Hedge fund SAC Capital is agreeing to plead guilty to every count of an insider-trading indictment issued in July. That means SAC would pay $1.8 billion in fines (the largest financial penalty in history for insider trading offenses), and close its investment advisory business which, according to the charges, illegally suggested trading stocks (Intel, Yahoo, Dell, among many) based on insider tips. Prosecutors claim SAC leaders intentionally created a culture that enabled widespread insider trading by its employees, including Mathew Martoma who is accused of using a doctor’s tip about a poor drug trial (to treat Alzheimer’s Disease) to recommend selling off Elan Corp and Wyeth shares, thus avoiding $276 million in losses.
The question that lingers, as it does whenever a giant financial company games the system and gets caught (see JP Morgan), is will it make a difference? SAC is a $15 billion operation which for its greed now has to pay in penalities about 10% of its overall value. And it has to surrender some, but not its core, business. Is that enough? The US Justice Department expressed satisfaction that it is, writing that “the proposed global resolution is fair, reasonable and firmly promotes the interests of justice, deterrence and respect for the law.” But why should it be fair? After all, the firm is being accused of being unfair–to its competitors and, if you drill down, to the 401K plans of regular people. How is taking a 10% hit, less even than the very favorable capital gains taxes paid by the lightly regulated hedge funds, going to be a “deterrence”? Is Steve Cohen, the billionaire mastermind of SAC (that’s Steven A. Cohen Capital, by the way, in case there’s any doubt about who’s responsible for the company)–is he really affected? Keep in mind that SAC Capital has agreed to plead guilty to EVERY count of the indictment. In the settlement the government places no restrictions on how Mr. Cohen may manage his own $8 billion fortune, accrued while running a shop that routinely, admittedly defied the rules.