Hedge Funds | Legal/Regulatory 217 Comments
SAC Capital Is Indicted
By BEN PROTESS and PETER LATTMAN
Federal authorities announced a raft of criminal charges on Thursday against SAC Capital, the hedge fund run by the billionaire Steven A. Cohen, an unusually aggressive move that could cripple one of Wall Street’s most successful stock trading firms.
In the 41-page indictment that includes four counts of securities fraud and one count of wire fraud, prosecutors charged SAC and its units with permitting a “systematic” insider trading scheme to unfold between 1999 and 2010, activity that generated hundreds of millions of dollars in profits for the firm. The case seeks to attribute criminal acts of several employees to the company itself, claiming that the fund “enabled and promoted” the illicit behavior.
“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Preet Bharara, the top federal prosecutor in Manhattan, said at a press conference on Thursday. “It is instead the predictable product of pervasive institutional failure.”
In a statement, an SAC spokesman argued that “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.”
The problems at SAC, according to the indictment, partly stemmed from a breakdown in internal controls — and ethics. The indictment cited “an institutional indifference” to wrongdoing that “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
The case, announced by Mr. Bharara and the F.B.I. in Manhattan, is the culmination of an investigation that spanned a decade. As the federal government mounted a relentless crackdown against insider trading, an investigation that reached into corporate board rooms and trading floors across Wall Street, it zeroed in on SAC, which became one of the most prominent players in the stock market.
SAC aggressively bought and sold stocks around market-moving events like quarterly earnings announcements and big mergers and acquisitions. Its success – at the height of his powers in 2006 and 2007 Mr. Cohen is reported to have earned about $900 million each year – afforded the firm a certain mystique. But it also generated whispers about whether the fund routinely crossed the line, prompting the government to target employees who pumped sources for insights that might give them an investment edge.
Steve Marcus/ReutersSteven Cohen, the chief of SAC Capital Advisors.
The pursuit of this “edge” is at the heart of the government’s case. SAC, according to the indictment, sought to hire traders with “proven access” to corporate insiders likely to hold inside secrets. Those employees were often rewarded if they outperformed other investors, the government said, a problem that SAC’s lax controls failed to thwart.
“If your information edge is inside information, you can’t trade on it,” said George Venizelos, assistant director in charge of the F.B.I. in New York.
In one instance cited in the complaint, Mr. Cohen was warned that a prospective employee, Richard Lee, was a known member of an “insider trading group,” at another hedge fund. But Mr. Cohen, overruling objections from his own legal department, hired Mr. Lee anyway.
Five onetime SAC employees have now admitted to insider trading while at the fund, including Mr. Lee, who was not publicly known until his name surfaced on Thursday in the SAC indictment.
The indictment said that Mr. Lee, who worked at SAC from April 2009 to June 2011 and again from September 2012 to March 2013, possessed inside information about Yahoo and 3Com Corporation. In his guilty plea, Mr. Lee acknowledged that he traded on some of the inside tidbits.
Without evidence directly linking Mr. Cohen to illicit trades, the government stopped short of criminally charging him. But the case is a blow to him all the same. Not only does the firm name bear his initials, but Mr. Cohen owns 100 percent of the company he founded with his own money more than two decades ago.
The indictment is also stacked with references to Mr. Cohen, though he is identified only as “the SAC owner.”
In a direct rebuke of Mr. Cohen, a 57-year-old collector of art and real estate, the indictment said he “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.”
To buttress the argument, the government cited instant messages that a recently hired SAC employee sent Mr. Cohen in July 2009. The employee informed Mr. Cohen that, due to “recent research,” he planned to bet against Nokia’s shares. The employee apologized for being “cryptic,” explaining that SAC’s compliance chief “was giving me Rules 101 yesterday – so I won’t be saying much,” adding that the warning was “scary.”
Mr. Cohen did not respond to the message.
In 2008, an SAC employee forwarded an e-mail to Mr. Cohen in which a job candidate is praised for his access to the industrial industry. The message described him as “the guy who knows the quarters cold, has a share house in the Hamptons” with a senior executive at a big industrial company and is “tight with management.”
While Mr. Cohen was not charged criminally, he still faces civil charges. The indictment on Thursday comes on the heels of a civil action filed by the Securities and Exchange Commission last week that accused Mr. Cohen of failing to supervise employees suspected of insider trading.
