SAC Capital Indicted For Unprecedent Insider Trading Scam

SAC Capital Advisors LP, the $14 billion hedge fund founded by Steven A. Cohen, was indicted for perpetrating what prosecutors called an unprecedented insider trading scheme that was revealed as part of the government’s six-year crackdown on Wall Street crime.

The case against the Stamford, Connecticut-based firm is the most significant to be brought by the U.S. since former Goldman Sachs Group Inc. director Rajat Gupta was charged with insider trading in October 2011. Gupta, convicted in New York federal court last year, was sentenced to two years in prison.

SAC was charged with four counts of securities fraud and one count of wire fraud in an indictment unsealed in Manhattan federal court. The alleged scheme, which involved more than 20 companies and went back as far as 1999, helped reap hundreds of millions of dollars in illicit profits, the U.S. said. The charges and related regulatory action may result in the firm’s dissolution.

“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Manhattan U.S. Attorney Preet Bharara said. “Today’s indictment is not just a narrative of names and numbers, it is more broadly an account of a firm with zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct,” he said. “So SAC, over time, became a veritable magnet for market cheaters.”

While he declined to comment on the possibility of charges against Cohen, Bharara said the investigation was “ongoing.” He also said the government isn’t “restraining” SAC assets.

“I’m not going to say what tomorrow may or may not bring,” he said at a press conference today in lower Manhattan.

’Institutional Practices’

In the indictment, the government said that SAC’s insider trading was “made possible by institutional practices that encouraged the widespread solicitation and use of illegal inside information. Unlawful conduct by individual employees and an institutional indifference to that unlawful conduct resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”

“SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously,” said Jonathan Gasthalter, a spokesman for the hedge fund, in an e-mailed statement. He said the “handful of men” implicated in wrongdoing at the firm doesn’t reflect on its other employees. “SAC will continue to operate as we work through these matters.”

Second E-Mail

In a second e-mail today, Gasthalter said the charges won’t “affect the ongoing operations of SAC’s business, prevent investor redemptions, or impact the interests of any of SAC’s counterparties.”

An initial hearing in the case is scheduled for tomorrow before U.S. District Judge Laura Taylor Swain in Manhattan.

There was no unusual price movement or volume in stocks where SAC Capital holds the biggest percentage of shares outstanding. Banks including Deutsche Bank AG and New York-based Goldman Sachs were debating whether to suspend doing business with the hedge fund, which has been one of Wall Street’s biggest trading clients, according to two people briefed on the matter.

Spokespeople for the biggest Wall Street banks declined to comment on whether they had come to a decision.

While Cohen, 57, wasn’t charged in the indictment, prosecutors described him as “the fund owner” and said he “encouraged” SAC employees to obtain trading information from company insiders while ignoring indications that it was illegal.

The U.S. described separate insider trading schemes by at least eight former SAC fund managers and analysts, including Noah Freeman, Donald Longueuil, Jon Horvath, Wesley Wang, Mathew Martoma, Richard Choo-Beng Lee and Michael Steinberg.

Richard Lee

Prosecutors added an additional SAC fund manager to the roster today, saying that Richard Lee, a former SAC portfolio manager who worked at the firm until March 2013, pleaded guilty to insider trading charges on July 23. His lawyer said he’s cooperating with the U.S.

Prosecutors said Lee focused on “special situations” including mergers and acquisitions, private equity buy-outs, and corporate restructurings in publicly-traded companies.

Martoma and Steinberg, who are charged with engaging in separate insider trading schemes in 2008, have both pleaded not guilty and face trial in November.

Freeman, Horvath and Wang have pleaded guilty to federal securities fraud charges and are cooperating with the U.S. Longueuil pleaded guilty to insider-trading, but isn’t cooperating.

