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SAC's Cohen wins partial dismissal of ex-wife's fraud lawsuit

Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question during a one-on-one interview sessi
Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question during a one-on-one interview sessi

By Joseph Ax

NEW YORK (Reuters) - Steven A. Cohen's ex-wife, who accused the billionaire hedge fund founder of hiding $5.5 million during their 1990 divorce, can pursue fraud claims against him but cannot go after him for racketeering, a federal judge ruled on Monday.

U.S. District William Pauley in New York dismissed civil racketeering claims against Steven Cohen, the founder of SAC Capital Advisors, but said Patricia Cohen's claims of fraud and breach of fiduciary duty would go forward.

In doing so, Pauley noted each side's "seemingly inexhaustible legal resources" as one of the unusual circumstances that have transformed what would otherwise be a mundane marital dispute into a years-long litigation battle.

The legal fight, which began with Patricia Cohen's request for increased child support in 1991, has lasted more than twice as long as the marriage, the judge noted.

"This is a case to restore faith in the old-fashioned idea that divorce is something that lasts forever," Pauley wrote.

Joshua Dratel, a lawyer for Patricia Cohen, said in an email, "Ms. Cohen is grateful for the court's ruling and looks forward to the case moving forward."

A spokesman for Steven Cohen, Jonathan Gasthalter, said Cohen was pleased that the judge dismissed the racketeering claims and added, "We will continue to defend against her equally specious fraud and breach of fiduciary duty claims."

The lawsuit, filed in 2009, has proceeded as prosecutors have focused on the extent employees at Cohen's hedge fund had engaged in insider trading. Six have pleaded guilty, while the seventh, former portfolio manager Michael Steinberg, was convicted at trial in December.

Mathew Martoma, another former portfolio manager, is currently on trial in New York, where prosecutors have accused him of using inside information about a clinical trial for an Alzheimer's drug to trade in Elan Corp Plc and Wyeth, now a unit of Pfizer Inc .

Cohen has not been charged criminally, though the U.S. Securities and Exchange Commission is seeking to bar Cohen from the financial industry for failing to supervise Martoma and another employee. Cohen has denied any wrongdoing.

SAC Capital last year agreed to pay $1.8 billion in criminal and civil settlements and plead guilty to fraud charges stemming from insider trading.

The divorce case is centered on a $9 million real estate deal that went sour. According to Patricia Cohen's lawsuit, Cohen recovered $5.5 million of the money as part of a settlement and failed to disclose it to her during negotiations.

The lawsuit was previously thrown out in 2011 by U.S. District Judge Richard Holwell, but the 2nd U.S. Circuit Court of Appeals last year revived the claims, reversing Holwell's decision.

The case was reassigned to Pauley after Holwell left the bench for private practice.

Pauley's ruling did not address the merits of Patricia Cohen's claims, only whether her allegations were sufficient to move forward.

He said Patricia Cohen's claims under the Racketeer Influenced and Corrupt Organizations statute, or RICO, could only survive legally if she showed that the real estate deal may have been related to SAC Capital's activities. He found that she had not done so.

"Patricia Cohen cannot take on the mantle of a private attorney general just because her ex-husband is a public figure and SAC is in prosecutors' cross-hairs," he wrote. "(T)hough treble damages are a tempting way to spice things up, civil RICO and marriage do not go together like a horse and carriage."

However, Pauley rejected Steven Cohen's bid to dismiss the fraud and breach of fiduciary claims, saying Patricia Cohen had sufficiently alleged that he owed a duty to inform her about the settlement money and never did so.

He dismissed a breach of fiduciary duty claim against Donald Cohen, Steven Cohen's brother, finding that he did not owe Patricia Cohen any obligation when he helped Steven Cohen during the separation negotiations, but let stand a fraud claim against him.

The case is Cohen v. Cohen, U.S. District Court for the Southern District of New York, No. 09-10230.

(Reporting by Joseph Ax; Editing by David Gregorio)

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