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(Reuters) - The U.S. government is threatening to file civil securities fraud charges against SAC Capital Advisors and is tightening the regulatory screws around Steven A. Cohen, the $14 billion hedge fund's founder and one of the industry's most famous traders.

The move comes a week after a former SAC Capital employee was charged with running the most lucrative insider trading scheme ever in a series of transactions Cohen signed off on. Cohen and a top SAC executive told investors on a 20-minute long conference call on Wednesday that the Securities and Exchange Commission had issued a so-called Wells notice to the firm, according to two sources, who listened to the call.

This puts new pressure on Cohen, a multibillionaire whose firm once made up as much as 3 percent of the New York Stock Exchange's daily trading activity. For years, Cohen and SAC have been dogged by allegations that the firm has relied on insider information to deliver an average annual return of 30 percent since Cohen founded it in 1992.

These kinds of returns have made Cohen, 56, rich and have also attracted outside investors like large funds of funds and wealthy individual clients to his firm.
Cohen spoke at the beginning of the phone call but then let his top deputy, SAC President Tom Conheeney, handle the remainder, which one of the two people who listened in described as "carefully scripted." Callers were not able to ask questions.

The news of the Wells notice also raises questions about SAC's future and how investors are likely to react. SAC told investors of the notice one week after the arrest of Mathew Martoma, one of its former portfolio managers. Martoma is the fifth person associated with the hedge fund to be charged with insider trading. Since then, SAC has been in touch with its biggest investors and held a staff meeting last week to allay fears about the firm's future. On the call, SAC gave no specifics on when the Wells notice physically arrived, but it appears the firm had been aware that the SEC was looking into something after it had subpoenaed the firm for information.

IN THE NAME OF TRANSPARENCY
On the SEC's investment advisory website, where all hedge funds must now register, SAC Capital recently updated its filing to note that the SEC had named CR Intrinsic, the unit where Martoma worked, as a defendant in last week's civil complaint. The firm, however, did not update the online filing to show that it had received a Wells notice.

Authorities charged Martoma with using illegally obtained information from a doctor about poor clinical results at two healthcare companies - Elan Corp Plc and Wyeth, which is now owned by Pfizer Inc - to recommend that SAC eliminate a big position in their stocks. This recommendation kept the firm from incurring millions of dollars in losses, the government said.

Last week, the SEC also filed a civil securities fraud charge against CR Intrinsic, the affiliated fund where Martoma worked. In seeking disgorgement of $276 million in profits and avoided losses against CR Intrinsic, the SEC did not specifically name SAC Capital in last week's civil complaint.

With the arrest of Martoma, the government has now charged five former SAC employees with insider trading while working for the Stamford, Connecticut-headquartered firm. In addition, several others who once worked for Cohen also have been charged with insider trading while working for other hedge funds.

Cohen has not been accused of wrongdoing.

Some on Wall Street applauded SAC for saying it had received the notice, a fact not always disclosed by investment firms.

"The best way to run a money management business, especially post-Madoff, is to let your investors know as much as possible, almost as if you're in a glass bowl. The more transparency you can provide, the better," said Jason Ader, a former Wall Street gaming analyst who now runs Ader Investment Management, which invests in hedge funds.

While 60 percent of SAC's $14 billion in assets belong to Cohen and his employees, the fund's strong and steady returns have made it popular with outside investors as well. Blackstone Group LP has been a long-term investor. With so much of the money in SAC coming from wealthy investors, the firm may not suffer from the kind of redemptions that a fund dependent on pension fund money might.

How investors will react to this news, however, is still far from certain, people familiar with SAC said.

One key may be what Blackstone Group's big fund of funds does, as it once had up to $500 million in SAC and is something of a bellwether in the hedge fund industry. Blackstone's investors include smaller and midsize endowments that might get itchy about SAC's Wells notice and pressure the fund of funds to pull its money from the firm.

A spokesman for Blackstone did not return a call seeking a comment.

BEARING ALL LEGAL COSTS
On the conference call, Conheeney, SAC's president, again told investors that the firm would bear all costs of defending itself against any legal action, the source said.

Conheeney also said the SEC had questioned Cohen about this matter earlier this year and that he had been responsive to all of the government's questions. SAC spokesman Jonathan Gasthalter said last week: "Mr. Cohen and SAC are confident that they have acted appropriately, and will continue to cooperate with the government's inquiry."

The FBI has been investigating SAC on and off since 2007.

Despite SAC's outstanding returns, the firm's reputation as a rough-and-tumble trading shop has sometimes prompted advisers to tell clients to get out or steer clear of the hedge fund.

Todd Petzel, chief investment officer of Offit Capital Advisors, said he had never invested with SAC because of a lack of transparency, even though he knows of the firm's "incredibly demanding culture" through interactions with Cohen and former SAC employees.

"SAC will tell you that they have incredibly rigorous compliance process," Petzel said. "I'm sure if this ever comes to court, they will demonstrate in court all the training that every one of their portfolio managers goes through."

On the other hand, he said Cohen probably protected himself by distancing himself from day-to-day activities. The SEC usually issues Wells notices, which are often not made public, to give firms plenty of warning that legal action is coming.

In the last year, hedge fund manager Philip Falcone and his Harbinger Capital Partners said they had received such notices. It is not clear when SAC got its notice.

"Certainly the Wells process and the public disclosure that there is a Wells process with respect to a hedge fund is something that is very challenging for the management of the hedge fund," said Stephen Crimmins, a partner in law firm K&L Gates in Washington.

Cohen and his top-flight legal team will probably work around the clock to try to negotiate a resolution and avoid a civil lawsuit, Crimmins said.

"It's a period of intense activity," he said. "It's a period that usually doesn't last that long, so we should expect some more news from SAC."