SAC Capital Advisors Investigation |

SAC Capital Advisors Investigation

Federal prosecutors are continuing to look for ways to build a criminal case against billionaire trader Steven A. Cohen as they announced criminal charges against his hedge fund on Thursday. Follow updates on this developing story here live.

  • Steven A. Cohen, founder of SAC Capital Advisors, a roughly $15 billion hedge fund, is under a federal indictment by the U.S. Department of Justice (“DOJ”) in one of Wall Street's longest insider trading investigations. The investigation has led to several convictions: prosecutors built their case with help from former employees who pleaded guilty to criminal insider trading charges.

    The charges against the firm (“SAC”) could imperil the future of the company, which has posted some of its industry's best returns and established Cohen as one of his generation's best traders. The indictment accused SAC and various affiliates of four criminal counts of securities fraud and one count of wire fraud. It accused SAC of "systematic insider trading" that enabled the fund to generate hundreds of millions of dollars of illegal profits and avoided losses.

    Read our most recent article on this investigation:
  • Reuters Matt Goldstein and Emily Flitter reported yesterday:

    "Federal prosecutors are continuing to look for ways to build a criminal case against billionaire trader Steven A. Cohen at the same time as they prepare to announce criminal charges against his hedge fund on Thursday, people familiar with the investigation said.

    Charges of securities fraud and wire fraud expected to be filed against the company, according to a source familiar with the investigation."
  • BREAKING: SAC Capital Advisors indicted by grand jury
  • From the indictment: on at least one occasion, SAC hired a candidate "despite a recognized reputation for insider trading". (This refers to Richard Lee, who was rumored to be part of an "insider trading group" at another fund).

    All the documents in the various SAC cases -- including past cases -- from DealBook.

    From Reuters' first take on the indictment:

    "The indictment accused SAC and various affiliates of four counts of securities fraud and one count of wire fraud. Cohen was charged last week in a civil case by the U.S. Securities and Exchange Commission and the hedge fund said it would fight the charges.

    It said that from roughly 1999 to 2010, SAC obtained inside information on publicly traded companies, and traded on that information to boost returns and fees."
    by Ryan McCarthy edited by Margarita Noriega (Reuters) 7/25/2013 2:22:12 PM
  • Reuters Lauren Tara LaCapra notes that the word "edge" -- meaning a trader's informational advantage over the competition -- is used 14 times in the indictment. That includes two mentions of "black edge" and "my edge" and one "better edge" mention.
  • READER COMMENT: I am not surprised. I just wonder why it has taken 7 years to do so. And this is not an isolated incident. There are many more like them on Wall Street.
    by ToshiBo edited by Margarita Noriega (Reuters) 7/25/2013 3:06:34 PM
  • The SAC emails and IMs: Illegal inside information?

    Dealbreaker's Matt Levine jokes about the euphemisms SAC traders appeared to use on email to describe their informational advantage in certain trades, an advantage that the U.S. Department of Justice's indictment argues is illegal inside information.

    Here is a brief list of some of the emails and instant messages that have formed the basis of the DOJ's indictment:

    - One job candidate was described as a "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."

    - One SAC employee, describing a pharmaceutical company, wrote an email that said "I am very comfortable with that this qtr is going to be solid vs current consensus and guidance. I am getting coffee Tues afternoon with the guy who runs north American generics business."

    - "My edge is contacts at the company and their distribution channel," one ex-SAC trader wrote. The trader said he had info "2nd hand read from someone at the company...who had been very good in the last two quarters."

    - Ex-SAC trader Matthew Martoma, who faces insider trading charges, claimed to have a "better edge" about a drug approval process for one major pharmaceutical company.

    - Other traders claimed Martoma had a "black edge," or inside information, on drug trial results.

    - In 2009, an SAC trader alerting management to "recent research" that backed the trader's shorting of Nokia. From indictment: "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."

    - Regarding Dell, another trader wrote "I have 2nd hand read from someone at the company - this is 3rd quarter I have gotten this read from them and it has been very good in the last two quarters...Please keep it to yourselves as obviously not well known."

    - Another ex-SAC trader, Richard Lee, who on Thursday was charged with conspiracy to commit securities fraud, wrote that "between you and me...a friend of my cousin...who works in Dell finance" was "telling me to avoid the stock for Q2, because Q2 is gonna be horrible." Lee also referred to other contacts as "my guy," "my contact" or "my check" at various companies.
  • If anyone keeps SAC Capital Advisors founder Steven Cohen up at night, it’s Preet Bharara, the U.S. Attorney for the Southern District of New York. The prosecutor has made a name for himself going after insider trading, and he’s got Cohen’s firm in his cross-hairs.

  • The full statement of the FBIs George Venizelos, the assistant director in charge of the New York field office: 

    "This is a case about corporate conduct and corporate responsibility. The indictment says it best: Illegal conduct by employees, and institutional indifference, resulted in  insider trading that was substantial, pervasive, and on a scale without known precedent.'

    SAC Capital and its management fostered a culture of permissiveness. To be blunt, SAC – through the actions and inactions of its management – not only tolerated cheating, it encouraged it. Management at SAC Capital, including the firm’s owner, actively recruited portfolio managers and research analysts with access to inside information.

    Once hired, these employees were rewarded financially for passing on inside information to the SAC owner. Repeatedly they described their information “edge” as “contacts at the company” or “my guy at” such-and-such company. 

    Compliance at SAC, to the extent that it existed, was woefully inadequate. That is to say, it was woefully inadequate to the task of monitoring and preventing the acquisition and use of
    inside information.

