Back in March, when the Securities and Exchange Commission agreed to settle a big insider-trading case involving SAC Capital Advisors, one of the biggest hedge funds in the country, I mischievously suggested that Steven A. Cohen, SAC’s mercurial and publicity-shy boss, was effectively buying off the U.S. government for six hundred and sixteen million dollars. (That was the size of the fine that the S.E.C. levied on SAC.) It turns out that I was wrong. Cohen is laying out a lot more than six hundred big ones to try to make the feds go away. To be exact, he’s paying them $1.8 billion.
Make no mistake, though: this could still be a sweet deal for Cohen, who set up shop twenty years ago with just twenty-five million dollars under management. Assisted by a battalion of high-priced lawyers, he has reached a “global resolution” with the Justice Department that allows him to keep the bulk of the vast fortune—some nine billion dollars, according to the New York Times—that he made running a firm at which insider trading was “substantial, pervasive and on a scale without known precedent in the hedge fund industry.” And, at least for now, Cohen won’t face any criminal charges or the prospect of any jail time.
That description of how pervasive insider dealing has been at SAC comes from the Justice Department’s criminal complaint against SAC, which it filed on July 25th. The complaint accused SAC of being criminally responsible for insider-dealing offenses. In effect, the government was asserting that Cohen and other SAC managers had created a corporate culture in which employees were encouraged to obtain proprietary information and make investments on the basis of it. Backing up this idea, six former employees have already pleaded guilty to insider-dealing charges, and two current employees are awaiting trial.
In today’s deal, the firm itself agreed to plead guilty to the criminal charges against it and pay a $1.8 billion fine, which will include the six hundred and sixteen million it had already agreed to pay the S.E.C. The company also agreed to stop taking in money from outside investors, and to cease operating as an investment adviser. SAC won’t be put out of business completely, but it will be transformed from a huge hedge fund into a smaller (but still pretty large) “family office” that invests Cohen’s money.
In a statement announcing the settlement, Preet Bharara, the U.S. Attorney for the Southern District of New York, said that “individual guilt is not the whole of our mission. Sometimes, blameworthy institutions need to be held accountable too. … Today, SAC Capital, one of the world’s largest and most powerful hedge funds, agreed to plead guilty, shut down its outside investment business, and pay the largest fine in history for insider trading offenses. That is the just and appropriate price for the pervasive and unprecedented institutional misconduct that occurred here.”
That’s arguable. By allowing the firm to plead guilty—rather than the man who created it, owns it outright, and runs it with an iron fist—today’s agreement also perpetuates the myth, visible in other recent Wall Street cases, that abstract corporate entities rather than flesh-and-blood humans are responsible for financial wrongdoing. Which, of course, defies the laws of physics. SAC Capital Advisors exists only on paper. It was the people who ran the firm that defined its culture and designed its peculiar internal structure, in which portfolio managers and analysts were encouraged to share their best investment ideas with Cohen directly. While Cohen wasn’t named as a defendant in any of the SAC insider-trading cases, court papers have alleged that, as the firm’s owner and chief executive, he “enabled and promoted” the wrongdoings.
If this is so, why isn’t he in the dock facing criminal charges?
One possibility is that he hasn’t done anything wrong, and didn’t know anything about the insider dealing that was “substantial, pervasive and on a scale without known precedent in the hedge fund industry.” In a statement issued in July, his spokesman said, “Steve Cohen acted appropriately at all times.” Another possibility is that the investigators and prosecutors in Preet Bharara’s office still don’t have enough evidence to tie Cohen directly to particular instances of insider trading. One of the SAC employees who is currently awaiting trial, Mathew Martoma, who reportedly spoke personally with Cohen about his investments, has so far refused to coöperate with the government, according to numerous reports.
The S.E.C., despite settling with SAC in March, subsequently brought a civil case against Cohen, charging him with failing to supervise his employees and prevent insider dealing. Today’s agreement leaves that case outstanding, and it doesn’t preclude the possibility that the Justice Department could bring criminal charges against Cohen. According to a report on the Times’ DealBook blog, investigators are currently examining SAC’s trading in Gymboree, the children’s clothing and music chain, with the aid of a witness.
The agreement does appear to rule out the possibility that the Justice Department will indict SAC and Cohen on racketeering charges, which can carry penalties of decades in prison. Back in the nineteen-eighties, when Rudy Giuliani held Bharara’s job, he threatened the investment bank Drexel Burnham Lambert with racketeering charges, and brought them against Princeton/Newport Limited Partners, a small investment firm. According to reports earlier this year, the U.S. Attorney’s office was considering exercising the racketeering laws, which are a kind of nuclear option, in this case, too.
Evidently, that idea was dropped. Far from being treated like a mobster, Cohen was hit solely in the pocketbook. He wasn’t even mentioned in the U.S. Attorney’s press release about today’s settlement, or in a letter and legal stipulation about the settlement that Bharara’s office filed in U.S. District Court. Rather than naming names, the documents contain repeated references to dozens of corporate entities and investment funds connected to SAC—the “SAC Entity Defendants.”
From Cohen’s perspective, that’s got to be encouraging. He’s not quite in the clear yet. But with about seven billion dollars in his back pocket even after he’s paid off all his fines, he’ll be feeling better about things. Maybe he’ll even go out and buy himself another Picasso to celebrate.
Photograph by Simon Dawson/Bloomberg/Getty.
