Feds File Insider-Trading Charges Against Hedge Fund SAC Capital
NEW YORK (CBSNewYork/AP) — A huge Connecticut-based hedge fund owned by an embattled billionaire is facing insider-trading charges.
Federal authorities in New York City announced the criminal charges against SAC Capital Advisors on Thursday. SAC is charged with wire fraud and four counts of securities fraud, but owner Steven Cohen is not charged.
Prosecutors alleged the crimes were carried out from 1999 through at least 2010.
The criminal charges come less the week after Cohen was accused of wrongdoing in a civil case brought by the Securities and Exchange Commission. The SEC alleged he failed to stop insider trading at his firm.
Web Extra: Read The Indictment (.pdf)
In papers filed in federal court in Manhattan, the government sought SAC’s forfeiture of “any and all” assets.
U.S. Attorney Preet Bharara said at a news conference that SAC “trafficked in inside information on a scale without any known precedent in the history of hedge funds.” He added that the firm had “zero tolerance for low returns, but seemingly tremendous tolerance conduct for questionable conduct.”
Still, he said shutting the company was not his goal.
He noted that the government was not seeking to freeze SAC’s assets and said prosecutors were “mindful to minimize risk to third-party investors.”
In a statement, SAC Capital said it “has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously.”
It added: “The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years. SAC will continue to operate as we work through these matters.”
In a statement, FBI Assistant Director George Venizelos said: “SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it.”
Bharara also announced that Richard Lee, a former SAC portfolio manager responsible for a $1.25 billion “special situations” fund, pleaded guilty Tuesday to conspiracy and securities fraud charges. Lee had worked for SAC in Manhattan from April 2009 through June 2011 and later at its Chicago office.
The Justice Department also filed a related civil lawsuit against SAC on Thursday in Manhattan. Both it and the indictment said insider trading at the company was “substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
In court papers, the government did not identify Cohen by name but blasted the “SAC owner,” saying he purposely tried to hire portfolio managers and analysts who knew employees of public companies likely to possess inside information.
The government said he “enabled and promoted the insider trading scheme by ignoring indications that trading recommendations were based on inside information” and failed to question new employee candidates who implied their trading advantage was based on sources of inside information.
It said Cohen fostered “a culture that focused on not discussing inside information too openly, rather than not seeking or trading on such information in the first place.”
SAC’s “relentless pursuit of an information `edge’ fostered a business culture within SAC in which there was no meaningful commitment to ensure that such ‘edge’ came from legitimate research and not inside information,” the criminal charges said.
It added: “The predictable and foreseeable result, as charged herein, was systematic insider trading by the SAC entity defendants resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.”
The indictment said SAC carried out the insider trading scheme through portfolio managers and research analysts “who engaged in a pattern of obtaining insider information from dozens of publicly-traded companies across multiple industry sectors.”
It said SAC sought to hire people with proven access to public company contacts likely to possess inside information. Portfolio managers and research analysts weren’t questioned when they made trading recommendations that appeared to be based on inside information, the indictment said.
The problem was compounded when SAC on numerous occasions failed to use effective compliance procedures or practices designed to root out wrongdoing. The pursuit of a trading edge overwhelmed limited SAC compliance systems, prosecutors said.
The government also faulted the company’s compliance department, saying its investigations were weak, with a focus on “confirming” that any employee’s email implying access to inside information was merely poorly drafted.
The government said the compliance department had identified only a single instance of suspected insider trading by its employees in its history even though former portfolio managers and analysts had pleaded guilty to insider trading.
Venizelos, head of the FBI’s New York office, called the company’s compliance department “the embodiment of the phrase, ‘See no evil. Hear no evil. Speak no evil.”’
Barry Boss, a criminal defense lawyer in Washington, said the government’s frequent references to Cohen in court papers were a way for prosecutors to cast aspersions of guilt without providing due process.
“Given a choice between being besmirched in the indictment and being named in the indictment, I think somebody would take besmirched every day,” he said.
SAC Capital has been at the center of one of the biggest insider-trading fraud cases in history. Four employees have already been criminally charged with insider trading, and two of them have pleaded guilty. And an SAC affiliate has agreed to pay $615 million to settle SEC charges.
Cohen, who lives in Greenwich, Conn., is one of the highest profile figures in American finance and one of the richest men in America. He is among the handful of upper-tier hedge fund managers on Wall Street who pull in about $1 billion a year in compensation.
An SAC portfolio manager pleaded not guilty last year to charges he earned $9 million in bonuses after persuading a medical professor to leak secret data from an Alzheimer’s disease trial.
An SAC Capital spokesman said last week that Cohen has “acted appropriately at all times.”
SAC Research Analyst Jon Horvath pled guilty in Sept. 2012 to conspiracy and securities fraud for insider trading. Horvath worked for portfolio manager Michael Steinberg, who has pleaded not guilty to insider trading charges filed against him.
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