One of the largest-ever insider trading cases took a giant
step forward Thursday, when a federal grand jury indicted Steven A. Cohen's
hedge fund SAC Capital Advisors on fraud charges.
The hedge fund was charged with wire fraud as well as four
counts of securities fraud, and the government is seeking to force SAC to
surrender any fraud-related profits.
The charges could undermine one of Wall
Street's top stock trading firms, although they do not touch founder Steven A.
Cohen.
The Securities and Exchange Commission recently filed civil
charges against Cohen for what it said was a failure to adequately supervise
the people at his firm. Last week a spokesman for Cohen said the SEC charges
have no merit.
According to the indictment from roughly 1999 to 2010, SAC
obtained and traded on inside information to boost returns and fees and that
the scheme involved a number of portfolio managers, research analysts and
dozens of publicly traded companies.
The government is also seeking to force SAC to surrender any
fraud-related profits.
The criminal charges said SAC's "relentless pursuit of
an information 'edge' fostered a business culture within SAC in which there was
no meaningful commitment to ensure that such 'edge' came from legitimate
research and not inside information."
It added: "The predictable and foreseeable result, as
charged herein, was systematic insider trading by the SAC entity defendants
resulting in hundreds of millions of dollars of illegal profits and avoided
losses at the expense of members of the investing public."
The indictment said SAC carried out the insider trading
scheme with a staff of numerous portfolio managers and research analysts
"who engaged in a pattern of obtaining insider information from dozens of
publicly-traded companies across multiple industry sectors."
It said SAC sought to hire portfolio managers and research
analysts with proven access to public company contacts likely to possess inside
information. The managers and analysts were then not questioned when they made
trading recommendations that appeared to be based on inside information, the
indictment said.
The problem was compounded when SAC on numerous occasions
failed to use effective compliance procedures or practices designed to root out
wrongdoing. The pursuit of a trading edge overwhelmed limited SAC compliance
systems, prosecutors said.
A spokesman for SAC and a lawyer for Cohen did not
immediately respond to messages for comment Thursday.
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