Nonpublic Information

The U.S. today alleged SAC’s fund’s owner traded after getting what prosecutors said was nonpublic information from an analyst in late August 2008. Prosecutors said the fund owner sold his entire position, about $12.5 million in Dell Inc., after receiving an advance tip from Horvath that the computer maker was announce disappointing quarterly earnings.

SAC employed practices that encouraged its portfolio managers and research analysts “to pursue industry contact networks to obtain an information ‘edge’ unavailable to other investors, without effective corresponding controls to prevent that ‘edge’ from consisting of inside information,” the U.S. said.

SAC’s owner “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,” the U.S. alleged.


The fund hired Richard Lee, who had a reputation of working at an “insider trading group” while working as a portfolio manager at another hedge fund, the U.S. alleged. That fund was Citadel LLC, according to a person familiar with the matter who asked not to be identified because the matter is private.

Lee, who went on to manage a $1.25 billion portfolio at SAC, pleaded guilty to conspiracy and securities fraud, the U.S. said. Lee admitted that in 2009, he got advance information about Yahoo! Inc. and 3Com Corp., generating more than $1.5 million in profits, according to a related Securities and Exchange Commission complaint.

“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.

Citadel said today in an e-mailed statement that Lee was employed there between January 2006 and April 2008.

“Citadel does not have, and never has had, an ‘insider trading group,’” the company said in its statement. “Citadel has strict rules against, and oversight designed to prevent, insider trading.”

Cited Example

Prosecutors cited an example of SAC’s alleged propensity for ignoring the provenance of information from July 29, 2009, when a newly hired fund manager sent an instant message to “SAC’s owner” and relayed that after “recent research” he planned to short Nokia Corp. when he started working at the firm 10 days.

The new hire later apologized for being cryptic, and added that he’d just received training from SAC’s compliance department, the government said.

Today’s charges aren’t the first time Bharara has sought charges against a business. In February 2012, his office charged Wegelin & Co., Switzerland’s oldest private bank, for helping U.S. taxpayers hide assets from the Internal Revenue Service. Wegelin pleaded guilty and was ordered to pay almost $58 million.

The SAC indictment, and a related SEC administrative action, may put the hedge fund out of business.


SAC must forfeit “all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses,” the government said in a parallel civil action filed today.

Bharara’s office alleged SAC engaged in money laundering of illicit profits which were comingled with the firm’s capital and used to pay bonuses. Prosecutors declined to specify how much money they may seek.

Cohen is worth about $9 billion, according to the Bloomberg Billionaires Index. He is also one of the world’s biggest art collectors, with works by Van Gogh, Manet, de Kooning, Picasso, Cezanne, Warhol, Johns and Richter.

Average Returns

Since he started his hedge fund, Cohen has achieved average annual returns of 30 percent, with just one money-losing year: 2008, when his main fund tumbled 19 percent.

The SEC, in its administrative action on July 19, accused Cohen of failing to supervise two portfolio managers who both face insider trading charges.

While the agency stopped short of accusing Cohen of insider trading himself, the SEC alleged he received “highly suspicious” information and ignored “red flags” that should have caused any reasonable hedge-fund manager to investigate the basis for trades made by SAC employees Martoma and Steinberg.

Those trades helped the hedge fund earn profits and avoided losses of more than $275 million in 2008, the SEC said.

Martoma, 39, was charged in November by Bharara as part of the most lucrative insider trading scheme in history. Prosecutors said Martoma helped SAC reap hundreds of millions of dollars in illegal profits on tips provided by a doctor about a clinical trial about an Alzheimer’s drug being developed by Wyeth LLC and Elan Corp.

Not Guilty

Martoma, who has pleaded not guilty, is scheduled to go to trial in Manhattan federal court on Nov. 4.

While Cohen wasn’t charged with Martoma, that case was the first to link Cohen directly to alleged inside information.

According to the U.S., Martoma learned on July 17, 2008, that test results of an experimental Alzheimer’s treatment from Dublin-based Elan and Madison, New Jersey-based Wyeth were worse than the market anticipated, and that those results would be made public at the end of that month.

