Indicted Hedge Fund SAC Capital 'Magnet for Market Cheaters'
The future of SAC Capital hangs in the balance after criminal charges are field.
July 25, 2013 — -- In the biggest indictment of a financial firm since auditor Arthur Andersen was charged in 2002, criminal allegations were brought against SAC Capital Advisors LP, which U.S. Attorney Preet Bharara called a "magnet for market cheaters."
SAC is accused of "systemic insider trading" that resulted in "hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public" over an 11-year period, according to a sealed 41-page indictment filed by the U.S. Attorney's Office for the Southern District of New York.
In a statement provided by a spokesman for SAC, based in Stamford, Conn., the company said, "SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously. The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years. We will continue to operate as we work through these matters."
After a nearly decade-long investigation, federal prosecutors in New York hosted a press conference this afternoon about the large and powerful hedge fund run by billionaire Steven A. Cohen, 57. Bharara, who did not rule out further indictments, said there have been eight SAC employees found guilty or charged with insider trading.
Cohen is a minority owner of the New York Mets and worth $9.3 billion, the 40th richest person in the country, according to Forbes. A father of seven, Cohen was called a "hedge-fund titan" by Vanity Fair last month.
While Cohen is not named as a defendant in this indictment, the government is going after his money. As the complaint notes, the "largest portfolio in existence at SAC Hedge Fund was, at all relevant times, a portfolio managed by the SAC owner himself." Bharara is seeking to force the company to forfeit profits "traceable" to the indictment charges, but he told reporters the indictment does not seek to seize SAC's assets.
The entity itself, rather than individuals, is charged with one count of wire fraud and four counts of securities fraud, a move that could crush the firm and cost its roughly 1,000 employees their jobs.
"Today's indictment, though, is not just a narrative of names and numbers," Bharara said in his prepared remarks. "It is, more broadly, an account of a firm with zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct. And so, S.A.C. became, over time, a veritable magnet for market cheaters. The S.A.C. Companies operated a compliance system that appeared to talk the talk, but almost never walked the walk."
The hedge fund was founded in 1992 and had over $15 billion of assets under management at its peak, the U.S. Attorney's Office said in the complaint.
A former SAC trader told ABC News that Cohen would encourage employees to get information from analysts and he would instruct traders to do so by saying, "Don't you have friends? This isn't about spreadsheets, it's about relationships," and "I want you going out every night."
FBI Assistant Director George Venizelos said, "SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it. Our aim all along has been to root out the wrongdoers, and send a message to anyone else inclined to break the law. If your information 'edge' is inside information, you can't trade on it."
Civil charges were brought against Cohen on Friday by the Securities and Exchange Commission for allegedly failing to prevent insider trading. A spokesman for the firm had said Cohen would "vigorously" fight the SEC's charges and those allegations have "no merit."
The indictment against SAC states that between about 1999 and at least through 2010, employees and agents of the firm "obtained material, non-public information" or "inside information" relating to publicly-traded companies and traded on that information to increase its return on investment and increase fees received by the company.
Employees of various rank, including portfolio managers and research analysts, "engaged in a pattern of obtaining inside information from dozens of publicly-traded companies across multiple industry sectors," accordng to the indictment. It details how the firm allgedly sought to hire employees who had an "edge" based in part on networks of contacts with employees in particular companies.
"The mere indictment of SAC would threaten its continued existence," said attorney Stan Twardy at law firm Day Pitney LLP.
The indictment of SAC is the first significant federal criminal prosecution in the financial sector since the government charged accounting company Arthur Andersen in March 2002. The auditor was indicted for obstruction of justice related to energy and commodities firm Enron. Though the U.S. Supreme Court ultimately reversed the company's conviction, the damage to Arthur Andersen's brand was so severe that the company broke up into other businesses.