The Morning Brief: U.S. Government Charges SAC With Fraud

It’s official: Steven Cohen’s hedge fund firm SAC Capital Advisors has been indicted, along with affiliated companies CR Intrinsic Investors and Sigma Capital Management. They were charged on Thursday with criminal responsibility for insider trading offenses committed by numerous employees over a period spanning more than a decade, and involved the securities of more than 20 publicly-traded companies across multiple sectors of the economy, according to the indictment.

These activities resulted in hundreds of millions of dollars in illegal profits and avoided losses, the government alleged. “It is charged that the acts of these employees were made possible by institutional practices that encouraged the widespread solicitation and use of material, non-public information,” the government stated.

In addition, the government said Richard Lee, an SAC portfolio manager, pled guilty on July 23, 2013 before U.S. District Judge Paul G. Gardephe to conspiracy and securities fraud charges in connection with his work at SAC. He specialized in mergers and acquisitions, private equity buy-outs, and corporate restructurings in publicly-traded companies, among other special situations strategies. Lee faces up to 20 years in prison for the securities fraud charge and five years for the conspiracy charge. Cohen, however, was not charged with any crime.

The SAC companies were charged with one count of wire fraud while each of four SAC companies is charged separately with securities fraud. Each of the SAC companies faces a maximum fine of the greater of $25 million, or twice the gross gain or loss derived from the offense on each charge. However, the Wall Street Journal reported that the government will try to get SAC to forfeit $10 billion, citing a person familiar with the matter.

In a statement, Manhattan U.S. Attorney Preet Bharara said: “SAC seeded itself with corrupt traders, empowered to engage in criminal acts by a culture that looked the other way despite red flags all around. SAC deliberately encouraged the no-holds-barred pursuit of an ‘edge’ that literally carried it over the edge into corporate criminality.”


SAC issued the following statement: “SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously. 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.”

The indictment raises questions as to whether SAC will be able to remain in business. Investors, mostly institutions, have already pulled $5 billion in assets this year. Wealthy individuals, however, may not feel the same urgency to bail out on Cohen.

The government’s move is highly controversial. One prominent hedge fund manager who knows Cohen tells me he would be shocked if the government could prove its case and wonders whether the charges would have trouble sticking, just as former U.S. Attorney Rudolph Giuliani’s high-profile case against prominent Wall Streeters in the 1980s wound up fizzling for the most part.

In its indictment, the government repeatedly makes reference to SAC’s owner, who is obviously Cohen. For example, it points out that in a November 16, 2008, e-mail forwarded to the “SAC Owner,” an SAC PM candidate in the industrial sector was recommended in part because he had “a house in the Hamptons with the CFO” of a Fortune 100 industrial sector company. The government also pointed out that SAC hired Lee “despite a warning to the SAC Owner from Lee’s prior employer” (Ken Griffin’s Citadel) that Lee was a member of an insider trading group there. The government also alleged that SAC employees “were financially rewarded” for recommending to the SAC owner “high conviction” trading ideas, “in which the SAC PM had an ‘edge’ over other investors.” The government also faulted SAC’s compliance measures.

Later in the day, SAC issued this additional statement: “As the U.S. Attorney stated, the government’s action today does not attempt to freeze any of SAC’s assets. We have been advised by the U.S. Attorney’s Office 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. We anticipate that we and the U.S. Attorney’s Office will agree to a protective order intended to reasonably protect all parties’ legitimate interests, but will expressly permit SAC to continue its operations in the ordinary course.”


Meanwhile, Citadel fired off a statement regarding Richard Lee. The firm acknowledged that Lee worked at the Chicago hedge fund firm from January 1, 2006, until April 1, 2008, when he was fired for misconduct. The firm said he reported to Ervin Shindell until March of 2008, when Shindell left Citadel. Lee then was named head of Citadel’s value special situation team.

“At the end of March, Mr. Lee internally transferred positions to the portfolio he would oversee in his new role,” Citadel stated, adding that he transferred positions “using a pricing methodology not in accordance with generally accepted practices.” Citadel emphasized that Lee’s actions would have affected only his potential future compensation. It also said Lee’s misconduct was reported to management “within hours” and that he was then immediately fired.

Citadel said the value special situation team was disbanded shortly afterward, citing deteriorating market conditions. The firm also responded to the indictment against SAC, which stated, “…the SAC Owner received a warning from an employee of another hedge fund (‘Hedge Fund A’) that Richard Lee, who previously had worked at Hedge Fund A, and was known for being part of Hedge Fund A’s ‘insider trading group.’” Citadel stressed it “does not have, and never has had,” an insider trading group. It added: “Citadel has strict rules against, and oversight designed to prevent, insider trading. Any suggestion to the contrary is baseless and without merit.”


New York-based hedge fund Starboard Value reported that its stake in Unwired Planet, a patent licensing firm previously known as called Openwave, has been shaved to 8.5 percent from 9.9 percent, even though it added about 45,000 shares since the end of March. The activist now owns nearly 8.56 million shares, including 18,667 shares underlying certain options exercisable within 60 days. Rather, Starboard stated in a regulatory filing that the change in the percentage ownership is solely due to the estimated increase in the number of the company’s shares outstanding following the completion of a recent rights offering as part of a $50 million long term financing transaction.