The New Improved SAC Capital?
Steven A. Cohen faces an abrupt end to his career as one of the world's most successful traders after his SAC Capital Advisors became the largest Wall Street firm in years to agree to plead guilty to criminal charges of insider trading, and pay $1.2 billion in fines.Svea Herbst-Bayliss and Katya Wachtel of Reuters also report, SAC will be much smaller, but Cohen's impact could endure:
But Cohen, a multi-billionaire and renowned modern art collector, has not been personally charged with any crime and will likely continue managing some $9 billion of his own money through a lightly regulated family office once the hedge fund's plea deal is approved by the courts.
The winding down of the hedge fund's advisory business, which began returning billions of dollars to investors earlier this year as a criminal investigation heated up, requires SAC to install an independent compliance monitor if it continues to trade in the near term, something that will be a big change for Cohen who is known to be a micro-manager.
SAC's guilty plea and fine, announced by prosecutors on Monday, is in addition to a $616 million settlement with the U.S. Securities and Exchange Commission.
Manhattan U.S. Attorney Preet Bharara said at a press conference that the plea deal sends a message to Wall Street that no "institution is too big to jail." He rejected criticism that the plea is something of a disappointment because Cohen himself was not charged with any criminal wrongdoing.
"What happened today is a very substantial and important thing," said Bharara. "It is a rare thing for an entity to be held to account."
Cohen's fund, which once employed more than 900 people with offices on three continents, will no longer manage money for outside investors including pensions, endowments and wealthy individuals, according to the settlement.
Jonathan Gasthalter, a spokesman for SAC Capital, said the firm is taking "responsibility for the handful of men who pleaded guilty" to insider trading while working at the hedge fund. But he added the firm has "never encouraged, promoted or tolerated insider trading."
April Brooks, special agent in charge of the Federal Bureau of Investigation's New York field office, said the case is a warning to those on Wall Street who aspire to the creed that unfettered "greed is good," as famously espoused by the character Gordon Gekko in the movie "Wall Street."
The guilty plea, which needs to be approved by two judges, coincides with SAC Capital posting solid performance and far outperforming other hedge funds despite the taint of scandal. The fund is up 1.3 percent in October and up 15.95 percent so far this year, a source familiar with its performance said, compared to an almost 6 percent gain for the average fund.
DECISION TIME FOR BANKS ON SAC
Legal observers said it could be days or even weeks before the settlement is approved, giving SAC Capital and prosecutors more time to choose a compliance monitor. It also may give more time to the big Wall Street banks likes Goldman Sachs Group Inc and JPMorgan Chase that lend money to SAC Capital and earn hundreds of millions of dollars a year in trading commissions to decide if they will continue doing business with Cohen firm once it reconstitutes as a family office.
Representatives for Goldman and JPMorgan did not immediately comment on their plans with regards to SAC Capital. But industry sources said the banks are likely to continue to do business with SAC as long as regulators permit.
Indeed, the settlement is only the beginning of a long process for Cohen of freeing himself from the constraints of a federal investigation that has gone on for at least seven years and has tarnished his reputation.
In charging SAC Capital in July with securities fraud and wire fraud, prosecutors accused the 21-year-old Stamford, Conn.-based firm of presiding over a culture in which employees regularly flouted the law and were encouraged to tap personal networks for inside information about publicly traded companies.
"The government is getting an enormous amount of money and shutting down his advisory business. They've basically achieved what they wanted, which is to cut off this guy's ability to manage other people's money," said C. Evan Stewart, a partner at Zuckerman Spaeder who is not connected with the case.
The agreement does not preclude future criminal charges against individuals in the investigation, according to a letter filed in U.S. District Court by prosecutors. Investigations are continuing into trading in at least two other stocks, Weight Watchers International and The Gymboree Corporation, according to a person familiar with the matter.
The person said the investigation could lead to other charges against people who are still employed at SAC. The source, who did not want to be identified, said authorities are still investigating whether Cohen personally can be tied to any allegation of insider trading at the firm.
Cohen is still facing an administrative action brought in July by the SEC accusing him of failing to properly supervise his employees. The indictment against SAC named seven one-time employees of the firm who have either been charged or convicted of insider trading.
LONG-RUNNING INVESTIGATION
The deal also does not include a specific cooperation agreement between the government and SAC, which means it is not clear whether the firm will have to provide more information to the government for the ongoing investigations.
The deal will punctuate one of the longest-running, highest-profile insider trading investigations in recent years, although it will not necessarily end the effort.
The guilty plea from SAC Capital is the biggest achievement yet for U.S. prosecutors in its multi-year crackdown on insider trading in the $2.2 trillion hedge fund industry that has already led to the convictions of former Galleon Group founder Raj Rajaratnam and former Goldman Sachs Group Inc director Rajat Gupta, also a onetime head of McKinsey & Co consultancy.
The hedge fund founded by Cohen in 1992 with $25 million charged some of the highest fees in the industry and was one the more successful, returning an average of 25 percent a year for investors.
U.S. prosecutors charged the hedge fund - which managed as much as $14 billion this year before investors began withdrawing money - on one count of wire fraud and four counts of securities fraud. As part of Monday's deal, SAC has agreed to plead guilty to all five counts.
The total settlement amount of $1.8 billion is made up of $900 million in fines and forfeiture of $900 million. The total forfeiture amount includes a $616 million sum that SAC had already agreed to pay earlier this year to settle civil lawsuits by the SEC.
Meanwhile, observers are expecting an exodus of top employees from SAC, which still maintains a large headquarters in Stamford, Conn. and this year has shuttered offices in London and Chicago.
