SAC Capital first sought to fend off a federal indictment. Then the hedge fund, run by the billionaire Steven A. Cohen, offered to pay about $700 million to settle. Finally, SAC suggested it plead guilty to only some of the criminal charges in the five-count indictment.
But at every turn, the government refused.
And so on Monday, SAC agreed to plead guilty to all five counts of insider trading violations and pay a record $1.2 billion penalty, becoming the first large Wall Street firm in a generation to confess to criminal conduct. The deal caps a decade-long investigation that has turned a mighty hedge fund into a symbol of financial wrongdoing.
An account of the negotiations, based on interviews with people briefed on the case, illuminates the private wrangling and underscores just how aggressive the government was in extracting the deal.
The guilty plea and fine paid by SAC are part of a broader plea deal that will impose a five-year probation on the fund. SAC must also terminate its business of managing money for outside investors, a largely symbolic blow, as it already faces an exodus of client money.
It will still most likely continue to manage Mr. Cohen’s vast fortune, a move that would help maintain its influence on Wall Street.
The case could inspire other aggressive actions against Wall Street, as the Justice Department’s uneven crackdown on financial fraud has gained momentum. Coming just days before JPMorgan Chase is expected to complete a $13 billion settlement with the government over the bank’s questionable mortgage practices, the SAC plea might stem long-seeded concerns that the Obama administration has been reluctant to bring charges against major financial firms.
“No institution should rest easy in the belief that it is too big to jail,†Preet Bharara, the United States attorney in Manhattan, said on Monday.
The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC already agreed to pay to the Securities and Exchange Commission. Mr. Cohen, who owns 100 percent of the firm, will pay those penalties himself.
SAC’s total $1.8 billion punishment sets a record for insider trading cases and far surpasses those of other recent noteworthy financial prosecutions. Raj Rajaratnam, the fallen hedge fund titan serving an 11-year prison sentence for insider trading, was ordered to pay about $157 million.
In a letter to the court, Mr. Bharara called the SAC penalty, which was slightly above federal guidelines, “steep but fair†and “commensurate with the breadth and duration of the charged criminal conduct,†a reference to the eight former SAC traders charged with securities fraud. Six of those traders have pleaded guilty and are cooperating with prosecutors.
SAC, which is based in Stamford, Conn., said in a statement that it took “responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.â€
SAC’s guilty plea serves as a capstone moment in the government’s vast insider trading crackdown, which has produced more than 70 convictions, including that of Mr. Rajaratnam.
Led by federal authorities in Manhattan, the inquiry began in the middle of the last decade using techniques normally reserved for organized crime cases. F.B.I. agents used wiretaps to record Wall Street traders and pressured low-level employees to cooperate against their colleagues and bosses.
The SAC case began 11 years ago with a simple suspicion: Its investment returns were too good to be true. The fund has posted average annual returns of nearly 30 percent.
With questions mounting, a small team of investigators at the S.E.C. contacted the nation’s stock exchanges to ferret out whether insider trading was at play, officials briefed on the case said. The inquiry ebbed and flowed for years, producing leads but no smoking gun.
But in 2006, the F.B.I. had a breakthrough. It secured the cooperation of David Slaine, an employee of Mr. Rajaratnam’s hedge fund, the Galleon Group. Mr. Slaine soon offered the government a lens inside not only Galleon but the inner workings of competitors like SAC.
Starting in 2009, after the S.E.C. intensified its focus on SAC, the government gained further momentum when it secured a series of guilty pleas that appeared to legitimize the speculation swirling around the hedge fund. Noah Freeman, who joined SAC in 2008, told investigators that he thought insider trading was part of his job description.
“What started with a key cooperator, led to thousands of hours of relentless investigative work by a team of F.B.I. agents, uncovering an extensive network trafficking in inside information throughout the hedge fund industry,†April Brooks, the F.B.I. special agent in charge, said at a news conference on Monday.
The trading by two other former SAC portfolio managers, Mathew Martoma and Michael S. Steinberg, is also central to the indictment.
Prosecutors have accused Mr. Martoma, who has pleaded not guilty, of using confidential drug trial information to trade the stocks of pharmaceutical firms.
Mr. Steinberg stands accused of trading on inside information about the computer maker Dell. He has maintained his innocence and will stand trial on Nov. 18.
From this batch of cases, the government readied charges against SAC. But an indictment was not a forgone conclusion.
SAC and the government, the people briefed on the matter said, discussed a plea deal that included a guilty plea and a fine but would have spared it the embarrassment of an indictment.
Ultimately, talks broke down, paving the way for the government to bring the indictment in July, charging SAC with four counts of securities fraud and one count of wire fraud.
SAC pleaded not guilty. But in the weeks that followed, the fund had little to do but settle. The law of corporate criminal liability, which allows the government to attribute the criminal acts of employees to the company itself, buttresses the case. With former SAC employees having pleaded guilty â€" and the employees likely to have testified at a trial â€" SAC’s defenses were few.
And yet SAC, led by lawyers at Paul, Weiss, Rifkind, Wharton and Garrison and Willkie Farr & Gallagher, still pushed back when it came to money.
The United States attorney’s office, according to the people briefed on the case, demanded $1.8 billion in penalties from SAC â€" $900 million in fines and $900 million in forfeited profits. The office and its criminal division chief who handled negotiations, Lorin L. Reisner, was willing to deduct from that amount the $616 million the fund already paid to the S.E.C., reducing the additional penalty to about $1.2 billion.
After prosecutors rejected SAC’s initial offer of roughly $700 million, the fund raised the amount to about $1 billion. When that failed, SAC acceded to the $1.2 billion deal.
Even with the deal, criminal authorities continue to view Mr. Cohen and other SAC employees as targets of a continuing insider trading investigation. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.â€
What’s more, the plea deal does not incorporate a separate civil action the S.E.C. brought against Mr. Cohen. The S.E.C., which accused him of turning a blind eye to misconduct at his fund, is seeking to bar Mr. Cohen from managing outside money, at SAC or elsewhere.
Many have drawn comparisons between Mr. Cohen and Michael R. Milken, the junk bond pioneer at Drexel Burnham Lambert who became synonymous with financial greed during the go-go 1980s. After pleading guilty to securities fraud charges, Mr. Milken paid about $1 billion in penalties, adjusted for inflation. A quarter-century ago, Drexel pleaded guilty to securities fraud, the last big Wall Street firm to enter a guilty plea.
Guilty pleas by financial institutions are exceedingly rare, and legal specialists say the case against SAC could embolden prosecutors to bring criminal charges against other firms.
Brandon L. Garrett, a professor at the University of Virginia School of Law and author of the forthcoming book, “Too Big to Jail: How Prosecutors Target Corporations,†said that while environmental and antitrust inquiries frequently resulted in corporate indictments, financial fraud investigators were just now “starting to see the light.â€
“Prosecutors have increasingly been saying that no company is too big to jail, and now they can point to the SAC case and say ‘We really mean it,’ †Mr. Garrett said.
