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SAC Capital indicted in 6-year US insider probe

SAC was indicted on four counts of securities fraud and one count of wire fraud in an indictment unsealed in Manhattan federal court

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Bloomberg New York
Last Updated : Jul 26 2013 | 1:02 AM IST
SAC Capital Advisors LP, the $14-billion hedge fund founded by Steven A Cohen, was indicted by a US grand jury for perpetrating an unprecedented insider trading scheme that was revealed as part of the government's six-year crackdown on criminal malfeasance on Wall Street.

The insider trading case against the Stamford, Connecticut-based firm is the most significant to be brought by the US since former Goldman Sachs Group Inc director Rajat Gupta was charged in October 2011. Gupta, convicted in New York federal court last year, was sentenced to two years in prison.

SAC was indicted on four counts of securities fraud and one count of wire fraud in an indictment unsealed in Manhattan federal court. The insider trading scheme involved more than 20 companies and went back as far as 1999, the US said. SAC was founded in 1992.

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SAC's insider trading, the US said, was "made possible by institutional practices that encouraged the widespread solicitation and use of illegal inside information. 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." Cohen, 57, wasn't charged in the indictment.

SAC employed practices that encouraged its portfolio managers and research analysts "to pursue industry contact networks to obtain an information 'edge' unavailable to other investors, without effective corresponding controls to prevent that 'edge' from consisting of inside information," the US said.

This isn't the first time Manhattan US Attorney Preet Bharara has sought charges against a business. In February 2012, his office charged Wegelin & Co, Switzerland's oldest private bank, for helping US taxpayers hide assets from the Internal Revenue Service.

Wegelin pleaded guilty and was ordered to pay almost $58 million.

Thursday's indictment, and a related Securities and Exchange Commission administrative action, may put SAC out of business.

The hedge fund must forfeit "all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses," the government said in a parallel civil action alleging money laundering.

Cohen is worth $9.5 billion, according to the Bloomberg Billionaires Index. He is also one of the world's biggest art collectors, with works by Van Gogh, Manet, de Kooning, Picasso, Cezanne, Warhol, Johns and Richter.

Since he started his hedge fund, Cohen has achieved average annual returns of 30 per cent, with just one money-losing year: 2008, when his main fund tumbled 19 per cent.

SEC action
The SEC, in its administrative action on July 19, accused Cohen of failing to supervise two portfolio managers who both face insider trading charges.

While the agency stopped short of accusing Cohen of insider trading himself, the SEC alleged he received "highly suspicious" information and ignored "red flags" that should have caused any reasonable hedge-fund manager to investigate the basis for trades made by SAC employees Mathew Martoma and Michael Steinberg. Those trades helped the hedge fund earn profits and avoided losses of more than $275 million in 2008, the SEC said.

Martoma, 39, was charged in November by Bharara as part of the most lucrative insider trading case in history. Prosecutors said Martoma helped SAC reap hundreds of millions of dollars in illegal profits on tips provided by a doctor about a clinical trial about an Alzheimer's drug being developed by Wyeth LLC and Elan Corp.

Pleaded guilty
Martoma, who has pleaded not guilty, is scheduled to go to trial in Manhattan federal court on November 4.

While Cohen wasn't charged with Martoma, that case was the first to link Cohen directly to alleged inside information.

According to the US, Martoma learned on July 17, 2008, that test results of an experimental Alzheimer's treatment from Dublin-based Elan and Madison, New Jersey-based Wyeth were worse than the market anticipated, and that those results would be made public at the end of that month.

Prosecutors said that on July 20 of that year, Martoma emailed the "hedge fund owner," otherwise unidentified in last year's indictment, stating it was "important" that they talk. Martoma said he was no longer "comfortable" with the fund's long position on the two stocks.

The US said that same day the two men had a 20-minute telephone call. A person familiar with the case said Cohen is the hedge fund owner referred to by the US.

In a separate scheme, Steinberg, 41, was indicted in March for insider trading in Dell Inc and Nvidia Corp in 2008 and 2009, based on illicit tips funnelled to him by his analyst, Jon Horvath. Steinberg is accused of earning $1.4 million in illegal profits for SAC.

Securities fraud
Steinberg, who pleaded not guilty to securities fraud and conspiracy, was the most senior SAC official to be charged by the U.S. He is scheduled to go to trial in federal court in New York on November 18. Horvath has pleaded guilty and is cooperating with the US.

The SEC alleged in its administrative action last week that Cohen, who was at his vacation home on New York's Long Island in late August 2008, reversed his trading position and sold $11 million worth of Dell shares within minutes after receiving a "highly suspicious" email sent to him by Steinberg and Horvath. Cohen avoided losses of more than $1.7 million, the SEC alleged.

"I have a 2nd hand read from someone at the company," Horvath wrote in the August 26 email, which provided details on gross margins, expenditures and revenue. "Please keep to yourself as obviously not well known."

Federal prosecutors said Horvath's message contained nonpublic revenue and gross margin information days before the Round Rock, Texas-based computer maker was set to announce quarterly earnings. Steinberg is charged with insider trading in Dell based on Horvath's tip.

SEC settlement
In March, SAC agreed to pay a record $616 million to settle an SEC complaint alleging insider trading by Martoma and Steinberg without admitting or denying wrongdoing.

SAC spokesman Jonathan Gasthalter said, in response to the regulator's administrative action, that it "has no merit," and that Cohen had acted appropriately.

More than 80 fund managers, analysts, lawyers and insiders at public companies have been convicted of insider trading in cases brought by the Manhattan US Attorney's office and the Federal Bureau of Investigation in New York since August 2009.

Since the government's crackdown on illegal trading at hedge funds was begun, at least nine current or former SAC employees were tied by US authorities to insider trading. Of the five former SAC employees who've pleaded guilty, three are cooperating with the US.

Portfolio manager
The US on Thursday acknowledged the increasing number of SAC-related defendants as the sprawling insider probe progressed, pointing to "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".

One of those who has pleaded guilty is former SAC portfolio manager Noah Freeman, who told the FBI that it was "understood" at SAC that "providing Cohen with your best trading ideas involved providing Cohen with inside information".

At one point in his career at SAC, Freeman, who worked in the firm's Boston office, said he sat next to Cohen.

"Freeman pitched to Cohen many trading ideas over the 18 months he was at SAC and some of the trading ideas involved dirty information," according to a memo written by FBI Agent B J Kang.

Horvath was one of eight analysts and portfolio managers charged in January 2012 with being part of what Bharara described as "a tight-knit circle of greed" whose members trafficked in confidential information from 2007 to 2009. Six of those charged in the case have pleaded guilty to insider trading and have agreed to cooperate with the US.

Quiet culture
In Thursday's indictment, the government said that Cohen "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".

Prosecutors cited an example from July 29, 2009, when a newly hired fund manager sent an instant message to "SAC's owner" and relayed that after "recent research" he planned to short Nokia Corp when he started working at the firm in 10 days.

The new hire later apologised for being cryptic, and added that he'd just received training from SAC's compliance department, the government said.

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First Published: Jul 25 2013 | 11:49 PM IST

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