After an almost decade-long investigation, the U.S. government Thursday charged SAC Capital, the $14 billion hedge fund founded by Steven A. Cohen, with orchestrating a massive insider-trading ring that produced hundreds of millions of dollars in ill-gotten gains.
In the 41-page indictment, which you can read here, the feds say SAC Capital "enabled and promoted" insider trading, and showed an "institutional indifference" to corruption that "resulted in insider trading that was substantial, pervasive, and on a scale without known precedent in the hedge fund industry." SAC Capital was charged with four counts of securities fraud and one count of wire fraud.
The case is just the latest in a six-year crackdown on insider trading that has seen the Justice Department convict the likes of billionaire Raj Rajaratnam. But SAC Capital might be the government's biggest catch yet.
"SAC Capital and its management fostered a culture of permissiveness," said FBI Assistant Director George Venizelos in a press statement. "SAC not only tolerated cheating, it encouraged it."
As Kevin Roose at New York put it:
The news in the indictment is basically that the firm's laissez-faire attitude toward inside information extended to all areas of operation — that SAC's entire strategy revolved around identifying people who were likely to be able to get inside information, hiring them, and pressing them to get as much information as they could. This wasn't a few traders acting on illegal information — it was a group of traders that had been given jobs on the basis that they could get illegal information to act on. [New York]
And here's Binyamin Appelbaum of The New York Times:
If the government is right, is SAC the most profitable criminal enterprise in history?
— Binyamin Appelbaum (@BCAppelbaum) July 25, 2013
Among the highlights of the indictment:
- SAC's hiring strategy favored candidates with "proven access" to corporate insiders. For example, Richard Lee, who ran a "special situations fund" for SAC, was hired "despite a recognized reputation for insider trading."
- Five ex-employees have admitted to insider trading while at the fund, including Lee, who pleaded guilty Tuesday to trading on nonpublic information about Yahoo and 3Com.
- Cohen "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."
- In 2009, a new employee sent Cohen an instant message saying that due to "recent research" he was going to bet against Nokia stock. He also apologized for not being more specific, saying SAC's compliance unit "was giving me Rules 101 yesterday – so I won't be saying much[.] [T]oo scary."
So what now for SAC Capital and its founder?
Investors have already pulled $5 billion of $6 billion in outside funds from SAC's accounts, and now the Justice Department will try to recover the proceeds from the illegal trades — which could be in the hundreds of millions. "But the charges will not necessarily destroy SAC," says The New York Times. "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."
As for Cohen himself, the government did not have enough evidence linking him directly to insider trades to press criminal charges. "But the case is a blow to him all the same," says the Times. "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."
Still, last week, the Securities and Exchange Commission filed charges against Cohen for allegedly averting his gaze. "The civil case against Cohen alleges that he failed to supervise two of his employees who have been accused of insider trading," says TIME. The SEC wants to bar Cohen from overseeing investor funds, "which could amount to a Wall Street death sentence for the hedge fund manager."