Billionaire Steven A. Cohen's hedge fund, SAC Capital Advisors, has agreed to plead guilty to insider trading charges and pay a record $1.8 billion fine, said federal prosecutors on Monday.
In addition, SAC will close its doors on outside funds, limiting the firm's investment activity to Cohen's own $8 billion nugget, and forcing him to return what is left of the $6 billion in outside investments to clients.
The indictment, which the government released in July, charged SAC with showing 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."
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The agreement follows a decade of investigations into Cohen's hedge fund, which have already resulted in charges against eight former employees, six of whom plead guilty to insider trading, as well as a $616 million fine in March for a related case — a sum that will be included in Monday's penalty, for a total of $1.8 billion.
Not only is it the largest fine on record for insider trading, but it will be the first time in a generation that a Wall Street firm has confessed to criminal behavior, says The New York Times.
And still, not all is said and done for SAC, its traders, or Cohen individually. The court filing says the agreement includes "no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense," says Bloomberg.
The line does not bode well for Cohen, as the FBI studies his trades, and the SEC, which over the summer brought civil action against Mr. Cohen for ignoring his managers' misconduct, "seeks to ban him from the securities industry entirely," says Business Insider.
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But even without additional charges, the SAC's guilty plea will be a "devastating blow" to Cohen, says The New York Times, "as the firm that bears his initials will acknowledge that it was a corrupt organization."
"That essentially means that CEO Steve Cohen's incredible run as one of Wall Street's most sought after money managers is finished," says Business Insider.
The legal trouble will continue for Cohen's employees, as well. Two former managers, Michael Steinberg and Mathew Martoma, have insider trading trials scheduled for November and January respectively. Steinberg allegedly used insider tips from an analyst to trade Dell Inc. and Nvidia Corp., while Martoma allegedly used tips from two doctors involved in a clinical trial of an Alzheimer's drug to trade shares of two drug companies. Of Martoma's case, "The government has called it the biggest criminal insider-trading case against an individual in history," says Bloomberg.
But in spite of the ongoing legal drama, record fines, and damage to Cohen's legacy, SAC may continue to function for some time, says The New York Times.
SAC appears fit for survival. Although the indictment threatened to cripple the fund, the government tried to limit the collateral damage that might have been inflicted on the fund’s investors and trading counterparties. Prosecutors did not freeze SAC’s assets and encouraged brokerage firms to continue to trade with the fund.
And the government’s demand that SAC stop managing client assets is largely symbolic. Nearly all of the fund’s investors have already pulled their money. But SAC was always more insulated than other hedge funds from the damaging effects of withdrawals because of the $15 billion it managed at its peak, only $6 billion was from outside investors. [The New York Times]
Even if SAC continues to function, the case could spell future trouble for the firm's peers. SAC's guilty plea "could inspire other aggressive actions against Wall Street, as the Justice Department’s uneven crackdown on financial fraud has gained momentum in recent months," says the Times.
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