Hedge fund SAC Capital indicted, VFIN Next?
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Kevin McCoy, USA TODAY 12:13 p.m. EDT July 25, 2013
(Photo: Jenny Boyle, PR Newswire)
STORY HIGHLIGHTS
Charges could make it difficult for SAC Capital to continue operations
NEW YORK — SAC Capital Advisors, one of Wall Street's largest and most profitable hedge funds, has been indicted on criminal charges for its role in insider trading offenses committed over a decade by many of its employees.
Though SAC Capital billionaire founder and head Steven Cohen was not charged individually, the indictment charged his Connecticut-based hedge fund and three of its affiliates with wire fraud and four counts of securities fraud — allegations that could cripple the nationally known fund.
Richard Lee, an SAC portfolio manager responsible for directing a $1.25 billion "special situations fund," pleaded guilty to insider trading charges Tuesday in the years-long SAC Capital investigation, the Manhattan U.S. Attorney's office said as prosecutors unsealed his plea.
The charges represent the hardest yet in a series of major legal blows for Cohen, who runs the fund and uses it as an investment and trading vehicle for his personal fortune.
The 41-page indictment charged that the insider trading scheme "was substantial, pervasive and on a scale without known precedent in the hedge fund industry."
Documents: Indictment and related documents
The alleged scheme was run through numerous portfolio managers and research analysts "who engaged in a pattern of obtaining inside information from dozens of publicly traded companies across multiple industry sectors," the indictment charged. The company allegedly:
• Sought to hire portfolio managers and analysts "with proven access to public company contacts likely to possess inside information."
• Gave portfolio managers financial incentives to give Cohen recommendations about "high conviction" trading ideas in which they had an "edge" over other investors. But the managers weren't "questioned when making trading recommendations that appeared to be based on inside information," the indictment charged.
• Failed to use effective compliance procedures or practices to prevent portfolio managers and analysts from engaging in insider trading.
The portfolio managers and research analysts "were required to share their best investment ideas with the SAC owner" — Cohen — "while indications that those ideas were based on inside information were often ignored," the indictment charged.
It listed numerous former SAC employees who have recently been accused or convicted on charges of trading on inside information while working for the hedge fund or its affiliates.
"The relentless pursuit of an information 'edge' fostered a business culture within SAC in which there was no meaningful commitment to ensure that such 'edge' came from legitimate research and not inside information," the indictment charged. "The predictable and forseeable result ... was systematic insider trading ... resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public."
Manhattan U.S. Attorney Preet Bharara scheduled a 1 p.m. news conference to discuss the case.
An SAC Capital spokesman did not immediately respond to messages seeking comment on the charges. But the company has said the company and Cohen had done nothing wrong.
The indictment could speed a recent outflow of investors from SAC Capital, though the company earlier this week sent employees a notice that it planned to continue normal operations. Until recent months, the fund held an estimated $15 billion.
Stuart Slotnick, a New York City defense lawyer who's not involved in the case, said "there's a great likelihood they (SAC Capital) will continue to lose investors" as a result of the government action.
"But don't forget, there are billions of dollars of (Cohen's) personal money in the fund," said Slotnick. "And what may result, at least in the short term, is that the business turns into a family fund, a family business that has employees, has a corporate structure and continues."
The widely anticipated criminal charges come after SAC Capital and CR Intrinsic, another Cohen affiliate, earlier this year agreed to pay the Securities and Exchange Commission a record $615 million in penalties to resolve civil insider trading charges against the firms.
Additionally, the SEC on July 19 filed civil administrative charges against Cohen himself, alleging that he "failed reasonably to supervise" two senior portfolio managers who themselves have been been hit with insider trading charges and are awaiting trial.
The civil case fell short of accusing Cohen, a hedge fund giant and one of the nation's richest people, with similar insider trading allegations. But an SEC victory could bar him from handling investor funds, a penalty that could force him to shut down portfolios that until recently investor withdrawals totaled more than $15 billion.
In the civil case, the SEC alleged that Cohen received "highly suspicious" non-public information in 2008 from top financial lieutenants Mathew Martoma and Michael Steinberg, who have pleaded not guilty in their cases. The allegations involved stock trading in pharmaceutical firms Elan and Wyeth, as well as in computer giant Dell.
Instead of heeding his supervisory responsibility to investigate, the SEC charged that Cohen "ignored red flags" and allowed trading on the information to proceed, thereby earning profits and avoiding losses totaling more than $275 million.
Disputing the charges, attorneys for Cohen have said he "had every reason to believe" that one of the portfolio managers relied only on public information and that the hedge fund founder didn't read a crucial email sent by the other manager.
"Steven Cohen did nothing wrong, and any fair review of the evidence will show that the SEC's charges are unfounded," his lawyers said.
The civil case against Cohen is scheduled to begin with an Aug. 26 hearing before SEC Chief Administrative Law Judge Brenda Murray.
John Coffee, a Columbia University law school professor expert in securities law last week said it's relatively rare for the SEC to bring such a case as an administrative proceeding, rather than in federal court.
The move potentially gives the SEC "home court advantage," said Coffee, because the rules of evidence are somewhat less strict than in federal court and could enable the agency to introduce more hearsay evidence.
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