Insider Trading Charges Finally Levied Against SAC


New York, NY – Last week the Department of Justice slapped Stamford CT-based hedge fund, SAC Capital Advisors, with criminal insider trading charges.  According to the indictment, Steve Cohen’s extremely successful hedge fund was charged with four counts of securities fraud and one count of wire fraud.

The Government’s Charges

Last Thursday, U.S. Attorney Preet Bharara brought criminal charges against the SAC and three of its subsidiaries accusing them of engaging in a pattern of insider trading that was “on a scale without known precedent in the hedge fund industry.”  The , U.S. government alleges that the scheme, which involved more than 20 companies and went back as far as 1999, helped reap hundreds of millions of dollars in illicit profits for the hedge fund.

So far, six former portfolio managers or research analysts employed by SAC have already pleaded guilty to insider trading while at the firm, with two more awaiting trial.

“A company reaps what it sows, and as alleged, SAC seeded itself with corrupt traders empowered to engage in criminal acts by a culture that looked the other way, despite red flags all around,” Bharara said.

A spokesman for SAC said that the firm’s employees who have pleaded guilty do not “reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years.”  At the present, no charges have been brought against founder Steve A. Cohen.

Attorneys for SAC Capital entered not guilty pleas to the government’s criminal charges against the hedge fund at the initial hearing in the case Friday morning.  In a related but separate action, the Justice Department is also seeking the forfeiture of “any and all assets” of SAC.

Mountains of Evidence Gathered

According to the attorneys involved with the case, the government has already gathered, and plans to collect mountains of information and potential evidence in the prosecution of this case against SAC.

“The discovery will be voluminous, including a large number of electronic recordings, including electronic messages, instant messages, court-authorized wiretaps and consensual recordings,” Assistant U.S. Attorney Antonia Apps told U.S. District Judge Laura Taylor Swain yesterday about the pretrial evidence-gathering process. “In short, a tremendous volume.”

One of the important issues related to this evidence for the defense is their ability to get access to statements made by the six former SAC employees who have pleaded guilty and are cooperating with the government.  The defense is currently speaking with the prosecution in order to arrange getting this evidence.

Charging a Company versus an Individual

Typically, the government charges individuals with criminal behaviors like insider trading and not companies.  However, in the case of SAC, the DOJ is bringing its insider trading charges against the firm.  This is because, the government contends, that SAC is a “criminal enterprise” whose corporate culture is so corrupt that it is irredeemable.

“SAC’s insider trading was “made possible by institutional practices that encouraged the widespread solicitation and use of illegal inside information. 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.”

Consequently, the government, by bringing this case against SAC, is effectively trying to shut down the firm, even though the DOJ has not been able to collect enough evidence to bring charges against the firm’s founder, Steve Cohen.

However, charging a firm as a “criminal enterprise” could pose some problems for the Justice Department as the government would be putting thousands of innocent employees out of work.  This was certainly the case in 2002 when the government brought charges against Arthur Andersen in the wake of the Enron scandal.  Andersen’s demise caused the loss of 28,000 jobs.  SAC employs close to 1,000 people.

Impact of This Case on Wall Street

However, the impact of this case could be much larger on the financial services industry as a whole.  The reason is that SAC generates a great deal of commission revenue for Wall Street brokers and investment banks.

According to a report by the Wall Street Journal in 2006, SAC alone accounted for 2% of the daily average trading activity in the US.  Bloomberg recently reported that SAC is one of the largest clients for Morgan Stanley and Goldman Sachs, and is a large prime services customer for JP Morgan, Credit Suisse and Barclays.

Not only would the demise of a firm like SAC Capital have a huge impact on Wall Street investment banks, but it would also hurt other firms, including regional, boutique and independent research providers.  SAC has historically been a huge purchaser of third-party research and many IRPs count SAC as one of their largest clients.


While last week’s indictment of SAC for insider trading is just the latest in a series of negative developments for the Stamford, CT based hedge fund, it could easily have the most lasting impact on the fund, with some saying that the case is a “death sentence” for the firm.

As a result, we suspect that a large number of firms, including SAC investors, other hedge funds, Wall Street investment banks, and research providers will be extremely interested in the outcome of this case.  Consequently, we will continue to follow the ongoing developments in this case and all related matters in order to keep you, our readers, up to date on the impact this case might on your business.



About Author

Leave A Reply