SAC tops list of insider trading pacts

It is one list Steven Cohen never intended to make.

By agreeing to pay more than $600m to resolve civil allegations of insider trading, SAC Capital and its affiliates top the list of biggest insider trading settlements with the Securities and Exchange Commission.

The pact with SAC, the $15bn hedge fund run by Mr Cohen, surpasses Raj Rajaratnam, the convicted co-founder of Galleon Group, who paid a total $156m in civil and criminal forfeiture, and the $100m in civil forfeiture and fines paid by Ivan Boesky, the famous 1980s arbitrageur who pleaded guilty to insider trading in a conspiracy that shook Wall Street.

The penalty also ranks as the third-largest settlement for any securities violation, according to the SEC, behind insurer AIG, which paid $800m, and WorldCom, the telecoms group that paid $750m to settle allegations of accounting fraud. None of the companies admitted or denied wrongdoing.

For SAC, which led Bloomberg’s list of most profitable hedge funds in 2012, it is a position the firm never expected to be in.

Mr Cohen has been the envy of Wall Street. His trading prowess helped the firm generate a coveted record of profits – an average 25 per cent annually since 1996, according to investors, a loyal investor base, and enormous wealth, estimated at $9.3bn by Forbes.

The fine, while large, will not threaten the existence of SAC. A person close to SAC said the fund chose to settle to resolve the uncertainty that would follow from two to three years of civil litigation after the trial of Mathew Martoma, the former portfolio manager charged with trading two drug company stocks in advance of negative clinical trial results. The settlement consists of $274.9m in disgorgement of ill-gotten gains from the trades, $51.8m in interest, and a $274.9m penalty.

It is less than the $790m in performance fees SAC was paid in the first 10 months of last year. The hedge fund is unusual in that it charges many investors 50 per cent of the investment profits made with their money each year, compared to the 18.5 per cent charged by the average hedge fund, according to HFR. So it topped the profitability table, even though SAC’s 10 per cent post-fee investment return over the period tied it at 86th in Bloomberg’s ranking of large hedge fund performance.

[Dropping Cohen would be] like saying you would drop Michael Jordan from your team because of a technical foul

The stakes for SAC changed in November after the Department of Justice and SEC filed criminal and civil charges against Mr Martoma. It was the first time authorities linked allegations of insider trading to Mr Cohen and came as the SEC issued a Wells notice, or intention to sue, to SAC. Mr Cohen has not been accused of any wrongdoing.

But the fine may also help to calm the nerves of investors in the hedge fund. Last month SAC extended the period during which its investors may request the return of their capital to give clients more time to await new information and consider the effect of the investigations on the fund.

Last month investors requested the return of $1.7bn, more than a quarter of the outside capital in a fund that managed more than $15bn at the start of the year. About 60 per cent of the money in the fund belongs to Mr Cohen and his employees, according to people familiar with the firm.

Most, including Ed Butowsky, of Chapwood Investments, remain loyal. Mr Butowsky said he retained full confidence in SAC and Mr Cohen to manage money for him and his clients following the settlement: “It’s like saying you would drop Michael Jordan from your team because of a technical foul.”

On Friday, George Canellos, acting director for the SEC’s enforcement division, made clear that the SEC’s investigation was ongoing. He said the settlement “does not preclude any such charges at all against any person, including Steven Cohen, who is not named as a defendant in these cases”.

Seven former SAC analysts or portfolio managers have been charged by the SEC and Department of Justice for insider trading; four of those were charged for trading while at the firm. Six of them have pleaded guilty. Mr Martoma is fighting the allegations and maintains his innocence. An eighth person was sued by the SEC and settled without admitting or denying wrongdoing.

Previously, the SEC did not charge SAC or its affiliates. Mr Canellos said the SEC will charge a company: “When we believe there is requisite involvement of senior participants of the organisation.” He said in the case of SAC, Mr Martoma was a “senior portfolio manager with significant discretion to trade enormous amounts of money on behalf of not only CR Intrinsic but others”.

“There’s a lot more to come in insider trading generally,” he added. “It has been a significant issue. It should remain a significant focus of our enforcement efforts.”