Apparently concluding that they don't have an insider trading case against hedge fund manager Steven Cohen, US Attorney Preet Bharara and his busybody minions have decided to indict SAC Capital and related firms for insider trading (are there no mafia bosses orterorrists they could be more usefully hunting down?).
Preet Bharara, the United States Attorney for the Southern District of New York, and George Venizelos, the Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of insider trading charges against four companies – S.A.C. CAPITAL ADVISORS, L.P. (“SAC Capital LP”), S.A.C. CAPITAL ADVISORS, LLC (“SAC Capital LLC”), CR INTRINSIC INVESTORS, LLC (“CR Intrinsic”), and SIGMA CAPITAL MANAGEMENT, LLC (“Sigma Capital”), collectively (the “SAC Companies”). The SAC Companies are responsible for the management of a group of affiliated hedge funds, collectively (the “SAC Hedge Fund” or “SAC”). Charges were also unsealed today against RICHARD LEE, a portfolio manager employed by SAC Capital LP, who focused on “special situations” like mergers and acquisitions, private equity buy-outs, and corporate restructurings in publicly-traded companies across various industry sectors. LEE pled guilty on July 23, 2013, before U.S. District Judge Paul G. Gardephe, to conspiracy and securities fraud charges in connection with his work at SAC Capital LP.
The SAC Companies are charged with criminal responsibility for insider trading offenses. These alleged offenses were committed by numerous employees, occurred over the span of more than a decade, and involved the securities of more than 20 publicly-traded companies across multiple sectors of the economy. It is charged that the acts of these employees were made possible by institutional practices that encouraged the widespread solicitation and use of material, non-public information (“Inside Information”). This activity allegedly resulted in hundreds of millions of dollars in illegal profits and avoided losses at the expense of members of the investing public. The SAC Companies are expected to be arraigned on the charges on tomorrow at 10:00 a.m. before U.S. District Judge Laura Taylor Swain.
Manhattan U.S. Attorney Preet Bharara said: “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. S.A.C. deliberately encouraged the no-holds-barred pursuit of an ‘edge’ that literally carried it over the edge into corporate criminality. Companies, like individuals, need to be held to account and need to be deterred from becoming dens of corruption. 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.”
What's the legal theory for holding SAC liable? As Donald Langevoort explains in his excellent treatise Insider Trading: Regulation, Enforcement, and Prevention:
Persons who possess or receive material nonpublic information in the course of their employment might well decide to trade on the basis of that information for their employer's proprietary trading account. That could happen when the employer is the issuer itself, as in the case where management engages in a stock repurchase program at the same time that they are aware of undisclosed positive information about the company's prospects. Or, more frequently, it could be a case where an employee of an investment firm, a broker-dealer, for example, receives a tip from some company insider and buys or sells stock in the insider's company for his firm's account on the basis of the tip.
In either case, liability under the federal securities laws would be fairly straightforward. Legally, the firm itself is the purchaser or seller of the securities; hence, this would be an issue of primary (not secondary) liability. When the issuer itself is the purchaser, it is deemed to "know" all information known by its officers, directors and senior management—indeed, probably all agents and employees—unless such persons are acting outside the scope of their employment or contrary to its interests. As a result, the basic test for liability under Rule 10b-5 is readily satisfied in the typical case: the company is trading while in possession of material nonpublic information. ...
The same result would follow in the case where the employer is trading in securities other than its own, assuming that the employee trading on its behalf is deemed a temporary insider or a tippee under the Dirks rationale or misappropriated the information in question. Again, the knowledge of the employee is attributed to the employer, since the information came to him or was used in the course of employment for the employer's benefit. The fiduciary duty imposed on the employee as a result of his tippee status would be attributed also. Thus, primary liability would exist, as in the SEC's action against the First Boston Corp. In that settled proceeding, First Boston learned confidential information about an increase in a client's loss reserves through its Corporate Finance department. That information made its way to the head trader in the firm's Equity Trading department (a managing director), who caused the firm to sell the client's stock. First Boston consented to disgorgement of profits of $132,138, a penalty of $264,276 and an undertaking to review and improve if necessary its procedures for handling confidential information.
SAC presumably will try to argue that the employees who engaged in insider trading on its behalf were unauthorized rogue traders. Hence, the indictment takes some considerable pains to describe how SAC created an environment in which insider trading was pervasive and internal controls were lacking.