U.S. Alleges Firm Was ‘Magnet for Market Cheaters’; Hedge Fund Denies Wrongdoing:
U.S. prosecutors accused SAC Capital Advisors LP, one of the country’s largest hedge-fund firms, of acting as a criminal enterprise where executives including founder Steven A. Cohen encouraged insider trading on a “scale without known precedent.”
The government charged that SAC, which has about $14 billion under management, repeatedly took inside information related to public companies and turned it into trading profits. Prosecutors said the firm encouraged the use of illegal tips and hired traders even after they “implied” their performance was based on the use of inside information.
U.S. Attorney Preet Bharara, at a news conference Thursday, called the company a “magnet for market cheaters.”
An SAC spokesman said Thursday the firm “never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously.”
The Wall Street Journal previously reported that the government was planning criminal charges against SAC, but the scope of the action and the language used by prosecutors caught many lawyers and financial executives by surprise. The government’s bold move comes after prosecutors determined they didn’t have sufficient evidence to personally charge Mr. Cohen, according to people familiar with the matter.
Mr. Cohen has denied wrongdoing for years and has the financial resources to marshal a vigorous defense of his namesake firm.
In a civil action filed alongside the criminal charges, the government said it is seeking to recover “any and all” of the firm’s assets, potentially a huge blow to the wealth Mr. Cohen and his employees have acquired over more than two decades of outsize investment returns. The government estimates those assets at $10 billion, according to people familiar with the matter.
Mr. Bharara said the U.S. isn’t freezing any assets but declined to comment on the amount sought through forfeiture. Depending on how the case evolves, the government could reduce the amount it seeks in forfeiture, one of the people familiar with the government’s estimate said.
The large amount contrasts with the hundreds of millions of dollars SAC is alleged to have made, or avoided losing, through insider trading. In seeking forfeiture of such size—unusual in an insider-trading case—the government is using the theory that SAC allegedly engaged in money laundering, tainting the firm’s assets as a whole, according to people familiar with prosecutors’ thinking.
SAC, which has largely stayed silent throughout the government investigation, pushed back against the allegations. In addition to saying the firm doesn’t tolerate insider trading, the SAC spokesman added that the government’s forfeiture attempt won’t immediately affect the firm’s operations: “SAC will continue to operate as we work through these matters.”
The government, while not charging Mr. Cohen, aimed directly at his reputation, saying he, as “the SAC owner,” failed to query analysts and portfolio managers about questionable information and recruited employees he believed could pry nonpublic information out of companies.
The move caps one of the longest-running investigations of a financial firm in Wall Street history, with government officials first having suspicions about trading at SAC more than a decade ago. The case pits an ambitious prosecutor, Mr. Bharara, against Mr. Cohen, known as one of the savviest investors on Wall Street, in a high-profile legal chess match that has captivated the financial world.
The charges, and an accompanying news conference by federal investigators, painted a picture of a firm allegedly constructed and managed as a high-powered insider-trading machine, with staffers paid huge sums to gain an illegal “edge” and a compliance staff that helped hide the allegedly manipulative activity.
George Venizelos, assistant director in charge of the New York office of the Federal Bureau of Investigation, said, “To be blunt, SAC—through the actions and inactions of its management—not only tolerated cheating, it encouraged it.”
The criminal charges by the U.S. attorney’s office in Manhattan come in an era of unprecedented insider-trading prosecutions, and they are the most aggressive move against a major Wall Street firm since investment bank Drexel Burnham Lambert Inc. in 1988 pleaded guilty to six felony counts and paid a $650 million fine.
No major financial firm has survived a criminal indictment.
Prosecutors accused SAC Capital and its business units of a total of four counts of securities fraud and one count of wire fraud. Thursday’s actions follow a separate civil proceeding filed last week in which the Securities and Exchange Commission is seeking to ban Mr. Cohen from managing client money for the rest of his life. An SAC spokesman said Mr. Cohen “acted appropriately at all times” and will fight those charges.
Mr. Cohen built SAC over the past two decades into a powerhouse, revered among investors for its returns and valued as a lucrative trading partner at many major securities firms.
The alleged illegal activity, which prosecutors say took place between 1999 and at least 2010, provided hundreds of millions of dollars for SAC in profits or avoidance of losses, according to the government.
Prosecutors named eight portfolio managers and analysts who worked at SAC and who, it said, received inside information and either traded with it themselves or shared it with others at the hedge fund for trading. Most of those were names that were previously disclosed as part of other civil and criminal actions.
One figure named was former SAC portfolio manager Richard Lee, whom the government on Thursday charged with conspiracy to commit securities fraud. Mr. Lee is cooperating with prosecutors and the FBI, according to a cooperation agreement dated Monday. He pleaded guilty in a closed hearing in Manhattan federal court Tuesday, according to the indictment against SAC. The government says Mr. Lee was hired even though Mr. Cohen “received a warning” from a previous employer of Mr. Lee’s that he was part of an “insider trading group.”
That previous employer, identified by prosecutors as Hedge Fund A, is Chicago-based Citadel LLC, according to people familiar with the matter. A spokeswoman for Citadel said the firm fired Mr. Lee in 2008 for violating policies not related to insider trading. She said Citadel doesn’t have an “insider trading group.” Citadel hasn’t been accused of wrongdoing.
“Richard Lee has accepted responsibility for his prior conduct” and “looks forward to moving past this episode in this life,” said his lawyer, Richard Owens of Latham & Watkins LLP.
Previously, in defending itself against allegations, SAC has said it has a strong compliance department and warned employees it wouldn’t tolerate illegal behavior. The government’s civil complaint characterized the compliance effort as lax.
Prosecutors noted that, while six former SAC employees have been convicted or pleaded guilty to insider-trading-related charges, “SAC’s compliance department contemporaneously identified only a single instance of suspected insider trading by its employees in its history.”
SAC’s compliance department rarely reviewed emails or computer instant messages for “suspicious terms” that might suggest insider trading before late 2009, when the firm beefed up its compliance, according to prosecutors.
According to the civil complaint, in the one case where inside trading was discovered within SAC, the two individuals involved were fined but not fired, and the firm didn’t report the matter to regulators or law-enforcement officials.
SAC’s consistent and enduring success allows it to charge some of the highest fees in the business: Most clients pay SAC an automatic fee annually amounting to 3% of the capital they invest with the firm, plus as much as 50% of whatever profit SAC generates, according to people familiar with the firm.
The firm’s trading prowess also helped Mr. Cohen amass what is considered one of the best private art collections in the world and a number of multimillion-dollar homes.
Amid the continuing government probe, clients have requested to withdraw billions from the firm, according to people with knowledge of SAC’s assets.
The charges come four months after SAC agreed to a record $616 million civil settlement of insider-trading charges with the SEC, without admitting or denying wrongdoing.