SAC Capital Advisors, the renowned hedge fund firm run by Steven Cohen, was indicted Thursday on criminal fraud charges tied to an alleged insider trading scheme. The new charges laid out in a 41-page indictment cap a long-running government crackdown on insider trading on Wall Street – an investigation that has for years cast a cloud over Cohen and his firm. Here’s what you need to know about the case:
Who is Steven A. Cohen?
He’s a star in the hedge fund industry, and one of the most high-profile, if fiercely private, figures in the world of finance. “Steve Cohen is considered one of the preeminent fund managers in the alternative investment industry,” says Ron Geffner, a partner at Sadis & Goldberg who oversees the law firm’s financial services group. After years as a trader at Gruntal & Co., Cohen used $20 million of his own money to found SAC Capital in 1992. He became known for a high-volume rapid-fire trading approach, the antithesis of Warren Buffett-style buy-and-hold investing. And through years of outsized gains averaging 30 percent annually, he built a reputation as a top investor and amassed a personal net worth of $9.3 billion, according to Forbes. That wealth ranked him 117th on the most recent Forbes list of the world’s richest people. Cohen, now 57, is also known as an avid and free-spending art collector with a taste for expensive real estate. He once told The Wall Street Journal that he began playing poker frequently in high school. The game, he said, taught him “how to take risks.”
How big is SAC Capital?
His company, based in Stamford, Conn., reportedly has 1,000 employees worldwide and had more than $15 billion in assets under management at its peak. Most of that money (about $8 billion ats of the beginning of the year) belongs to Cohen. A 2010 profile in Bloomberg Markets magazine said that Cohen and 100 SAC portfolio managers buy and sell 100 million shares daily, or about 1 percent of all shares traded in the U.S. at the time. A 2006 Wall Street Journal piece said that SAC’s trades accounted for 2 percent of overall stock market activity on a typical day. That approach made SAC a lucrative client for Wall Street’s securities firms, racking up hundreds of millions in commissions. Yet Cohen’s string of consistent success also enabled him to charge management fees above the industry standard. Where investors in other funds typically pay 2 percent of assets under management as an annual fee plus 20 percent of investment gains, SAC Capital charged outside investors 3 percent and up to half of profits.
What are the charges against SAC Capital?
Cohen himself was not charged in the criminal indictment, though U.S. Attorney Preet Bharara said the investigation is ongoing. Cohen’s company was charged with wire fraud and four counts of securities fraud in connection with what prosecutors called an insider trading scheme that ran from 1999 through at least 2010. The indictment alleges that “an institutional indifference” resulted in “insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
Prosecutors say that SAC employees were encouraged to pursue an information “edge” and that SAC sought to hire employees with proven access to contacts who were likely to have inside information about publicly traded companies. SAC became “a veritable magnet for market cheaters," Bharara said Thursday. The “predictable and foreseeable result” of that SAC culture was “systemic insider trading” that resulted in “hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public,” the indictment says.
How unusual are these types of charges against a company?
“Generally, criminal actions are not brought against companies. They’re brought against individuals,” Geffner says. “But certainly in this case it would appear that the government lacks hard information directly against Mr. Cohen.” Bringing such charges against companies can have far-reaching consequences. As The New York Times notes, accounting firm Arthur Andersen collapsed after being indicted by the Justice Department in 2002 – and 28,000 jobs were lost. At a press conference Thursday, Bharara indicated that the problems at SAC went beyond just individual actions. “When so many people from a single hedge fund have engaged in insider trading, it is no coincidence,” he said. “Companies, like individuals, need to be held to account and need to be deterred from becoming dens of corruption.”
Wasn’t Cohen already hit with charges last week?
Yes, but those were civil charges brought by the Securities and Exchange Commission, which alleged that Cohen failed to supervise SAC employees accused of insider trading while under his watch. The SEC alleged that, rather than follow up on “red flags” indicating potential insider trading, Cohen praised and rewarded the portfolio managers involved in the trades in question. Those illegal trades allowed the SAC hedge funds involved to earn profits and avoid losses totaling more than $275 million in 2008, the SEC says. In a white paper outlining his defense against the SEC charges, Cohen’s lawyers called the allegations “baseless” and said that “Steve Cohen did nothing wrong, and any fair review of the evidence will show that the SEC’s charges are unfounded.” The document also says Cohen didn’t read key emails that would have suggested illegal information was being used.
In March, SAC Capital agreed to pay the SEC a $616 million penalty to settle the insider-trading civil case. It did not admit or deny guilt as part of that settlement. In all, eight SAC employees have been charged or convicted with insider trading, with two of the cases still pending.
Could these charges be a death sentence for SAC Capital?
They could. The SEC is looking to have Cohen barred from overseeing investor money. But outside investors have already been pulling billions out of SAC’s funds. “Whether the prosecution goes into a conviction or not, it will have a severe negative impact on the firm,” says Geffner. “Unfortunately, in the financial services industry perception may become reality.” Even if he is banned from the securities industry, Geffner says, Cohen would still be allowed to manage his own money.
