Steven Cohen: Will the biggest fish in the hedge fund ocean get to swim free again?

Employees who packed up their belongings and left the hedge fund SAC Capital’s defunct London offices for the last time in December 2013 probably thought it was over. The US-based investment firm, led by Steven Cohen, had been indicted on insider trading allegations.

Most star fund managers left for rivals in the capital. Hedge funds such as Carrhae Capital, Carmignac Gestion, BlueCrest and Moore Capital all saw a flow of ex-SAC staffers walk through their wood-panelled doors.

But the 18 former SAC partners who worked in the London office will be looking with puzzlement this week at the Lazarus-like revival of the business and Mr Cohen, its colourful frontman.

Several developments, including a groundbreaking legal change and ongoing woes within SAC’s state prosecutors, are paving the way for a dramatic revival of the fund manager just two years after it closed to outside money.

SAC Capital was founded by Mr Cohen, a former pro-poker player, in 1992 with just $25m (£16.2m); he subsequently grew funds under management to $14bn and ran the cash from a 25,000sq ft office in Connecticut packed with traders who were encouraged to don SAC-embossed fleece jackets.

Mr Cohen, like famous traders such as Michael Milken before him, was always top dog in the trading pecking order. According to a 2010 article by Vanity Fair, Mr Cohen had a small video camera placed on his desk to broadcast his every move to staff in a bid to put himself in the centre of the trading action.

For years, rivals had whispered darkly about the company and its unusually stellar performance, maintaining returns of about 30 per cent for nearly two decades straight.

Mr Cohen’s carefully calibrated set-up came crashing down in 2013 when SAC pleaded guilty to criminal insider trading charges in 2013, paying US authorities a $1.8bn fine and promising not to manage third-party money for investors again. The group rebranded as Point72 Asset Management to manage Mr Cohen’s personal fortune, which currently stands at $11.2bn.

Mr Cohen was not charged with any wrongdoing but two SAC traders – Mathew Martoma and Michael Steinberg – were both charged and convicted. Martoma was sentenced to nine years in prison last September after being found guilty of insider trading charges related to activity in two pharmaceutical stocks, Elan Corp and Wyeth. Mr Steinberg, whose conviction has since been overturned, was sentenced to three and a half years in prison in May 2014.

The Securities and Exchange Commissions (SEC), the US watchdog which brings financial crime cases, has also brought a civil case against Mr Cohen over failing to supervise the two men and prevent them from insider trading.

Yet a recent overhaul of legal precedent on insider trading in the US has paved the way for all of the parties pursued by the SEC – Martoma, SAC, Mr Steinberg and Mr Cohen – to win out against the regulators.

A recent ruling from the US Court of Appeals in New York effectively limited the scope of insider trading laws by raising the bar on proof of guilt for prosecutors.

Groups such as the SEC now need to prove that a defendant knew insider trading tips came from a person who benefited financially from leaking the information – a much higher bar than simply proving the person knew they should not be leaking the information as before.

The ruling is a blow for US attorney Preet Bharara, who has pursued a crackdown on insider trading leading to 87 people being convicted over the past six years.

The new standard has already led to 14 of those convictions being dismissed or lost – and one of those was Mr Steinberg’s. Last week, because of the ruling, the SEC dismissed charges against the former SAC trader, along with another six people unrelated to SAC who were convicted.

Martoma also launched an appeal this week against his conviction, arguing that the person who gave him information related to the trades did not receive benefits from passing him the data.

Both cases will put a spring in Mr Cohen’s step. The avid art collector, who hit the headlines for buying Picasso’s Le Rêve for $155m two years ago and also owns Damien Hirst’s famous shark-in-a-tank piece called The Physical Impossibility of Death in the Mind of Someone Living, is still facing the civil charges.

However, with Mr Steinberg and now Martoma pushing back against their convictions, the tide could be turning for the star fund manager.

Back in London, there is already a spring in the step. Point72 this month moved into plush new offices at 8 St James’s Square, a promotion on the company’s old office in an office block overlooking Paternoster Square in the City next to the London Stock Exchange. The company has launched a slick new website – where Mr Cohen promises the firm “acts with integrity and professionalism and sets the standard for ethical behaviour” – and has started running a graduate recruitment programme tapping students coming out of university in the UK.

Old SAC talent is already flowing back to the new group, which is established as a family office and cannot accept third-party money. The group says it has “no plans” to change this. But one of the firm’s top former money managers, Israa Al Bayaa, this month returned to Point72 to work at its London office. Mr Al Bayaa had left – along with eight colleagues – to work at rival fund manager Moore Capital after SAC shut its doors but a Companies House filing this week showed he had returned to the group. Mr Cohen still faces civil charges from the SEC but with Mr Steinberg’s case overturned and Martoma’s conviction under threat, the ex-poker pro could just be about to play his strongest hand yet.

Mathew Martoma, a former portfolio manager at SAC, was sentenced to nine years in jail in 2014 after being convicted in what prosecutors called the most lucrative insider trading scheme in US history.

Martoma started selling SAC’s $700m stake in two drug companies Elan and Wyeth, in July 2008 after talking to a doctor involved in clinical trials on the Alzheimer’s drug bapineuzumab, or bapi. It was just days before Elan updated the markets on stage two trials.

Steven Cohen’s SAC had bet about three-quarters of a billion dollars on the drug’s success but the trial results were mixed. Within a day, Elan’s shares had dived by 40 per cent and Wyeth’s by 12 per cent. SAC, however, had not only sold all of its $700m stake by the time the results became public, it had shorted them – placing bets on the price falling – and walked away with a $275m profit.