Indictment of SAC Capital Creates Economic Losers and Winners
SAC Capital, the giant hedge fund, faces an existential threat after its indictment. But the economic impact of its legal saga extends far beyond its Stamford, Connecticut, headquarters.
SAC Capital, the hedge fund controlled by billionaire Steven A. Cohen, was indicted Thursday for securities fraud and wire fraud. The blow from the feds was the latest in a string of legal assaults the hedge fund has faced; in March, the firm paid $616 million to settle two insider trading suits brought by the SEC, a record insider-trading fine. But the government isn’t through with SAC yet. It is pursuing forfeiture of about $10 billion, The Wall Street Journal reported. Much of the focus thus far has been on direct effects on SAC and its investors. But when an institution with the size, wealth, and footprint of SAC gets into trouble, it’s likely to have an economic and financial impact beyond the trading floor.
Here are three potential losers:
The art market. Cohen, whose salary at the peak of SAC’s success in 2006 and 2007 has been reported as around $900 million and whose net worth is estimated by Forbes at $9.3 billion, is a big man on the international art scene. He’s often represented at auctions by gallery owner and art dealer superstar Larry Gagosian and has lent art by De Kooning and Picasso to Sotheby’s and a Damien Hirst to the Met. Last year he bought four Matisse sculptures for $120 million, and back in March he acquired Picasso’s Le Reve from Stephen A. Wynn for $155 million—less than a month after SAC settled insider-trading allegations with the government for a cool $616 million.
The stock-trading complex. SAC might not be systemically important like Lehman Brothers, but it is a major force in the markets. SAC Advisors accounted for up to 3 percent of the New York Stock Exchange’s average daily trading and 1 percent of the NASDAQ’s volume in the early 2000s. It is still a force to be reckoned with a decade later, trading up to 100 million shares daily accounting for about 1 percent of trades on U.S. exchanges. SAC manages $15 billion. Blackstone, Citigroup, and other investors have pulled between $5 billion and $6 billion from SAC thus far, and the continuing legal drama may force brokerage firms to stop trading with SAC.
Commericial landlords. SAC, with about 1,000 employees, has a reasonably large office footprint. SAC’s Stamford, Connecticut, office space was purchased in 2000 for $19 million. It has outposts in New York, Hong Kong, London, and Singapore. In the Stamford office, where Cohen maintains the trading floor, the temperature is always set at 69 degrees Fahrenheit, and van Gogh and Warhol pieces from Cohen’s personal connection hang nearby. Cohen doesn’t like noise—phones on the floor light up instead of ringing—but things are likely to get quieter quickly at the firm, with many observers anticipating cutbacks of the 950-person workforce.
And here are two potential winners:
Public-relations firms. SAC is represented by Jonathan Gasthalter, a partner of PR heavy-hitter Sard Verbinnen & Co. Gasthalter has rarely offered comment, except to say the SEC’s suit against Cohen “has no merit.” Sard Verbinnen has also managed the troubled public image of Martha Stewart and former Lehman CEO Richard Fuld. The ongoing legal issues faced by SAC and Cohen are likely to provide Gasthalter and his colleagues with many more opportunities not to comment.
Big law. At a time when their business model is being challenged, big law firms like nothing more than a combative, deep-pocketed client with serious legal issues. SAC faces both civil and criminal charges and has enlisted all-star law firms Willkie Farr & Gallagher and Paul, Weiss, Rifkind, Wharton & Garrison to marshal its defense. Martin Klotz and Daniel Kramer, two of the attorneys at the helm, previously defended SAC against a three-year, $4 billion suit by a Canadian pharmaceuticals company and got the case dismissed in 2009. Klotz also helped negotiate SAC’s earlier $600 million SEC settlement. The firm has also called upon Mark F. Pomerantz and Theodore V. Wells Jr. of Paul Weiss. Pomerantz has dealt with many insider-trading cases, and the latter has represented high-profile political figures like former U.S. senator Robert G. Torricelli and former New York governor Eliot Spitzer.