Hedge-fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, listens to a question during a one-on-one interview session at the SkyBridge Alternatives Conference in Las Vegas on May 11, 2011.
Over the past twenty years, Steve Cohen built his hedge fund SAC Capital into one of the largest and most successful operations on Wall Street, making himself into a billionaire nine times over. But Cohen’s long and illustrious career may be coming to an end, as reports say that the Justice Department and SAC Capital will soon agree to terms on a settlement that will ultimately cost the firm nearly $1.2 billion and bar Cohen from ever managing other people’s money again.
This is the culmination of a years-long effort by federal officials to bring down a shop they allege fostered an environment where insider trading was implicitly encouraged. It’s also the largest in a series of cases brought by the Feds aimed at stamping out a hedge-fund culture on Wall Street they say is more inclined than ever toward bending the rules. It is impossible to know exactly how much insider trading is occurring on at any given time. But, the government has bee nailing more inside traders than ever before. According to the SEC over the past three years it has brought 168 insider trading actions–more than in any three-year period in its history.
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And it’s not just the SEC that’s taking notice . Federal prosecutors, in particular New York‘s Preet Bahara, see the crime as a very serious one that threatens the integrity of financial markets. As Bahara told TIME last year:
“Insider trading tells everybody at precisely the wrong time that everything is rigged . . . and only people who have a billion dollars and have access to and are best friends with people who are on boards of directors of major companies–they’re the only ones who can make a true buck.”
Though the SEC doesn’t always go after a crime like insider trading with a consistent level of force, the rapid increase in insider trading actions raises the question of whether Wall Street has become more inclined to try to get an edge through inside information. Charles Geisst, a finance professor at Manhattan College and author of Wall Street: A History says that the prevalence of insider trading tends to move in cycles. In the 1980s there was raft of high-profile prosecutions that ensnared financiers like Michael Milken and Ivan Boesky, long before many of the current crop of Wall Streeters began their careers. “Wall Street will stub its toe and learn its lesson for a while, but hubris always seems to win the day,” Geisst argues. Another factor: the intense competition in the hedge fund industry. The number of hedge funds chasing capital and returns exploded in the 2000s, creating pressure to achieve returns.
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But there’s reason to believe that the feds efforts at cracking down on insider trading might begin to bear fruit soon. Marc Powers, a former SEC enforcement lawyer and partner at the law firm BakerHostetler says that since the Dodd-Frank financial reform law required hedge funds to register with the SEC, there’s been a lot more oversight of the industry. Regulator’s ability to oversee hedge funds operations and practices give them a greater opportunity to sniff out misdeeds. ‘ New regulations and the zeal with which the Feds are cracking down on insider trading is making a lot of fund managers more cautious, Powers says. “The hedge fund industry is just beginning to create a more robust culture of compliance,” he says. “They’re becoming much more institutionalized in the way they operate.”
This will lead to increased costs. A recent report from KPMG says that hedge funds are spending more money in recent years on regulatory compliance, sometimes nearly 10% of their operating budget. This creates higher barriers to entry and will probably dampen returns for investors. But as Powers says, Wall Street’s seen this story before. “For thirty years regulators have had their focus on the brokerage industry, which was then forced to build up their compliance efforts, and now we’re seeing the same thing in the hedge fund industry through SEC presence examinations, enforcement actions such as those involving short sales and other efforts.”