VOL. 37 | NO. 30 | Friday, July 26, 2013
Feds charge hedge fund SAC Capital in NY case
NEW YORK (AP) — The hedge fund operated by embattled billionaire Steven A. Cohen made hundreds of millions of dollars illegally and allowed unprecedented and pervasive insider trading to go unchecked for years, federal prosecutors said in an indictment unsealed Thursday.
SAC Capital Advisors was charged with wire fraud and four counts of securities fraud. Prosecutors alleged the crimes were carried out from 1999 through at least 2010.
Cohen himself wasn't named as a defendant in the criminal case, but the charges could topple his Stamford, Conn., firm, which once managed $15 billion in assets. 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."
The charges came less than a week after federal regulators accused Cohen in a related civil case of failing to prevent insider trading at the firm.
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."
A lawyer for Cohen did not immediately respond to a message seeking comment Thursday. Last week, an SAC Capital spokesman said the related Securities and Exchange Commission allegations have "no merit" and that "Steve Cohen acted appropriately at all times."
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, Mathew Martoma, has pleaded not guilty to insider-trading charges accusing him of earning $9 million in bonuses after persuading a medical professor to leak secret data from an Alzheimer's disease trial between 2006 and 2008. Authorities haven't disputed reports that Cohen is the "Hedge Fund Owner" repeatedly referenced in a criminal complaint against Martoma.
Even in the high-flying hedge fund world, SAC Capital stands out for its mammoth returns. Meanwhile, Cohen became one of the highest-profile figures in U.S. finance and the 40th-richest American, with a net worth of $8.8 billion, according to Forbes. Of the roughly $15 billion in assets that SAC Capital managed as of earlier this year, about half belonged to Cohen and his employees and half was client money.
In the past, the Justice Department has been wary of bringing criminal prosecutions against entire organizations out of fear of the collateral damage — that going further than fining a company could kill a business. The accounting firm Arthur Andersen went under after it was convicted in 2002 of destroying Enron-related documents before the energy giant's collapse — an outcome that cost tens of thousands of jobs.
There are already reports that SAC's clients are pulling their money from the Stamford, Conn.-based firm. It's not always an easy process: Clients usually have to give notice of at least 30 days. Hedge funds also can write into their contracts that they'll deny withdrawal requests if too many clients want to pull out money at the same time.
In the face of mounting legal woes, Cohen has kept up his philanthropic efforts. The Steven and Alexandra Cohen Foundation, named for Cohen and his wife, recently helped sponsor a $10,000-per-table poker tournament in Manhattan that raised money for an education advocacy group.