Billionaire Steven Cohen’s SAC Capital Advisors LP, the hedge fund firm accused of fostering a culture of rampant insider trading, has agreed to plead guilty to a federal indictment and pay $1.8 billion, the U.S. said.
The company, charged earlier this year, was accused of operating a conspiracy stretching back to 1999, reaping hundreds of millions of dollars in illicit profit. Cohen, 57, wasn’t charged in the indictment of the Stamford, Connecticut-based firm. He still faces an administrative action filed by the U.S. Securities and Exchange Commission for his alleged failure to supervise the hedge fund’s activities.
The fund’s penalty includes $616 million that Cohen, SAC’s founder and owner, agreed to pay the SEC to settle a related lawsuit in March. SAC has agreed to terminate its investment advisory businesses, “effectively closing the affiliate SAC capital hedge funds to outside investors,” the U.S. said.
“The aggregate $1.8 billion financial penalty is — to the government’s knowledge — the largest financial penalty in history for insider trading offenses,” prosecutors said in a court filing.
Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., didn’t respond to requests for comment on the agreement.
Internal Workings
The plea deal isn’t the end of the U.S. investigation of SAC or Cohen, who has been the target of the multi-year probe. Two insider-trading trials in the next three months of managers at his hedge fund may shed more light on its internal workings, and prosecutors continue to investigate trading by SAC employees in Gymboree Corp., a children’s-apparel maker, a person familiar with the matter said.
The SAC agreement provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense,” the government wrote in the court filing.
“It’s far easier for SAC Capital as a corporate entity to plead guilty and settle with the government because it doesn’t have to worry about being incarcerated,” Anthony Sabino, a professor of law at St. John’s University in New York, said in an interview. “The government has amassed tons of evidence against the fund which can’t be helpful to the others. The pressure’s on for one of them to plead guilty.”
Two Doctors
SAC portfolio manager Michael Steinberg is scheduled to go on trial Nov. 18 for allegedly engaging in insider trading in Dell Inc. and Nvidia Corp. based on illicit tips provided by Jon Horvath, his analyst. Horvath, who has pleaded guilty and is cooperating with the U.S., is scheduled to be a witness against Steinberg, who is the longest-serving SAC employee of those the U.S. has charged in its insider-trading probe.
Mathew Martoma, a former fund manager for a unit of SAC, has a January trial date. He’s accused of using inside information from two doctors who were involved in the clinical trial of an Alzheimer’s drug to trade shares of Elan Corp. and Wyeth. The government has called it the biggest criminal insider-trading case against an individual in history.
As part of the agreement, SAC will name an independent compliance consultant who will be approved by the government, according to prosecutors. SAC Capital and its funds named in the indictment are pleading guilty to all five counts, including securities fraud and wire fraud. Each of the SAC entities will be under a term of five years’ probation, the U.S. said.
‘Market Cheaters’
Manhattan U.S. Attorney Preet Bharara in July called the hedge fund “a veritable magnet for market cheaters” and said the company had “zero tolerance for low returns but seemingly tremendous tolerance for questionable conduct.”
While Cohen wasn’t charged, prosecutors said he “encouraged” SAC employees to obtain trading information from company insiders while ignoring indications that it was illegal.
Clients have pulled their money out of SAC as the government investigation progressed. Executives at the hedge fund, which oversaw about $15 billion in assets at the start of 2013, expect to begin 2014 with about $9 billion.
The agreement is contingent upon the approval of U.S. District Judge Laura Taylor Swain, who is presiding over the criminal case, and U.S. District Judge Richard Sullivan, who is overseeing the civil money-laundering case.
The criminal case is U.S. v. SAC Capital Advisors LP, 13- CR-00541, U.S. District Court for the Southern District of New York (Manhattan). The civil case is U.S. v. SAC Capital Advisors LP, 1:13-cv-5182, U.S. District Court, Southern District of New York (Manhattan).
