Steve Cohen should worry less about Picassos and more about fleeing big clients

Clients don’t want to hang around this
Clients don’t want to hang around this
Image: AP Photo/Louis Lanzano
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The question of what Steve Cohen should do with his hedge fund SAC Capital, which is being investigated for insider trading, may be answered by his clients. Today is the deadline for investors to withdraw their money from SAC Capital, and media reports say clients are expected to pull out several billion dollars. SAC Capital executives have already considered becoming a family office that doesn’t manage any outside investor money. Now it may be forced in that direction.

US authorities have arrested at least nine current and former employees of SAC over allegations of insider trading., including SAC portfolio manager Michael Steinberg. He was the most senior SAC official taken into custody in March, which led to speculation that the case might eventually turn to SAC founder Cohen. So far, he has not been charged with any wrongdoing but he did receive a subpoena last month to testify before a grand jury.

The mounting legal troubles have caused SAC’s investors to flee, including the clients who had previously stuck by the hedge fund, like the Blackstone Group (SAC’s largest outside client). SAC expects that about $3.5 billion will be redeemed by the end of today’s deadline, which adds to the roughly $1.7 billion that was withdrawn in the first quarter of this year. Bloomberg reports that eventually, SAC may be left with less than $1 billion of outside money.

That would leave SAC with the $9 billion belonging to Cohen and other employees, which makes up the bulk of the $15 billion hedge fund. A $9 billion “family office” would still be larger than many hedge funds, but it would be a blow to Cohen, who had resisted calls to return outside money.

Cohen has at times appeared oblivious to his firm’s legal troubles. He spent more than $200 million on a Picasso painting and an East Hampton home, and put a Manhattan duplex up for sale for $115 million, all while current and former employees were being arrested.

Now is the time for Cohen to keep his lavish lifestyle under wraps. The SEC, federal prosecutors and other government officials are craving a big win, and authorities are evaluating whether to bring criminal charges against SAC. No doubt Cohen’s flashy behavior has only made them hungrier.