SAC agrees to plead guilty to insider trading, pay $1.2 billion penalty

The beleaguered hedge fund owned by billionaire Steven A. Cohen agreed to pay $1.2 billion to settle charges that it tolerated rampant insider trading for more than a decade, a deal that could sink one of Wall Street’s big success stories and crush its owner’s vaunted reputation.

SAC Capital Advisors agreed to plead guilty to each of the five counts in a criminal indictment unveiled in July by U.S. Attorney Preet Bharara in Manhattan. The Connecticut-based firm would stop managing the money of outside investors if the deal is approved by the courts. It can continue to manage Cohen’s sizeable fortune, but would have to do so under the eye of an independent compliance consultant.

The plea agreement, announced Monday, marks the culmination of a multi-year effort to close in on a storied hedge fund that has racked up stellar profits since Cohen founded it in 1992. It also represents one of the most high-profile successes in the government’s aggressive push to purge Wall Street of insider
trading and hold wrongdoers accountable.

Since Bharara took office in August 2009, he has filed insider-trading charges against 87 defendants and convicted 75 of them — including hedge fund billionaire Raj Rajaratnam, who is now behind bars, and his friend Rajat K. Gupta, a former Goldman Sachs board member who was found guilty of divulging boardroom secrets to Rajaratnam.

Under Monday’s deal, SAC agreed to pay $900 million in fines and forfeit an additional $900 million, for a total of $1.8 billion, a record for an insider-
trading case. But the firm will receive a $616 million credit for civil settlements it reached with the Securities and Exchange Commission in March involving alleged insider trading at two SAC affiliates.

“It’s the end of SAC as the markets have come to know it,” said Jacob S. Frenkel, a former federal prosecutor and a former SEC enforcement lawyer. “Today’s plea will kick the pedestal out from under Cohen’s long-enjoyed lofty status on Wall Street.”

In a statement, SAC said that it takes responsibility for the “handful of men” who have pleaded guilty to insider trading while at the firm. Early in the day, SAC’s statement said that it “has never encouraged, promoted or tolerated insider trading.” That language disappeared in the afternoon and the statement instead said: “Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.”

None of the cases that the government has settled with the hedge fund accuse Cohen of criminal wrongdoing. But he remains a target of a separate civil proceeding by the SEC, which recently charged him with failing to supervise two of the firm’s employees in insider-trading incidents. If the SEC wins, Cohen might be banned from the industry for life.

On Monday, Bharara implied that Cohen remains in his office’s crosshairs, too, saying that the plea agreement does not provide criminal protection or immunity for any individuals.

Bharara described the deal as a “fair but steep” resolution.