Thursday’s indictment against SAC, which seeks to recover the firm’s proceeds from illicit trades, represents a new phase in the investigation. Criminal charges against large companies are rare, given the collateral consequences for the economy and innocent employees. After the Justice Department indicted Enron’s accounting firm, Arthur Andersen, in 2002, the firm collapsed and 28,000 jobs were lost.
In the SAC case, the indictment could spook the fund’s investors. Already, amid several guilty pleas by former SAC employees and a series of civil actions brought by federal securities regulators, the fund’s investors have pulled about $5 billion of $6 billion in outside money from the firm. Those that have withdrawn money include big financial industry players like the Blackstone Group and Citigroup.
That exodus could accelerate in the wake of the indictment. SAC also must assuage concerns from Goldman Sachs and other large banks that trade with SAC and finance its operations. There is little precedent for what a criminal charge would mean for SAC and its banking relationships, but legal experts said that an indictment could trigger default provisions in the fund’s agreements with its trading partners, meaning that it would force brokerage firms to stop doing business with the fund.
But the charges did not spell immediate disaster for the firm. The SAC spokesman said that the firm “will continue to operate as we work through these matters.”
Until now, Mr. Cohen has been largely shielded from the crippling effects of mass investor withdrawals. Of the $15 billion that SAC managed at the beginning of the year, about $8 billion is Mr. Cohen’s.
One option for Mr. Cohen would be to shut down SAC and open up a so-called “family office” that manages his own personal fortune. But Securities and Exchange Commission, as part of a civil action filed against Mr. Cohen last week that accuses him of failing to supervise his employees, could seek to have him barred from the financial services industry for life, an outcome that would prohibit him from trading stocks.
Mr. Cohen could also deploy his deep Wall Street Rolodex to sustain the fund. He sits on the vaunted board of the Robin Hood Foundation, a nonprofit fighting poverty, with David M. Solomon, the co-head of investment banking at Goldman Sachs. He also serves as a trustee of Brown University, alongside Brian T. Moynihan, the chief executive of Bank of America. (One of Mr. Cohen’s seven children graduated from Brown.)
SAC, which is based in Stamford, Conn., with about 1,000 employees spread across the world, has scrambled to assure its staff that it did nothing wrong. On Monday, the fund’s lawyers circulated a document to staff that outlined their defense to the S.E.C.’s case, a measure that could curb an employee exodus. And on Wednesday, it issued a memo saying that “The firm will operate normally and we have every expectation that will be the case going forward.”
SAC could also stem concerns if it strikes a defiant tone in combating the criminal charge. The government will face off against an army of lawyers from two of the world’s most sophisticated law firms: Willkie Farr & Gallagher and Paul, Weiss, Rifkind, Wharton & Garrison. Martin Klotz at Willkie and Daniel J. Kramer at Paul Weiss have spearheaded the SAC representation.
For the criminal case, the fund has also enlisted Mark F. Pomerantz and Theodore V. Wells Jr. of Paul Weiss. Mr. Pomerantz has been involved in a number of insider trading cases, including the defense of Samuel D. Waksal, former chief executive of ImClone Systems, and Joseph Contorinis, a former portfolio manager at the Jefferies Group. Anthony Chiasson, a former SAC employee convicted last year, recently hired him to handle his appeal.
Mr. Wells is considered one of the country’s pre-eminent trial lawyers, and he and Mr. Pomerantz work closely together on many of their cases. Among Mr. Wells’s assignments have been political corruption cases, including representing Robert G. Torricelli, a former United States senator; I. Lewis Libby Jr., a former adviser to Vice President Dick Cheney; and Eliot Spitzer, the former New York governor.
A spokesman for SAC did not immediately respond to a request for comment.
The government’s effort to root out insider trading on Wall Street has swept up more than 80 people; of those, 73 have either been convicted or pleaded guilty.
The crackdown echoes the scandals of the late 1980s, when one of the most powerful financial firms of that generation, Drexel Burnham Lambert, was forced to shut down, and its star banker, the junk bond salesman Michael R. Milken, served prison time for securities fraud. Another prominent financier, Ivan F. Boesky, went to jail for trading on secret information gleaned from a Drexel banker.
