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According to Reuters, Blackstone Group, SAC Capital Advisors' largest outside investor, notified billionaire hedge fund manager Steven A. Cohen (no relation to the author) that it intends to "fully redeem" a significant portion of the (approximate) $550 million in funds the investment firm placed with Cohen. The reason given was ongoing concerns pertaining to the insider trading investigation currently pursued by Preet Bharara, US Attorney for the Southern District of New York. With this kind of money leaving the fund, traders may want to take a hard look at what Cohen will throw overboard to keep his ship afloat.

But first some background. Bharara has long pursued Cohen, recently charging Mathew Martoma, a former SAC Capital Advisors LP portfolio manager, with the largest insider-trading scheme in history. Readers will recall Martoma was the conduit to SAC of confidential information from a University of Michigan doctor regarding the status of a drug undergoing a pivotal trial for Alzheimer's. The drug was being developed by Elan (NYSE:ELN) and Wyeth (now part of Pfizer (NYSE:PFE)). As well, Bharara recently brought charges against Michael Steinberg, one of Cohen's top portfolio managers, for insider trading in shares of Dell (NASDAQ:DELL) and Nvidia (NASDAQ:NVDA). Both Martoma and Steinberg have pleaded not guilty. Finally, SAC Capital still may face charges based on trading in other stocks, including InterMune (NASDAQ:ITMN) and Weight Watchers International (NYSE:WTW). To date, Cohen himself has not been charged with wrongdoing.

It's now the end of May, 2013. The statute of limitations for securities fraud is 5 years. This means the US attorney is running out of time to file new charges based on the Elan and Wyeth trades (which occurred late in July, 2008). Remember…the 5-year clock starts ticking when the fraud occurs, not when it is discovered. But now, prosecutors have come up with a new wrinkle: use of a racketeering law against SAC.

Now, according to Reuters, "[P]rosecutors are considering charging Steven A. Cohen's SAC Capital Advisors as a criminal enterprise engaged in a long pattern of insider trading in stocks…." Specifically, the US attorney may use the Racketeer Influenced and Corrupt Organizations Act (RICO), something usually reserved for the mafia, to attack Cohen's $15 billion hedge fund company. According to Reuters, no decision has been made in this matter, which requires approval from the highest levels in the Department of Justice (DOJ). It's interesting to note that prosecutors used the RICO statute to indict felon Michael Milken, who they claimed used his firm Drexel Burnham Lambert to break securities laws. (Milken subsequently pleaded guilty to lesser charges; he was sentenced to 2 years in jail and paid $1.1 billion in fines and other fees.)

The important things from a timing standpoint vis-à-vis RICO is that according to the Wall Street Journal, "[u]nder RICO, prosecutors could file charges in connection with crimes committed over a decade, as long as any act that is part of the alleged enterprise occurred within the past five years. The law also contains stiff forfeiture provisions. Each fraud count could carry up to 20 years in prison." [emphasis added] Thus, under RICO, Bharara could go back to 2003 for evidence, which may be important, for example, if he delves deeper into the case involving Fairfax Financial Holdings Ltd. (FFH.TO). Cohen's 2011 deposition helped Stamford, CT-based SAC win a dismissal from an underlying lawsuit filed by Fairfax over short-sale damages. As well, a New Jersey Court recently cleared Exis Capital in the Fairfax lawsuit. (Exis has said it will appeal the decision.) Now, the US attorney has subpoenaed Cohen's testimony, looking to establish what kind of control he had over SAC's CR Intrinsic unit and the unit's compliance and ethics policies.

If Bharara decides to dig deeper into the Fairfax matter, there is the potential that other hedge funds could be sucked into the SAC maelstrom. In 2009, Judd Bagley wrote two investigatory pieces for DeepCapture (here and here) regarding issues related Fairfax's lawsuits against SAC and others. Shown in these two publications were the full texts of e-mails exchanged between various individuals who worked for a number of Wall Street hedge funds. These e-mails pertained to the impending release of a negative analyst's report on Fairfax by John Gwynn, then of Morgan Keegan (now part of Raymond James Financial Corporation (NYSE:RJF)). According to Bud Meyers, Morgan Keegan fired Gwynn for telling clients before publication that he planned to issue a negative report. Whether or not the backstory regarding the Fairfax lawsuits (outside of Cohen's testimony in the case) and the multitude of e-mails leading up to and following the release of Gwynn's report has 'legs' is yet to be seen.

Regardless, it's clear US Attorney Preet Bharara is upping the ante in this game of high-stakes poker. So, it's no wonder that Blackstone Group decided to pull the plug and "fully redeem" a major portion of the roughly $550 million the firm has invested with Cohen. According to Tyler Durden, writing for ZeroHedge, "[T]he letter from pension consulting firm Russell Investments said Blackstone submitted its redemption notice to SAC Capital sometime before May 15 because of ongoing concerns about the insider trading investigation that continues to engulf Cohen's fund." Blackstone expects to receive 100% of its money by year end. This is a significant blow to SAC Capitol. Blackstone has had money invested with Cohen for at least 10 years and is a well-respected member of the Wall Street community.

So, the question is, what will the market do when it senses Cohen is about to liquidate positions to meet Blackstone Group's call on its money, assuming the 'smart money' doesn't start to front-run the liquidation in the near term? Durden conveniently provided a list of the top 30 holdings of Cohen's positions, which is topped by EQT (NYSE:EQT), followed by Amazon.com (NASDAQ:AMZN), Suncor Energy (NYSE:SU), and Visa Inc-Class A (NYSE:V), and Michael Kors Online (NYSE:KORS), to name the top five holdings. The list makes interesting reading. It also raises serious questions as to whether or not the market in these stocks is set up for the perfect storm: a market correction coupled with SAC liquidation to meet Blackstone's call on its money.

Source: Trading Ahead Of The SAC Capital Fire Sale

Additional disclosure: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.