SAC Agrees to Plead Guilty to End Insider-Trading CasePatricia Hurtado
Billionaire Steven A. Cohen’s SAC Capital Advisors LP, the hedge fund accused of fostering a culture of rampant insider trading, has agreed to plead guilty Nov. 8 to securities fraud and wire fraud, pay a record $1.8 billion and shutter its investment advisory business.
The company, indicted this year, was accused of operating a conspiracy stretching back to 1999, reaping hundreds of millions of dollars in illicit profit. Cohen, 57, wasn’t charged in the indictment of the Stamford, Connecticut-based firm. He still faces an administrative action filed by the U.S. Securities and Exchange Commission for his alleged failure to supervise the hedge fund’s activities.
“What SAC Capital’s plea demonstrates is that cheating and breaking the law were not only permitted but allowed to persist,” George Venizelos, head of the Federal Bureau of Investigation’s New York office, said yesterday in a statement.
The fund’s penalty includes $616 million that Cohen, SAC’s founder and owner, agreed to pay the SEC to settle a related lawsuit in March. SAC also has agreed to close the affiliate SAC capital hedge funds to outside investors, the U.S. said.
Jonathan Gasthalter, a spokesman for SAC, said in an e-mailed statement that the hedge fund takes “responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. These wrongdoers do not represent the 3,000 honest men and women who have worked at the firm during the past 21 years.”
The firm changed the statement after it was told it could be violating the terms of its plea agreement, said a person familiar with the matter who asked not to be identified because it wasn’t public.
In its initial statement, the firm said, “SAC has never encouraged, promoted or tolerated insider trading.” That appeared to contradict the fund’s acceptance of responsibility in the accord reached with federal prosecutors in New York, potentially scuttling the agreement, said the person.
Hours later, that line was deleted in the second statement. “Even one person crossing the line into illegal behavior is one too many and we greatly regret this conduct occurred,” according to the new statement.
A representative of SAC will plead guilty on its behalf in Manhattan federal court on Nov. 8, court officials said today. A hearing to resolve the civil money-laundering suit filed by the U.S. is scheduled for tomorrow, court officials said.
The plea deal isn’t the end of the U.S. investigation of SAC or Cohen, who has been the target of the multiyear probe. Two insider-trading trials in the next three months of managers at his hedge fund may shed more light on its internal workings, and prosecutors continue to investigate trading by SAC employees in Gymboree Corp., a children’s-apparel maker, a person familiar with the matter said.
The SAC agreement provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense,” the government wrote in the court filing.
“It’s far easier for SAC Capital as a corporate entity to plead guilty and settle with the government because it doesn’t have to worry about being incarcerated,” Anthony Sabino, a professor of law at St. John’s University in New York, said in an interview. “The government has amassed tons of evidence against the fund which can’t be helpful to the others. The pressure’s on for one of them to plead guilty.”
SAC portfolio manager Michael Steinberg is scheduled to go on trial Nov. 18 for allegedly engaging in insider trading in Dell Inc. and Nvidia Corp. based on illicit tips provided by Jon Horvath, his analyst. Horvath, who has pleaded guilty and is cooperating with the U.S., is scheduled to be a witness against Steinberg, the longest-serving SAC employee of those the U.S. has charged in its insider-trading probe.
Mathew Martoma, a former fund manager for a unit of SAC, has a January trial date. He’s accused of using inside information from two doctors who were involved in the clinical trial of an Alzheimer’s drug to trade shares of Elan Corp. and Wyeth. The government has called it the biggest criminal insider-trading case against an individual in history.
As part of the agreement, SAC will name an independent compliance consultant who will be approved by the government, according to prosecutors. SAC Capital and its funds named in the indictment are pleading guilty to all five counts in the indictment, including securities fraud and wire fraud. Each of the SAC entities will be under a term of five years’ probation, the U.S. said.
Manhattan U.S. Attorney Preet Bharara in July called the hedge fund “a veritable magnet for market cheaters” and said the company had “zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct.”