The Wall Street stars of that era were suspender-wearing, cigar-smoking investment bankers who were exposed trading on secret information about takeovers during a wave of corporate mergers.
Today, hedge fund managers have emerged as among the most powerful forces in finance, charging lucrative fees with the promise of delivering superior returns in up and down markets. Many of these firms, including SAC, are based in and around Greenwich, Conn., the New York suburb where many of them live. Mr. Cohen owns one of the largest homes in that town, a 35,000 square foot mansion that houses one of the world’s fabled private art collections.
Mr. Cohen’s extraordinary fortune and spendthrift ways — Forbes magazine places his net worth at about $10 billion — have been well documented, but less well known is that dozens of his employees have also accumulated spectacular wealth. In good years, SAC top portfolio managers earn tens of millions of dollars annually. Several dozen have left to start their own multi-billion dollar funds.
The indictment, however, shines a light on some traders who made their millions using a “black edge,” or an improper upper hand.
In addition to citing Mr. Lee’s conduct, the indictment focused on two SAC traders: Mathew Martoma and Michael S. Steinberg, both of whom were charged criminally. Each pleaded not guilty to insider-trading-related charges and face separate trials.
Mr. Steinberg’s case stems from trading the computer maker Dell. In a 2008 e-mail, an SAC analyst, Jon Horvath, told Mr. Steinberg that he had a “2nd hand read from someone at” Dell who provided financial information about the company before its earnings announcement. The e-mail from Mr. Horvath, who has since pleaded guilty and is expected to testify against Mr. Steinberg and SAC, was then forwarded to Mr. Cohen. Minutes later, Mr. Cohen started to sell his position in Dell, though his lawyers argue that he never read the e-mail and was merely following another employee’s trading patterns.
The indictment also references a 2007 e-mail Mr. Horvath sent to Mr. Cohen, saying “My edge is contacts at the company and their distribution channel.” The government blamed Mr. Cohen for failing to query whether Mr. Horvath’s contacts were legitimate or not.
Mr. Martoma’s case involves 2008 trading in the stocks of Elan and Wyeth, which at the time were developing an Alzheimer’s drug. Prosecutors accused Mr. Martoma of obtaining from a doctor secret information that the drug’s clinical trials were going poorly.
When the government arrested Mr. Martoma last November, the indictment cited a 20-minute phone call that Mr. Martoma had with Mr. Cohen the day before SAC began dumping its holdings in the drug stocks.
William Alden contributed reporting
In the 41-page indictment that includes four counts of securities fraud and one count of wire fraud, prosecutors charged SAC and its units with permitting a “systematic” insider trading scheme to unfold between 1999 and 2010, activity that generated hundreds of millions of dollars in profits for the firm. The case seeks to attribute criminal acts of several employees to the company itself, claiming that the fund “enabled and promoted” the illicit behavior.
“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Preet Bharara, the top federal prosecutor in Manhattan, said at a press conference on Thursday. “It is instead the predictable product of pervasive institutional failure.”
In a statement, an SAC spokesman argued that “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.”
The problems at SAC, according to the indictment, partly stemmed from a breakdown in internal controls — and ethics. The indictment cited “an institutional indifference” to wrongdoing that “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
Documents: Sealed Indictment of SAC
Graphic
VideoThe case, announced by Mr. Bharara and the F.B.I. in Manhattan, is the culmination of an investigation that spanned a decade. As the federal government mounted a relentless crackdown against insider trading, an investigation that reached into corporate board rooms and trading floors across Wall Street, it zeroed in on SAC, which became one of the most prominent players in the stock market.
SAC aggressively bought and sold stocks around market-moving events like quarterly earnings announcements and big mergers and acquisitions. Its success – at the height of his powers in 2006 and 2007 Mr. Cohen is reported to have earned about $900 million each year – afforded the firm a certain mystique. But it also generated whispers about whether the fund routinely crossed the line, prompting the government to target employees who pumped sources for insights that might give them an investment edge.
Steve Marcus/ReutersSteven Cohen, the chief of SAC Capital Advisors.“If your information edge is inside information, you can’t trade on it,” said George Venizelos, assistant director in charge of the F.B.I. in New York.
In one instance cited in the complaint, Mr. Cohen was warned that a prospective employee, Richard Lee, was a known member of an “insider trading group,” at another hedge fund. But Mr. Cohen, overruling objections from his own legal department, hired Mr. Lee anyway.
