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The Other Side Of An Insider Trading Investigation

When the SEC suspects an organization is involved in fraud, the investigation can last for months, if not years.

President Obama’s nomination of super mobster-and-terrorist prosecutor Mary Jo White to lead the SEC is almost certainly a warning that hundreds more financial fraudsters will soon be quaking in their shoes and facing jail time.

In fact, the industry regulator started its sprawling crackdown on insider trading over three years ago: since then, it has charged more than 400 individuals and entities with the crime. Among these, Galleon Group’s head Raj Rajaratnam is currently in jail serving an 11-year sentence and Rajat Gupta, a former McKinsey managing director also involved in the infamous Galleon case, is serving 2 years behind bars.

When the SEC suspects an organization is involved in fraud, the investigation can last for months, if not years. During that time, firms need to work hard to contain the fallout out from the investigation and prevent investors from turning away before any charges have even been filed. An article in the New York Times offers an interesting glimpse into what can take place behind the scenes at the firm that is being scrutinized.

SAC Capital, the $14 billion hedge fund, is currently under pressure from regulators and its own investors following an insider trading investigation that started in 2010: Neither SAC nor its owner Steven A. Cohen have been accused of any wrongdoing, although several former employees have been charged and federal authorities are working hard to build a case against Cohen. Investors have already started fleeing. Last week, a Citigroup unit that manages money for wealthy families revealed that it was withdrawing its $187 million investment in SAC. Titan Advisors and a Societe Generale unit have also declared that they are withdrawing investments.

However, the Times notes that unlike many of its competitors, SAC can brush off a few investor defections such as the Citigroup one, partly because of its owner’s massive wealth: the Times points out that unlike other hedge fund managers, who rely almost entirely on outside investors, “Cohen has the comfort of knowing that about $8 billion of SAC’s fund belongs to him and his employees.”

Also, many wealthy investors will seemingly be able to calm their nerves with the knowledge that since 1992 the firm has boasted an average annual return of 30 percent.

Still, according to the New York Times, as investigators work round the clock, behind the scenes SAC has been offering staff members higher bonuses to stay with the company, marketing officers have been working overtime trying to persuade investors to keep their money at the fund – this weekend SAC held an annual golf outing in Palm Beach on the eve of a hedge fund conference at the Breakers sponsored by Morgan Stanley - and defense lawyers are fighting to convince federal securities regulators not to file a civil fraud lawsuit against the firm.

Times journalist Peter Lattman notes on a Twitter post that “Stevie Cohen and SAC are like ducks -- calm on the surface, but paddling like hell underneath.”

And it looks likely that with Mary Joe White heading over to the SEC, many more ducks will soon be paddling like crazy under the water.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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