After a six-year crackdown on Wall Street's penchant for insider trading, federal prosecutors have filed criminal charges against SAC Capital Advisors, the powerful hedge fund run by YOLO-ing billionaire Steve Cohen. The indictment (below) includes one count of wire fraud and four counts of securities fraud for insider trading violations carried out from 1999 through at least 2010.
In a civil suit filed alongside the criminal charges, prosecutors are seeking forfeiture of “all property” involved in laundering the proceeds of insider trading offenses from SAC Capital. The hedge fund oversaw roughly $14 billion in assets earlier this year and the Wall Street Journal says forfeited property could be worth billions, so enjoy your Hamptons house while you have it.
The federal grand jury indictment was unsealed by office of U.S. Attorney Preet Bharara, who has made catching Cohen his own personal Moby Dick, spurred by the suspicion that something must be amiss in SAC’s consistently astonishing returns, which “outpaced his peers.”
As described below, this Indictment charges the corporate entities responsible for the management of a major hedge fund with criminal responsibility for insider trading offenses committed by numerous employees and 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.
Last week, the SEC filed charges against Cohen for “failure to supervise” employees accused of insider trading—in an attempt to bar the billionaire from overseeing investors funds. (Martin Klotz, Cohen’s Seinfeld superfan of a lawyer, issued a 46-page white paper in his defense, claiming that Cohen didn’t see the message alerting him to ill-gotten intel because his seven-screen set-up made it impossible to read before the trade was made and, besides, he only reads 11 percent of his email anyway.)
The criminal complaint stops short of personally accusing Cohen of any wrongdoing, but it’s still packed to the gills with gory details about how SAC’s 30 percent returns got made.
Here are some of the highlights:
- Richard Lee, the portfolio manager responsible for SAC’s $1.25 billion “special situations fund,” who pled guilty on Tuesday, was hired “despite a recognized reputation for insider trading” and being fired from his previous job at “Hedge Fund A”
- Reuters reports that “Hedge Fund A” with its own rival “insider trading group” is Citadel Investment Group, a massive firm Chicago firm that managed $13.3 billion at the end of last year.
- Emails from SAC's recruiting team show that the firm’s primary hiring criterion was “is good at insider trading,” quips Dealbreaker:
For example, a brief write-up of a SAC PM candidate specializing in the industrial sector forwarded to the SAC Owner on or about November 16, 2008, described the candidate as "the guy who knows the quarters cold, has a share house in the Hamptons with the CFO of [a Fortune 100 industrial sector company], tight with management."
- SAC also happened to foster a culture that “focused on” being secretive about inside information, “rather than not seeking or trading on such information in the first place,” says the complaint:
For example, on or about July 29, 2009, a recently hired SAC PM (the "New PM") sent an instant message to the SAC Owner and relayed that, due to some "recent research," the New PM planned to short Nokia when he started work 10 days later. The New PM apologized for being "cryptic" but noted that the head of SAC compliance "was giving me Rules 101 yesterday - so I won't be saying much [.] [T]oo scary." The SAC Owner did not react or respond in the instant message to the New PM's proposal to trade securities based on information that the New PM was "scar[ed]" to tell the SAC Owner for fear of violating compliance rules.
For example, on or about October 30, 2007, Horvath's trading recommendation emailed to the SAC Owner concerning Sun stated [m]y edge is contacts at the company and their distribution channel." Steinberg, who was copied on the e-mail, forwarded it to the SIGMA CAPITAL Chief Operating Officer (the COO") with the comment: "I suspect the line about contacts at the company may wake up some of our legal eagles."
- All these alleged illegal trades were helped along by SAC’s see-no-evil compliance department. Against management recommendations dating as far back as 2005, the department “rarely reviewed” electronic communication for suspicious terms. It also let “expert networks [that] presented a risk of insider trading” slide:
For example, the SAC compliance department failed to detect or prevent Martoma from using an expert network for approximately 42 consultations with a doctor involved in the Drug Trial, even though some of the expert networking firm's scheduling e-mails with Martoma- sent through the SAC e-mail system - expressly stated that (1) the doctor in question had confidential information about the Drug Trial; and (2) the purpose of the consultation was to ask the doctor about the experimental medicine being tested in the Drug Trial. The doctor in question in fact provided Martoma with Inside Information about the Drug Trial during many of these consultations.
- According to the indictment, SAC was much, much better organized when it came to making sure it getting the best trading ideas from its employees, including “semi-regular Sunday evening calls,” “a template filled out on SAC's computer system and designated voicemail and e-mail boxes to collect trading ideas,” and “research traders” to spy on its own employees.
Steve Cohen made employees call in on Sunday evening. Convict him on that.— Stephen Gandel (@stephengandel) July 25, 2013
Wall Street banks like Goldman Sachs were already debating whether to stop doing business with SAC before the charges hit, so we can’t wait to see what defense Cohen’s lawyer will come up with this time.
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[Image via Getty]