Feds in NY bring criminal charges against hedge fund SAC Capital, but not against owner

  • Article by: LARRY NEUMEISTER , Associated Press
  • Updated: July 25, 2013 - 6:55 PM

NEW YORK — One of Wall Street's biggest and most successful hedge fund companies was a hotbed of insider trading and its embattled billionaire owner wanted to hear no evil, prosecutors said in an indictment unsealed Thursday that claimed the firm earned hundreds of millions of dollars illegally.

The criminal indictment and civil lawsuits brought against SAC Capital Advisors and related companies did not name billionaire Steven A. Cohen as a defendant, referencing him only as the "SAC owner" who "enabled and promoted" insider trading practices.

At a news conference, U.S. Attorney Preet Bharara said SAC "trafficked in inside information on a scale without any known precedent in the history of hedge funds." He declined to comment on whether Cohen would be charged.

For more than a decade, the company earned hundreds of millions of dollars illegally as its portfolio managers and analysts traded on inside information from at least 20 public companies, Bharara said, announcing charges of wire fraud and four counts of securities fraud spanning 1999 to 2010. A court appearance for the firm's lawyers was scheduled for Friday.

The possibility that the criminal case could topple the Stamford, Conn., firm, which once managed $15 billion in assets, led the prosecutor to note that the government was not seeking to freeze SAC's assets. Bharara added that prosecutors were "mindful to minimize risk to third-party investors."

In a statement, SAC Capital welcomed the prosecutor's assurances and said it had been advised by prosecutors that "their action is not intended to affect the ongoing operations of SAC's business, prevent investor redemptions or impact the interests of any of SAC's counterparties."

The company said it expected to agree with the government on a protective order that would "permit SAC to continue its operations in the ordinary course."

Still, the government in one lawsuit sought SAC's forfeiture of "any and all" assets.

The charges came less than a week after federal regulators accused Cohen in a related civil case of failing to prevent insider trading at the firm. While the Justice Department's action targets SAC but not Cohen directly, the civil case brought by the Securities and Exchange Commission seeks to effectively shut him down by barring him from managing investor funds.

In its statement, SAC Capital said Thursday it "has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously."

It added: "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."

A lawyer for Cohen did not immediately respond to a message for comment. Last week, an SAC Capital spokesman said "Steve Cohen acted appropriately at all times."

In a statement, FBI Assistant Director George Venizelos said: "SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it."

Bharara also announced that Richard Lee, a former SAC portfolio manager responsible for a $1.25 billion "special situations" fund, pleaded guilty Tuesday to conspiracy and securities fraud charges. Lee had worked for SAC in Manhattan from April 2009 through June 2011 and later at its Chicago office.

In court papers, the government was critical of Cohen, saying he purposely hired portfolio managers and analysts who knew employees of public companies likely to possess inside information and "enabled and promoted the insider trading scheme by ignoring indications that trading recommendations were based on inside information."

It said 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."

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," the criminal charges said.

The government also faulted the company's compliance department, saying its investigations were weak, with a focus on "confirming" that any employee's email implying access to inside information was merely poorly drafted.

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