July 25, 2013

Major hedge fund SAC Capital charged with fraud

The federal indictment accuses the firm of unprecedented amounts of insider trading.

The Associated Press

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U.S. Attorney for the Southern District of New York Preet Bharara speaks during a news conference Thursday in New York. SAC Capital, the hedge fund operated by embattled billionaire Steven A. Cohen, was hit with white-collar criminal charges Thursday that accused the fund of making hundreds of millions of dollars illegally, and a related government lawsuit said insider trading was pervasive and unprecedented at the firm.

The Associated Press

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In this Dec. 10, 2009, photo released by Peppe Communications, billionaire hedge fund manager Steven Cohen and his wife, Alexandra, attend a benefit in New York.

2009 file photo/The Associated Press

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It said Cohen fostered "a culture that focused on not discussing inside information too openly, rather than not seeking or trading on such information in the first place."

SAC's "relentless pursuit of an information 'edge' fostered a business culture within SAC in which there was no meaningful commitment to ensure that such 'edge' came from legitimate research and not inside information," the criminal charges said.

The government also faulted the company's compliance department, saying its investigations were weak, with a focus on "confirming" that any employee's email implying access to inside information was merely poorly drafted.

The government said the department had identified only a single instance of suspected insider trading by its employees in its history even though former employees had pleaded guilty to insider trading.

Venizelos, head of the FBI's New York office, called the company's compliance department "the embodiment of the phrase, 'See no evil. Hear no evil. Speak no evil.'"

Barry Boss, a criminal defense lawyer in Washington, said the government's frequent references to Cohen in court papers were a way for prosecutors to cast aspersions of guilt without providing due process.

"Given a choice between being besmirched in the indictment and being named in the indictment, I think somebody would take besmirched every day," he said.

SAC Capital has been at the center of one of the biggest insider-trading fraud cases in history. Four employees have already been criminally charged with insider trading, and two of them have pleaded guilty. And an SAC affiliate has agreed to pay $615 million to settle SEC charges.

Cohen, who lives in Greenwich, Conn., is one of the highest profile figures in American finance and one of the richest men in America. He is among the handful of upper-tier hedge fund managers on Wall Street who pull in about $1 billion a year in compensation.

An SAC portfolio manager, Mathew Martoma, has pleaded not guilty to insider-trading charges accusing him of earning $9 million in bonuses after persuading a medical professor to leak secret data from an Alzheimer's disease trial between 2006 and 2008.

Even in the high-flying hedge fund world, SAC Capital stands out for its mammoth returns. Meanwhile, Cohen became one of the highest-profile figures in U.S. finance and the 40th-richest American, with a net worth of $8.8 billion, according to Forbes. Of the roughly $15 billion in assets that SAC Capital managed as of earlier this year, about half belonged to Cohen and his employees and half was client money.

In the past, the Justice Department has been wary of bringing criminal prosecutions against entire organizations out of fear of the collateral damage — that going further than fining a company could kill a business. The accounting firm Arthur Andersen went under after it was convicted in 2002 of destroying Enron-related documents before the energy giant's collapse — an outcome that cost tens of thousands of jobs.

There are already reports that SAC's clients are pulling their money from the firm. It's not always an easy process: Clients usually have to give notice of at least 30 days. Hedge funds also can write into their contracts that they'll deny withdrawal requests if too many clients want to pull out money at the same time.

Hedge funds typically consist of wealthy individuals and institutional investors attracted to the ability to both bet against and for different markets and stocks, giving themselves a "hedge" to do well in both good economies and bad. Most people never directly invest in a hedge fund, though the directors who manage their mutual fund, pension or college's endowment might.

In the face of mounting legal woes, Cohen has kept up his philanthropic efforts. The Steven and Alexandra Cohen Foundation, named for Cohen and his wife, recently helped sponsor a $10,000-per-table poker tournament in Manhattan that raised money for an education advocacy group.

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Additional Photos

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This May 23, 2013, photo shows SAC Capital Partners headquarters in Stamford, Conn.

2013 file photo/The Associated Press/ The Stamford Advocate, Lindsay Perry

Preet Bharara
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Preet Bharara, U.S. attorney for the Southern District of New York, at a news conference Thursday said SAC trafficked in insider information on a scale without precedent.

The Associated Press


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