SAC Record $1.8 Billion Insider Plea Caps 7-Year ProbePatricia Hurtado, Bob Van Voris and Saijel Kishan
SAC Capital Advisors LP’s landmark $1.8 billion settlement of a U.S. government insider-trading probe stretching back to 2007 was approved by a federal judge, bringing to an end the hedge fund’s role as a money manager and capping a decade of insider-trading cases.
SAC Capital, which this week changed its name to Point72 Asset Management LP, pleaded guilty to reaping hundreds of millions of dollars in illegal profits and fostering a culture of criminality that encouraged brazen insider trading by its employees.
Though never able to charge or even sue founder Steven A. Cohen, the government managed to snare eight current or former employees through guilty pleas and trial convictions. Cohen, 57, who has consistently denied wrongdoing, is the subject of an administrative proceeding by the Securities and Exchange Commission, which claims the billionaire failed to supervise employees to ensure they complied with securities laws.
“Both sides in this case can claim victory,” said Doug Burns, a former federal prosecutor. “Cohen can say ‘they didn’t have the ability to prosecute me individually because I did nothing wrong.’ And the government gets to say this was a place with a horrid culture and, while the evidence didn’t enable us to prosecute Steve Cohen, we got a very, very sizable monetary fine out of the culmination of all our efforts.”
“The defendants’s crimes were striking in their magnitude and striking in their lack of respect for the law,” U.S. District Judge Laura Taylor Swain in Manhattan said today in accepting the plea. Each SAC Capital fund was sentenced to five years’ probation and will be under a federal compliance monitor. Cohen wasn’t present for the hearing.
The plea deal ends both the prosecution and money-laundering lawsuit brought by the office of Manhattan U.S. Attorney Preet Bharara. The agreement consists of a $900 million fine to end the criminal case, as well as a separate $900 million judgment the hedge fund agreed to pay to end the suit. Within that judgment is $616 million Cohen agreed to pay the SEC to settle a separate lawsuit filed last year.
As part of the plea deal, the firm agreed to manage money mainly for Cohen.
“Today marks the day of reckoning for a fund that was riddled with criminal conduct,” Bharara said in a statement. “Today’s sentence affirms that when institutions flout the law in such a colossal way, they will pay a heavy price.”
SAC Capital’s conviction is the apex of a seven-year effort by the Justice Department to root out market cheating not only at hedge funds, but among insiders at publicly traded companies and so-called expert-networking firms.
Those firms, middle-men who put company insiders together with traders to provide industry insight, were the new twist of modern-day market manipulation. The Federal Bureau of Investigation in New York upped the ante as well, leveraging wiretaps and surveillance measures previously reserved for mobsters and drug dealers, to catch Wall Street criminals.
The initiative has netted convictions and guilty pleas of about 80 people charged since August 2009.
U.S. District Court Judge Richard Sullivan, who presided over the money-laundering suit, previously approved that settlement, which included a $284 million payment from SAC Capital, in addition to what Cohen agreed to pay the SEC.
Bharara called SAC “a veritable magnet for market cheaters” in announcing the indictment in July, and said the U.S. had determined the insider-trading scheme dated back to 1999, spanned more than a decade and involved at least 20 public companies.
“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Bharara said at the time. “It is, instead, the predictable product of substantial and pervasive institutional failure.”
To date, former SAC employees Noah Freeman, Donald Longueuil, Wesley Wang, Richard Choo-Beng Lee, Jon Horvath and Richard Lee have all pleaded guilty to insider trading as part of the Justice Department’s investigation of the hedge fund, which drew federal scrutiny in part due to its reputation for very high rates of return on client investments.
Since he started his firm in 1992, Cohen has achieved average annual returns of 30 percent, one of the best records in the industry’s history. He had just one money-losing year: 2008, when his main fund tumbled 19 percent.
“The defendants were once a group of very respected hedge funds earning up to 25 percent returns,” the judge said today. “We now know how some of that was achieved.”
In December, Michael Steinberg, SAC’s longest-serving portfolio manager to be accused of wrongdoing, was convicted of conspiracy and securities fraud after a five-week trial.
This year, Mathew Martoma, a former SAC fund manager, was found guilty of using secret information about the clinical trial of an Alzheimer’s drug to trade in shares of Elan Corp. and Wyeth. Prosecutors called Martoma’s insider-trading scheme, which netted SAC Capital $275 million, the biggest single insider trading event in U.S. history.
Steinberg and Martoma, who have yet to be sentenced, face as long as 20 years in prison.
Two others SAC employees, Jonathan Hollander and Ron Dennis, were sued by the SEC for insider trading. Both settled with the regulator, paid fines and didn’t admit or deny wrongdoing.
