Cohen Ignored Warning Lee Had Insider-Trading ReputationKatherine Burton and Saijel Kishan
In the summer of 2008, Steven A. Cohen was warned by an employee at Citadel LLC that a portfolio manager he was about to hire, Richard S. Lee, had a reputation for insider trading.
Cohen ignored the red flag as well as objections from his own legal department and hired him the following year, according to an indictment yesterday that accused Cohen’s SAC Capital Advisors LP of securities fraud and wire fraud. The government said SAC created an environment in which employees were encouraged to use illicit information and the compliance office identified only one example of suspected insider trading in its history.
Lee, 34, was charged with securities fraud for trading in stocks including Yahoo! Inc. and 3Com Corp. and has pleaded guilty. He is at least the 11th person to be linked to insider trading while working at the SAC, and his actions as late as 2010 represent some of the most recent examples of alleged wrongdoing at firm, occurring after the government’s probe was publicized.
“The particular story of Richard Lee’s time at SAC is emblematic of the broader culture problem at the fund,” Manhattan U.S. Attorney Preet Bharara said yesterday at a news conference.
Lee’s hiring was among the evidence cited by the government to allege that SAC, based in Stamford, Connecticut, enabled and promoted insider trading from as early as 1999 through at least 2010. Lee, who co-managed a $1.25 billion portfolio at SAC, including borrowed money, joined Cohen’s firm in April 2009 and left in June 2011 before returning for a second stint last year.
Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment on the allegations against Lee.
The hedge-fund company denied that it encouraged or tolerated insider trading and said it will continue to operate as it works through the matter.
“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,” the firm said in an e-mailed statement.
Lee, who wears glasses and has a slender build, was described by a former SAC employee who knew him as studious and bookish. He wasn’t the aggressive, hyper-competitive type usually found at hedge funds, said this person, who asked not to be identified. Lee graduated from Brown University in Providence, Rhode Island, in 2001 with a bachelor’s degree in economics, according to school records.
The person who spoke to Cohen about Lee referred to him as part of an “insider trading group” at Citadel, the government said. The firm, run by Ken Griffin, hasn’t been accused of any wrongdoing.
“Citadel does not have, and never has had, an ‘insider trading group,’” Katie Spring, a spokeswoman for Citadel, said in an e-mailed statement. “Citadel has strict rules against, and oversight designed to prevent, insider trading. Any suggestion to the contrary is baseless and without merit.”
Lee joined the Chicago-based firm in 2006 and two years later was terminated for cause unrelated to market transactions, according to Spring. He worked within a special situations group that seeks to profit by predicting triggers for stocks and bonds such as corporate restructurings and acquisitions.
Lee initially interviewed with SAC in 2006 and at that time told a senior executive that his investment process included consulting with an expert network. The SAC executive responded that most portfolio managers relied on their own personal networks of industry contacts, according to the government.
Lee did develop his own network, prosecutors said. A contact at an unnamed private-equity firm got him early access to a Yahoo earnings report and to information related to a contemplated partnership between Yahoo and Microsoft Corp. in 2009, according to the complaint.
Lee spoke with an analyst that month from a research firm doing business with SAC about the partnership. In a recorded call, the analyst told Lee that his friend, a “senior guy” at Microsoft who had been “very, very accurate in the past,” had told him that a team from Yahoo had arrived at Microsoft to restart deal talks with the two highest-ranking people in Microsoft’s Internet business, the government said.
Other SAC portfolio managers also allegedly spoke to this analyst, according to the complaint.
In November 2009, Lee also received an e-mail with material, nonpublic information about 3Com after which he bought 700,000 shares of the company for his portfolio, the government said.
Lee had worked from 2003 to 2005 at Farallon Capital Management LLC’s Noonday Asset Management unit as a research analyst. He worked at McKinsey & Co. Inc. before Farallon. After his first stint at SAC, Lee was trying to raise his own hedge fund and had hired some people for the venture, according to a person with knowledge of the matter.
Lee returned to Cohen’s firm in September 2012, working in its Chicago office, and was among those who departed earlier this year when SAC closed that office.
“Richard Lee has accepted responsibility for his prior conduct and is cooperating with the government and looks forward to moving past this episode in his life,” Lee’s lawyer, Richard Owens, a partner at Latham & Watkins LLP, said in a telephone interview.