Why the biggest insider trading fine in history might not be the end of the giant hedge fund's woes.
- By Jamila TrindleJamila Trindle is a senior reporter who covers finance, economics and business where they intersect with national security and foreign policy. Her beat spans everything from the economic underpinnings of conflict to sanctions, corruption and terror finance. Before coming to Foreign Policy magazine, Jamila reported for the Wall Street Journal’s Washington bureau, covering financial regulation and economics. She has also worked as a foreign correspondent in China, Indonesia and Turkey as a freelancer for NPR, Marketplace, The Guardian and others. She moved back to the U.S. to cover the post-crisis economy for PBS in 2009.
Hedge fund SAC Capital Advisors LP pled guilty to insider trading and agreed to pay a record-setting fine for the crime on Monday, Nov. 4, concluding part of the closely watched investigation that has gone on for years. But the saga of billionaire owner Steven A. Cohen isn’t over yet.
The firm will have to pay $1.2 billion in addition to the more than $600 million it paid to settle civil charges from the Securities and Exchange Commission in March, if the plea deal is approved by the court. U.S. Attorney Preet Bharara said it was the "largest fine in history for insider trading offenses." The victory for prosecutors is a mighty fall for the firm that built a track record for astronomical returns that, at times, topped 25 percent annually. Mr. Cohen built a reputation as a brilliant investor and collector of expensive art, even as rumors of illicit activity continued to grow.
Prosecutors allege that SAC employees traded on and recommended trades to Mr. Cohen that were based on non-public information about more than 20 different companies, from 1999 through 2010. The firm allegedly recruited employees who knew people inside public companies and then failed to question them about trades that appeared to be based on inside information, according to the indictment. Several former employees have already pled guilty to obtaining inside information through networks of insiders and experts on everything from tech companies to pharmaceutical trials.
The agreement, if approved, would also require the firm to stop managing money for outside investors and submit to five years probation, including review of firm procedures by an outside compliance expert. Most of SAC’s outside investors have already withdrawn their investments.
While the agreement is about charges against the firm, it leaves open the possibility of charges against Cohen or other employees, by specifying that it "provides no immunity from prosecution for any individual."
Cohen has not been charged criminally, but the SEC has a pending civil case against him for allegedly ignoring red flags and rewarding his employees for trading on "suspicious information."
"Greed sometimes is not good," Bharara said, referencing Michael Douglas’s character Gordon Gecko’s famous line from the 1987 movie Wall Street. (He said something similar when Galleon Group’s Raj Rajaratnam was arrested for insider trading four years ago, according to the New York Times.)
Bharara also said no firm should believe it’s "too big to jail," pushing back on the notion that prosecutors have been too hesitant to go after big Wall Street firms after the financial crisis.
Insider trading is a high-profile crime that hits a nerve because it evokes a common suspicion that insiders have advantages, but it’s very different than the complex cases of alleged mismanagement that helped fuel the financial crisis. Legal experts don’t see it leading to a watershed of criminal charges against financial firms.
"SAC was a situation where you had a single type of offense that went to the very heart of how they operated, SAC traded on insider information, that’s what they did," said Peter Henning, a professor at Wayne State University Law School.