It has been dubbed an epic insider trading case, unmatched in the history of hedge funds.
SAC Capital has agreed to plead guilty to criminal fraud charges and will pay a record $1.8 billion penalty.
Under its billionaire founder, Steven A. Cohen, SAC grew to be one of the nation’s most profitable hedge funds. Portfolio managers were paid six- and seven-figure bonuses. But prosecutors charged that some of that money was made illegally from confidential information that others were not privy to.
Does the settlement spell the end for a company that once swaggered through markets?
Here are some answers to those and other questions about the case:
Q: What is SAC Capital?
A: SAC is a hedge fund, which is a financial firm that aggressively manages billions of dollars in pooled investments. The goal is to produce even bigger returns than the stock market, usually by taking extraordinary risks.
Q: What crime did SAC commit?
A: Prosecutors say SAC made hundreds of millions of dollars, from 1999 to 2010, off of illegal inside information from at least 20 public companies, including Elan Corp., Dell Inc., and Wyeth. Depending on the magnitude of the profits gained, illegal insider trading can be a civil or criminal offence.
Q: What exactly is insider trading?
A: Federal officials focus on illegal insider trading. That’s when investors use confidential or advance information that is not available to the market as a whole to make a profit or avoid a loss. Insider trading can be legal if company officers, directors or employees buy or sell their company stock after significant information becomes publicly known. But they must report those purchases or sales to the Securities and Exchange Commission.
Q: Who are the victims of illegal insider trading?
A: Authorities say the most obvious victim is the market. When investors profit from inside information, the market is no longer a level playing field in which all investors have a fair shot. It means investors who weren’t privy to the inside information paid more for a stock or sold it for less than insiders did. Companies whose confidential information was used can also be victims, too.
Q: Who’s been running SAC? And is its leader in trouble, too?
A: To know who runs SAC, all you need to do is look at the company name. Those are the initials of its founder, Steven A. Cohen. He’s often cited as one of the richest men in America. Forbes recently estimated he’s worth nearly $9 billion.
The Justice Department’s indictment doesn’t name Cohen as a defendant. But the agreement doesn’t preclude future criminal charges against him. Nor does it resolve a civil case that the SEC brought against him in July that alleges he failed to prevent insider trading at SAC. The SEC seeks to fine Cohen and bar him from managing investor funds. Cohen has disputed the allegations.
Q: Is this the end of SAC?
A: In a way, it is. Under the deal, the company can no longer make investments on behalf of clients. But about half of the estimated $15 billion in assets that SAC managed at one point this year belonged to Cohen and his employees. So the company is free to continue investing that money.
Q: What will the penalty money be used for?
A: The $1.8 billion penalty will go to the U.S. Treasury.
Q: How does the SAC case compare with similar cases?
A: For many, the term insider trading conjures images of Ivan Boesky and Michael Milken, powerful financiers who made headlines for sensational scandals in the 1980s. And who can forget Michael Douglas portraying Gordon Gekko, who taught audiences that “greed is good.”
The SEC files dozens of insider trading cases each year. Many are small cases that fall below the public’s radar. But sometimes they ensnare famous people.
In 2004, Martha Stewart went to jail for lying to the SEC in a case that accused her of avoiding $45,000 in stock losses. Dallas Mavericks owner Mark Cuban won a years-long fight last month with the SEC. Jurors decided Cuban didn’t violate the law when he sold his stake in an Internet company in 2004.
Prior to the SAC’s deal, the biggest insider trading case involved Raj Rajaratnam, a one-time billionaire and founder of the Galleon group of 14 hedge funds, and others linked to him. Rajaratnam is serving an 11-year prison sentence for reaping up to $75 million through illegal trading.