UPDATE 5-U.S. charges SAC Capital with insider trading crimes

Thu Jul 25, 2013 7:48pm EDT

* "Systematic insider trading" - criminal case by prosecutors

* Companion civil case seeks asset forfeiture and fines

* Allegations cover period roughly from 1999 to 2010

* SAC says to stay open; does not tolerate insider trading

By Emily Flitter, Svea Herbst-Bayliss and Jonathan Stempel

NEW YORK, July 25 (Reuters) - U.S. prosecutors indicted billionaire Steven A. Cohen's hedge fund for insider trading, a rare move that could end the career of one of Wall Street's most successful investors and trigger a fundamental change in how traders try to gain an edge over rivals.

The government accused SAC Capital Advisors LP of presiding over a culture where employees flouted the law and were encouraged to tap their personal networks of contacts for inside information about publicly traded companies.

The result was "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry," the indictment said.

While not personally charged criminally, Cohen joins junk bond financier Michael Milken and Galleon Group hedge fund founder Raj Rajaratnam among prominent Wall Street executives who have been linked to insider trading.

The indictment filed by the U.S. Department of Justice against SAC, together with a related civil case seeking forfeitures and money laundering penalties, imperils the future of the roughly $15 billion hedge fund.

It also may end Cohen's career of managing outside money, where he generated some of the hedge fund industry's best returns and became one of the foremost traders of his generation.

Last week, the U.S. Securities and Exchange Commission charged Cohen in a civil case with failing to supervise two employees, Mathew Martoma and Michael Steinberg. Both men have pleaded not guilty to criminal insider trading charges and face trials in November.

Many Wall Street firms that lend money to and trade with Stamford, Connecticut-based SAC may stop or pull back because of Thursday's criminal charges, though some said on they would take a wait-and-see approach.

Cohen may yet be able to stay in business because more than $8 billion of the fund's assets belong to him and his employees.

SAC said in a statement it has no plans to shut down.

"SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously," it said. "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."

VIRTUAL SLAM DUNK?

The government's indictment of SAC Capital also will stand as the signature action of its multi-year crackdown on insider trading in the $2.25 trillion hedge fund industry.

The investigation burst into the open in October 2009 with the arrest of Rajaratnam, founder of Galleon Group, and led to the conviction of more than 60 people including Rajaratnam. But for authorities Cohen always was the big fish to be caught because he loomed large over the hedge fund industry.

In fact, when Cohen first opened shop, hedge funds were not well understood and the industry was a fraction of its current size, with funds managing well under $1 trillion. But in large part because of the success of firms like SAC Capital, hedge fund managers surpassed investment bankers and even some bank chief executive officers in terms of fame and fortune.

Over the years, Cohen has been the subject of two Vanity Fair magazine stories, countless front-page stories in The New York Times, and is maybe just as famous in the art world for his prized collection of works by Damien Hirst, Jeff Koons and Pablo Picasso.

More recently, he tried to become the owner of the Los Angeles Dodgers baseball team, but instead settled for a minority stake in the New York Mets. As the scrutiny of Cohen and his firm has risen in recent year, he's became more visible at hedge fund events, donating money to charities and buying even more artwork.

Several lawyers, including former federal prosecutors, said a decision not to criminally charge Cohen might signal an admission that there is a shortage of evidence against him.

But the indictment does not preclude the government from gathering more evidence and filing new charges later. Some lawyers believe the case against SAC is strong now.

"It's going to be a virtual slam dunk for the prosecution," said Solomon Wisenberg, a partner at Barnes & Thornburg in Washington, D.C., and author of "White Collar Crime: Securities Fraud."

"The story is basically that there's a whole culture here where red flags were ignored, (and) compliance efforts were more or less window dressing."

The Justice Department's decision to indict SAC, and not just individuals, is an unusual move that underscores prosecutors' belief about the pervasiveness of the alleged insider trading.

Prosecutors have shied away from indicting large financial firms after their 2002 case against Enron Corp's auditor, Arthur Andersen, helped put that firm out of business.

