negative trials in an Alzheimer's drug being developed by both companies.

While allegations do not mention Cohen by name, they repeatedly refer to a "Hedge Fund Owner" as receiving Martoma's advice to sell shares and instructing the hedge fund to liquidate large blocks of stock.

The charge against Martoma is the sixth time a current or former SAC worker has been linked to insider trading while working at the company.

Already, two former SAC Capital traders and an analyst at the hedge fund have pleaded guilty to insider trading, and a former portfolio manager Michael Steinberg has been named as an unindicted co-conspirator, but is yet to be charged.

"Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry," Jonathan Gasthalter, a spokesman for SAC Capital, said last week.

Martoma's lawyer, Charles A. Stillman, said last week he expected the former portfolio manager to be "fully exonerated."

-- Written by Antoine Gara in New York