SAC Capital Advisors has agreed to plead guilty to insider trading violations and pay a record $1.2 billion penalty, becoming the first large Wall Street firm in a generation to confess to criminal conduct. The move caps a decade-long investigation that turned a once mighty hedge fund into a symbol of financial wrongdoing. The guilty plea and fine paid by SAC, which is owned by the billionaire investor Steven A. Cohen, are part of a broader plea deal that federal prosecutors in Manhattan announced on Monday. It also will impose a five-year probation on the fund and require SAC to terminate its business of managing money for outside investors, though the firm will probably continue to manage Mr. Cohen’s fortune. SAC’s case could inspire other aggressive actions against Wall Street, as the Justice Department’s uneven crackdown on financial fraud has gained momentum in recent months. Coming just days before JPMorgan Chase is expected to finalize a $13 billion settlement with the government over the bank’s questionable mortgage practices, the SAC case could stem concerns that financial firms are too big to charge. “No institution should rest easy in the belief that it is too big to jail,” Preet Bharara, the United States attorney in Manhattan, said at a press conference on Monday. [...] SAC, which is based in Stamford, Conn., said in a statement that it takes “responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years. SAC has never encouraged, promoted or tolerated insider trading.” Mr. Cohen, whose enormous compensation and conspicuous consumption have made him an emblem of the new Gilded Age, has not been charged criminally. Still, the plea deal is a devastating blow to Mr. Cohen, as the firm that bears his initials will acknowledge that it was a corrupt organization. SAC’s admission that several of its employees traded stocks based on secret information also colors Mr. Cohen’s astounding investment track record. Since 1992, the fund posted average annual returns of nearly 30 percent. The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC agreed to pay to federal regulators earlier this year. Mr. Cohen, who owns 100 percent of the firm, will pay those penalties. SAC’s total $1.8 billion punishment sets a record for insider trading cases and surpasses those of other noteworthy financial prosecutions. Raj Rajaratnam, the fallen hedge fund titan serving an 11-year prison sentence for insider trading, was ordered to pay about $157 million. [...] In recent weeks, friends say, Mr. Cohen’s spirits have been high in the hopes that the SAC settlement will put his legal problems behind him. On Wednesday, he appeared relaxed sitting courtside at Madison Square Garden, where he watched the New York Knicks defeat the Milwaukee Bucks in the season opener. But Mr. Cohen is not out of the woods. The plea deal does not incorporate a separate civil action the Securities and Exchange Commission brought against Mr. Cohen. Filed a week before the SAC criminal indictment was announced, the lawsuit accused him of turning a blind eye to misconduct at his fund. The S.E.C. is seeking to bar Mr. Cohen from ever managing outside money, at SAC or elsewhere, people briefed on the matter said. Criminal authorities also continue to view Mr. Cohen and other SAC employees as targets of a continuing insider trading investigation. F.B.I. agents, the people said, are examining SAC’s trading records and seeking the cooperation of potential informants. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.” Still, SAC’s guilty plea serves as a capstone moment in the government’s vast insider trading investigation. Led by federal authorities in Manhattan, the inquiry began in earnest during the middle of the last decade using techniques normally reserved for organized crime and drug trafficking cases. F.B.I. agents used wiretaps to secretly record the telephone conversations of Wall Street traders. They also pressured low-level traders to cooperate and help build cases against their colleagues and bosses. The crackdown has produced more than 70 convictions, including those of Mr. Rajaratnam and his former friend Rajat K. Gupta, the onetime head of the consulting firm McKinsey & Company. But SAC is the first corporate entity charged with insider trading since the investigation began. Guilty pleas by financial institutions are exceedingly rare, and legal specialists say the case against SAC could embolden prosecutors to bring criminal charges against other Wall Street firms. The Justice Department has been reluctant to go after big companies in the wake of the 2002 indictment of Enron’s accounting firm, Arthur Andersen, which led to the firm’s swift collapse and the loss of 28,000 jobs. [...] By contrast, SAC appears fit for survival. Although the indictment threatened to cripple the fund, the government tried to limit the collateral damage that might have been inflicted on the fund’s investors and trading counterparties. Prosecutors did not freeze SAC’s assets and encouraged brokerage firms to continue to trade with the fund. And the government’s demand that SAC stop managing client assets is largely symbolic. Nearly all of the fund’s investors have already pulled their money. But SAC was always more insulated than other hedge funds from the damaging effects of withdrawals because of the $15 billion it managed at its peak, only $6 billion was from outside investors. The balance, about $9 billion, belongs largely to Mr. Cohen, with a fraction consisting of employees’ money. In the wake of the guilty plea, SAC will likely morph into a so-called family office, with Mr. Cohen managing his personal wealth. It is unclear how many traders and staff members Mr. Cohen will employ, but SAC has begun to substantially pare back its operations. The fund, which recently employed more than 1,000 people in 10 offices around the world, has said it will shut its 50-person London unit by year-end. It also has cut six portfolio management teams based in the United States. Though SAC management has told its staff that there will be no more cuts, it expects some traders to leave after receiving their year-end bonuses. The fund’s performance year to date has been solid – it is up more than 13 percent. SAC had an unusual structure, with Mr. Cohen sitting atop a decentralized firm in which about 140 small teams each had control over hundreds of millions of dollars to invest. The teams were all required to share their best investment ideas with Mr. Cohen, who managed the largest trading account with several billion dollars in capital. SAC attracted ambitious, talented traders and promised them outsize compensation as long as they performed. In good years, the fund’s top talent earned tens of millions of dollars in annual pay. Mr. Cohen was able to pay such compensation because, on the strength of superior performance, he charged among the highest annual fees in the hedge fund industry – 3 percent of assets and as much as 50 percent of profits. The average hedge fund charges a 1.5 percent management fee and 20 percent of the gains. Though it branched into other investment strategies, SAC’s stock in trade was its so-called mosaic style of investing, using disparate sources of information to buy and sell stocks around market-moving events like quarterly earnings, big mergers and new products. His traders became known for aggressively pumping their sources for insights that would give them an edge, and speculation persisted that the fund routinely crossed the line into trading on confidential information.
Posted on: Mon, 04 Nov 2013 21:49:27 +0000
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