SAC Capital Advisors has agreed to plead guilty to 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 move caps a decade-long investigation that turned a once mighty hedge fund into a symbol of financial wrongdoing.
The guilty plea and fine paid by SAC, which is owned by the billionaire investor Steven A. Cohen, are part of a broader plea deal that federal prosecutors in Manhattan announced on Monday. It will also require SAC to wind down its business of managing money for outside investors, though the firm will probably continue to manage Mr. Cohen’s fortune.
SAC’s case could inspire other aggressive actions against Wall Street, as the Justice Department’s uneven crackdown on financial fraud has gained momentum in recent months. Coming just days before JPMorgan Chase is expected to finalize a $13 billion settlement with the government over the bank’s questionable mortgage practices, the SAC case could stem concerns that financial firms are too big to charge.
In a letter to the court, Preet Bharara, the United States attorney in Manhattan, called the penalty “steep but fair†and “commensurate with the breadth and duration of the charged criminal conduct.†The letter explained that SAC agreed to plead guilty to every count in the indictment.
The government scheduled a press conference for Monday afternoon to discuss the deal. A spokesman for SAC, which is based in Stamford, Conn., did not have an immediate comment on the guilty plea.
Mr. Cohen, whose enormous compensation and conspicuous consumption have made him an emblem of the new Gilded Age, has not been charged criminally. Still, the plea deal is a devastating blow to Mr. Cohen, as the firm that bears his initials will acknowledge that it was a corrupt organization.
SAC’s admission that several of its employees traded stocks based on secret information also colors Mr. Cohen’s astounding investment track record. Since 1992, the fund posted average annual returns of nearly 30 percent; during that same stretch, the Standard & Poor’s 500-stock index returned about 6.6 percent, on average.
The $1.2 billion penalty adds to the $616 million in insider trading fines that SAC agreed to pay to federal regulators earlier this year. Mr. Cohen, who owns 100 percent of the firm, will pay those penalties.
SAC’s total $1.8 billion punishment sets a record for insider trading cases and surpasses those of other 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.
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. To avoid an indictment a quarter century ago, Drexel pleaded guilty to securities fraud, the last big Wall Street firm to enter a guilty plea before SAC.
A resolution of the criminal case against SAC comes more than three months after a grand jury indicted the fund for permitting a “systematic†insider trading scheme to unfold from 1999 through 2010. The government had built the charges around eight former SAC traders charged with securities fraud. Six of those traders have pleaded guilty and are cooperating with the government. Two others are fighting their indictments and are awaiting trial.
“The scope and the pervasiveness of the insider trading that went on at this particular place is unprecedented in the history of hedge funds,†Mr. Bharara, the United States attorney in Manhattan, said this summer, referring to SAC.
Mr. Cohen, 57, has told his friends that he at all times acted appropriately and complained that the government was obsessed with destroying him and his firm. He has also said he thinks it is unfair that he is paying nearly $2 billion in penalties out of his pocket for the crimes of what he believes are rogue employees.
In recent weeks, friends say, Mr. Cohen’s spirits have been high in the hopes that the SAC settlement will put his legal problems behind him. On Wednesday, he appeared relaxed sitting courtside at Madison Square Garden, where he watched the New York Knicks defeat the Milwaukee Bucks in the season opener.
But Mr. Cohen is not out of the woods.
The plea deal does not incorporate a separate civil action the Securities and Exchange Commission brought against Mr. Cohen. Filed a week before the SAC criminal indictment was announced, the lawsuit accused him of turning a blind eye to misconduct at his fund. The S.E.C. is seeking to bar Mr. Cohen from ever managing outside money, at SAC or elsewhere, people briefed on the matter said.
Criminal authorities also continue to view Mr. Cohen and other SAC employees as targets of a continuing insider trading investigation. F.B.I. agents, the people said, are examining SAC’s trading records and seeking the cooperation of potential informants. The plea agreement expressly states that it “provides no immunity from prosecution for any individual.â€
Still, SAC’s guilty plea serves as a capstone moment in the government’s vast insider trading investigation. Led by federal authorities in Manhattan, the inquiry began in earnest during the middle of the last decade using techniques normally reserved for organized crime and drug trafficking cases. F.B.I. agents used wiretaps to secretly record the telephone conversations of Wall Street traders. They also pressured low-level traders to cooperate and help build cases against their colleagues and bosses.
The crackdown has resulted in more than 70 convictions, including those of Mr. Rajaratnam and his former friend Rajat K. Gupta, the onetime head of the consulting firm McKinsey & Company. But SAC is the first corporate entity charged with insider trading since the investigation began.
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 Wall Street firms. The Justice Department has been reluctant to go after big companies in the wake of the 2002 indictment of Enron’s accounting firm, Arthur Andersen, which led to the firm’s swift collapse and the loss of 28,000 jobs.
But a policy shift appears to be afoot. Mr. Bharara, who according to people briefed on the matter is also weighing a criminal charge against JPMorgan Chase related to its role as Bernard L. Madoff’s banker, has argued that corporations should face the consequences of financial misdeeds. The S.E.C. has also begun to demand admissions of wrongdoing from corporate defendants, a change from its historical practice of not requiring an acknowledgment of misconduct.