Prosecutors said that on July 20 of that year, Martoma e-mailed the “hedge fund owner,” otherwise unidentified in last year’s indictment, stating it was “important” that they talk. Martoma said he was no longer “comfortable” with the fund’s long position on the two stocks.

The U.S. said that same day the two men had a 20-minute telephone call. A person familiar with the case said Cohen is the hedge fund owner referred to by the U.S.

Separate Scheme

In a separate scheme, Steinberg, 41, was indicted in March for insider trading in Dell Inc. and Nvidia Corp. in 2008 and 2009, based on illicit tips funneled to him by his analyst, Jon Horvath. Steinberg is accused of earning $1.4 million in illegal profits for SAC.

Steinberg, who pleaded not guilty to securities fraud and conspiracy, was the most senior SAC official to be charged by the U.S. He is scheduled to go to trial in federal court in New York on Nov. 18. Horvath has pleaded guilty and is cooperating with the U.S.

The SEC alleged in its administrative action last week that Cohen, who was at his vacation home on New York’s Long Island in late August 2008, reversed his trading position and sold $11 million worth of Dell shares within minutes after receiving a “highly suspicious” e-mail sent to him by Steinberg and Horvath. Cohen avoided losses of more than $1.7 million, the SEC alleged.

“I have a 2nd hand read from someone at the company,” Horvath wrote in the Aug. 26 e-mail, which provided details on gross margins, expenditures and revenue. “Please keep to yourself as obviously not well known.”

Horvath’s Message

Federal prosecutors said Horvath’s message contained nonpublic revenue and gross margin information days before the Round Rock, Texas-based computer maker was set to announce quarterly earnings. Steinberg is charged with insider trading in Dell based on Horvath’s tip.

Gasthalter said, in response to the regulator’s administrative action, that it “has no merit,” and that Cohen had acted appropriately.

In March, SAC agreed to pay a record $616 million to settle an SEC complaint alleging insider trading by Martoma and Steinberg without admitting or denying wrongdoing.

More than 80 fund managers, analysts, lawyers and insiders at public companies have been convicted of insider trading in cases brought by the Manhattan U.S. Attorney’s office and the Federal Bureau of Investigation in New York since August 2009.

Since the government’s crackdown on illegal trading at hedge funds was begun, at least nine current or former SAC employees were tied by U.S. authorities to insider trading. Of the five former SAC employees who’ve pleaded guilty, three are cooperating with the U.S.

Increasing Number

The U.S. today acknowledged the increasing number of SAC-related defendants as the sprawling insider probe progressed, pointing to “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.”

Freeman, the former SAC portfolio manager who pleaded guilty and is cooperating with the U.S., told the FBI that it was “understood” at SAC that “providing Cohen with your best trading ideas involved providing Cohen with inside information.”

At one point in his career at SAC, Freeman, who worked in the firm’s Boston office, said he sat next to Cohen.

“Freeman pitched to Cohen many trading ideas over the 18 months he was at SAC and some of the trading ideas involved dirty information,” according to a memo written by FBI Agent B.J. Kang.

Eight Analysts

Horvath was one of eight analysts and portfolio managers charged in January 2012 with being part of what Bharara described as “a tight-knit circle of greed” whose members trafficked in confidential information from 2007 to 2009. Six of those charged in the case have pleaded guilty to insider trading and have agreed to cooperate with the U.S.

“This is a case about corporate conduct and corporate responsibility,” Federal Bureau of Investigation Assistant Director George Venizelos said in a statement. “SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it. Our aim all along has been to root out the wrongdoers, and send a message to anyone else inclined to break the law. If your information ’edge’ is inside information, you can’t trade on it.”

The case is U.S. v. SAC Capital Advisors LP, 13-00541, U.S. District Court for the Southern District of New York (Manhattan).

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