Can Steven Cohen Move On From SAC’s Insider Trading Past?
Follow @jbrezlowApril 10, 2014, 12:35 pm ET
A ruling by a U.S. District Court judge on Thursday has officially sealed the end of an era for the man once nicknamed “the hedge-fund king.”
Judge Laura Swain has approved SAC Capital Advisors’ guilty plea for insider trading violations, a $1.8 billion agreement that represents the largest penalty on record for an insider-trading case. The settlement brings to a close SAC’s business of trading for outside investors, transitioning the firm to a family office that will instead manage primarily the fortune of its billionaire founder, Steven A. Cohen.
Watch To Catch a Trader, FRONTLINE’s examination of the government’s vast investigation into insider trading in the hedge fund industry.
The decision caps a tumultuous chapter in SAC’s 22-year history. Once the envy of Wall Street for its giant returns, the firm has watched its name become synonymous with a decade-long investigation into insider trading within the hedge fund industry. Since 2009, that crackdown has resulted in charges against eight SAC employees. Six pleaded guilty. Two others were convicted at trial. In November, SAC as an institution pleaded guilty to insider trading violations, becoming the first major Wall Street firm in a generation to confess to criminal misconduct.
The ensuing fallout has stretched beyond guilty pleas and government fines. In February, Deutsche Bank, one of SAC’s lending and trading partners, was reported to have cut ties, citing the “reputational risk” of doing business with the firm. SAC has also seen roughly a dozen portfolio managers and analysts depart for rival companies, leading the firm to press employees to sign a two-year contract binding them to the fund until 2016, according to a New York Times report.
In a bid to revive its reputation, SAC this week rebranded itself Point72 Asset Management, a reference to the firm’s headquarters at 72 Cummings Point Road in Stamford, Conn. It has also begun an internal reshuffling, slimming its workforce, selling its reinsurance unit and closing offices in both London and Chicago.
Part of that makeover includes a new emphasis on compliance. In a 2011 deposition video obtained for the FRONTLINE investigation To Catch a Trader, Cohen testified that he was unfamiliar with the guidelines spelled out in SAC’s code of ethics and conduct. “I don’t know what it says,” he tells an attorney in the video.
As part of its plea agreement, SAC agreed to monitoring by an outside compliance consultant, and earlier this month it appointed Bart Schwartz, a former federal prosecutor, to fill the position. Schwartz, whose appointment was confirmed Thursday by Swain, is expected to submit regular reports to government prosecutors on Point72’s compliance with U.S. securities law.
In addition to Schwartz, Point72 announced the hiring this week of Vincent Tortorella, formerly an assistant U.S. attorney, to the newly created position of chief surveillance officer. The firm has also brought in an outside analytics firm to boost oversight of employees as they pivot from managing money from outside investors to primarily caring for Cohen’s estimated $11 billion fortune.
The shakeup has come with a shift in tone. In an internal email distributed to staff in February, for example, Cohen and SAC President Tom Conheeney told employees, “We are committed to doing everything in our power to ensure we never go through again what we have experienced over the last few years.”
In a sentencing memorandum sent to Judge Swain in March, an SAC attorney argued that the firm would no longer be a breeding ground for insider trading. “The defendants are deeply remorseful for the misconduct of each of the individuals who broke the law while employed by them,” wrote attorney Martin Klotz. “Even one person crossing the line into illegal behavior is unacceptable. The defendants are chastened by this experience, but are determined to learn from it.”
While his rebranded firm may be looking forward, Cohen still faces a civil lawsuit by the Securities and Exchange Commission that alleges he failed to properly supervise his employees. According to the complaint, Cohen ignored multiple red flags that should have led him to investigate suspicious trading at SAC, a charge his attorneys call “unfounded.” Cohen is not facing any criminal charges.
Still, legal experts say the jury convictions of two former SAC employees and guilty pleas from six others will only make Cohen’s case that much harder for his attorneys to defend.
“The SEC is just going to pile this on,” said Peter Henning, a professor of law at Wayne State University. “It’s a defensible case, [but] it’s certainly not one I’d like to defend.”
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