Government’s spotlight turns to Steve Cohen by Katie Benner @FortuneMagazine May 16, 2011, 3:22 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons But do investigators have the juice to snag the man that they have been circling for years? FORTUNE — With a massive victory against hedge fund titan Raj Rajaratnam in the rearview mirror, it seems like the government has turned its attention to its next big target. All eyes on SAC's Steve Cohen. I’m not talking about the trial that begins today against Zvi Goffer, a former Galleon employee who allegedly ran an insider trading ring of his own. I’m talking about Steve Cohen, the founder of the $13 billion hedge fund SAC Capital. Earlier this month, Senator Charles Grassley asked the Financial Industry Regulatory Authority to look into trading at SAC, saying that insider trading allegations against former SAC employees “raise serious questions about the corporate culture at SAC Capital and undercut investor confidence in a fair and balanced playing field.” And the Wall Street Journal made a splash with news that prosecutors are examining trades made in the $3 billion stock portfolio managed by Cohen. Cohen has not been accused of any wrongdoing. The US Attorney’s office declined to comment on any investigation into SAC. The company, through its outside spokesperson, has said time and again that SAC is cooperating with any and all government investigations. The idea that Cohen is a person of interest for the government has become conventional wisdom in large part because of the mounting pile of circumstantial evidence that prosecutors are circling him. As noted by Senator Grassley, many of the money managers snagged in the Galleon probe had also worked at SAC, including two men who allegedly gave Cohen investing tips based on illegal inside information. And the firm has said that it received a broad subpoena from the government. And fair or not, the Rajaratnam trial has created an environment whereby amazing returns may be treated with suspicion for a little while, worry fund of fund managers and investment advisors. SAC has famously delivered stupendous 30% annualized returns by creating what writer Marcia Vickers described as a “superpowerful information machine.” In a older profile of Cohen and his firm, Vickers quotes a former SAC trader who says that the name of the game there is to “try to get the information before anyone else.” It’s the sort of performance and reputation that is going to pique the interest of prosecutors who are determined to wipe out Wall Street shenanigans. Unsurprisingly, Cohen has been forced to field questions about insider trading. For example, during last week’s SkyBridge Alternatives Conference, host Anthony Scaramucci kicked off his interview with Cohen by addressing press speculation about insider trading at SAC. Cohen told the crowd that SAC has a strong compliance framework, and that risk management is very important at the firm. But one thing may separate the Cohen probe from the Rajaratnam case: wiretaps. The tape recorded conversations between Rajaratnam and his associates convinced the jury that the hedge fund manager intended to trade on inside information, and that he conspired with others to do so. “Securities fraud prosecutions are substantially simplified when the jury is allowed to hear the defendant’s incriminating words in his own voice,” says Scott Meyers, a securities and financial services litigator at Ulmer & Berne. “It is very powerful evidence that is quite difficult to overcome. Expect the government to continue using wiretaps in securities cases.” Without audio tapes, insider trading cases are notoriously hard to prove, since it usually boils down to whether prosecutors can prove a defendant’s intent to commit a crime, beyond a reasonable doubt. The government has brought many insider trading cases since snagging Ivan Boesky, but have netted far fewer convictions. Martha Stewart, for example, went to jail for lying, not for insider trading. So are there recordings of Cohen? It seems like investigators tried to get the fund manager on tape as recently as 2009, when former SAC employee Choo Beng Lee tried to be rehired at SAC so that he could record phone calls with coworkers for the government. But if no recordings were made of Cohen by the time Galleon indictments were handed out and the government’s use of wiretaps became common knowledge, it’s unlikely that anyone at SAC (or at any hedge fund) would be so foolish as to utter an incriminating word during a call again. Expect the government to struggle in any pursuit of Cohen without the sort of tape recorded conversations that have proven so effective. In the case of Steve Cohen – the hedge fund manager who has been investigated by authorities for so many years that Reuters called him the government’s Moby Dick – prosecutors may be too late to catch their great white whale whispering into the phone. ******** And in other news… ** A Raj round up: In more bad news for the former hedge fund titan, pension advisors I’ve spoken with say that institutional investors may sue Rajaratnam and Galleon. Committing fraud violates the terms of most agreements between limited partners and managers, including the payment of management fees. Large institutional players may have a fiduciary duty to try and get back the management fees that they paid Galleon. Also, the jury never believed that Rajaratnam was innocent. And if you’re already nostalgic for the Rajaratnam trial, these quotes should help get you through the week. ** Government crackdowns continue. Federal prosecutors accused Lloyd Barriger of fraud, alleging that he hid portfolio troubles from investors in his Gaffken & Barriger Fund. US Attorney Preet Bharara said: “Barriger allegedly continued to lure investors in with his misinformation. Today’s arrest makes it clear that those who defraud innocent investors will not get away with it.” ** SALT round up: The conference was a huge success for the organizer, Anthony Scaramucci and his SkyBridge Capital. The New York Times called 1,750-person event “spring break” for hedge funds. Ken Griffin says Obama isn’t listening to hedge fund managers when it comes to the deficit, and that the president is no Bill Clinton. He also told the audience at SALT that he doesn’t like the too-big-to-fail piece of Dodd-Frank; and Griffin may take Citadel public. Speakers at the conference predict doom and gloom, and discuss how to profit from armageddon. And SAC may close to new investors. ** Commodities fallout: Hedge funds cut their long positions in 22 futures markets by $17 billion during the commodities downturn. But Brevan Howard Asset Management and Jamison Capital Partners gained during the recent upheaval. ** Relationship building: Phil Falcone sold $280 million worth of preferred shares in his Harbinger Group to investors including Fortress Investment Group FIG . SAC says that Steve Cohen’s ex-wife, Patricia, met with Fairfax Financial before she sued the hedge fund titan for hiding money from her during their 1990 divorce. Fairfax has long been at war with SAC, claiming that the hedge fund shorted Fairfax, and then spread negative information about the company so that the shares would decline. ** Street fights: Goldman Sachs GS to battle Blackstone BX for hedge fund seeding dominance. Cerberus portfolio company NewPage hits the skids; and Apollo and Avenue are circling the troubled paper making business. Investors still can’t get at about $100 billion that was gated in 2008 and 2009. ** All-star lists: Financial News publishes its list of 40 Under 40 hedge fund stars. Institutional Investor reveals the 100 largest hedge funds. ** Loose change: The head of the Alternative Investment Management Association writes that hedge funds aren’t part of the shadow banking system. Hedge fund managers, including Michael Kao and Kyle Bass, are buying Fannie Mae and Freddie Mac preferred shares. Why David Einhorn may regret his bullish call on Yahoo YHOO . Carlyle wants to expand into the fund of funds world.