Five onetime SAC employees have now admitted to insider trading while at the fund, including Mr. Lee, who was not publicly known until his name surfaced on Thursday in the SAC indictment.
The indictment said that Mr. Lee, who worked at SAC from April 2009 to June 2011 and again from September 2012 to March 2013, possessed inside information about Yahoo and 3Com Corporation. In his guilty plea, Mr. Lee acknowledged that he traded on some of the inside tidbits.
Without evidence directly linking Mr. Cohen to illicit trades, the government stopped short of criminally charging him. But the case is a blow to him all the same. Not only does the firm name bear his initials, but Mr. Cohen owns 100 percent of the company he founded with his own money more than two decades ago.
The indictment is also stacked with references to Mr. Cohen, though he is identified only as “the SAC owner.”
In a direct rebuke of Mr. Cohen, a 57-year-old collector of art and real estate, the indictment said he “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.”
To buttress the argument, the government cited instant messages that a recently hired SAC employee sent Mr. Cohen in July 2009. The employee informed Mr. Cohen that, due to “recent research,” he planned to bet against Nokia’s shares. The employee apologized for being “cryptic,” explaining that SAC’s compliance chief “was giving me Rules 101 yesterday – so I won’t be saying much,” adding that the warning was “scary.”
Mr. Cohen did not respond to the message.
In 2008, an SAC employee forwarded an e-mail to Mr. Cohen in which a job candidate is praised for his access to the industrial industry. The message described him as “the guy who knows the quarters cold, has a share house in the Hamptons” with a senior executive at a big industrial company and is “tight with management.”
While Mr. Cohen was not charged criminally, he still faces civil charges. The indictment on Thursday comes on the heels of a civil action filed by the Securities and Exchange Commission last week that accused Mr. Cohen of failing to supervise employees suspected of insider trading.
Thursday’s indictment against SAC, which seeks to recover the firm’s proceeds from illicit trades, represents a new phase in the investigation. Criminal charges against large companies are rare, given the collateral consequences for the economy and innocent employees. After the Justice Department indicted Enron’s accounting firm, Arthur Andersen, in 2002, the firm collapsed and 28,000 jobs were lost.
In the SAC case, the indictment could spook the fund’s investors. Already, amid several guilty pleas by former SAC employees and a series of civil actions brought by federal securities regulators, the fund’s investors have pulled about $5 billion of $6 billion in outside money from the firm. Those that have withdrawn money include big financial industry players like the Blackstone Group and Citigroup.
That exodus could accelerate in the wake of the indictment. SAC also must assuage concerns from Goldman Sachs and other large banks that trade with SAC and finance its operations. There is little precedent for what a criminal charge would mean for SAC and its banking relationships, but legal experts said that an indictment could trigger default provisions in the fund’s agreements with its trading partners, meaning that it would force brokerage firms to stop doing business with the fund.
But the charges did not spell immediate disaster for the firm. The SAC spokesman said that the firm “will continue to operate as we work through these matters.”
Until now, Mr. Cohen has been largely shielded from the crippling effects of mass investor withdrawals. Of the $15 billion that SAC managed at the beginning of the year, about $8 billion is Mr. Cohen’s.
One option for Mr. Cohen would be to shut down SAC and open up a so-called “family office” that manages his own personal fortune. But Securities and Exchange Commission, as part of a civil action filed against Mr. Cohen last week that accuses him of failing to supervise his employees, could seek to have him barred from the financial services industry for life, an outcome that would prohibit him from trading stocks.
Mr. Cohen could also deploy his deep Wall Street Rolodex to sustain the fund. He sits on the vaunted board of the Robin Hood Foundation, a nonprofit fighting poverty, with David M. Solomon, the co-head of investment banking at Goldman Sachs. He also serves as a trustee of Brown University, alongside Brian T. Moynihan, the chief executive of Bank of America. (One of Mr. Cohen’s seven children graduated from Brown.)
SAC, which is based in Stamford, Conn., with about 1,000 employees spread across the world, has scrambled to assure its staff that it did nothing wrong. On Monday, the fund’s lawyers circulated a document to staff that outlined their defense to the S.E.C.’s case, a measure that could curb an employee exodus. And on Wednesday, it issued a memo saying that “The firm will operate normally and we have every expectation that will be the case going forward.”
