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SAC Capital fined $1.8 billion for insider trading

November 4, 2013 at 12:00 AM EDT
SAC Capital agreed Monday to plead guilty to criminal fraud. The insider trading charges will cost billionaire investor Steven Cohen's high-profile hedge fund $1.8 billion in fines. Sheelah Kolhatkar of Bloomberg Businessweek joins Jeffrey Brown to offer insight on the message this sends to Wall Street.
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GWEN IFILL: Today’s insider trading plea by the hedge fund SAC Capital Advisors was notable not just for its financial penalty, but also for the prosecutors’ pursuit of criminal charges against the firm.

Jeffrey Brown takes a deeper look at what the case might suggest about the government’s broader investigations into Wall Street practices.

JEFFREY BROWN: Steven Cohen is one of Wall Street’s best-known traders. And his firm was one of the more successful, with a record of returning 25 percent a year to investors.

Sheelah Kolhatkar, a national correspondent at Bloomberg Businessweek, has been chronicling this case and the world of hedge funds. She was at the press conference today and joins me now.

Sheelah, I want to pick up on this notion of the successful pursuit of a Wall Street firm on criminal charges. That has been a rare thing, right?

SHEELAH KOLHATKAR, Bloomberg Businessweek: Generally, the government has been reluctant to charge companies with criminal wrongdoing because it can lead to enormous job losses.

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Now, they did in this case, because they have been investigating this firm for going on seven years now. They were quite convinced, apparently, that both Steve Cohen and those working for him were engaging in some kind of wrongdoing. But they were unable to make a criminal case against Mr. Cohen himself. They didn’t have the evidence they needed to make that case.

So back in July, they indicted the firm and suggested that the entire firm was fostering a culture of securities fraud.

JEFFREY BROWN: A culture of securities fraud. So remind us. It is insider trading, so the charge is — the charge that they agreed to is, what, that they — this was going on? But he still says he has nothing to do with it?

SHEELAH KOLHATKAR: Right.

Well, he and his company have maintained that they behaved properly throughout this process. But, back in July, the government indicted the company, said that basically a large number of employees of SAC Capital had been trading on material non-public information. That is information that has the ability to move stock prices, but is not known by the broader public.

The government also alleged that Cohen had been hiring people specifically because they had relationships with people at publicly traded companies, relationships they could potentially mine for tips that they could trade off of, and also suggested that he was incentivizing people, paying bonuses to people for bringing this kind of information into the firm, and passing it up the food chain to him, so he could trade on it as well.

JEFFREY BROWN: And tell us a little bit more about him, because he is a — he’s a big player. He famously lives large, buying art, buying all kinds of things.

He’s going to come out of this not going to jail and still with a lot of money, right?

SHEELAH KOLHATKAR: Well, that’s one of the interesting things about this. It is a very, very historic, sort of enormous settlement. It’s very impressive.

Yet, no one is actually going to jail. Steve Cohen has a net worth of around $9 billion. So, even after paying a $1.8 billion fine to the government, which is what he agreed to today, he will still have $7 billion left. So, yes, he can still go out and buy $100 million paintings. He will still live in a 35,000-square-foot mansion. He will still do basically whatever he likes.

And the fact is that the government wasn’t able to find the evidence to sort of bring them over the line to charge him criminally himself.

JEFFREY BROWN: Yes, we heard that line from Preet Bharara, the U.S. attorney: “No institution should rest easy in the belief that it is too big to jail.”

Is there a — was that read as a larger signal to the Wall Street world today?

SHEELAH KOLHATKAR: Well, the government is clearly trying to set an example here and create an atmosphere that will deter illegal trading activity on Wall Street

Back in 2006, when the string of insider trading cases started to get going, the government prosecutors felt that this was rampant on Wall Street. And, in fact, it’s true. Back then, Wall Street traders did not feel scared of prosecution. They thought the Securities and Exchange Commission, their main regulator, was essentially a joke. They did not take any of it seriously.

Now, after today, it is likely that people will be paying much more attention, and it will be taken more seriously among the Wall Street rank-and-file.

JEFFREY BROWN: And this case, of course, has been — was part of a much larger insider trading effort by the government against a number of firms.

SHEELAH KOLHATKAR: Right.

Well, in 2006, as they discussed today at the press conference, they started getting a lot of reports from sort of informants and different sources on Wall Street that illegal trading was rampant; it was very common. And since then, we have seen a number of historic, very significant insider trading prosecutions.

For example, there was the charge against Raj Rajaratnam, who ran the Galleon group, who is now serving an 11-year sentence. Rajat Gupta was convicted. He was the former head of McKinsey. There have been many, many others — in fact, they quoted the number today — 75 guilty pleas or convictions. So this is a large number, and it’s growing.

JEFFREY BROWN: And, finally, let me ask you about — we’re talking about this criminal case against the firm, but there is more to come, right, civil charges against Steven Cohen and more against the firm.

So what’s next?

SHEELAH KOLHATKAR: Well, they went out of their way today to say that this settlement of the charges against SAC Capital Advisors, the company, doesn’t create any sort of immunity for Cohen himself or any individual.

And I think the U.S. attorney, he might have mentioned that four different times during a 40-minute press conference. So they are still looking into him. There is also a civil case with the SEC which also could carry a significant bite. The SEC is looking to bar Steven Cohen from the securities industry for life. This is almost the harshest penalty the SEC can dish out to anyone.

That has yet to be resolved. That is likely to be a major blow for someone who thought of himself and was widely seen as the greatest trader of his generation.

JEFFREY BROWN: All right, Sheelah Kolhatkar of Bloomberg Businessweek, thanks very much.