Not a Lexis+ subscriber? Try it out for free.
LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
What a difference a week makes.
In the space of only seven days, the Securities and Exchange Commission charged Steven Cohen, owner of hedge fund S.A.C. Capital Advisors, with “failing to supervise two senior employees and prevent them from insider trading under his watch,” and the Department of Justice charged Cohen’s firm with “criminal responsibility for insider trading offenses.”
Which global audit firm serves S.A.C. Capital Advisors, an investment advisor registered with the SEC that gave S.A.C. a clean opinion on its most recent report?
Last week’s announcements add to prior SEC charges against S.A.C. portfolio managers Matthew Martoma and Michael Steinberg, who allegedly obtained material non-public information about publicly traded companies in 2008, and traded on that information. The SEC charged Martoma and his tipper with insider trading in an enforcement action last year, and charged Steinberg with insider trading in a complaint filed earlier this year. CR Intrinsic, an affiliate of S.A.C. Capital Advisors, also agreed to pay more than $600 million related to those charges, in the largest-ever insider trading settlement. Another Cohen affiliate, Sigma Capital, agreed to pay nearly $14 million to settle more insider trading charges.
Also last year, Diamondback Capital Management LLC, a hedge fund started by alumni of S.A.C, agreed to pay more than $9 million to settle SEC’s insider-trading charges related to some of the same investments named in the latest S.A.C. complaints. PricewaterhouseCoopers LLP. also audited Diamondback, which closed up shop at the end of 2012.
The SEC alleges that S.A.C. owner Steven Cohen ignored “red flags” after receiving “highly suspicious” information from Martoma and Steinberg that should have caused any reasonable hedge fund manager to investigate the source. Instead of setting a proper “tone at the top” and scrutinizing his employees’ conduct, Cohen praised them and rewarded Martoma with a $9 million bonus for the tip. According to the SEC complaint, Cohen’s funds earned profits and avoided losses of more than $275 million as a result of the illegal trades.
“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. “After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law. In addition to the more than $615 million his firm has already agreed to pay for the alleged insider trading, the Enforcement Division is seeking to bar Cohen from overseeing investor funds.”
The Department of Justice, in its criminal complaint against S.A.C. the firm, says numerous employees, over more than a decade, allegedly traded in the securities of more than 20 publicly-traded companies based on inside information. The DOJ says so many illegal acts were possible because of the “institutional practices that encouraged the widespread solicitation and use of material, non-public information”.
In particular, S.A.C and its affiliates were subject to “limited” compliance policies and procedures that would have detected or prevented insider trading by S.A.C. staff. Compliance staff failed to routinely monitor employee e-mails for indications of insider trading until late 2009, a common industry practice. To his credit, it seems S.A.C.’s head of compliance had recommended such monitoring to management four years earlier.
Given what we know now about tons of cases of insider trading at S.A.C. – there were guilty pleas by six former S.A.C. Portfolio Managers and Research Analysts for repeated insider trading over long periods of time – it’s incredible that S.A.C.’s compliance department only identified one instance of suspected insider trading by its employees. In that one case, according to the SEC, those employees did not lose their jobs and S.A.C. did not report the conduct to regulators or law enforcement.
U.S. Attorney for the Southern District of New York Preet Bharara:
“A company reaps what it sows, and as alleged, S.A.C. seeded itself with corrupt traders, empowered to engage in criminal acts by a culture that looked the other way despite red flags all around…To all those who run companies and value their enterprises, but pay attention only to the money their employees make and not how they make it, today’s indictment hopefully gets your attention.”
To that statement I would add “To all those who audit companies but pay attention only to the fees paid by the clients…”
Read this article in its entirety at the re: The Auditors, a blog by Francine McKenna.
For more information about LexisNexis products and solutions connect with us through our corporate site.