The United States has charged SAC Capital, the multi-billion dollar hedge fund, with multiple federal crimes, in a stinging blow for its embattled founder, Wall Street mogul Steven A. Cohen. In the indictment, which was expected, the government leveled securities fraud and wire fraud charges against the fund, which the feds say engaged in a pattern of “systematic insider trading” that allowed it to reap hundreds of millions of dollars in illegal profits. The charges could spell the end of Cohen’s storied Wall Street career, in which he made billions through his trading acumen.
The 41-page U.S. indictment against Stamford, Conn.-based SAC Capital is one of the most high-profile insider trading actions in U.S. history. In the indictment, the government said Cohen’s firm displayed “an institutional indifference” to unlawful conduct that “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.” The charges represent the culmination of a multi-year federal probe of SAC Capital, which has long been dogged by rumors of insider trading.
Manhattan U.S. Attorney Preet Bharara said the charges against SAC Capital represent “what can only be described as rampant insider trading,” during a Thursday news conference in New York. “When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence,” Bharara said, adding that SAC Capital is a “company with zero tolerance for low returns but seemingly limitless tolerance for insider trading.” Bharara did not rule out bringing separate criminal charges against Cohen himself.
The government, which alleges that the insider trading scheme lasted from 1999 to 2010, says that SAC’s “relentless pursuit of an information ‘edge’ fostered a business culture within SAC in which there was no meaningful commitment to ensure that such ‘edge’ came from legitimate research and not inside information,” according to the indictment. “The predictable and foreseeable result,” the feds charged, “was systematic insider trading by the SAC entity defendants resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.”
Cohen himself has not been charged with criminal actions, but the indictment says that his hedge fund “fostered a culture that focused on not discussing inside information too openly, rather than not seeking or trading on such information in the first place.” Last Friday, the feds aimed civil charges at the 57-year-old billionaire, saying that he failed to supervise two of his employees who have been accused of insider trading. Cohen’s lawyers maintain that he has done nothing wrong over the last two decades, during which time he became one of the wealthiest men on Wall Street.
Cohen is worth an estimated $9.3 billion and lives with his family in a palatial 35,000 square foot Connecticut mansion filled with expensive art that the mogul has spent hundreds of millions of dollars to collect. Last month, faced with a grand jury probe, Cohen’s lawyers informed the government that their client would invoke his Fifth Amendment right against self-incrimination. Since the beginning of the year, several SAC clients, including Wall Street giants Citigroup and Blackstone Group, have sought to withdraw more than $5 billion, but Cohen retains an estimated $8 billion of his own money in the fund.
Last November, the U.S. charged one of SAC’s former portfolio managers, Mathew Martoma, with orchestrating an insider trading fraud that resulted in $276 million in gains and avoided losses for the fund. Martoma is charged with trading illegally on inside information he obtained from a doctor involved in a 2008 pharmaceutical trial for an Alzheimer’s drug. The feds had hoped to convince Martoma, who earned a $9 million bonus thanks to the alleged scheme, to testify against Cohen, but apparently have thus far not been successful. Several other SAC employees have cooperated, however, including Noah Freeman, Jon Horvath, Donald Longueuil, and Wesley Wang, who have all pleaded guilty to insider trading charges.
A SAC Capital spokesman did not immediately return a request for comment Thursday, but issued a statement to MarketWatch. “SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously,” the statement read. “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.”
The criminal case against SAC Capital, which was announced by federal prosecutors and the FBI in Manhattan, is the latest example of the federal government’s wide-ranging insider trading crackdown on Wall Street. U.S. Attorney Preet Bharara has secured dozens of convictions against Wall Street figures, including former Galleon Group founder Raj Rajaratnam and former Goldman Sachs director and McKinsey managing director Rajat Gupta. Rajaratnam is currently serving an 11-year prison sentence, and last year Gupta was sentenced to two years in prison.
The civil case against Cohen alleges that he failed to supervise two of his employees who have been accused of insider trading. The SEC’s civil action came two weeks after reports emerged that Cohen himself was poised to avoid criminal charges. The SEC is seeking to bar the reclusive hedge fund titan — who earned as much as $900 million per year at the peak of his career — from overseeing investor funds, which could amount to a Wall Street death sentence for the hedge fund manager.
The SEC alleged that Cohen received “highly suspicious” information that should have caused any “reasonable” hedge fund manager to investigate the basis for trades made by Martoma and another former SAC portfolio manager, Michael Steinberg, who has also been charged with insider trading. When the FBI showed up at Martoma’s Florida mansion last fall, he fainted on his front lawn. Steinberg was arrested at his Park Avenue home in March. The feds allege that Cohen ignored “red flags” and allowed Martoma and Steinberg to place the suspicious trades. The SEC’s administrative proceeding will determine what measures to take against Cohen, including financial penalties and, potentially, a financial services industry ban.
Earlier this week, SAC sought to fight back against the SEC allegations. In a 46-page document, SAC lawyers said Cohen shouldn’t be held responsible for the alleged insider trading of his employees because he didn’t read the email that the government says should have raised “red flags” about insider trading concerns. “Cohen has no memory of having seen it and no witness will testify that they discussed it with him,” said the document, which was reviewed by TIME.
Martoma has pleaded not guilty to insider trading charges and is set to go on trial in November. He faces decades in prison for what the feds have called the largest insider trading scheme in U.S. history. In March, SAC Capital agreed to pay a $616 million penalty to the SEC to settle the insider-trading civil case, without admitting or denying guilt.