As expected, the Department of Justice filed criminal charges against SAC Capital, the hedge fund managed by billionaire investor Steven Cohen today. The hedge fund and three of its affiliates has been charged with four counts of securities fraud and one count of wire fraud.
Damages to SAC Capital after lawsuit
Some people in the investment community believe that the lawsuit confronting SAC Capital could cripple its business operations.
The 41-page indictment stated that SAC Capital’s insider trading activities were systematic, and resulted in hundreds of millions of dollars in illegal profits, and prevented losses, at the expense of members of the investing public.
The DOJ identified individual defendants in the case as Wes Wang, Richard Choo-Beng Lee, and Jon Horvath, SAC Capital research analysts previously employed by the hedge fund’s affiliate Sigma Capital. They obtained insider information from technology companies and provided trading ideas to their portfolio managers using the information. The three staff members pled guilty for conspiracy to commit securities fraud. Lee also pled guilty to commiting wire fraud.
Noah Freeman obtains inside information
Noah Freeman, a former portfolio manager specializing in the technology sector, also obtained insider information from different companies such as Dell Inc. (NASDAQ:DELL); Research In Motion Ltd—now BlackBerry Ltd (NASDAQ:BBRY)—and pled guilty to conspiracy and securities fraud for insider trading he committed during his tenure at SAC Capital.
Donald Longueuil, another former portfolio manager at SAC Capital’s CR Intrinsic also obtained inside information from tech companies while working at the hedge fund. He also pled guilty to conspiracy to commit securities fraud
Richard Lee, a former SAC portfolio manager who managed $1.25 billion in special situations funds across industry sectors such as mergers and acquisitions, private equity buyouts, and corporation restructurings also obtained insider information. He also pled guilty for conspiracy and securities fraud.
Elan and Wyeth insider-trading charges
Mathew Martoma, a former portfolio SAC portfolio manager employed by CR Intrinsic is facing insider-trading charges related to the shares of Elan Corporation, plc (ADR) (NYSE:ELN) and Wyeth Limited (NSE:WYETH). He pled not guilty to the allegations and refused to provide information against Cohen.
The DOJ said SAC Capital’s insider trading scheme was “substantial, pervasive, and on a scale without known precedent in the hedge fund industry.”
The indictment also emphasized that SAC Capital’s relentless pursuit of information “edge” was the root of the business culture of the hedge fund with “no meaningful commitment to ensure that such edge came from legitimate research and not inside information.”
Prosecutors are still building their case against Cohen. Since there is not enough evidence to prove his direct involvement in the insider trades committed by his employees, the government cannot file a criminal case against him. He was charged with an administrative case for failing to supervise his employees. A spokesperson for the hedge fund said Cohen will vigorously deny the failure-to-supervise allegations against him.