One of the world’s best-known hedge funds has agreed to plead guilty to criminal charges and pay a record penalty for engaging in illegal insider trading, federal prosecutors said.
SAC Capital Advisors LP, the hedge-fund firm run by billionaire Steven Cohen, will pay $1.2-billion (U.S.) and cease to manage any money for outside investors, according to the agreement.
Monday’s announcement marks the first time in 25 years that a major financial firm agreed to plead guilty to criminal charges and constitutes a victory for U.S. authorities, who made SAC and Mr. Cohen the subject of a lengthy and relentless investigation.
For Mr. Cohen, the agreement spells the effective end of the firm he founded, bearing his own initials, in 1992. SAC grew into an industry giant, swelled by funds from investors seeking a piece of Mr. Cohen’s outsized returns. If the firm continues to exist, its sole function will be to manage Mr. Cohen’s own fortune, an estimated $9-billion.
Considered a legendary investor, Mr. Cohen, 57, is famous for his palatial homes and pricey collection of artwork. He was not named as a defendant in the criminal charges against his firm and has maintained that his conduct was proper at all times.
Under the plea agreement, which is awaiting court approval, SAC will pay $1.2-billion in penalties in addition to a settlement of $616-million reached in March. The earlier deal was to resolve civil insider-trading charges brought by the U.S. Securities and Exchange Commission.
“No institution should rest easy in the belief that it is too big to jail,” said Preet Bharara, the top federal prosecutor in Manhattan, at a press conference. The penalty to be paid by SAC is “the just and appropriate price for the pervasive and unprecedented institutional misconduct that occurred here.”
Mr. Bharara noted that Monday’s announcement did not preclude future criminal charges against individuals. He emphasized that his office would forge ahead with its sprawling investigation into insider trading, which has already produced more than 70 convictions.
SAC sought to portray the criminal behaviour as limited to a small group of employees. “We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability,” a spokesman for SAC said in an e-mailed statement.
Six former SAC traders have pleaded guilty to criminal charges related to insider trading. Two more maintain their innocence and will stand trial, including Michael Steinberg, a senior portfolio manager at the firm and a friend of Mr. Cohen for many years.
According to the criminal indictment of the firm, numerous SAC employees made illegal profits from inside information over the course of at least a decade. SAC focused on hiring traders and analysts based on their contacts at publicly traded firms, the indictment said, then failed to check or detect whether the information they were obtaining was confidential.
SAC once managed as much as $15-billion, including roughly $9-billion belonging to Mr. Cohen and some employees. For two decades, it delivered annual returns of 30 per cent, a record that inspired envy from other investors but also persistent questions about the legality of its tactics. As SAC’s legal troubles intensified, outside investors fled the firm.
Meanwhile, Mr. Cohen himself is facing a civil action by U.S. regulators – accusing him of failing to properly supervise his employees – which could end up banning him from the securities industry. He will also foot the bill for Monday’s $1.2-billion penalty, together with the earlier $616-million settlement.
“There’s only one shareholder here,” said John Coffee, a professor of securities law at Columbia University. A penalty against SAC “is the same thing as a fine on Mr. Cohen personally.”
It is rare for federal prosecutors to file criminal charges against a financial firm – and rarer still for the firm to plead guilty. Back in 1988, Drexel Burnham Lambert, the brokerage firm and junk-bond pioneer built by Michael Milken, agreed to register a guilty plea to six criminal counts of fraud and pay $650-million.
Such agreements certainly have “a short-term deterrent effect,” said Bruce Baird, a partner at Covington & Burling LLP and a former federal prosecutor who worked on the cases against Drexel. But, he added, “It’s a big industry and there’s a lot of money to be made … in maybe five to 10 years, there are new people and the deterrent doesn’t last.”