Feds Charge Hedge Fund

SAC Capital Advisors faces criminal and civil charges.
3:00 | 07/25/13

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Transcript for Feds Charge Hedge Fund
This is a special report from the EC. Hello everyone I'm time and is in New York with his ABC news digital special report insider trading as with the federal government says the most successful Wall Street firms did. On a scale never before seen SAC capital -- hedge fund run by billionaire Stephen Cohen. Was slapped with a 41 page indictment but it stopped short of criminally charging Stephen Cohen himself right now US attorney pre -- -- speaking about the. Chart its second. We have filed civil money laundering charges against numerous SAC funds seeking appropriate forfeiture of assets to address. SAC's liability. And third. We unsealed today the guilty plea as of yet another portfolio manager at SAC. Richard Lee who just this past Tuesday. Pled guilty to committing insider trading offenses while an employee. At SEC. Mr. Lee brings to eight. The number of employees so far convicted of -- charged with insider trading for the benefit. Of SAC. What today's indictment against a Stacey makes clear. Is this when so many people. From a single hedge fund have engaged in insider trading. It is not a coincidence. It is instead. The predictable product. A substantial. And pervasive. Institutional failure. As alleged fast AC traffic -- inside information. On a scale without any known precedent in the history of hedge funds. As described in the indictment the scope of illegal trading was deep and it was wide. It spanned more than a decade in time. Involve the securities of at least twenty public companies. Extended across multiple sectors of the economy. And benefited SEC to the tune of at least hundreds of millions of dollars. Today's indictment though is not just a narrative of names and numbers. It is more broadly an account of a firm. We have zero tolerance for low returns -- seemingly tremendous tolerance. For questionable conduct. And so as Stacey became overtime. Veritable magnet for market cheaters. The SEC companies operated a compliance system that appeared to talk the talk but almost never. Walk the walk. And that is why today the institution itself. Rather than just individuals. Stands charged with a wire and securities -- -- before -- review some of the charges in detail let me introduce our partners in this investigation and prosecution I'm joined. By our partner in this and so many. Other cases the FBI led by George -- is -- the assistant director in charge of the FBI office here in New York. And April Brooks the special agent in charge of the FBI's criminal division. I want to thank -- April and they're dedicated team at -- I special agent James Hinkle. Matthew Callahan BJ can David medical Matthew Thorsten and -- Rhonda Byrne. Further incredibly hard work and assistance not just on this particular case criminal cases that let us to this point. Shy especially -- -- knowledge about the career prosecutors from my own office. They are and -- apps -- Dylan brown. And John -- GAO -- handling the prosecution and their chiefs mark Berger and -- and -- Also Micah Smith for his work on the -- aspects of the case as well SaaS of corporate chief. Sharon -- Levin. And I also want to acknowledge. The exceptionally hard work and supervision done by the -- of the television -- -- In a deputy US attorney Richard Zabel. Now let me take -- to talk about the particulars of today's charges. And guilty plea. First the guilty plea we announced today is by one -- SEC's portfolio managers. Richard Lee. Who until very recently. Co managed a one point 25 billion dollar portfolio focused on special situations. Like mergers and acquisitions. While still a portfolio manager at SAC. -- obtained inside information with respect to various securities including Yahoo! and 3COM corporation. As set forth in the larger indictment the particular story -- Richard -- -- Stacy. Is emblematic of the broader culture problem at the fun. -- alleged the SEC companies hired Richard -- despite. Despite a reputation for insider trading. Indeed he was hired over objections from SEC's a legal department. Despite specific. Warnings. During the application process that Lee had improperly been part of an insider trading group at his prior employer. And -- predictably. From virtually the inception of his employment and SEC in 2009. Richard -- Began to trade on inside information. Conduct as I mentioned that he pled guilty to two days ago. And he is continuing to cooperate with the government's investigation. Second. As I mentioned this morning we filed a civil forfeiture action in federal court. The forfeiture complaint alleges that the SEC companies engaged in money laundering by commingling -- illegal profits from insider trading. We have other assets using the profits the profits to promote additional insider trading. And transferring the profits. Our action today. Does not seek to freeze any of SEC's assets. And we are always in this case and other cases mindful to minimize risks to third party investors. In other -- we have not. Today restrained any money and we will discuss with the company. A reasonable -- going forward to protect. All parties' legitimate interest. And finally as I