A federal grand jury today indicted SAC Capital Advisors, the hedge fund named after and managed by billionaire trader Steven A. Cohen, with one count of wire fraud and four counts of securities fraud in New York federal district court. Richard Lee, a former SAC portfolio manager, also pleaded guilty to insider trading on Tuesday.
The indictment against SAC and funds affiliated with it described the insider trading scheme as "substantial, pervasive, and on a scale without known precedent in the hedge fund industry." Cohen is not named in the indictment and is instead referred to as "SAC Owner." The indictment alleges that SAC's insider trading scheme ran from 1999 through 2010 and involved the use of material, nonpublic information on publicly traded companies in order to goose investment returns.
The indictment says that SAC was set up for portfolio managers to recommend "high conviction" investment ideas based on an "edge" to Cohen that overwhelmed the firm's "limited" compliance systems and procedures. The indictment alleges that SAC earned "hundreds of millions of dollars in illegal profits."
The indictment also outlines how SAC allegedly sought out portfolio managers who had a wealth of contacts in a particular industry or sector "without a corresponding effort to ensure" that these managers "did not use these contacts to obtain illegal inside information." An SAC employee said in an email to Cohen about a prospective hire for a portfolio manager that the potential hire was a "guy who knows the quarters cold, has a share house in the Hamptons with the CFO of [a Fortune 100 industrial company, tight with management," according to the indictment.
The grand jury also said that when portfolio managers were hired by the firm, the firm would check out the strength of their network within a sector but did no corresponding check for "ethics, integrity, compliance" or whether the new hire had used nonpublic information for insider trading.
The indictment alleges that SAC hired Richard Lee, who plead guilty to securities fraud on Tuesday, despite Cohen having known that he was part of an "insider trading group" at another hedge fund.
The investigation into Cohen and his firm has been ongoing for years and has already resulted in a $616 million settlement in March and an administrative charge against Cohen last week for "for failing to supervise two senior employees and prevent them from insider trading under his watch." The criminal indictment against the firm largely reprises the allegations in the SEC's adminsitrative charge, specifically that Cohen signed off on trades in Dell and two pharmaceutical companies based on information that he should have known was likely to be nonpublic.
The indictment also details alleged weakness in SAC's internal compliance procedures, saying that "SAC's compliance department contemporaneously identified only a single instance of suspected insider trading by its employees in its history," and in that one case, only imposed fines on the employees involved and let them keep their jobs without alerting legal authorities.
According to the SEC's order filed in administrative court, SAC profited or avoided losses of nearly $277 million in 2008 on trades on Dell based on an early look at the company's earnings and two pharmaceutical stocks based on advance knowledge that a trial for a particular drug showed it was ineffective. The basis for the trades, the complaint alleges, was illegally obtained inside information. Cohen's lawyers responded with a 46-page white paper last week distributed to SAC employees outlining their defense against the SEC's allegations. If the SEC is successful in its administrative case, Cohen could be banned from managing investors' money.
Cohen is widely viewed as one of the most successful traders in recent history. Until outside investors began to pull money from his firm in response to the SEC and FBI's investigation, SAC managed about $16 billion, around $9 billion of which was Cohen's own money. Cohen has taken home around $1 billion in compensation from investment gains and fees charged to investors in several years.
Correction: An earlier version of this story misidentified Richard Lee. The person who plead guilty to insider trading in 2009 was Richard Choo Beng Lee. 7/25/13