The federal government has given a devastating blow to hedge fund titan SAC Capital Advisors following a criminal indictment where the company pled guilty to criminal fraud. The settlement, which is still pending, was set at $1.8 billion and would be the largest settlement paid by a financial institution.
U.S. Attorney General Preet Bharara, the federal prosecutor who pursued the case, said that SAC Capital “engag[ed] in insider trading that was substantial, pervasive, and in a scale without precedent in history of hedge funds.” SAC is a whale company containing other smaller companies and funds.
History’s largest insider trading penalty will be divvied up two parts: $900 million in fines, and $900 million to the government. The Huffington Post reported, however, that $616 million could be cut because an already standing agreement by SAC companies to pay over $600 million to similar actions. The company has received some rightfully harsh criticism from the government.
FBI Assistant Director George Venizelos said that “What SAC Capital’s plea demonstrates in that cheating and breaking the law were not only permitted but allowed to persist.”
From 1999 to about 2010, SAC Companies employees used non-public information to make or recommend trades to portfolio managers or the SAC owner. Employees used the securities of over 20 publicly-traded companies “across multiple sectors of the economy” and SAC managers failed to question employees on the trades. The managers also failed to properly stop the insider trading because of “ineffective compliance measures.”
SAC was also accused of money laundering by combining the illegal profits with unrelated assets, used that money to perpetuate more insider trading, and passed the profits through outside financial institutions.
The provisions of the agreement reached government and SAC is a potential death blow to the company. Along with the settlement, the company may not “accept third party investor funds and will terminate operations as an investment adviser,” and will be placed on the maximum five years probation, which can end earlier “if the SAC Companies cease operating entirely.”
“This case of insider trading illustrates the most reckless of financial practices and shows that cases of extreme fraud are still prevalent on Wall Street,” said Peter Mougey, securities attorney and shareholder at the Levin, Papantonio law firm. Of the penalties, Mougey continued in candidly saying that “The penalties are stiff, as they should be.”