Tim Mullaney,USA TODAY
The giant hedge fund SAC Capital capitulated to federal prosecutors in a plea deal announced Monday, agreeing to plead guilty to every count of an insider-trading indictment issued in July, pay $1.8 billion in fines, and close its investment advisory business.
The deal was disclosed in a letter from Prett Bharara, U.S. Attorney for the Southern District of New York, to two judges overseeing the case. The agreement will let SAC principal Steven A. Cohen continue to manage his personal fortune, estimated at $8 billion.
Prosecutors alleged that SAC leaders created a culture that enabled widespread insider trading by its employees, in stocks such as pharmaceutical maker Elan and a slew of technology companies including chipmakers Intel and Advanced Micro Devices, as well as consumer companies like Yahoo and BlackBerry. The government said top SAC leaders ignored signs that their employees were suggesting trades based on illegal tips.
``The government believes the proposed global resolution is fair, reasonable and firmly promotes the interests of justice, deterrence and respect for the law,'' Bharara and three other Justice Department attorneys wrote in the letter. ``The aggregate $1.8 billion financial penalty is -- to the Government's knowledge -- the largest financial penalty in history for insider trading offenses.''
A federal grand jury indicted SAC and three affiliates in July, charging them with wire fraud and securities fraud. The 41-page indictment and prosecutors depicted a corporate structure and culture in which Cohen sat at the center of a web of portfolio managers and research analysts, systematically collecting and trading on information he should have suspected was illegally gathered from employees of publicly traded firms such as Intel, Dell and Yahoo.
Citing numerous examples of "institutional indifference" to the alleged unlawful conduct, the indictment charged that the trading scheme "was substantial, pervasive and on a scale without known precedent in the hedge fund industry."
Along with the criminal charges of wire fraud and securities fraud, federal prosecutors filed a civil forfeiture complaint seeking to recover illegal gains from insider-trading offenses. The complaint also seeks to impose money-laundering penalties against the hedge fund and its affiliates for allegedly commingling insider-trading profits with other cash in the funds.
According to the indictment, portfolio managers and research analysts "engaged in a pattern of obtaining inside information from dozens of publicly traded companies across multiple industry sectors." The company allegedly:
• Sought to hire portfolio managers and analysts "with proven access to public company contacts likely to possess inside information."
• Gave portfolio managers financial incentives to give Cohen recommendations about "high conviction" trading ideas in which they had an "edge" on other investors. But the managers weren't "questioned when making trading recommendations that appeared to be based on inside information," the indictment charged.
• Failed to use effective compliance procedures or practices to prevent portfolio managers and analysts from engaging in insider trading. SAC managers on several occasions failed to refer suspicious trading recommendations to the company's compliance department for investigation, the indictment charged.
The portfolio managers and research analysts "were required to share their best investment ideas with the SAC owner" - Cohen - "while indications that those ideas were based on inside information were often ignored" by the funds' management, the indictment also alleged.
SAC Capital and CR Intrinsic, another Cohen affiliate, earlier this year agreed to pay the SEC a record $616 million in penalties to resolve civil insider-trading charges against the firms. The $1.8 billion in penalties announced Monday includes credit for the earlier amount.
Additionally, the SEC on July 19 filed civil administrative charges against Cohen himself, alleging that he "failed reasonably to supervise" two senior portfolio managers who themselves have been been hit with insider-trading charges and are awaiting trial.