NEW YORK—The federal government has launched a rare criminal prosecution of a major Wall Street firm: SAC Capital Advisors, a hedge-fund operator that investigators have long suspected of illegally trading on inside information, ironically reported by the L.A. Times.
U.S. Atty. Preet Bharara, the top federal prosecutor in Manhattan, announced the grand jury’s indictment of SAC Capital last Thursday. The indictment, which names SAC Capital and related entities, alleges one count of wire fraud and four counts of securities fraud.
The indictment alleges “systematic insider trading” from 1999 through 2010, “resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.”
A spokesman for the firm did not immediately respond to a request for comment.
SAC Capital’s indictment is seen as the most prominent corporate prosecution in a decade and comes as the U.S. Justice Department has drawn criticism for a paucity of cases against Wall Street firms or top executives.
The case against SAC Capital is the culmination of a years-long government probe into allegations that the firm’s employees sought to obtain and then trade stocks based on confidential information unavailable to the broader investing public.
Steven A. Cohen, who founded SAC, has been circled by federal prosecutors for years, but he was not charged personally last Thursday.
In addition to the case lodged against SAC, prosecutors also announced insider-trading charges against portfolio manager Richard Lee, who pleaded guilty earlier last week.
Observers have seen recent criminal cases against two other top managers as an attempt by prosecutors to snag Cohen himself.
The Securities and Exchange Commission last week filed an administrative action against Cohen seeking to bar him from managing other investors’ money. The action accused Cohen of failing to supervise his employees who allegedly engaged in insider-trading, but did not accuse him of participating in any schemes. A spokesman for Cohen has maintained the fund manager has always acted appropriately.
Apart from last Thursday’s indictment, the government’s case against SAC Capital has already had its own milestones.
In November, federal prosecutors accused former SAC portfolio manager Mathew Martoma with conducting the most lucrative trading scheme of all time. His allegedly illicit trades in two drug company stocks netted $276 million in illegal profits and avoided losses. Prosecutors said Martoma had leaked confidential information concerning problems with the company’s experimental Alzheimer’s drug.
Then in March, SAC Capital agreed to a record $616-million settlement with the SEC. The firm agreed to pay the largest-ever insider-trading penalties to end probes into Martoma’s trades, as well as other allegedly suspicious trades in Dell stock. SAC settled the cases without admitting or denying wrongdoing.
Regulators were looking at Cohen as early as three decades ago. The SEC questioned Cohen in 1985, peppering him with questions about whether he traded RCA Securities stock based on inside information. He asserted his 5th Amendment right against self-incrimination and refused to answer questions, according to a transcript obtained via the Freedom of Information Act. Cohen was never accused of wrongdoing in the case.
The U.S. Justice Department has been wary of bringing criminal cases against corporations in recent years, mindful that prosecution led to the death of giant accounting firm Arthur Andersen, which was Enron’s auditor. The firm’s demise resulted in thousands of lost jobs.
Yet lost jobs were just some evils of the Enron catastrophe, according to NPR. Enron’s illegal manipulation of electricity in California, on the heels of deregulation in that state, caused exorbitant rate increases coupled with outages, nearly bankrupting the state and resulting in the recall of Gov. Gray Davis.
Returning to SAC Capital, insider trading, however, did not cause the financial crisis, and SAC Capital lacks the global reach of a major bank. But the $15-billion fund nevertheless has an outsize presence on Wall Street and its prosecution could and should cause economic collateral damage in the New York area. Once again, this would go a long way to make brokers and clients stop playing these unlawful games. Do the crime, pay the time.
Based in Connecticut, SAC Capital employs roughly 1,000 people and generates enormous trading revenue for other firms in the financial ecosystem, horribly out of balance with predators feeding on the greed of hapless investors. Very soon, they will get a taste of failure and insolvency, not the most pleasant things in the world.
Jerry Mazza is a freelance writer and life-long resident of New York City. An EBook version of his book of poems “State Of Shock,” on 9/11 and its after effects is now available at Amazon.com and Barnesandnoble.com. He has also written hundreds of articles on politics and government as Associate Editor of Intrepid Report (formerly Online Journal). Reach him at gvmaz@verizon.net.