SAC could also stem concerns if it strikes a defiant tone in combating the criminal charge. The government will face off against an army of lawyers from two of the world’s most sophisticated law firms: Willkie Farr & Gallagher and Paul, Weiss, Rifkind, Wharton & Garrison. Martin Klotz at Willkie and Daniel J. Kramer at Paul Weiss have spearheaded the SAC representation.
For the criminal case, the fund has also enlisted Mark F. Pomerantz and Theodore V. Wells Jr. of Paul Weiss. Mr. Pomerantz has been involved in a number of insider trading cases, including the defense of Samuel D. Waksal, former chief executive of ImClone Systems, and Joseph Contorinis, a former portfolio manager at the Jefferies Group. Anthony Chiasson, a former SAC employee convicted last year, recently hired him to handle his appeal.
Mr. Wells is considered one of the country’s pre-eminent trial lawyers, and he and Mr. Pomerantz work closely together on many of their cases. Among Mr. Wells’s assignments have been political corruption cases, including representing Robert G. Torricelli, a former United States senator; I. Lewis Libby Jr., a former adviser to Vice President Dick Cheney; and Eliot Spitzer, the former New York governor.
A spokesman for SAC did not immediately respond to a request for comment.
The government’s effort to root out insider trading on Wall Street has swept up more than 80 people; of those, 73 have either been convicted or pleaded guilty.
The crackdown echoes the scandals of the late 1980s, when one of the most powerful financial firms of that generation, Drexel Burnham Lambert, was forced to shut down, and its star banker, the junk bond salesman Michael R. Milken, served prison time for securities fraud. Another prominent financier, Ivan F. Boesky, went to jail for trading on secret information gleaned from a Drexel banker.
The Wall Street stars of that era were suspender-wearing, cigar-smoking investment bankers who were exposed trading on secret information about takeovers during a wave of corporate mergers.
Today, hedge fund managers have emerged as among the most powerful forces in finance, charging lucrative fees with the promise of delivering superior returns in up and down markets. Many of these firms, including SAC, are based in and around Greenwich, Conn., the New York suburb where many of them live. Mr. Cohen owns one of the largest homes in that town, a 35,000 square foot mansion that houses one of the world’s fabled private art collections.
Mr. Cohen’s extraordinary fortune and spendthrift ways — Forbes magazine places his net worth at about $10 billion — have been well documented, but less well known is that dozens of his employees have also accumulated spectacular wealth. In good years, SAC top portfolio managers earn tens of millions of dollars annually. Several dozen have left to start their own multi-billion dollar funds.
The indictment, however, shines a light on some traders who made their millions using a “black edge,” or an improper upper hand.
In addition to citing Mr. Lee’s conduct, the indictment focused on two SAC traders: Mathew Martoma and Michael S. Steinberg, both of whom were charged criminally. Each pleaded not guilty to insider-trading-related charges and face separate trials.
Mr. Steinberg’s case stems from trading the computer maker Dell. In a 2008 e-mail, an SAC analyst, Jon Horvath, told Mr. Steinberg that he had a “2nd hand read from someone at” Dell who provided financial information about the company before its earnings announcement. The e-mail from Mr. Horvath, who has since pleaded guilty and is expected to testify against Mr. Steinberg and SAC, was then forwarded to Mr. Cohen. Minutes later, Mr. Cohen started to sell his position in Dell, though his lawyers argue that he never read the e-mail and was merely following another employee’s trading patterns.
The indictment also references a 2007 e-mail Mr. Horvath sent to Mr. Cohen, saying “My edge is contacts at the company and their distribution channel.” The government blamed Mr. Cohen for failing to query whether Mr. Horvath’s contacts were legitimate or not.
Mr. Martoma’s case involves 2008 trading in the stocks of Elan and Wyeth, which at the time were developing an Alzheimer’s drug. Prosecutors accused Mr. Martoma of obtaining from a doctor secret information that the drug’s clinical trials were going poorly.
When the government arrested Mr. Martoma last November, the indictment cited a 20-minute phone call that Mr. Martoma had with Mr. Cohen the day before SAC began dumping its holdings in the drug stocks.
William Alden contributed reporting
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