    The compliance department did enable SAC Capital to say it had a compliance department.
    And the compliance department was effective in explaining away potentially troublesome employee e-mails that seemed to describe access to inside information.

    The e-mails were typically documented as being simply the result of careless writing by a portfolio manager or analyst. Essentially, the compliance people were saying, “This e-mail isn’t evidence of inside information; it’s just badly written.

    Despite a history of insider trading at SAC Capital – including the conduct that resulted in the six guilty pleas outlined in the indictment – SAC’s compliance department uncovered just one single case of employee insider trading in its entire history. 

    The SAC compliance department was like the embodiment of the phrase, “See no evil. Hear no evil. Speak no evil.” The charges against the corporate entity are serious crimes. The indictment recounts the history of systemic, institutional insider trading at SAC Capital over a period of more than a decade. 

    The government brings charges based on the evidence. We didn’t draw a target on SAC Capital, or anyone who worked there. Today’s charges grew out of years of work by our two offices.

    These investigations have already led to dozens of people being charged with insider trading. Information developed in one case often forms the predication for the next one.
    We will continue to work with the U.S. Attorney and the Securities and Exchange Commission.

    'Our aim all along has been to root out the wrongdoers, and send a message to anyone else inclined to break the law. If your information ‘edge’ is inside information, you can’t trade on it.'"

  • Preet Bharara: SAC Capital became "a veritable magnet for market cheaters."
  • "He's not even the first Richard Lee that has plead guilty" -- Bharara
  • Bharara: "Companies, like individuals need to be held to account and prevented from being dens of corruption"
  • Never ever? RT @SDNYnews “As far as we can tell, SAC never reported suspicious trading to any regulators or criminal authority, ever.”
  • The court hearing in U.S. criminal case against SAC Capital Advisors has been scheduled for Friday, July 26, 2013 at 10:00 AM EDT, according to a court officer, noting that the proceedings will be held before U.S. District Judge Laura Taylor Swain. (Reuters Wire)
  • Bharara says that this isn't the first hedge fund criminally indicted by the DOJ. There was a small fund in NJ that was indicted last year, he said.
  • Despite repeated questions from reporters about the size of the illegal profits allegedly gained by SAC traders, Bharara wouldn't speculate. Instead, he pointed to the "hundreds of millions" of ill-gotten gains referenced in the indictment.
  • Is SAC the big fish? "People like to talk about fish and the size of fish...Sometimes small fish, they're delicious also." Bharara
  • How rare are criminal charges against companies?

    Bringing criminal charges against an entire company is exceedingly rare, and convictions rarer still. (A rough count puts the figure at just 14 companies to have plead guilty, no contest, or been convicted of felonies).

    The 2002 case against accounting firm Arthur Andersen has come to be seen as validation of the theory that criminal charge against companies unfairly punishes employees, and other stakeholders who have not committed crimes. As a result of the company's conviction, and despite of a 2005 Supreme Court decision overturning it, thousands of jobs were lost.

    The current head of the SEC is well aware of this rationale. As a federal prosecutor, Mary Jo White declined to pursue criminal charges against Prudential in 1994. The company's attorney lauded her rationale: "We persuaded them there was an unacceptably high risk that charging Prudential Securities would lead to significant losses for the innocent shareholders... What she avoided was inappropriate collateral damage." Recently, Pfizer, Standard Chartered, BP and HSBC have each avoided criminal prosecution through multi-billion dollar settlements.

    For background on charging corporations criminally see Santa Clara County v S. Pacific Railroad (1886), which is interpreted to have granted personhood status under 14th amendment. -- Ben Walsh
  • SAC’s Rigorous Compliance Program Focused On Coming Up With Euphemisms For Insider Trading « Dealbreaker
  • Antony Currie and Breakingviews columnists discuss how criminal charges against SAC may push the hedge fund under, unfairly punishing the fund's current staff.

  • The fact that SAC will have to defend itself in court, and try to prove that its behaviour was legal, is how justice should work. 

    -- John Gapper in the FT
  • "The government will seek forfeiture of about $10 billion from SAC, according to a person familiar with the matter," reports the WSJ.
  • Lauren Tara LaCapra on Steve Cohen's fraught relationship wit the word "edge", and the semantics at the heart of the government's case:

    Despite Cohen's apparent distaste for the term, "edge" appears to have been used frequently inside SAC by employees who were struggling to outgun the markets and each other. One variation is "black edge," which the Justice Department said meant "Inside Information."

    "(T)he 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 filing said.

  • Statement from SAC Capital:

    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.
    by jennifer.ablan edited by shane.ferro 7/25/2013 6:48:59 PM
  • "There is no insider trading group at Citadel," a spokeswoman says in response to SAC indictment.

    Full story here.
  • Bharara declined to specify an amount: The amount will depend in part on how much in illegal profits SAC made.

    Bharara on SAC: "We are seeking a forfeiture of what will ultimately be deemed to be reasonable, based on all of the evidence."
    by Paritosh Bansal via twitter edited by Margarita Noriega (Reuters) 7/25/2013 7:10:58 PM
  • Just spoke with a psychologist who specializes in workplace trauma, asked what SAC employees may feel now - look for @katyawachtel's blog.
  • Anthony Scaramucci's fund-of-funds, Skybridge Capital, has pulled most of its money out of SAC, reports Fox Business News reporter Charlie Gasparino via Twitter.

    Bloomberg reported earlier this morning that Wall Street banks were also considering suspending business with the firm.

  • Reuters' Peter Rudegeair and Katya Wachtel spent the day at the SAC offices in Stamford and Manhattan, respectively, and rounded up reactions to the indictment.
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