The beleaguered hedge fund owned by billionaire Steven A. Cohen agreed to pay $1.2 billion to settle charges that it tolerated rampant insider trading for more than a decade, a deal that could sink one of Wall Street’s big success stories and crush its owner’s vaunted reputation.
SAC Capital Advisors agreed to plead guilty to each of the five counts in a criminal indictment unveiled in July by U.S. Attorney Preet Bharara in Manhattan. The Connecticut-based firm would stop managing the money of outside investors if the deal is approved by the courts. It can continue to manage Cohen’s sizeable fortune, but would have to do so under the eye of an independent compliance consultant.
The plea agreement, announced Monday, marks the culmination of a multi-year effort to close in on a storied hedge fund that has racked up stellar profits since Cohen founded it in 1992. It also represents one of the most high-profile successes in the government’s aggressive push to purge Wall Street of insider
trading and hold wrongdoers accountable.
Since Bharara took office in August 2009, he has filed insider-trading charges against 87 defendants and convicted 75 of them — including hedge fund billionaire Raj Rajaratnam, who is now behind bars, and his friend Rajat K. Gupta, a former Goldman Sachs board member who was found guilty of divulging boardroom secrets to Rajaratnam.
Under Monday’s deal, SAC agreed to pay $900 million in fines and forfeit an additional $900 million, for a total of $1.8 billion, a record for an insider-
trading case. But the firm will receive a $616 million credit for civil settlements it reached with the Securities and Exchange Commission in March involving alleged insider trading at two SAC affiliates.
“It’s the end of SAC as the markets have come to know it,” said Jacob S. Frenkel, a former federal prosecutor and a former SEC enforcement lawyer. “Today’s plea will kick the pedestal out from under Cohen’s long-enjoyed lofty status on Wall Street.”
In a statement, SAC said that it takes responsibility for the “handful of men” who have pleaded guilty to insider trading while at the firm. Early in the day, SAC’s statement said that it “has never encouraged, promoted or tolerated insider trading.” That language disappeared in the afternoon and the statement instead said: “Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.”
None of the cases that the government has settled with the hedge fund accuse Cohen of criminal wrongdoing. But he remains a target of a separate civil proceeding by the SEC, which recently charged him with failing to supervise two of the firm’s employees in insider-trading incidents. If the SEC wins, Cohen might be banned from the industry for life.
On Monday, Bharara implied that Cohen remains in his office’s crosshairs, too, saying that the plea agreement does not provide criminal protection or immunity for any individuals.
Bharara described the deal as a “fair but steep” resolution.
“No institution should rest easy in the belief that it is too big to jail,” Bharara said when announcing the agreement. “That is a moral hazard that a just society can ill afford.”
The deal is likely to eat into the considerable wealth amassed by Cohen, whose net worth is estimated at $9 billion by Forbes magazine. None of the $1.8 billion will be paid by outside investors, which means that Cohen or his various entities must pony up the cash, according to legal experts tracking the case.
All the funds will go to the U.S. Treasury, Bharara said.
Investors have pulled billions of dollars in recent months from Cohen’s hedge fund, which managed $15 billion in assets at its peak. Nearly all the money left over belongs to Cohen.
When prosecutors announced the criminal charges leveled against SAC in July, Bharara described the hedge fund as a “veritable magnet for market cheaters.”
The indictment portrayed a pressure-cooker culture that encouraged illegal tips in the quest for profits. Bharara said SAC “seeded itself” with corrupt traders and then turned a blind eye to suspicious activity, which is why he went after the company, not just its employees.
In the past few years, eight SAC employees have either been accused or convicted of insider trading that took place from 1999 through 2010. Five have pleaded guilty, and two — Mathew Martoma and Michael Steinberg — are fighting the allegations in court.
Prosecutors say the hedge fund failed to detect any of the employees’ misconduct. It even hired Richard Lee despite warnings that he had been involved in an “insider trading group” at his prior firm, prosecutors said. Only once in its history did SAC identify possible insider trading at its firm, the indictment said. But it did not fire the individuals involved or report the matter to federal authorities.
Prosecutors did not mention Cohen by name in the indictment. But they said that the corrupt employees at times recommended trades to the “SAC owner” based on illegal tips.
Tying Cohen directly to insider trading has proved elusive, in part because none of the current or former employees charged turned on him. Now, all eyes are on Steinberg and Martoma, who face trial in mid-November and January, respectively.
“The people who testified against Rajaratnam were lifetime friends,” said John C. Coffee Jr., a professor at Columbia Law School. “But people facing years in prison can give up on friendships.”