WASHINGTON – Federal prosecutors unveiled criminal charges Thursday against famed hedge fund SAC Capital, citing “institutional practices” that encouraged a culture of using inside information to gain illegal profits.
The government charged SAC Capital with wire fraud and four counts of securities fraud. The indictment cites activity that spanned more than a decade from roughly 1999 to 2010, saying employees at the hedge fund engaged in a “pattern” of collecting nonpublic information about dozens of publicly traded companies.
“Unlawful conduct by individual employees and an institutional indifference to that unlawful conduct resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry,” said the indictment.
The 41-page document paints a picture of a hedge fund where a constant pressure to gain an edge in trading led to the widespread use of inside information, resulting in hundreds of millions of dollars of illegal profits.
“SAC became over time a veritable magnet for market cheaters,” said Preet Bharara, U.S. attorney for the Southern District of New York.
The charges did not target the firm’s founder, Steven Cohen, although they do mark a new nadir for the billionaire’s career.
With a number of employees already convicted or charged with insider trading, investors have been pulling out their money from the fund en masse. It is likely that a large share of the money left over now is Cohen’s own.
Bharara said the indictment does not seek to freeze any of SAC’s assets.
Prosecutors say traders and analysts were hired in part for their network of contacts at public companies. Time and again, the indictment alleges, the company failed to check whether the information being used was obtained legally.
Prosecutors say the firm was warned that a prospective employee, who was at another hedge fund, had been working in what was known informally as the “insider trading group.” According to the indictment, the candidate was hired anyway — over the objections of SAC’s legal department.
Cohen, the firm’s founder, is not named in the indictment, but references to him are made throughout the pages of charges and evidence, always as the “SAC Owner” who is constantly pressing his employees for tips and a “better edge” on trades.
In a wide-ranging series of insider-trading investigations that has ensnared several other firms and dozens of people, SAC is the most ambitious target yet. The hedge fund and its billionaire founder are symbols of the greatest possible success that can be attained on Wall Street.
SAC, based in Stamford, Connecticut, at its peak managed $15 billion in assets. It charged its clients more than the industry standard and performed especially well when markets were down.
Cohen, whose initials form the name of his company, is known for running a cutthroat office. He is also known for his lavish spending habits. Earlier this year, he paid $155 million for the Picasso painting “Le Reve,” the most ever paid by a U.S. collector. That same month, he paid $60 million for an oceanfront property in East Hampton, New York.
Some legal experts said the government went after the hedge fund since it has failed so far to amass enough evidence to indict Cohen himself.
“I view it largely as a face-saving measure,” said Martin Sklar, an attorney at Kleinberg, Kaplan, Wolff & Cohen who works primarily with hedge-fund clients.
Federal prosecutors have already targeted at least eight traders and analysts at SAC Capital for insider trading, apart from the charges filed this week.