SAC, the $15 billion hedge fund run by Steve Cohen, will forfeit its investment advisory business and pay a total fine of $1.8 billion after pleading guilty to insider trading charges.

SAC Capital, the $15 billion hedge fund run by Steve Cohen,
one of the biggest names in the global hedge fund business, will forfeit its investment advisory business and pay a total fine of $1.8
billion after pleading guilty to insider trading charges, the US Department of Justice announced yesterday.

The settlement brings to an end a
seven-year-long investigation by US prosecutors and fuels months of speculation as regards whether Cohen might turn the remainder of his business into a family office-type structure (view a related article here). 

“Unlawful conduct by individual employees and an
institutional indifference to that unlawful conduct resulted in insider trading
that was substantial, pervasive and on a scale without known precedent in the
hedge fund industry,” official documents from the US Attorney’s office for the
Southern District of New York say.

The filings outline that portfolio managers and
research analysts from across the SAC entity “engaged in a pattern of obtaining
inside information from dozens of publicly-traded companies across multiple
industry sectors.” The documents add that the “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.”

SAC Capital Advisors LP, SAC Capital Advisors, CR Intrinsic Investors and
Sigma Capital Management LLC are the entities responsible for the management of
a group of affiliated hedge funds known as the SAC hedge fund, or SAC.

Under the agreement - which remains subject to court approval - the SAC companies
will plead guilty to each count in which they are charged of an indictment
unsealed in July of this year. The SAC companies were charged with securities
fraud and wire fraud in connection with a large-scale insider trading scheme.

The $1.8 billion fine is split between a $900 million fine in the criminal
case and a $900 million forfeiture judgment in a civil money laundering and
forfeiture action. However, the $616 million amount that SAC has already agreed to pay to the Securities
and Exchange Commission to resolve related civil insider trading charges will
be credited against the new penalty. The additional payment required under this
agreement will therefore be about $1.2 billion.

The SAC companies will each be sentenced to five-year terms of
probation (the maximum allowed by law) with a provision to end probation
earlier if the SAC Companies cease operating entirely.

Part of the terms of
probation will require that they employ “appropriate compliance measures to identify and prevent insider
trading.” Meanwhile, the insider trading compliance measures of the
SAC companies (and any related entities trading securities) will be
reviewed by an independent expert.

“The agreement relates only to the guilt of the SAC companies and
resolves pending charges against only the SAC companies - it does not
include any admissions pertaining to individual defendants. All criminal
defendants are presumed innocent unless and until proven guilty,” said Preet Bharara, US Attorney for the Southern District of New
York, and George Venizelos, the Assistant Director in Charge of the New York
Office of the Federal Bureau of Investigation, in a statement.

However, it also said that, under the terms of the agreement, “the government is not prevented from
charging any individual with insider trading offenses and seeking the
maximum prison term authorized by law for such offenses.”

The case

The case was brought in coordination with President Barack Obama’s Financial
Fraud Enforcement Task Force, on which Bharara serves as a co-chair of the
Securities and Commodities Fraud Working Group.

The task force was established to “wage an aggressive, coordinated, and
proactive effort to investigate and prosecute financial crimes.” More than 20 federal agencies, 94 US attorneys’ offices - and state
and local partners - are involved.

Over the past three fiscal years, the Justice Department said it has filed nearly
10,000 financial fraud cases against some 15,000 defendant.