By and large, and subject to the inequities of resources and circumstances, individuals in the U.S. are still innocent until proven guilty.  Not so entity defendants, for whom that time-honored axiom is reversed.  In practice, entity defendants are guilty until proven innocent; the law moves deliberately, but markets and investors move quickly.  And in the rare circumstances where the law vindicates an entity defendant (Andersen comes prominently to mind), it is often too late.  Hedge funds and their managers are uniquely susceptible to this guilty until proven innocent phenomenon.  Raj Rajaratnam and Galleon, and Art Samburg and Pequot, are exhibits A and B.  Granted, Rajaratnam, Samberg and their respective management companies have not been "proven innocent" of the insider trading with which they were charged.  But nor have they been proven guilty or liable.  Yet the reputations of the individual defendants have been irrevocably tarnished, and both of those seafaring management companies have sailed into the hedge fund graveyard.  Indeed, it has effectively become a truism in the hedge fund industry that an accusation of insider trading by the SEC or DOJ against a hedge fund management company or any of its personnel constitutes a "death knell" for that management company and its funds.  However, a recent development suggests that an insider trading charge need not be fatal to hedge fund managers that appropriately prepare for and respond to discovered or suspected insider trading.  On December 20, 2010, the SEC entered into a non-prosecution agreement with Carter's Inc., a publicly traded clothing marketer, based on the company's response to discovery of accounting fraud and insider trading by one of its sales executives.  In doing so, the SEC exercised for the first time one of the tools added to its enforcement arsenal as part of its cooperation initiative announced in January 2010.  See "Katten Muchin Rosenman Hosts Program on 'Infected Hedge Funds' Highlighting Rights and Remedies of Investors in Hedge Funds Whose Managers are Accused of Insider Trading or of Operating Ponzi Schemes," Hedge Fund Law Report, Vol. 3, No. 12 (Mar. 25, 2010); "Paul Hastings Hosts Program on Securities Litigation and Enforcement in Light of New SEC Initiatives to Enhance Enforcement Efforts and Encourage Witness Cooperation," Hedge Fund Law Report, Vol. 3, No. 6 (Feb. 11, 2010).  Although the Carter's matter arose in the public company context, the SEC's stated rationale for entering into a non-prosecution agreement with Carter's − as opposed to initiating an enforcement action against Carter's (as it did against the sales executive) − would apply with equal strength to a scenario where a hedge fund manager discovers, responds vigorously to and had prepared for an isolated instance of insider trading by one of its employees.  Accordingly, this article examines the Carter's matter as a precedent for how hedge fund managers can discover an insider trading violation by one of their employees, yet live to fight another day.  Specifically, this article: briefly reviews the relevant facts and legal allegations of the Carter's matter; discusses the SEC's stated rationale for entering into the non-prosecution agreement with Carter's; details four important lessons for hedge fund managers to be drawn from that rationale; then details the relevant provisions of the non-prosecution agreement (which are quite rigorous; the SEC does not give up good enforcement facts for a peppercorn).