Federal grand jury indictment alleges that SAC maintained elite group that has traded on insider information since 1999
A federal grand jury has indicted SAC Capital, the embattled hedge fund that has been pursued by financial authorities for years, for insider trading after regulators failed to charge its powerful founder, Steven A Cohen.
The US attorney who brought the charges, Preet Bharara, also hit the firm with civil money-laundering charges that would require the firm to forfeit potentially billions of dollars in assets.
A 41-page indictment alleges that SAC, founded in 1992, maintained an elite group that has traded on insider information since 1999.
SAC is also alleged to have hired portfolio managers specifically for their insider contact in the industries in which they traded, and failed to raise red flags when insider information was suggested as the basis for a trade.
The indictment marks the culmination of a six-year investigation by Bharara. The government pursued an investigation against Cohen but apparently dropped its attempt to bring charges last month.
“SAC became, over time, a veritable magnet for market cheaters,” Bharara said at a news conference in Manhattan. “That’s why the institution, and not individuals, stand accused of insider trading.” He said that the charges were “a predictable product of pervasive institutional failure”, and added: “A company reaps what it sows. SAC seeded itself with corrupt traders.”
Cohen was not mentioned by name in the indictment but referred to obliquely as “the SAC owner” and an “individual residing in Greenwich, Connecticut.”
“The SAC owner failed to question candidates who implied that their ‘edge’ was based on sources of inside information,” the indictment says. Later, it notes: “The SAC 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 government’s case centers on SAC’s culture. It alleges that employees at SAC “engaged in a pattern of obtaining inside information from dozens of publicly-traded companies across multiple industry sectors. Employees …traded on inside information themselves and, at times, recommended trades to the SAC owner based on inside information.”
Under US securities laws, fund managers may only trade on company information that has been publicly disclosed.
The indictment mentions several other SAC employees as well as employees of affiliate investment firms. One portfolio manager for Cohen-controlled Sigma Capital, Wes Wang, is cited in connection with insider trading in eight technology stocks including Taiwan Semiconductor, Cisco, and eBay. In 2012, Wang pleaded guilty to two counts of conspiracy to commit securities fraud.
Other alleged insider trading by SAC Capital mentioned in the indictment includes some of the biggest North American companies, such as Intel, Advanced Micro Devices, BlackBerry maker RIM, and Yahoo.
SAC denied the allegations. It said in a statement: “SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously. 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. SAC will continue to operate as we work through these matters.”
The chief target of the US attorney’s legal strategy, according to experts, is to foil Cohen himself by attacking his deputies and the trading culture of the firm he created. Cohen controls 60% of the money in SAC Capital and has a net worth of roughly $9bn, according to Bloomberg.
The indictment holds that SAC’s trading culture was heavily centralized, with dozens of portfolio managers answering directly to Cohen without knowledge of what their peers in the firm were doing.
Cohen, until his legal troubles, was a towering figure on Wall Street, a billionaire unknown to much of the public but famous in the finance community for his enviable investment profits and casual style. While maintaining an intense work regimen – working at over seven computer screens in his office – he was habitually seen around the firm’s Connecticut trading floor in a blue fleece vest that became almost iconic.
He was known for quirks such as his disdain of ringing phones, which created a silent trading floor, and maintaining the firm’s temperature at a breezy 69F so traders would not be too comfortable.
For investors, he held a notable mystique: SAC was so sought-after by clients that they paid the firm a fee of 3% of the money under management and allowed the firm to take up to 50% of their investment profits, according to the indictment.
SAC seemed to have a green thumb for stocks, watching them gain up to 10% in value in a single day after buying shares, and up to 15% in a month, according to a Wall Street Journal analysis in March.
The swirl of legal issues around insider trading have already temporarily claimed the careers of two of Cohen’s top lieutenants, Michael Steinberg and Mathew Martoma, both of whom were arrested at their homes and subsequently indicted. The government’s case against Martoma accuses him of making a profit of $276m by trading on nonpublic information related to healthcare companies Wyeth and Elan.
Martoma has maintained his innocence. His trial is set for November.
The indictment is the latest in a series of investigations of SAC by regulators such as the Securities and Exchange Commission as well as federal prosecutors.
Most recently, last week the SEC filed civil administrative charges against Cohen, arguing that he “failed reasonably to supervise” Steinberg and Martoma.
In response to the SEC’s charges, Cohen’s lawyers argued, in 46-page white paper to staff, that he was too busy to read his email, and estimated he opened only 11% of his messages. As a result, they held, he could not have acted on insider tips contained in those emails.
Previously, SAC and its affiliates paid a $617.5m fine to settle SEC charges on insider trading, even though a judge grew irritated that the firm would be able to pay money to absolve itself of charges without admitting or denying wrongdoing.