The record $1.8 billion insider-trading settlement announced Monday between a Wall Street investment giant and a branch of the Justice Department included a warning shot to other power players that nobody in the financial sector is “too big to jail.”
“The aggregate $1.8 billion financial penalty is -- to the government’s knowledge – the largest financial penalty in history for insider trading offenses,” Preet Bharara, the U.S. Attorney for the Southern District of New York, said in a settlement document with SAC Capital Advisers LP sent to two presiding federal judges Later, in an afternoon news conference to announce an unprecedented settlement with the hedge-fund group SAC, Bharara made it clear his office has its eyes on others and sent a warning to Wall Street. No firm anywhere, “whether the misbehaving corporation is a hedge fund or a commercial bank” should think that are “too big to jail,” he said.
SAC is owned by investment magnate Steven A. Cohen, and as part of the deal, which still needs a judge’s approval, his company would stop investing on behalf of others. It could only operate as a “family office,” meaning Cohen could only invest his family money going forward. Cohen himself was not charged. Hedge funds are private investment pools for the uber-wealthy. They generally require huge minimum sums from a small number of rich investors who seek so-called alpha returns, which eclipse what could be earned in more conventional fashion in the stock market or by buying bonds. Under the revamp of financial regulations in 2010, hedge funds were required to register with the Securities and Exchange Commission for the first time, but they continue to be regulated only from the standpoint of investor protection and not safety and soundness, despite their large size.
It’s an important distinction given that at its peak, SAC had more than $15 billion worth of assets under management, and in the most recent reading in September had more than $9 billion under management. Under the pending settlement announced Monday, SAC would pay a penalty of $900 million and would forfeit $900 million too. But the company would be able to count toward that forfeiture $616 million already agreed to by some of the company’s defendants and the Securities and Exchange Commission. Monday’s settlement thus added another $284 million to the total sum of forfeiture. SAC has continually maintained that insider-trading was not widespread at the firm, and issued a statement repeating that after Bharara finished his news conference.
"We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC's liability. The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years,” the statement said. “SAC has never encouraged, promoted or tolerated insider trading.” In its original indictment of SAC, the U.S. attorney told quite the opposite story. It cited “institutional practices that encouraged the widespread solicitation and use of illegal inside information.” It also called that insider trading “substantial, pervasive and on a scale without known precedent in the hedge fund industry. Importantly, Bharara noted that the settlement was only with his office and did not preclude further legal action from other state or federal prosecutors or regulators. Bharara is the former chief counsel for U.S. Senator Charles Schumer, D-NY, who is known for both rhetorical flare and friendships with Wall Street’s power players. Cohen had historically been a big contributor to Democratic candidates but began giving more to Republicans during the fight over the landmark 2010 legislation that put new curbs on the financial sector.