U.S. files criminal fraud charges against SAC

Washington Post – by Jia Lynn Yang

Federal prosecutors unveiled criminal charges Thursday against SAC Capital, the famed hedge fund, citing “institutional practices” that encouraged a culture of using inside information to gain illegal profits.

The government charged SAC Capital with wire fraud and four counts of securities fraud. The indictment cites activity that spanned more than a decade from roughly 1999 to 2010, saying employees at the hedge fund engaged in a “pattern” of collecting nonpublic information about dozens of publicly traded companies.  

“Unlawful conduct by individual employees and an institutional indifference to that unlawful conduct resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry,” said the indictment.

The indictment paints a picture of a hedge fund where a constant pressure to gain an “edge” in trading led to the widespread use of inside information, resulting in hundreds of millions of dollars of illegal profits.

“SAC became over time a veritable magnet for market cheaters,” said Preet Bharara, U.S. attorney for the Southern District of New York at a press conference Thursday.

The charges did not target the firm’s founder, Steven A. Cohen, although they do mark a new nadir for the billionaire’s career.

The criminal charges against the firm could mark the end of SAC, which has already seen investors steadily pull out their money after its legal troubles began to bubble up a few years ago. Bharara said the indictment does not seek to freeze any of SAC’s assets.

A spokesman for SAC Capital did not respond immediately to a request for comment Thursday morning.

Prosecutors say traders and analysts were hired in part for their network of contacts at public companies. For instance, one prospective employee who specialized in the industrial sector was described in a November 2008 e-mail as “the guy who knows the quarters cold, has a share house in the Hamptons with the CFO of [a Fortune 100 industrial sector company], tight with management.”

Time and again, the indictment alleges, the company failed to check whether the information being used was obtained legally.

Prosecutors say the firm was warned once about a prospective employee, whose colleague at another hedge fund warned worked in his fund’s “insider trading group.” According to the indictment, the candidate was hired anyway — over the objections of SAC’s legal department.

Cohen, the firm’s founder, is not named in the indictment but references to him are made throughout the 41 pages of charges and evidence, always as the “SAC Owner” who is constantly pressing his employees for tips and a “better edge” on trades.

Cohen, whose initials form the name of his company, is known for running a cutthroat office. He is also known for his lavish spending habits. Earlier this year, he paid $155 million for the Picasso painting “Le Rêve,” the most on record for a U.S. collector. In the same month, he also bought an oceanfront property in East Hampton, N.Y., for $60 million.

In a massive insider-trading investigation that has ensnared several other firms, SAC is the most ambitious target yet. The hedge fund and its billionaire founder are symbols of Wall Street at its most successful — and most excessive.

SAC, based in Stamford, Conn., at its peak managed $15 billion in assets. It charged its clients more than the industry standard and performed especially well when markets were down.

Federal prosecutors have already targeted at least eight traders and analysts at SAC Capital for insider trading, apart from the charges filed this week.

Bharara announced Thursday that a portfolio manager, Richard Lee, pled guilty on Tuesday to insider trading charges. Lee, according to the indictment against him, received nonpublic information about Yahoo‘s earnings and then executed trades based on the data.

A research analyst, Jon Horvath, pleaded guilty in federal court in September 2012 to conspiracy and securities and securities fraud for insider trading related to tech companies Dell and NVIDIA.

Horvath admitted that he passed on inside information about the firms to his manager Michael Steinberg, who prosecutors say executed trades based on the tips. In March, a grand jury indicted Steinberg for insider-trading.

Earlier this month, the Securities and Exchange Commission accused Cohen of failing to supervise two of the SAC portfolio managers accused of insider trading. But the agency did not charge him with fraud or insider trading.

In that civil case, the SEC is seeking to demonstrate that Cohen received suspicious information that should have tipped him off to wrongdoing at his firm.


One thought on “U.S. files criminal fraud charges against SAC

  1. You can be sure of one thing, SAC Capital has zero connection to JP Morgan or Goldman Sachs….they just ain’t one of the good-ole-boys. So prosecute them to the hilt.

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