SAC Pleads Not Guilty on Insider-Trading Charges

SAC CapitalSAC Capital Advisors LP, one of the nation's largest hedge-fund firms, on Friday denied charges that it acted as a criminal enterprise and encouraged insider trading by its employees on an unprecedented scale.

Source: Source: WSJ | Published on July 26, 2013

Federal prosecutors in Manhattan alleged Thursday that SAC, which has about $14 billion under management, made "hundreds of millions of dollars" in illicit profits from improper trading by its employees on at least 20 public companies over a decade.

The government alleged that SAC management, including its founder, Steven A. Cohen, sought out persons as employees with access to corporate insiders and became a "magnet for cheaters."

"Not guilty," said Peter Nussbaum, SAC's general counsel, at a brief hearing in federal court in Manhattan on the criminal charges against the firm of wire fraud and securities fraud. The next hearing in the case is Sept. 24.

The Justice Department also has filed a related civil-forfeiture lawsuit against the firm. The alleged criminal activity occurred between 1999 and at least 2010.

Assistant U.S. Attorney Antonia Apps said prosecutors plan to turn over a "rather tremendous volume" of documents to SAC as part of the evidence in the case, as well as wiretap recordings.

The criminal charges followed years of investigation by federal authorities into the activities of SAC and its employees. Six former employees have pleaded guilty to insider-trading charges and two more are awaiting trial later this year in Manhattan.

Prosecutors said Thursday that SAC hired one former portfolio manager, Richard Lee, despite "a reputation for insider trading" and even over the objections of its own legal department. Mr. Lee pleaded guilty to criminal charges at a sealed proceeding on Tuesday.

The Wall Street Journal previously reported that the government was planning criminal charges against SAC, but the scope of Thursday's action and the language used by prosecutors caught many lawyers and financial executives by surprise. The government's bold move comes after prosecutors determined they didn't have sufficient evidence to personally charge Mr. Cohen, according to people familiar with the matter.

Mr. Cohen has denied wrongdoing for years and has significant financial resources to fund a defense of the firm. However, no major financial firm has survived a criminal indictment.

The charges come just months after SAC agreed to pay a record $616 million settlement of civil insider-trading allegations by the Securities and Exchange Commission without admitting or denying wrongdoing.

In the civil action filed alongside the criminal charges, the government said it was seeking to recover "any and all" of the firm's assets, potentially a huge blow to the wealth Mr. Cohen and his employees have acquired over more than two decades of outsize investment returns. The government estimates those assets at $10 billion, according to people familiar with the matter.

The large amount contrasts with the hundreds of millions of dollars SAC is alleged to have made, or avoided losing, through insider trading. In seeking forfeiture of such size-unusual in an insider-trading case-the government is using the theory that SAC allegedly engaged in money laundering, tainting the firm's assets as a whole, according to people familiar with prosecutors' thinking.

SAC, which has largely stayed silent throughout the government investigation, pushed back against the allegations. In addition to saying the firm doesn't tolerate insider trading, an SAC spokesman added Thursday that the government's forfeiture attempt won't immediately affect the firm's operations: "SAC will continue to operate as we work through these matters."

The government, while not charging Mr. Cohen, aimed directly at his reputation, saying he, as "the SAC owner," failed to query analysts and portfolio managers about questionable information and recruited employees he believed could pry nonpublic information out of companies.

Thursday's indictment caps one of the longest-running investigations of a financial firm in Wall Street history, with government officials first having suspicions about trading at SAC more than a decade ago. The case pits an ambitious prosecutor, Mr. Bharara, against Mr. Cohen, known as one of the savviest investors on Wall Street, in a high-profile legal chess match that has captivated the financial world.

The criminal charges by the U.S. attorney's office in Manhattan come in an era of unprecedented insider-trading prosecutions, and they are the most aggressive move against a major Wall Street firm since investment bank Drexel Burnham Lambert Inc. in 1988 pleaded guilty to six felony counts and paid a $650 million fine.