U.S. Files Criminal Charges Against SAC Capital

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Published July 25, 2013

| FOXBusiness

The U.S. filed a criminal indictment against SAC Capital Advisors on Thursday, charging the embattled hedge fund with securities and wire fraud related to alleged "systematic" insider trading that took place over the course of a decade. 

The criminal charges against one of the financial industry's most successful hedge funds had been widely expected following years of scrutiny and allegations of insider trading. No major financial firm has ever survived a criminal indictment.

“The government has a strong case against SAC,” Harvey Pitt, former chairman of the Securities and Exchange Commission, told FOX Business. “The mere indictment is the death knell of the firm as a public hedge fund. Cohen is done as a manager even if he wins the case.”

It remains unclear if Cohen himself will be hit with criminal charges, though the indictment portrays the billionaire -- referred to as the "SAC Owner" in the document -- as the focal point of a massive insider-trading scheme.

The indictment accuses the hedge fund of motivating employees to seek out non-public information that would give the firm an "edge" against other investors, resulting in hundreds of millions of dollars in illegal profits..

Sources told FBN's Charlie Gasparino that remaining SAC investors say the hedge fund may force them to redeem their shares. 

“We have been advised by the U.S. Attorney's Office that their action is not intended to affect the ongoing operations of SAC's business, prevent investor redemptions, or impact the interests of any of SAC's counterparties,” SAC spokesman Jonathan Gasthalter said in a statement.

SAC said it anticipates agreeing with the U.S. on a protective order intended to “reasonably protect all parties’ legitimate interests, but will expressly permit SAC to continue its operations in the ordinary course.”

A “handful of men” who admitted to insider trading does not reflect the integrity of the firm or employees, SAC said, adding that it takes compliance obligations seriously and never encouraged or tolerated insider trading.

'Magnet for Cheaters'

The government said SAC had an “institutional indifference” to unlawful conduct that resulted in “substantial, pervasive” insider trading that was “on a scale without precedent in the hedge fund industry.”

“SAC became over time a veritable magnet for market cheaters,” said Preet Bharara, the U.S. attorney for the Southern District of New York.

The indictment hits SAC with four counts of securities fraud and one count of wire fraud.

The U.S. said SAC bears “criminal responsibility for insider trading offenses committed by numerous employees and made possibly by institutional practices that encouraged the widespread solicitation and use of illegal inside information.”

In a statement, George Venizelos, assistant director of the FBI, said: “SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it.”

Click here to read the full indictment. 

The U.S. is seeking to force SAC to forfeit an unspecified amount of illegal profits stemming from the alleged fraud, although the government said "hundreds of millions of dollars" of ill-gotten gains were obtained.

The indictment accuses SAC of obtaining and trading on inside information from roughly 1990 until 2010 in an effort to boost returns and fees.

Will Cohen be Charged Next?

Bharara declined to say whether or not Cohen will be indicted. Cohen recently told a friend his “number one goal is not to get indicted personally,” Gasparino reported.

Asked about a possible criminal indictment of Cohen, Venizelos told FBN's Elizabeth MacDonald: "We are following the evidence where it leads us; we are pursuing all leads." He added: "It is never good for a firm to be criminally indicted." 

Michael Shapiro, a partner at Carter Ledyard & Milburn and former New York special assistant attorney general, predicted Cohen will ultimately be indicted himself “if the government gets one or more people who will point the finger at Steve Cohen.”

Additional leverage against Cohen could be gained from Richard Lee, a former SAC portfolio manager who the U.S. charged with conspiracy to commit securities fraud related to alleged insider trading in Yahoo (YHOO) and 3Com stock.

The U.S. said Lee pleaded guilty earlier this week, admitting he obtained inside information and that he purchased and sold securities based in part on such information in connection with his employment at SAC. 

While Cohen himself wasn't named, the indictment alleges the SAC owner "enabled and promoted the insider trading scheme by ignoring indications that trading recommendations were based on Insider Information." It went on to allege the individual “furthered the insider trading scheme by fostering a culture that focused on not discussing Inside Information too openly, rather than not trading on such information in the first place."

In one specific incident, the U.S. said portfolio manager Mathew Martoma obtained negative inside information in July 2008 from a medical doctor about a trial being conducted by Elan (ELN) and Wyeth.

The next day Martoma spoke to “the SAC owner,” who then sold his entire $700 million stake in the two drug companies and took a short position worth $260 million, according to the indictment. The U.S. said SAC’s profits and avoided losses from this incident amounted to about $276 million.

'Enabled and Promoted' Insider Trading

Last week, the SEC charged Cohen in a civil case with failing to supervise portfolio managers and prevent insider trading. SAC has denied any wrongdoing and said it plans to fight those administrative charges filed by the SEC.

SAC's compliance department also came under fire in the criminal complaint, with the DOJ saying until late 2009, it "rarely reviewed electronic communication … for suspicious items." Instant messages were also purged after 36 hours, and emails that were not "affirmatively saved" were deleted after 30 days until the hedge fund adopted a new document retention policy in September 2008, the DOJ alleged. 

The government said the insider-trading “scheme” involved “numerous” portfolio managers and analysts, who received inside information from “dozens” of publicly traded companies across “multiple” industries.  

The U.S. said SAC “enabled and promoted” insider trading by trying to hire portfolio managers with “proven access” to contacts likely to possess inside information.

Also, the government said employees were given financial incentives to recommend “high conviction” trading ideas to Cohen in which the portfolio manager had an “edge” over other investors.

The indictment also said the encouragement to seek an “edge overwhelmed limited SAC compliance systems.”

The U.S. said Cohen received a warning from a former hedge fund colleague of Lee that he was part of that hedge fund’s “insider trading group.”

In a statement, Citadel acknowledged that Lee worked at the firm between January 2006 and April 2008 when he was terminated for misconduct that only would have impacted his future compensation.

“Citadel does not have, and never has had, an ‘insider trading group.’ Citadel has strict rules against, and oversight designed to prevent, insider trading. Any suggestion to the contrary is baseless and without merit,” the firm said.

Shapiro, the partner at Carter Ledyard & Milburn, said after reading the indictment he was somewhat surprised the U.S. didn’t file racketeering charges against SAC under the RICO act.

FOX Business reporters Adam Samson and Julie VerHage contributed to this report.

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http://www.foxbusiness.com/industries/2013/07/25/reports-us-files-criminal-charges-against-sac-capital/