New York cops barricade streets to prevent demonstrators from reaching Wall Street on November 17, 2011. The city shutdown Zuccotti Park on November 15 to halt the anti-capitalist encampment., a photo by Pan-African News Wire File Photos on Flickr.
U.S. accuses hedge fund SAC Capital Advisors of insider trading
The fund's manager, Steven A. Cohen, isn't named in the indictment, but the government could seek to cripple his firm or even ban him from doing business on Wall Street.
By Andrew Tangel
July 25, 2013, 6:30 p.m.
Los Angeles Times
NEW YORK — Like nobody else, Steven A. Cohen conquered Wall Street.
The boy from blue-collar Long Island built one of the era's most legendary investment firms, helping him amass a personal fortune of $9 billion. He lives a lavish life even by billionaire standards. His 35,000-square-foot Connecticut mansion has an ice skating rink with a Zamboni machine, and his other home in the Hamptons has an oceanfront view.
His vast art collection includes a $150-million Picasso. During his unsuccessful bid to buy the Los Angeles Dodgers last year, Cohen earned his way onto the prestigious Museum of Contemporary Art's board and made a donation of as much as $10 million.
But Cohen's success has a dark side, according to the federal government. In a rare criminal prosecution of a major financial institution, authorities took unprecedented steps Thursday that could effectively close Cohen's hedge fund, SAC Capital Advisors, and drain his largesse.
"Cohen is done," said Dominic Auld, a securities attorney at the New York law firm Labaton Sucharow who is not involved in the case. "This is it. The death knell is sounding. It's just a matter of when the bell stops tolling."
The government has been circling Cohen for the better part of a decade in an investigation that has now culminated in a 41-page indictment against SAC Capital. Authorities accused the $15-billion hedge fund of an unprecedented "deep and wide" illegal trading operation that cheated the investing public of "hundreds of millions of dollars."
Cohen isn't named in the court documents nor personally accused of insider trading. But the government could seek to cripple his firm or even ban him from doing business on Wall Street for life. The case accuses several SAC Capital employees of criminal acts and claims that management "enabled and promoted" the illegal behavior.
The federal charges also mark a major turning point for the Justice Department, which has been lambasted in the past for not leveling criminal charges against Wall Street wrongdoers in the shadow of the global financial crisis. It has led some critics to openly wonder whether some financial firms are not just too big to fail but also too big to jail.
"A company reaps what it sows," U.S. Atty. Preet Bharara, the top federal prosecutor in Manhattan, said in unveiling the charges. "Companies, like individuals, need to be held to account and need to be deterred from becoming dens of corruption."
The case won praise on Capitol Hill. Sen. Charles E. Grassley (R-Iowa) said the case would help make markets more fair.
"I've criticized prosecutors and the SEC for not taking on big fish," Grassley said in a statement. "They deserve credit for taking on a big, challenging case. This sends a signal that no firm is too big or too powerful to escape scrutiny. It has a deterrent factor. It gives a level of assurance to investors that markets are fair and the playing field for investors is level."
SAC Capital has been one of the hedge fund world's most successful companies, employing a nearly 1,000-person workforce known for turning out massive profits quarter after quarter.
But the firm's success also generated buzz on Wall Street trading floors that Cohen's firm might have an unfair edge. There have been whispers about insider trading for years, and that piqued the interest of law enforcement and regulators.
At the heart of the government's case is the allegation that SAC Capital prospered by fostering and turning a blind eye to cheating. Prosecutors alleged SAC Capital encouraged its traders and portfolio managers to sniff out lucrative, secret company information to give the hedge fund an all-important edge.
A top FBI official said the fund's in-house compliance department embodied: "See no evil. Hear no evil. Speak no evil." Bharara said SAC Capital became a "magnet for market cheaters" over more than a decade.
Cohen's firm fired back against the government's assertions Thursday.
"SAC has never encouraged, promoted or tolerated insider-trading and takes its compliance and management obligations seriously," a spokesman said in a statement. "The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years. SAC will continue to operate as we work through these matters."
Regulators had Cohen on their radar three decades ago. The SEC questioned Cohen in 1985, peppering him with questions about whether he traded RCA Corp. stock based on inside information. He asserted his 5th Amendment right against self-incrimination and refused to answer questions, according to a transcript The Times obtained via the Freedom of Information Act. Cohen was never accused of wrongdoing in the case.
More recently, his firm caught investigators' attention, and observers speculate that it's all part of a bigger plan to snag Cohen himself.
In November, federal prosecutors accused former SAC portfolio manager Mathew Martoma with conducting the most lucrative trading scheme of all time. His allegedly illicit trades in two drug company stocks netted $276 million in profits and avoided losses. Prosecutors say Martoma — who has pleaded not guilty — leaked confidential information concerning problems with the companies' experimental Alzheimer's drug.
In March, SAC Capital agreed to a record $616-million settlement with the Securities and Exchange Commission. The firm agreed to pay the largest-ever insider-trading penalties to end probes into Martoma's trades, as well as other allegedly suspicious trades in Dell Inc. stock. SAC settled the cases without admitting or denying wrongdoing.
Thursday's indictment listed SAC employees accused of insider trading. Of eight noted by authorities, six have pleaded guilty.
The SEC, which has been conducting a parallel regulatory probe, took administrative steps last week in an attempt to bar Cohen from managing anyone else's money.
The Justice Department has been wary of prosecuting financial companies, fearful that criminal cases could have severe economic consequences. A decade ago, prosecution led to the death of accounting giant Arthur Andersen, which was energy giant's Enron's auditor. Thousands of people lost their jobs.
But John Coffee, a securities law expert at Columbia University, said SAC Capital seemed to be a perfect candidate for indictment — unlikely to cause much collateral damage. However the case shakes out, Coffee said, Cohen may be able to keep much of his workforce if he can run a "family office" investing his money alone. (Authorities noted that they did not freeze SAC Capital's assets.)
"No one else is going to suffer," Coffee said. "There are no widows and orphans invested in this firm."
Auld, the New York securities attorney, said the government's case could tarnish SAC employees who never broke the law.
"I shed a tear for the other traders who never managed to cross that boundary," Auld said. "SAC Capital is not going to look so good on a resume for a while."