The indictment comes after a seven-year investigation of SAC and amid a broader crackdown on insider trading that has resulted in more than 70 convictions and guilty pleas.

It is as much a forceful reproof of an era of free-wheeling trading by hedge funds as it is a condemnation of SAC's culture as an alleged breeding ground for traders and analysts who traffic in illegal tips about corporate earnings and buy-outs.

The indictment said SAC's illegal practices ran roughly from 1999 to 2010. SAC and various affiliates were charged with four criminal counts of securities fraud and one count of wire fraud.

"When so many people from a single hedge fund engage in insider trading, it is not a coincidence," U.S. Attorney Preet Bharara said at a press conference. He declined to address how much money the government will seek to have SAC forfeit.

U.S. District Judge Laura Taylor Swain will oversee the criminal case, and an initial hearing is scheduled for Friday morning. A colleague, U.S. District Judge Richard Sullivan, will oversee the civil forfeiture case, according to court records.

In Washington, lawmakers critical of prosecutors' past efforts to go after Wall Street heavyweights applauded the indictment.

"They deserve credit for taking on a big, challenging case," said Senator Chuck Grassley, a Republican of Iowa whose office has conducted its own probe of Cohen and SAC Capital.

"LIKE A MOVIE"

Launched in 1992 with just $25 million, SAC became the most successful hedge fund to rely on the so-called mosaic theory of investing, which builds investment theses on stocks by gathering information from multiple sources.

Cohen has been able to generate average annualized returns of 25 percent, far outpacing most rivals.

That has helped him to charge a 3 percent management fee and keep 50 percent of investment profits. A typical hedge fund manager gets a 2 percent fee and 20 percent of the profits.

SAC's success has also enabled Cohen to spend well, and he has become known for his collection of expensive art and real estate holdings. Cohen recently paid casino mogul Steve Wynn a reported $155 million for Pablo Picasso's "Le RĂªve," and owns properties valued well into eight figures.

Many investors stuck with Cohen despite years of speculation about improper trading. But over recent months they requested about $4 billion in withdrawals as investigators closed in.

SAC generates more than $300 million annually in trading fees for Wall Street brokerages large and small, such as JPMorgan Chase & Co and Jefferies & Co.

Although SAC has $6 billion to $8 billion of cash, according to people familiar with its finances, some question how effectively it can operate. "It's an ugly situation," said an executive at one counterparty.

On Thursday, extra security was posted outside SAC's Stamford office, and reporters were kept far away. One employee at the firm's New York office said there were no recent internal signs of panic or anxiety. "It's like a movie," he said.

COOPERATING WITNESSES

Prosecutors built their case against SAC with help from several former employees, including Noah Freeman, Jon Horvath, Donald Longueuil and Wesley Wang, who pleaded guilty to charges of criminal insider trading.

Among suspect trades was Cohen's August 2008 sale of a $12.5 million stake in Dell Inc, launched within 10 minutes after he was forwarded an email in which Horvath told Steinberg, based on a "2nd hand read from someone at the company," that the computer maker's earnings would disappoint.

Cohen's lawyers this week said he never read that email.

The indictment also alludes to Cohen hiring a new employee, Richard Lee, despite a warning that he had been in another fund's "insider trading group." Lee pleaded guilty on July 23 to securities fraud and conspiracy involving trades in Yahoo Inc and 3Com Corp.

The indictment does not identify the fund, but a person familiar with the matter said it was Kenneth Griffin's Citadel Investment Group. Citadel managed roughly $13.3 billion at year end.

A Citadel spokeswoman, Katie Spring, said Lee was fired in 2008 for breaching company rules, not insider trading. "There is no insider trading group at Citadel," she added.

The criminal case is U.S. v. SAC Capital Advisors LP et al, U.S. District Court, Southern District of New York, No. 13-cr-00541. The civil case is U.S. v. SAC Capital Advisors LP et al in the same court, No. 13-05182.

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Comments (1)
4Cryinoutloud wrote:
If Cohen was smart he would have become an Obama bundler like Jon Corzine. Serves him right.

Jul 25, 2013 3:21pm EDT  --  Report as abuse
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