This past Monday, federal prosecutors announced that SAC Capital agreed to plead guilty to insider trading violations brought in July, pay a combined fine of $1.8 bln, and close down its business managing money for outside investors. Unfortunately SAC is not yet out of the woods.
SAC Admits Guilt
In announcing this plea agreement with Stamford-based hedge fund SAC Capital Advisors, U.S. Attorney in Manhatten, Preet Bharara, said that the insider trading at SAC was “substantial and pervasive and on a scale without precedent in the history of hedge funds.”
Criminal charges were filed in July against SAC Capital. As part of the plea deal, SAC Capital LP, SAC Capital Advisors LLC, CR Intrinsic Investors LLC and Sigma Capital Management LLC, will all plead guilty to a single count of wire fraud and four counts of securities fraud, the government said.
As part of the deal with the government, SAC agreed to pay $900 million in fines and forfeit another $900 million for a total $1.8 bln fine – the largest financial penalty in history for insider trading. The government agreed that the $616 million that SAC already agreed to pay to settle separate actions by the SEC will be deducted from the $1.8 billion.
In addition, the “proposed global resolution” of the criminal and civil cases against SAC Capital and related companies also includes an agreement that SAC will cease operating as an investment adviser and will not accept any additional funds from third-party investors.
Another Slip Up With Feds
After the announcement of the landmark settlement, SAC management released the following statement, “We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability,” the firm said. “The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years. SAC has never encouraged, promoted or tolerated insider trading.”
Unfortunately, government officials were not terribly happy with this statement because it contradicted SAC’s admission that it committed insider trading crimes. Consequently, SAC decided to issue a revised statement where the last sentence was replaced with a more repentant one, “Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.”
The Good News And Bad News
Despite the landmark nature of the government settlement, SAC (and more specifically founder Steven A. Cohen) is probably breathing a sigh of relief now for one very important reason. After years of trying to build a case against him, the government was not able to bring insider trading charges against Cohen directly. Instead the Feds settled for the next best thing by charging the company.
Unfortunately, one piece of bad news is that two federal judges must still approve portions of the settlement for it to become effective – a step which is more than a mere formality. In the past few years, there has been a growing debate about how closely judges should scrutinize regulatory settlements.
Consequently, U.S. District Judge Richard Sullivan directed SAC and the U.S. Department of Justice to present what standard the judge should use to evaluate whether the civil forfeiture portion of the settlement is appropriate. This took place at a hearing this morning. Separately, U.S. District Judge Laura Taylor Swain, scheduled a hearing for Friday to review the criminal portion of the settlement in which SAC agreed to plead guilty to five fraud counts.
Even if the two judges approve the settlement, SAC is not out of the woods yet as one issue which was not addressed by the plea agreement is the SEC’s pending civil case against Steve Cohen directly. Cohen was accused of “failure to supervise” the firm, thereby preventing his employees from insider trading. The SEC is seeking to fine Cohen and bar him from managing outside investor funds. Cohen has disputed the SEC’s allegations.