While Cohen wasn’t charged, prosecutors said he “encouraged” SAC employees to obtain trading information from company insiders while ignoring indications that it was illegal.
SAC “focused on hiring the best talent, talent who was equipped with extensive networks to circumvent traditional lines of communication,” April Brooks, FBI special agent in charge of the New York office’s criminal division, said at a press conference yesterday in lower Manhattan. “Talent who would be prepared to get confidential information to fuel their illicit trades.”
Clients have pulled their money out of SAC as the government investigation progressed. Executives at the hedge fund, which oversaw about $15 billion in assets at the start of 2013, expect to begin 2014 with about $9 billion.
“One of the world’s largest and most powerful hedge funds agreed to plead guilty, to shut down its outside investment business and pay the largest fine in history for insider trading offenses,” Bharara said at the press conference. “That is the just and appropriate price, in our view, for the pervasive and unprecedented institutional misconduct that occurred here.”
The plea agreement is contingent upon the approval of U.S. District Judge Laura Taylor Swain, who is presiding over the criminal case, and U.S. District Judge Richard Sullivan, who is overseeing the civil money-laundering case. The agreement was signed by the U.S. and SAC, who was represented by Peter Nussbaum, the hedge fund’s general counsel, on Nov. 1.
Bharara said the investigation of insider trading at SAC is “ongoing.”
“You would think that SAC would agree only to a global resolution that would put this whole thing to bed, and would also include a resolution to a criminal investigation of Steve Cohen,” said Stephen Miller, a former federal prosecutor, now a partner at Cozen O’Connor in Philadelphia. “The government would have a good reason why it doesn’t and it could mean further charges may very well be coming down the pike.”
“From the government’s perspective, it’s a guilty plea for an entity and it’s a sizable amount of money,” Miller said. “Their willingness to accept a monetary settlement and plea reflects a view that it might be difficult to prevail at trial.”
Bharara’s office has charged at least 87 people with insider trading and won convictions after trial or guilty pleas against 75.
Raj Rajaratnam, the Galleon Group LLC co-founder whose 11-year prison sentence is one of the longest in U.S. history for insider trading, was ordered to pay $156 million in civil and criminal fines and penalties stemming from his conviction in 2011.
Ivan Boesky, who pleaded guilty to conspiracy in 1987 in an insider case, paid $100 million and was sentenced to three years in prison.
Michael Milken, the former junk bond financier who pleaded guilty to securities fraud, paid more than $1.1 billion in criminal and civil fines as part of his March 1991 settlement with the Justice Department and SEC. In 1990, Milken was sentenced to 10 years in prison. That term was later reduced to two years.
In its civil money-laundering complaint, the U.S. said it wanted “all right, title and interest” in SAC’s assets, should the government prove its case.
The civil claims posed the greatest threat to Cohen’s fortune. The law states that any property “involved in” money-laundering activities, or traceable to them, can be forfeited. Bharara said criminal conduct at SAC resulted in “hundreds of millions of dollars of illegal profits.”
Under the theory of commingling, profits from an insider-trading scheme that are plowed back into a hedge fund’s general account could expose all the fund’s money to a forfeiture claim if the transfer was found to be money laundering.
Still, some judges have invoked the U.S. Constitution’s prohibition on excessive fines to stop prosecutors from punishing a defendant disproportionately.
Taken to its extreme, the government’s demand for assets in its money-laundering suit could cover even Cohen’s personal property, from his mansion in the Hamptons to his art collection, said Hillary Sale, a professor at Washington University School of Law. The art collection is valued at about $750 million, according to Bloomberg’s Billionaires Index.
The criminal case is U.S. v. SAC Capital Advisors LP, 13-cr-00541, U.S. District Court, Southern District of New York (Manhattan). The civil case is U.S. v. SAC Capital Advisors LP, 1:13-cv-5182, U.S. District Court, Southern District of New York (Manhattan).