One of the largest-ever insider trading cases took a giant step forward Thursday, when a federal grand jury indicted Steven A. Cohen's hedge fund SAC Capital Advisors on fraud charges.
The hedge fund was charged with wire fraud as well as four counts of securities fraud, and the government is seeking to force SAC to surrender any fraud-related profits. The charges could undermine one of Wall Street's top stock trading firms, although they do not touch founder Steven A. Cohen.
The Securities and Exchange Commission recently filed civil charges against Cohen for what it said was a failure to adequately supervise the people at his firm. Last week a spokesman for Cohen said the SEC charges have no merit.
"SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously. The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years. SAC will continue to operate as we work through these matters,” said an emailed statement from SAC Capital.
According to the indictment from roughly 1999 to 2010, SAC obtained and traded on inside information to boost returns and fees and that the scheme involved a number of portfolio managers, research analysts and dozens of publicly traded companies.
The government is also seeking to force SAC to surrender any fraud-related profits.
The criminal charges said SAC's "relentless pursuit of an information 'edge' fostered a business culture within SAC in which there was no meaningful commitment to ensure that such 'edge' came from legitimate research and not inside information."
It added: "The predictable and foreseeable result, as charged herein, was 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."
The indictment said SAC carried out the insider trading scheme with a staff of numerous portfolio managers and research analysts "who engaged in a pattern of obtaining insider information from dozens of publicly-traded companies across multiple industry sectors."
It said SAC sought to hire portfolio managers and research analysts with proven access to public company contacts likely to possess inside information. The managers and analysts were then not questioned when they made trading recommendations that appeared to be based on inside information, the indictment said.
The problem was compounded when SAC on numerous occasions failed to use effective compliance procedures or practices designed to root out wrongdoing. The pursuit of a trading edge overwhelmed limited SAC compliance systems, prosecutors said.
U.S. Attorney Preet Bharara said at a news conference that SAC was "a magnet for market cheaters."
FBI Assistant Director George Venizelos said in a statement, "This is a case about corporate conduct and corporate responsibility. SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it."
The Associated Press contributed to this report.
First published July 25 2013, 9:18 AM