Criminal Forfeiture and SAC Capital

As you probably know, federal prosecutors indicted SAC Capital Advisors LP and a number of related entities last Thursday on wire fraud and securities fraud charges connected to its alleged insider trading over the last five years. Our first reaction was that this wasn’t the worst news SAC Capital chief Steve Cohen might have heard, as he escaped indictment personally and will apparently avoid any prison time arising out of activity described in the indictment.

After all, Cohen already faced a significant threat to his firm’s survival.  

The SEC’s failure-to-supervise case, filed in administrative court on July 19th, could lead to at least Cohen’s temporary suspension from the securities industry. This indictment? Well, it could be the end of SAC Capital. But the two matters, and their potential outcomes, looked to us something like this:

•   SEC's failure-to-supervise case → Steve Cohen's suspension from the securities industry → End of SAC Capital

•   SDNY indictment → withdrawal of SAC investors' money → End of SAC Capital

Those are oversimplified, of course. Perhaps Cohen could recover from a non-permanent suspension and start up a new fund after it ran its course. Still, it did seem to us that the two cases might end up in the same place.

But in the event of a conviction, the criminal case does have at least one prominent feature that the SEC’s case does not: the prospect of a massive criminal forfeiture of assets gained by any criminal conduct. In addition to the indictment, prosecutors filed a civil forfeiture complaint for what it alleges is money laundering activity by the defendants. The Wall Street Journal reported on Thursday that the government will seek forfeiture of around $10 billion, “according to a person familiar with the matter.”

Criminal Forfeiture Generally

Criminal and civil forfeiture have some big differences, but here is how criminal forfeiture generally works: It may go without saying, but forfeiture happens after conviction. To compel a defendant to forfeit its assets, the government must show a nexus between the property it seeks to seize and the crimes of conviction. However, its burden of proof is not the familiar “beyond a reasonable doubt” but the more easily met “preponderance of the evidence”. Also, the government is required to give a defendant notice of what it intends to seek through forfeiture. But anonymously-sourced information in the Wall Street Journal doesn’t count. In the government’s charging documents, it has not mentioned $10 billion, but has instead provided a more spare notice with boilerplate forfeiture language. It seems likely that prosecutors are trying to maintain maximum flexibility in what they could seek after conviction.

Other Points Specific to SAC Capital

Some other interesting points:

•   If the proceeds of criminal activity have been commingled with other property and cannot be isolated without difficulty, the government can seek to attach “substitute assets.” That is to say, if the defendant’s crimes have yielded money the defendant has turned into boats or houses or Picasso’s Le Rêve, the government can go after those, too. But only the assets of the defendants are on the table.  Because Cohen is not a defendant, his personal assets are not subject to criminal forfeiture.

•   You can be sure SAC Capital’s lawyers will fight hard to limit its financial exposure. One obvious way would be to limit the number of convictions the government establishes at trial. Another way would be to influence how the court calculates the “proceeds of the offense of conviction.” In the criminal sentencing context for insider trading cases, courts have taken two approaches: (1) the net gain approach and (2) the market absorption approach.  The first simply looks at how much profit was generated from the tainted trade.  The second examines when the inside information was made public and freezes the price of the security at that time.  Given the many trading positions that will be at issue, if there is a conviction, these calculations will be critical to figuring SAC Capital’s financial liability.

•   Also, if this matter were within the Fourth Circuit, the government could take a very aggressive position and seek a pre-judgment attachment of the defendants’ assets.  Obviously, this would put the defendants in an extremely difficult position, and other courts do not allow this procedure.  Cohen can be thankful for some small blessings and be glad this case is within the Second Circuit and not the Fourth.

•   Assuming the government meets its burden of proof in the post-conviction forfeiture proceedings, investors in SAC Capital – including Steve Cohen – could seek to exempt their investment from the forfeiture judgment by establishing that they were “innocent investors”.  Assuming we get to this point, these ancillary proceedings could be where the sparks really fly.

All of this is to say there is a long way between here and a $10 billion forfeiture order.  It will be interesting to see how far the government gets.