The Manhattan U.S. Attorney’s Office achieved another significant win with the announcement of an agreement by the SAC Capital Companies to plead guilty to the indictment against them and to resolve the parallel civil forfeiture case. U.S. v. S.A.C. Capital Advisors, LP, Case No. 13 cr 541 (S.D.N.Y.); U.S. v. SAC Capital Advisors, LP, Civil Action No. 13 Civ. 5182 (S.D.N.Y.). For the U.S. Attorney’s Office the plea arrangement is the culmination of an unprecedented, unbroken string of insider trading guilty pleas and convictions. For the defendants, the result is harsh, effectively ending the business of a Wall Street titan.
The five count indictment named as defendants the key SAC entities: S.A.C Capital Advisors, LP, S.A.C. Capital Advisors LLC, CR Intrinsic Investors, LLC and Sigma Capital Management, LLC. It contains one count of wire fraud and four counts of securities fraud.
The indictment is built on two essential components. First, it rolls up prior insider trading convictions and charges brought against former and current employees and affiliates of the firms. The list includes former employee Wes Wang who furnished inside information about a variety of companies including Cisco Systems, Broadcom Corporation and others; Richard Choo-Beng Lee who provided illegal tips on Intel, AMD and others; Jon Horvath who is alleged to have illegally tipped Michael Steinberg, currently awaiting trial, about inside information regarding NVIDIA and Dell; Noah Freeman who provided inside information about Avnet, Inc., Fairchild Semiconductor, Atheros Communications, Inc., and others; Donald Longueuil who passed-on material non-public information about Fairchild, Broadcom, Dell and others; Mathew Martoma who, like Mr. Steinberg, is awaiting trial on insider trading charges only related to Elan Corporation and Wyeth; and Richard Lee who pleaded guilty to providing illegal tips about Yahoo! Inc. and 3Com Corporation.
The Second component is the culture, reflected in the relentless pursuit of “edge” or inside information, hiring practices that fostered contacts with companies and the lack of effective compliance systems. The firm encouraged the hiring of those who had deep connections to public companies which could yield “edge” or inside information. This was exemplified by the hiring Richard Lee who had a questionable history but was reputed to have access to inside information. The lack of effective compliance procedures aided this culture where suspicious practices were not referred to compliance or glossed over, according to the indictment.
Under the terms of the deal the SAC Companies will pled guilty to all of the counts in the indictment. In addition, the companies will pay a financial penalty of $1.8 billion. That sum represents a $900 million judgment in the forfeiture action and a $900 million criminal fine. The defendants will be given credit for the $616 million paid earlier to resolve an SEC civil insider trading case. The companies will also terminate their registration with the SEC as an investment advisor. Finally, the defendants will be on probation for five years. During that period they will implement insider trading compliance procedures which will be supervised by a monitor.
The guilty plea only resolves charges for the defendants. It does not resolve liability for any individual. Accordingly, the failure to supervise action brought by the SEC against Mr. Cohen still must be resolved. Likewise, the civil and criminal insider trading inquiries will continue. The date for the defendants to appear and enter the guilty pleas and be sentenced has not been announced.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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