Nov 14

The Blame Game: Who Should be Indicted – the Company or the Individual?

Just how wide is the net being cast upon SAC by federal authorities?  Last week, I posted about the unprecedented plea agreement worked out between prosecutors and SAC Capital Advisors, L.P. in what could be described as the most rampant insider trading scheme ever charged.

Last Friday, SAC’s general counsel, Peter Nussbaum, appeared in federal court to plead guilty to all five charges filed against SAC on the behalf of the company.  The presiding criminal judge, U.S. District Judge Laura Taylor Swain, was emphatic that she would not approve the agreement without an exhaustive review of its terms, including the “no immunity clause” which provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense,” a clause that allows the government to potentially charge SAC’s founder, Steven A. Cohen.  And while national headlines are abuzz about SAC – the company – reporters have been remiss to discuss the implications of alleged insider trading upon SAC’s individuals – alumni, traders, and advisors.

Here is the scoop on some of the primary individuals indicted in connection with SAC:

  • Richard Lee, former SAC trader, pled guilty to insider trading and is cooperating with prosecutors.  Lee was allegedly responsible for giving the government information about SAC’s so-called expert networks that connect traders with corporate insiders and the company’s questionable hiring procedures and protocol, including the fact that he was hired by SAC after being terminated by a prior hedge fund on his first day of employment for accessing the hedge fund’s accounting system and misstating the value of his holdings.
  • Donald Longueuil and Noah Freeman, both former portfolio managers, were charged with insider trading relative to publicly traded technology companies, including chip maker Marvell Technology.  Freeman received insider information about Marvell, which he passed along to Longueuil, who turned the tip into a $1 million profit.  Reportedly, Longueuil was taken down in part of a larger effort by authorities to crack down on SAC’s so-called expert networks.  He pled guilty in 2011 and is currently serving a two and a half year sentence.  Freeman pled guilty in 2011 but because he is cooperating with prosecutors, he has yet to be sentenced.
  • Jon Horvath, a former technology industry analyst pleaded guilty in September 2013, for his role in the insider trading conspiracy involving Dell computer and the chip maker Nvidia.  The conspiracy allegedly earned $62 million in illegal gains and included Horvath’s former boss, Michael Steinberg.
  • Anthony Chiasson, co-founder of Level Global Investors, was convicted by a federal jury of illegally trading the technology stocks Dell and Nvidia as part of the conspiracy discussed, supra.  On appeal, Chiasson’s attorneys are arguing that Chiasson lacked knowledge that the insider information was, in fact, given by tippers with the intent to benefit themselves.
  • Michael Steinberg, former SAC portfolio manager, has been indicted for insider trading and the government contends that he utilized secret tips about quarterly earnings results from computer mogul Dell and technology company Nvidia.  He is scheduled for trial on Monday, November 18.  With SAC’s increased notoriety and significant media attention in the past few weeks, Steinberg’s lawyers have already raised concerns that he may not be able to obtain a fair and impartial jury.
  • Mathew Martoma, an ex-SAC trader and pharmaceutical-industry analyst, is charged with conspiring to profit from insider knowledge pertaining to an Alzheimer’s drug and is scheduled for trial in January 2014.  Prosecutors allege that Martoma received insider information about a drug trial from Sidney Gilman, a neurology professor at Michigan and leading expert in Alzheimer’s disease.  Based on Gilman’s tip, Martoma bought and sold large blocks of Elan and Wyeth shares and was allegedly able to avoid losses and make profits for SAC amounting to $276 million, the biggest insider-trading case in history.

Questions remain: how will these prosecutions affect company founder Cohen?  Specifically, will information obtained through cooperating defendants and/or outstanding trials result in the government turning its attention from the company to Cohen, the individual on top?

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