Steve Cohen Claims Inside Information is a Gray Area

Hedge fund billionaire Steven A. Cohen, founder of SAC Capital Advisors LLC, said earlier this year that insider trading rules are “very vague” and sometimes it’s a “judgment call” whether or not a nugget about a public company is inside information or not.

Cohen made these statements under sworn testimony in February and April for a deposition in the lengthy lawsuit with Canadian insurer Fairfax Financial.

Usually a man of few public words, his remarks are surprising for this long-controversial topic and the fact that his $14 billion firm is involved in a open insider trading investigation. In a recent Reuters story, Cohen’s deposition had been obtained and his remarks have been parsed.

He said that he defers to his fund’s attorney to decide if something is inside information and that he’s not extremely knowledgeable with his firm’s compliance manual.

Cohen said in the deposition, “The answer is when you’re trading securities, it’s a judgment call. Whatever the compliance manual says, it probably doesn’t take into account every – every potential situation.”

The cited deposition is from the 2006 lawsuit filed by Fairfax which alleged that SAC Capital, James Chanos’ Kynikos and additional traders participated in a “short conspiracy.” According to Reuters, the lawsuit alleged that hedge funds bet against Fairfax shares and then disseminated negative stories about the company in an attempt to drive down the share  price.

SAC Capital has recently won a motion to be dismissed from the lawsuit; however, Fairfax’s allegations of improper trading against other hedge funds and traders are still pending.

The transcript further notes that Cohen was concerned about his public image and attempted to improve it through some high-profile interviews. In the deposition, he comes off as well-prepared and attempts to clarify his insider trading comments.

Cohen said, “You know, I mean, I can argue that someone else could think that a – being short in front of a sell recommendation is a non-event because it’s not going to move the stock, and somebody else would think, you know, that’s trading on material nonpublic information regardless if it moves the stock or not. These are judgment calls.”

Reuters recently obtained the deposition. The Fairfax investigation has been closed by the Securities and Exchange Commission for SAC Capital and Fairfax.