mentioned the indictment unsealed today charges of four -- management companies -- insider trading if you look at the very simple start. To -- right. -- -- before management company for -- capital management LLC efficacy capital advisors LLC as its capital -- healthy. And -- intrinsic investors LLC. So so why -- the SEC. Entities being charged. In addition to individuals sometimes the organizations. That employ them are criminally culpable. And merit prosecution to. The SEC companies are being held accountable for the criminal acts of so many of their employees because the misconduct was pervasive. Because those employees were acting for the direct financial benefit of the firm and because the company did not effectively police its own precincts. As alleged in the indictment the SEC companies went out of their way to find employees -- personal networks of company insiders. But did not correspondingly consider. Whether the employees were using such contacts to obtain inside information despite. Red flags. But it just one example Jon Horvath was an analyst in the tech sector for one of the -- -- today SEC's hiring report on Horvath. Touted Horvath generated investment ideas by quote minding his industry contact network for data points to close -- Last September mr. -- pled guilty to mining illegal inside information. From that very network. More generally the failures of SEC to police itself. Are legion as alleged in the indictment. Red flags and warning signs repeatedly ignored. Until late 2009. The compliance department rarely reviewed electronic communications by SEC employees containing suspicious terms. And failed to detect the insider trading by -- Any of the eight SEC employees. Charged today. And as alleged in its entire history. SEC. Identified possible insider trading by any of its employees. Just once. And on that occasion as -- -- not only failed to report the matter to law enforcement or regulators. But those individuals were not even terminated from employment in fact so far as we can tell. Stacy never reported suspicious trading to any regulator for criminal authority. -- Now our company. Reaps what it -- And as alleged. SAC seated itself with corrupt traders. Empowered to engage in criminal act by a culture that looked the other way despite red flags all round. SAC deliberately encouraged the no holds barred pursuit of an edge. That literally has carried it over the edge into corporate criminality. Companies. Like individuals. Need to be held to account and need to be deterred from becoming dens of corruption. Answer to all those who run companies and value their enterprises. But pay only pay attention only. To the money in their employees make. And not how they make it today's indictment hopefully. Get your attention. Now it is my honor to call to the podium to head the FBI here in New York towards and his -- Thank you for. That was used attorney -- -- laying out the charges against SAC capital and might not like to bring in ABC's Rebecca Jarvis to tell us more about the charges Rebecca how serious are these charges and allegations this is very significant and if you take a step back and look at the significance of it first of -- it's significant because. It's the biggest a federal criminal prosecution. Since Arthur Ray Anderson back in march of 2002. But what's more significant here is that SAC capital is one of the biggest most powerful hedge funds in the entire world at their peak they controlled fifteen billion dollars. In assets and this is a hedge fund that does business with everybody on Wall Street. Wall Street at from the people that I've spoken to there isn't a single person sitting on the trading desk anywhere on Wall Street who doesn't have a counterpart at SEC capital that there are accustomed to doing business with. Some of the things that stood out from that press conference we just heard about first a ball that it is a systemic. Issue that this is something that's been going on at SEC capital at least that's what's alleged here in the indictment that this has been going on -- SEC capital. Now for eleven years between 1999. And 2010. There was insider trading -- -- far fraud that's what this indictment is alleging. That's pretty significant and they also mentioned in twenty at least twenty public companies so companies that UN meet anybody out on the street could a -- As -- capital was getting a leg up according to these allegations. -- in -- according to this indictment was getting a leg up on those companies in getting inside information. Now the FCC decided. To charge the entire company so what does that mean for individuals within the company. So this is that the criminal prosecution. Here is it. Alleging that the company SAC capital. Had -- systemic problem. What will happen to the people inside of that company while outside of one individual that they mentioned in the press conference who has come forward admitted to this. -- admitted to insider trading there are no specific individuals at this point in time that are tied. To this criminal prosecution. But for the people inside of the company. This could be. A loss of jobs in fact this is the kind of thing that could shut down SAC capital because there's a lot of people on Wall Street as this criminal investigation continues. They're going