White Collar Alert

Billionaire Steven A. Cohen’s SAC Capital Advisors, L.P., a hedge fund accused of engaging in rampant insider trading, has agreed to plead guilty and pay an unparalleled $1.8 billion in penalties.  In response to the indictment issued by Manhattan U.S. Attorney Preet Bharara on July 25th of this year, SAC will plead guilty to all five counts alleged– four counts of securities fraud (one for each of the four SAC units that were charged) and one count of wire fraud.  The indictment, which primarily targeted SAC for creating a corporate culture that encouraged employees to obtain proprietary information and make investments on the basis of it, also alluded to Cohen’s criminal conduct, specifically identifying his failure to question employees about suspicious information and outlining his questionable recruiting practices of individuals alleged to have access to inside information.  Indictment at 17-19 can be found here.

Because SAC’s own employees were pleading guilty to the very conduct SAC was accused of, SAC had “no defense,” opined Richard Scheff, Montgomery McCracken chairman on The Wall Street Journal’s MarketWatch blog. Thus, the government was able to exert massive control over the future of SAC in its proposed plea agreement, forcing the wind down of the company’s investment advisory business and requiring it to retain a compliance consultant to keep a watchful eye on Cohen’s remaining business ventures.

Described by Bharara as a “fair but steep” resolution, SAC has agreed to pay $900 million in criminal fines and $900 million in civil fines, amounting to a total penalty of $1.8 billion, a penalty unmatched by other federal insider trading prosecutions.  Should the pact be approved, SAC shall receive a $616 million credit for civil settlements it previously reached with the Securities and Exchange Commission in March involving alleged insider trading at two SAC affiliates, thus resulting in an outstanding $1.184 billion dollar penalty.  In his Monday press conference, Bharara was explicit in mandating that the financial burden is to be paid by those conspirators participating in the scheme and not to fall upon third party investors.  A representative of SAC will plead guilty on its behalf in Manhattan federal court on November 8.

While Bharara may describe the punishment as appropriate, defense attorneys forewarn that this case exhibits just how unforgiving the government can be when it comes to insider trading.  “No matter how you slice it, it’s awful [for SAC],” said Scheff, and “it certainly demonstrates that that government is watching… it’s [insider trading is] a focus of the government and it will continue to be a focus.”  Occurring on the heels of the prosecutions of Galleon Group hedge-fund founder and billionaire Raj Rajaratnam, who is now incarcerated, and his friend Rajat K. Gupta, a former Goldman Sachs board member who was found guilty of divulging boardroom secrets to Rajaratnam, this prosecution marks the climax of the Bharara administration’s efforts to target Wall Street insider trading.

The question remains, is SAC’s pact with the government going to satisfy prosecutors’ hunger for Wall Street’s insider trading moguls?  The proposed plea agreement unambiguously reserves the right to investigate and pursue charges against other individuals – i.e. Cohen.  And in a related SEC investigation, Cohen remains a target of potential charges for failing to supervise Michael Steinberg and Mathew Martoma, two ex-SAC employees who are slated to go to trial in November and January respectively on charges of insider trading.  Only time will tell if SAC’s plea negotiation quells the insider trading prosecutorial fire or if it is simply a catalyst for the inferno to come.