Criminal charges for SAC 'insider trades'

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The Independent Online

US prosecutors mounted an aggressive legal assault on the giant SAC Capital hedge fund yesterday, alleging in a rare criminal case that insider trading "was substantial, pervasive and on a scale without known precedent in the hedge fund industry".

The action, backed up by a civil complaint seeking forfeiture of assets and calling for money laundering penalties, is the result of a long-running investigation into a business that at the height of its powers managed more than $15bn (£9.8bn) in assets.

Founded by Steve Cohen in 1992, SAC is among the largest and, so far, the most profitable hedge funds in the industry. Mr Cohen is estimated to be worth more than $9bn by Forbes.

But prosecutors allege in a 41-page criminal indictment that underlying that success, employees and agents of the business participated in an expansive insider trading scheme over about 11 years to boost the fund's returns and the fees it drew from investors.

"SAC became over time a vertiable magnet for market cheaters," the US Attorney for the Southern District of New York, Preet Bharara, said.

The allegations and criminal charges were made against the firm, a rare step given the potentially fatal damage such action could inflict on a business.

Mr Cohen was not accused of any wrongdoing. Last week, he was charged in a civil action with failing to supervise certain employees.

Prosecutors said yesterday that SAC and its units "enabled and promoted" the alleged insider trading scheme. They did this, according to the indictment, by hiring employees with access to public company contacts likely to posses insider information, incentivising stock recommendations that had an "edge" over other investors while failing to question the provenance of such tips, and by failing to "employ effective compliance procedures" to prevent insider trading activity.

The outcome was allegedly "systematic insider trading … resulting in hundreds of millions of dollars of illegal profits and avoided losses".

The indictment named a number of SAC-linked individuals accused of obtaining or trading on inside information, including Richard Lee, a former employee who has been accused of obtaining inside information. Earlier this week, Lee pleaded guilty to conspiracy and securities fraud related to his employment at SAC.

Others named include Mathew Martoma, a former SAC manager arrested last year on accusations of illegal trading in pharmaceuticals' shares.

The authorities said Mr Lee was hired by Mr Cohen despite his previously employment at a rival hedge fund – identified only as Hedge Fund A but named in reports as Chicago-based Citadel – where he was "known for being part of … [its] 'insider trading group'."

Citadel yesterday denied any such group existed. Katie Spring, a spokeswoman, said Mr Lee was fired in 2008, although the termination was not related to insider trading. A source alleged he was let go because of the way he managed his records.

SAC last night said it had "never encouraged, promoted or tolerated insider trading". It added:" SAC will continue to operate as we work though these matters."