to have to about -- whether or not they wanna continue to do business with -- AC. And if enough of them decide not to that could end up putting SEC capital under. One thing that the US attorney mention is that they're not looking to freeze any money here is that in essence to protect clients because. Right wondering what happens to their money now exactly that's exactly what it is clients -- everybody would say. Wait a minute what about us if you're freezing the assets those assets are really our money. SEC capital happens to be making money with our money and there's a lot of counter party as -- say counterparty risk. In a situation like this and since Wall Street like I mentioned since Wall Street is very much entangled. Within as AC capital Wall Street money is inside of that house as AC capital. There would be a lot of problems if they -- to freeze assets but I should mention on Steve Collins that had MS AC capital who has made literally hundreds of millions of dollars over the course of his career there is some speculation. That eventually. That money may be at risk. As the -- federal investigators continue their investigation now we understand he's not facing criminal charges at this point but what anonymous charges he is facing civil charges the SEC brought civil charges against Stephen Collins last week. -- -- It's fairly hard to prove insider trading so does the fact that went forward with this indictment an indication that they do you have. The evidence a lot of most legal analysts would say this is this looks like it is likely they have some smoking guns. That they believe will actually work and that will. Ultimately bring SAC capital injustice here. It looks like. This has been that you a very long process and they -- a obviously a lot of -- to go through how long -- SEC capital an investigation. This is -- many many years in the making as I mentioned from 1999. This indictment is alleging that from 1999. Q2 101011. Years in more or at least twenty different. Public companies there was insider trading I've been speaking to a number of individuals traders who worked at as -- -- formerly who have said. They understand when. The -- -- the criminal prosecution is suggesting that this was eight culture. Of insider trading they understand what they're talking about because they say they remember Steve Cohen. B had MSAs seek capital saying get that edge and get that edge and have now what what get that edge meant. It meant getting information. And getting inside information over the rest of the world what would that look like well. Talking to analysts before they put -- analyst reports to try to figure out if they were gonna say good things are bad things about a -- so they could determine. How SEC capital would trade -- it head. Of the analyst coming out with the information. Cozying up to come -- corporate executives in determining. Howell company. Was doing before the rest of us got the information that's exactly what insider trading -- And people who used to trade at SEC capitals say there was a clear message in their mind from Steven -- that date could get the edge by cozying up I think one of the quotes. I don't wanna -- quoting here but one of my people that I've spoken to was a trader SAC said. That Steve Cohen used to say -- to traders it's not about spreadsheets it's about relationships. And what they -- took that to mean. Was go out there and get the inside information don't. Don't sit around and looking your excel spreadsheet and determine how to trade in a company based off of the map that you're seeing in front -- -- instead. Get the juicy bits of information from outside of BS EC capital. Building get it from that company get it from the analysts and use that as your point of -- Rebecca finally talked about the influence of SEC capital so what kind of ripple effects this news bring on Wall Street. Well like I mentioned that they are a very substantial. Trader in the markets and there are a lot of people a lot of companies they're on the other sides of those trades. So there are some companies. From people that I've been talking to in the industry who are almost entirely dependent on SEC capital that the air. -- -- well being is contingent on as they seek capital going forward if that's AC capital where to go out of business first of all there's a thousand people there. Who would lose their jobs. But then these other companies the agency brokers and then the rest of Wall Street would most likely see some ripple effect at least in the near term. There could be other companies going out of business there could also be reductions. On Wall Street we've already seen. A number of reductions in headcount and there could be more reductions in headcount as a result of -- All right Rebecca Jarvis thank you so much for joining us. And helping us understand some of what we just on if you're just say it's time OK -- -- -- the rest that news conference at the US attorney the FBI and other agencies in get. That live streaming on abcnews.com as well as complete recap on time Hernandez in new York and -- -- an ABC news. Digital special report. This has been a special group. Report from ABC.

This transcript has been automatically generated and may not be 100% accurate.

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