“The pendulum had swung too far back the other way,†Mr. Bharara said in September. “I think we should be entering a serious era of institutional accountability, not just personal responsibility.â€
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.
These cases can exact a significant toll. In the case of Drexel, the guilty plea caused the firm to unravel and ultimately collapse.
By contrast, SAC appears fit for survival. Although the indictment threatened to cripple the fund, the government tried to limit the collateral damage that might have been inflicted on the fund’s investors and trading counterparties. Prosecutors did not freeze SAC’s assets and encouraged brokerage firms to continue to trade with the fund.
And the government’s demand that SAC stop managing client assets is largely symbolic. Nearly all of the fund’s investors have already pulled their money. But SAC was always more insulated than other hedge funds from the damaging effects of withdrawals because of the $15 billion it managed at its peak, only $6 billion was from outside investors.
The balance, about $9 billion, belongs largely to Mr. Cohen, with a fraction consisting of employees’ money. In the wake of the guilty plea, SAC will likely morph into a so-called family office, with Mr. Cohen managing his personal wealth.
It is unclear how many traders and staff members Mr. Cohen will employ, but SAC has begun to substantially pare back its operations. The fund, which recently employed more than 1,000 people in 10 offices around the world, has said it will shut its 50-person London unit by year-end. It also has cut six portfolio management teams based in the United States.
Though SAC management has told its staff that there will be no more cuts, it expects some traders to leave after receiving their year-end bonuses. The fund’s performance year to date has been solid - it is up more than 13 percent.
SAC had an unusual structure, with Mr. Cohen sitting atop a decentralized firm in which about 140 small teams each had control over hundreds of millions of dollars to invest. The teams were all required to share their best investment ideas with Mr. Cohen, who managed the largest trading account with several billion dollars in capital. SAC attracted ambitious, talented traders and promised them outsize compensation as long as they performed. In good years, the fund’s top talent earned tens of millions of dollars in annual pay.
Mr. Cohen was able to pay such compensation because, on the strength of superior performance, he charged among the highest annual fees in the hedge fund industry - 3 percent of assets and as much as 50 percent of profits. The average hedge fund charges a 1.5 percent management fee and 20 percent of the gains.
Though it branched into other investment strategies, SAC’s stock in trade was its so-called mosaic style of investing, using disparate sources of information to buy and sell stocks around market-moving events like quarterly earnings, big mergers and new products. His traders became known for aggressively pumping their sources for insights that would give them an edge, and speculation persisted that the fund routinely crossed the line into trading on confidential information.
Since early 2011, the government secured a series of guilty pleas that gave legitimacy to the speculation and ultimately underpinned the government’s indictment of SAC. Noah Freeman, a Harvard graduate, told investigators that he thought insider trading was part of his job description. Richard Choo-Beng Lee, a Malaysian immigrant with an engineering degree, said he freely trafficked in secret corporate information about technology companies. Richard S. Lee, who worked at the Clinton Foundation and McKinsey before pursuing riches on Wall Street, admitted to trading on leaks about corporate restructurings and acquisitions.
The trading of two other former SAC portfolio managers, Mathew Martoma and Michael S. Steinberg, is also central to the indictment. Prosecutors have accused Mr. Martoma of using confidential drug trial information to trade the stocks of the pharmaceutical companies Elan and Wyeth.
In bringing charges against Mr. Martoma, prosecutors appeared to be closing in on a case against Mr. Cohen. Prosecutors said Mr. Martoma spent 20 minutes on the telephone with Mr. Cohen the day before SAC made questionable trades in the drug stocks. But the government stopped short of saying Mr. Martoma told Mr. Cohen about the secret trial data. Mr. Martoma has refused to cooperate with investigators, and his trial is set for January.
Mr. Steinberg stands accused of trading on inside information about the computer maker Dell. Jon Horvath, a former SAC analyst who worked under Mr. Steinberg, has pleaded guilty and is expected to testify against Mr. Steinberg at his trial, which is scheduled to begin on Nov. 18.
From this batch of cases against SAC employees, the government in July brought a 41-page indictment against the fund in that included four counts of securities fraud and one count of wire fraud. Prosecutors argued that SAC allowed its traders to generate hundreds of millions of dollars in profit from insider trading. The fund, the government said, “enabled and promoted†the illicit behavior.
SAC pleaded not guilty. But in the weeks that followed, SAC had little to do but strike a deal.
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 six former SAC employees having pleaded guilty to insider trading while at the fund - and the employees very likely to have testified at a trial - SAC’s defenses were few.
Mr. Cohen’s troubles have hardly slowed down his prodigious buying and selling of real estate and art. This year, he purchased a $60 million oceanfront property in the Hamptons while at the same time putting his Manhattan penthouse on the market for $115 million. Last fall, he paid $150 million for Picasso’s “Le Rêve,†one of the highest prices ever for a painting. But next week, at the contemporary sales at Sotheby’s, he will put up for auction about $80 million worth of art, including two Warhols and a Richter.
