SAC Capital will plead guilty to insider trading, pay record penalty

NEW YORK — SAC Capital Advisors, the high-flying, fast-trading hedge fund in coastal Stamford that’s become target No. 1 in the government’s crackdown of a new generation of Wall Street crimes, has agreed to plead guilty to insider trading and wire fraud, close its doors to outside investors, and pay the government a record sum of $1.8 billion in penalties.

U.S. Attorney Preet Bharara announced the proposed agreement in a 1 p.m. press conference Monday in lower Manhattan. It’s still subject to approval from the federal judges overseeing the criminal case and related civil action against SAC.

SAC Capital was charged in July with four counts of insider trading and one count of wire fraud. It was also charged a civil forfeiture and money laundering case.
Steve Cohen, of Greenwich, founder of SAC Capital in Stamford

Steve Cohen, of Greenwich, founder of SAC Capital in Stamford

The deal could strike a tremendous blow to the hedge fund, which was founded and is 100 percent owned by Greenwich’s Steven A. Cohen, who has a net worth of $9.3 billion, according to Forbes.
The firm would also be placed on a five-year probation and be forced to enact compliance procedures that satisfy an independent consultant approved by the government. Moreover, nobody associated with the decade-long investigation and resulting legal action would be granted immunity.
“Greed sometimes is not good,” Bharara said at Monday’s press conference, one of many allusions to the fictional character of Gordon Gekko in the 1987 film Wall Street who amassed a fortune through corporate raiding that relied heavily on insider trading.

The fines are broken down as follows:

– $900 million for the criminal case against SAC

– $900 million for the related civil forfeiture and money laundering civil case against SAC

SAC’s $616 million settlement with the Securities and Exchange Commission from earlier this year is credited in its favor here. So the new penalties announced Monday total $1.184 billion. None of that fine can be paid with outside investors’ money, Bharara noted, and the payments are not tax-deductible.

Such penalties “are steep but fair, and are commensurate with the breadth and duration of the charged criminal conduct,” Bharara wrote in a letter to Federal Judges Laura T. Swain and Richard J. Sullivan in the Southern District of New York Court.

photo In July, when the government issued a 41-page indictment against SAC, charging the hedge fund with four counts of insider trading and one count of wire fraud, Bharara said the illegal activity had been treated with such indifference from higher-ups at the firm between 1999 and 2010 that it had become “substantial, pervasive and on a scale without known precedent in the hedge fund industry.”

SAC, commenting on the deal Monday through spokesman Jonathan Gasthalter of Sard Verbinnen & Co, stated: “We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years.  SAC has never encouraged, promoted or tolerated insider trading.”

That marks a new chapter in the federal government’s decade-long investigation of SAC Capital, which since opening in 1992 has been one of the world’s most successful hedge funds. Six former SAC traders have pleaded guilty to insider trading. Two have not done so and have upcoming trials.

The firm has regularly churned out annual returns of some 30 percent — but also charged its customers some of the highest fees in the industry.

In early 2013, at its peak, SAC was managing over $15 billion in assets. But it’s believed to have some $9 billion in Cohen’s fortune and that of his employees.

The government has never charged — indeed, it never explicitly even names — Cohen himself, who owns 100 percent of the fund and has long been widely presumed to be the ultimate target of the investigation.

Tim Loh