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From Securities Regulation Daily, November 4, 2013

SAC Capital will plead guilty to insider trading, pay $1.8 billion penalty

By John M. Jascob, J.D.

The U.S. Attorney’s Office in Manhattan has announced that four companies affiliated with billionaire hedge fund manager Steven A. Cohen have agreed to plead guilty and to pay $1.8 billion in penalties to settle federal charges of insider trading. Under the plea agreement, S.A.C. Capital Advisors, L.P., S.A.C. Capital Advisors LLC, CR Intrinsic Investors LLC and Sigma Capital Management, LLC (collectively, SAC Capital) will each plead guilty to all of the securities and wire fraud charges filed against them in an indictment unsealed in July 2013. The $1.8 billion financial penalty – the largest insider trading penalty in history – reflects a $900 million fine in the criminal case and a $900 million forfeiture judgment in a parallel civil money laundering and forfeiture action. SAC Capital and its affiliates also agreed that they will no longer accept outside investor funds and will shut down their investment advisory operations (U.S. v. S.A.C. Capital Advisors, L.P., November 1, 2013).

Institutions not too big to jail. In announcing the settlement, Manhattan U.S. Attorney Preet Bharara said: “No institution should rest easy in the belief that it is too big to jail. Today, SAC Capital, one of the world’s largest and most powerful hedge funds, agreed to plead guilty, shut down its outside investment business, and pay the largest fine in history for insider trading offenses. That is the just and appropriate price for the pervasive and unprecedented institutional misconduct that occurred here.”

Nature of the scheme. The indictment alleged that from 1999 to 2010 SAC Capital had engaged in a pattern of obtaining inside information from dozens of publicly traded companies across multiple industry sectors. The government alleged that SAC Capital sought to hire portfolio managers and research analysts with proven access to contacts likely to possess inside information. SAC Capital’s relentless pursuit of an informational “edge” fostered a business culture within the firm in which there was no meaningful commitment to ensure that such an advantage came from legitimate research and not inside information. The “predictable and foreseeable result” was systematic insider trading which garnered for SAC Capital hundreds of millions of dollars of illegal profits and avoided losses, the government charged.

Probation and compliance conditions. In addition to paying the financial penalties and ceasing to act as investment advisers, the SAC Capital companies will each be sentenced to five-year terms of probation, with a provision to end probation earlier if the companies cease operating entirely. The terms of probation will require that the SAC Capital companies employ appropriate compliance measures to identify and prevent insider trading, among other conditions. Additionally, an independent compliance expert will review the insider trading compliance measures and will direct SAC Capital to correct any deficiencies. The entire agreement remains subject to court approval.

SEC action against Cohen. Neither the indictment nor the civil complaint named Cohen as a defendant, although he is SAC Capital’s founder and owner. However, Cohen still faces civil charges in a related enforcement action brought against him by the SEC in July 2013. The SEC seeks to bar Cohen from the securities industry for failing to prevent insider trading by two of SAC Capital’s portfolio managers, Mathew Martoma and Michael Steinberg. The U.S. Attorney had obtained a stay of the SEC's administrative action against Cohen pending the resolution of the criminal proceedings against SAC Capital and Martoma and Steinberg. The government’s settlement with SAC Capital resolved the criminal charges against the firms but did not provide immunity from prosecution.

Attorneys: Arlo Devlin-Brown for the United States of America. Martin Klotz (Willkie Farr & Gallagher LLP) and Theodore V. Wells, Jr. (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for S.A.C. Capital Advisors, L.P., S.A.C. Capital Advisors LLC, CR Intrinsic Investors LLC, and Sigma Capital Management, LLC.

Companies: S.A.C. Capital Advisors, L.P.; S.A.C. Capital Advisors LLC; CR Intrinsic Investors LLC; Sigma Capital Management, LLC.

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