When subpoenas keep coming for a hedge fund’s executives and investors learn the company is definitely not cooperating with investigators, it’s likely to cause a run for the exits. Blackstone Group (NYSE:BX) is following this path with SAC Capital as the hedge fund faces mounting legal pressure and Steve Cohen may be forced to plead the Fifth in a Manhattan court.
Blackstone’s $550 million investment represents the largest chunk of outside money in SAC Capital, which manages $15 billion of assets, about $9 billion of which belong to Cohen himself. If Blackstone removes the majority of its investment from the fund, as Reuters is reporting, more investors are likely to follow. According to The New York Times, SAC Capital has several controls in place that restrict the options for investors when exiting the fund.
One such safeguard mandates that investors remove their money in thirds, over the course of three quarters. As Blackstone’s correspondence to SAC Capital has indicated, the company plans to “fully redeem” its investment in the hedge fund by year’s end. A little more than one week ago, SAC Capital informed its investigators that it would not continue to cooperate with the investigation involving insider trading at the firm. The Blackstone letter that informed SAC of its intention to withdraw its money from the fund didn’t mention Cohen by name, but federal prosecutors have done that themselves with a subpoena.
According to the Times report, prosecutors may force Cohen onto the stand though they don’t intend to charge him with a crime. Since he almost certainly would plead the Fifth Amendment, the move would serve mainly to embarrass Cohen into a court appearance. Hostile voices inside the company claim that federal attorneys are intent on shutting down the hedge fund, which is why they’ve chosen to stop cooperating.
Blackstone sees the latest developments as the final straw, according to sources. Though SAC Capital settled an SEC investigation by paying $616 million in damages in March, Blackstone was not satisfied the hedge fund had learned its lesson. Now that the biggest investor is out, it remains to be seen how long the others take to jump ship.