Did SAC Capital Turn a Blind Eye to Insider Trading?

Accounting

U.S. Attorney for the Southern District of New York Preet Bharara on Thursday announced that his office has indicted SAC Capital Advisors

on one count of wire fraud and four counts of securities fraud. Eight portfolio managers and research analysts have been charged with or convicted of insider trading. It’s important to point out that Steven Cohen — who owns the fund — was not individually charged.

“This Indictment charges the corporate entities responsible for the management of a major hedge fund with criminal responsibility for insider trading offenses committed by numerous employees and made possible by institutional practices that encouraged the widespread solicitation and use of illegal inside information,” the indictment reads. “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.”

The case against SAC and the eight individuals charged has been in the works for nearly a decade. The indictment references guilty pleas from as early as 2009 and targets fraudulent behavior from as early as 1999.

Providing an overview of “the scheme,” the indictment outlines a system where portfolio managers and research analysts were “financially incentivized to recommend to the SAC Owner ‘high conviction’ trading ideas in which the SAC PM had an ‘edge’ over other investors, but were not questioned when making trading recommendations that appeared to be based on Inside Information.”

This failure to identify or act on suspicious information — let alone to incentivize it — is what could come back to bite Cohen, the owner. While he has not been criminally charged, he faces civil charges based on his failure to supervise employees accused of insider trading, and to hire employees even after being warned — sometimes by his own legal council — that they may be in some way connected to insider trading groups.

As it stands, the indictment is only targeting money made from the illegal trades. However, the weight and publicity of the case could have serious negative consequences for the hedge fund. Due to the weight and exposure of this indictment and several other legal scuffles, investors in SAC Capital like the Blackstone Group (NYSE:BX) and Citigroup (NYSE:C) have reportedly pulled out nearly $5 billion, apparently in an effort to distance themselves from the case.

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