What do the criminal charges mean for SAC?

Prosecutors are effectively trying to force SAC Capital out of the professional money management business. A guilty verdict would make it very difficult for banks and brokers to trade with or lend money to the hedge fund and would prevent SAC from managing money for others.

SAC maintains that it has done nothing wrong, however, and for now the banks and brokers with which it trades have taken an innocent-until-proven-guilty stance. They are sticking with a longstanding and lucrative client, reassured by the $9bn of capital owned by Mr Cohen and his staff.

Outside investors in the $14bn hedge fund are unlikely to hang around, however. The long running investigation has already spooked most of them, with Blackstone Asset Management, Citigroup Private Bank and Titan Advisors among the clients who have requested the return of about $5bn of their money by the end of the year.

Prosecutors are also seeking forfeiture of hundreds of millions of dollars of SAC’s profits gained through insider trading.

What are the implications for Steven Cohen?

Mr Cohen has not been accused of criminal wrongdoing, so he faces no prospect of jail time or criminal sanctions.

Separate from the criminal charges against the hedge fund, the Securities and Exchange Commission is seeking to ban Mr Cohen from the industry as part of a civil complaint that he failed to properly supervise employees now accused of illegal trading.

As the sole owner of SAC, the 57-year-old may have to write another very large cheque to the government if it is found guilty, on top of the $616m the firm has already paid to settle civil charges with the SEC without admitting or denying wrongdoing.

What does Mr Cohen say?

Mr Cohen has said he is innocent and will fight the SEC’s administrative action. He has long maintained that he and his firm have done nothing wrong.

On Monday, lawyers for SAC sent the hedge fund’s staff a detailed rebuttal of the SEC’s claims, including minute-by-minute accounts of trading in computer maker Dell designed to show that no insider trading took place.

Can regulators stop Steven Cohen from trading entirely?

No. The company, with offices spread around the world could simply give the outside money back, change the name on the door to the Cohen family office and manage his personal wealth.

The preserve of both billionaires and the mere super rich, a family office is simply a way for the very wealthy to organise the affairs of their fortune and foundations.

But the term is also important in the context of US financial regulation. Under the Dodd-Frank reforms passed in 2010, all money managers looking after more than $100m or 250 clients were required to register with the SEC, submitting details about their investors and activities. Family offices, however, are exempt from the requirement to register with the SEC.

In this scenario, what might remain of SAC could still see it rank among the largest hedge funds in the world, commanding respect, attention and capital from Wall Street. There are only about 45 hedge funds globally managing more than $8bn, according to HFR, the research group.

Will SAC be able to retain staff?

Multi-strategy hedge funds such as SAC are in a cut-throat business where traders are paid for results, or swiftly fired.

The partner of one large hedge fund said that, were he in Mr Cohen’s position, he could make up around half the drop in assets by using a little more leverage. However he also said that “we’ve seen a lot of CVs, no question”.

As a family office, the lack of third-party fees and Mr Cohen’s desire to make up the difference, might affect the pay calculation. SAC typically charges a 3 per cent management fee, and keeps as much as half of investor profits, some of the highest fees in the business, allowing it to offer some of the highest rewards in the industry. The firm would have to shrink, and this month it began lay-offs among staff such as salespeople, according to people familiar with the situation.

Martin Skylar of Kleinberg Kaplan said “I have not heard of a case where the SEC or the Department of Justice has banned someone from trading their own capital”.

In this scenario, what might remain of SAC could still see it rank among the largest hedge funds in the world, commanding respect, attention and capital from Wall Street. There are only about 45 hedge funds globally managing more than $8bn, according to HFR, the research group.

Although Mr Skylar said that Mr Cohen could voluntarily agree to cease trading personally as part of the terms of any settlement with regulators.

SAC has already announced higher bonuses for employees this year, and family offices can still run money for key staff, providing an incentive for longstanding traders to stay put. Fund of fund investors also say it may be hard for SAC alumni to raise capital for their own funds until the government inquiry is resolved.

Yet rivals are circling. “Most of us try to be polite about it, but if opportunities come up, we are going to take them. Its not a genteel business,” said one.

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