SAC and three of its units sought to plead guilty last year to four counts of securities fraud and one count of wire fraud.
Swain delayed approval until today, saying she wanted to review sentencing documents. She questioned prosecutors today as to why they said insider trading was pervasive at SAC, suggesting that eight convictions was only a “handful” of people.
Assistant U.S. Attorney Antonia Apps said the eight convictions of SAC employees was the largest number of insider traders at one institution the prosecutor’s office has seen.
Peter A. Nussbaum, general counsel for SAC and now Point72, apologized to the court for the actions of the funds.
“We accept responsibility for the misconduct of our employees that has brought us before your honor,” Nussbaum said. “We have paid and are paying a significant penalty for this misconduct. This includes not only the heavy penalty that this court may impose and the other sanctions that have been imposed on us, but also the stain on the reputations of the honest and hardworking people at our firm.”
Martin Klotz, an SAC lawyer, wrote in a March 27 letter urging Swain to approve the settlement that the proposed fine was above the highest range, of $411 million to $823 million, called for under federal sentencing guidelines.
In a copy of an internal SAC memo today from President Thomas Conheeney obtained by Bloomberg News, the hedge fund’s employees were told that the firm has “taken responsibility, appropriately, for the employees whose misconduct led to these charges. We will do whatever we can to make sure this doesn’t happen again.”
In a bid to distance itself from the conviction, SAC, which Cohen started with $25 million, abandoned its founder’s initials this week by changing the name to Point72, a reference to the address of its headquarters at 72 Cummings Point Road in Stamford, Connecticut.
The firm said that it had returned almost all investor money as of the end of January, leaving it primarily to manage Cohen’s private wealth. It also said it had shrunk its headcount to 850 people from 1,000.
As part of the transition, Cohen’s firm said it has stepped up its compliance procedures, including the hiring of Palantir Technologies Inc., a Central Intelligence Agency-backed software maker, to boost surveillance. It also created a new position, chief surveillance officer, and hired a former Assistant U.S. Attorney in Manhattan, Vincent Tortorella, for the role.
SAC Capital said in February that its chief compliance officer, Steve Kessler, would be stepping down after nine years at the firm. Prosecutors said last July that his group had identified only one example of suspected insider trading in its history.
The hedge fund also hired a compliance officer for health care to review investment ideas and chaperon telephone calls between employees and doctor consultants. Such communications were the focus of the government’s case against Martoma.
The firm also overhauled its business group, doing away with its Sigma and CR Intrinsic units, where many of its former employees embroiled in the insider-trading probe worked.
Cohen’s firm managed about $11.9 billion in assets as of Feb. 1, according to regulatory filings. Executives at SAC, which had $15 billion at the start of 2013, had expected the firm to start this year with about $9 billion once capital was given back to investors.
The SAC Capital case is the second time the government has prosecuted a hedge fund for insider trading.
In 2012, Tiger Asia Management LLC, the New York-based hedge fund founded by Bill Hwang, pleaded guilty and agreed to pay $16.3 million to resolve insider-trading charges and $44 million to settle SEC claims.
Federal prosecutors in New Jersey claimed Tiger Asia used inside information it got through private placement offerings to sell short shares in two Chinese banks.
Even with its new name and new mission, SAC Capital’s conviction isn’t the end of the U.S. investigation of the renamed hedge fund, or Cohen, the ultimate target of the multiyear probe, a person familiar with the matter has said.
Bharara’s office continues to investigate trading by SAC employees in Gymboree Corp., a children’s-apparel maker, said the person, who requested anonymity because the probe is continuing.
“Yes, this is a big achievement for them, but on the other side of it, the reality is, the real fish that they wanted, the person that they thought was the shark, swam off,” said Thomas O. Gorman, a corporate defense lawyer and former SEC enforcement official. “This is certainly one of the most significant pleas that the U.S. attorney’s office has gotten in this whole string of insider trading cases.”
While “the unbroken string of cases, the careful craftsmanship that went into these cases, really sends out a deterrent message” to would-be insider-traders, Gorman said, “that they couldn’t get where they clearly wanted to go really does undercut that message.”
Not everyone will view SAC Capital’s fate as a warning, said Anthony Sabino, a law professor at St. John’s University in New York.
“This is not, I repeat not, the end of insider trading,” Sabino said in an interview. “Others will follow. There will always be somebody who will say ‘I am smarter than Martoma. I am smarter than SAC.’ They will take their chances.”
The criminal case is U.S. v. SAC Capital Advisors LP, 13-cr-00541; 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).