MANHATTAN (CN) – Federal prosecutors today unsealed a five-count indictment accusing S.A.C. Capital Advisors of criminal responsibility for insider trading offenses committed by numerous employees.”
The 41-page indictment charges S.A.C., one of the nation’s largest hedge funds, and its wholly owned affiliates with wire fraud and four counts of securities fraud.
The indictment was unsealed five days after the SEC filed an administrative action against S.A.C. founder and principal Steven A. Cohen, charging him with failing to supervise employees who profited enormously from insider trading.
Though the indictment stops short of charging Cohen with criminal wrongdoing, it’s the latest in a series of blows to his firm. In March, the hedge fund paid a record $616 million to settle two inside trading lawsuits filed by the Securities and Exchange Commission.
Cohen also has been sued by his ex-wife, Patricia, who claims he made a lot of money from inside trading and hid millions from her during their divorce.
Cohen’s S.A.C. managed more than $15 billion at its peak, including about $8 billion of Cohen’s own money, according to The New York Times. Forbes magazine estimates Cohen’s net worth at $10 billion.
According to the grand-jury indictment, “institutional indifference” at S.A.C. Capital Advisors, S.A.C. Capital Advisors, CR Intrinsic Investors and Sigma Capital Management “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
Prosecutors say the inside trading that occurred between 1999 and 2010 was “made possible by institutional practices that encouraged the widespread solicitation and use of illegal inside information.”
“First, the S.A.C. entity defendants sought to hire S.A.C. [portfolio managers] and S.A.C. [research analysts] with proven access to public company contacts likely to possess inside information,” the indictment states. “Second, the S.A.C. entity defendants’ employees were financially incentivized to recommend to the S.A.C. owner ‘high conviction’ trading ideas in which the S.A.C. [portfolio managers] had an ‘edge’ over other investors, but repeatedly were not questioned when making trading recommendations that appeared to be based on inside information. Third, on numerous occasions, the S.A.C. entity defendants failed to employ effective compliance procedures or practices to prevent S.A.C. [portfolio managers] and S.A.C. [research analysts] from engaging in insider trading.”
The indictment is one of two criminal indictments and two civil complaints filed or unsealed Thursday against S.A.C., its affiliates and a former employee.
In the second indictment, former S.A.C. portfolio manager Richard Lee is charged with securities fraud and conspiracy. He allegedly received, and traded on, inside information about Yahoo, from sources in that company. Based on inside tips about Yahoo earnings that he obtained on April 20, 2009, he sold 1.2 million shares of Yahoo from his portfolio the next day, the indictment states.
Lee is also accused of buying 700,000 shares of 3Com, also acting on inside information.
“At times the portfolio that Lee co-managed had a buying power of approximately $1.25 billion,” the indictment states.
He is one of five former S.A.C. employees who have admitted to inside trading. Former portfolio managers Michael S. Steinberg and Mathew Martoma, and former analyst Jon Horvath, among others, also were charged with criminal wrongdoing.
In the first of two civil cases revealed Thursday, a federal class action was filed on behalf of everyone who traded in Elan Corp. shares opposite to the S.A.C. defendants from July 1, 2006 to July 29, 2008. These plaintiffs demand at least $549 million.
They claim the defendants ran the most profitable insider trading conspiracy ever uncovered, particularly in trading of American Depositary Receipts of Elan Corp. As a result of the conspiracy, they claim, the defendants illegally profited by at least $549 million to the detriment of the class.
They say the SEC settlement, “while historic in size, provides for disgorgement of only a fraction of the S.A.C. defendants’ gains from their two-year conspiracy.”
Defendant doctor Sidney Gilman allegedly tipped off S.A.C.’s Martoma about the results of a clinical trial for an Alzheimer’s drug being developed by Elan. Acting on that information, S.A.C. “illegally traded in Elan ADRs and options between 2006 and 2008,” the class claims.
“The widespread use of illegal inside information at S.A.C. reflects Cohen’s own approval of the practice,” according to the lawsuit.
“The absence of any compliance culture at SAC is perhaps best illustrated by a single fact: that despite its policies and putative compliance program, no SAC employee has ever been discharged or suspended from the firm as a result of insider trading,” the lawsuit states. (Emphasis in original.)
The lawsuit lists 11 current and former S.A.C. employees who have been accused of inside trading while employed by the firm.
Investors say the founder himself also engaged in inside trading early in his career, based on allegations in his ex-wife’s lawsuit. Cohen allegedly made $10 million in the mid-1980s trading on a tip that General Electric Co. was going to buy RCA Corp.
Gilman began to cooperate with authorities in 2012 in exchange for avoiding prosecution. He also agreed to disgorge more than $234,000 in illicit profits.
Martoma, a relatively inexperienced portfolio manager whom one fund officer later described as a “one trick pony with Elan,” was fired in 2010, according to the lawsuit. He faces both criminal and civil charges.
The second civil lawsuit goes after S.A.C.’s assets, and the assets of its affiliates.
Here are the defendants in that 39-page forfeiture complaint: S.A.C. Capital Advisors LP; S.A.C. Capital Advisors LLC; CR Intrinsic Investors LLC; Sigma Capital Management LLC; Any and all assets of S.A.C. Capital Advisors LP, S.A.C. Capital Advisors LLC, CR Intrinsic Investors LLC, Sigma Capital Management LLC; Any and all assets of S.A.C. Offshore Capital Funding Ltd., S.A.C. Spectrum Fund LLC, S.A.C. Global Macro Fund LLC, S.A.C. Arbitrage Fund LLC, S.A.C. Multiquant Fund LP, S.A.C. Global Investments LP, S.A.C. Private Equity Investors LP, S.A.C. Domestic Investments LP, S.A.C. Domestic Capital Funding Ltd., Canvas Capital Associates LLC, Sigma Capital Associates LLC, S.A.C. Capital Associates LLC, S.A.C. Strategic Investments LLC, S.A.C. Meridian Fund LLC, S.A.C. International Equities LLC, CR Intrinsic Investments LLC, International Equities (S.A.C. Asia) Ltd., S.A.C. Structured Investments LP, Sigma Fixed Income Fund Ltd., S.A.C. Select Fund LLC, S.A.C. Energy Investments LP, S.A.C. Genesis Fund LLC, S.A.C. Healthco Fund LLC, and S.A.C. Domestic Investments (CA) LLC.
(This is a developing story. Courthouse News will update it throughout the day.)
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