Several employees leaving SAC Capital's offices in midtown Manhattan declined to comment. Wall Street recruiters have said in recent weeks that traders and analysts at the hedge fund have begun taking preliminary steps towards looking for new jobs.
Cohen will have to "dramatically" downsize his operation, said Stephen Martiros, an independent consultant to family office and private investors.
"Most everything about the way they've been running the firm will have to change," he said, adding SAC could shed marketing specialists, client relationship managers and some legal and compliance staff.
A person who worked with SAC for many years said since the bulk of the firm bonuses will be paid out in the next few weeks, many employees poised to join other hedge funds or start their own funds will likely make their moves.
After settling criminal charges of insider trading, SAC Capital Advisors hedge fund could operate with as little as one fifth of its roughly 900 employees, but founder Steven A. Cohen's personal fortune is big enough to keep him important on Wall Street.I'm not worried about Steve Cohen, he will survive and thrive and realize that in the new regulatory environment, running a mega hedge fund isn't all that's it's cracked up to be. In fact, in my opinion, the glory years of mega hedge funds are over.
The 57 year-old billionaire, often called his generation's greatest trader, has a taste for expensive objects from Jeff Koons and Pablo Picasso artwork to mansions in Connecticut and on New York's Long Island, all part of his $9 billion fortune.
In the coming months Cohen will be reducing his $14 billion hedge fund to a family office after prosecutors announced on Monday that SAC would plead guilty to insider trading charges and would no longer manage money for outside investors.
Dozens of marketing and sales staff have already been let go and analysts and portfolio managers have left on their own as SAC has began quietly winding down, returning billions of dollars to investors. The firm's London office will be shuttered and other offices in the United States and Asia could be next.
"Although Steven Cohen still has a vast personal fortune, he will not require the services of hundreds of people or an international operation to manage just his portfolio," said Mark Rifkin, a partner at law firm Wolf Haldenstein Adler Freeman & Herz.
The knock-on effect could ripple through Fairfield County in Connecticut where many of Cohen's marketing, investor relations and human resources specialists live. While rival hedge fund managers in New York have said that SAC resumes are flooding Wall Street, they acknowledge that some potential employers worry about hiring someone from Cohen's operation just now.
A plea deal that brings SAC's total fines and forfeitures to a total of $1.8 billion could also be felt in the art world where Cohen has put Andy Warhol's painting of late Academy Award winning actress Elizabeth Taylor and other works up for sale.
And it could be felt in the Stamford, Connecticut real estate market if Cohen should put his vast office building at 72 Cummings Point Road up for sale, as one person familiar with his fund has suggested. For a family office, including a much smaller group of investment professionals, Cohen would have no need for the 98,905-square-foot office building that he bought for $19 million more than a decade ago.
LESS REGULATION
For Cohen there will be fewer regulatory headaches including the costly and time consuming requirements of registering with the U.S. Securities and Exchange Commission. But he will still have to file the quarterly ownership data required for investors of a certain size.
There will also be changes for SAC Re, the Bermuda-based reinsurance business, which SAC started with about $500 million only a year ago.
Cohen may even opt to change the name of the organization to wipe away any taint of insider trading transgressions. The firm was indicted in July and the plea deal has yet to be approved by the courts.
SAC Capital spokesman Jonathan Gasthalter said the firm is taking "responsibility for the handful of men who pleaded guilty" to insider trading while working at the hedge fund. He said the firm has "never encouraged, promoted or tolerated insider trading."
Cohen retains a loyal following of investors despite the road signs pointing to a smaller operation. They say the man who earned them double digit returns over the course of two decades could play the role of an important power broker.
Three of the industry's biggest personalities - Julian Robertson, George Soros and Carl Icahn - have all shut down their hedge funds but still have an impact on investing through proxy contests, big scale investments or seeding newcomers.
"You have more freedom as a private family than as a large hedge fund investing money on behalf of institutional clients," said Stephen Martiros, an independent consultant to family offices and private investors.
For starters, Cohen could use a lot more borrowed money to run a significantly more aggressive portfolio if it is only his money at play, several experts said. Even now, SAC is up 15.95 percent for the year, ranking as one of the industry's best performers.
And Cohen could go back to giving some of his talented fund managers some start up money if they are ready to go out on their own.
"He's a trader and would be bored stiff sitting at home, so he can become an entrepreneur and invest in the funds that will take in outside money and effectively continue his operation that way," said one former investor who asked not to be identified because he is not permitted to speak about his firm's bets publicly.
So what's next for Steve Cohen and SAC Capital? First, he will settle with SEC, paying his $1.2 billion fine. That is an astronomical amount but for Cohen, it's a year's profits.
Next, he will scale back his operations at SAC Capital, shedding dead weight like marketing, client service representatives and a lot of back, middle and front office staff he doesn't need to run his family office. He'll probably keep his best traders or just seed their new hedge fund.
Third, he will likely make more money than before with a lot less headaches except he will have to use his money to do this. I'm sure his loyal clients will be itching for him to start a new hedge fund, which is always an option down the road. In this business, money rules and people have short memories even with managers who lost billions (how many hedge funds did John Meriwether start after LTCM?).
Fourth, if he's smart, he'll set up a research operation here in Montreal, and hire a bunch of young and hungry finance whiz kids for virtually free and have their salaries mostly covered by the Quebec government. I can also introduce him to some smart people who know all about real alpha and can help him find new managers to seed. Hell, if he's willing to pay me big bucks, I might even join his new operation, trading biotech, solar, coal, mining, shipping, tech and other high beta stocks.
On a more serious note, the SEC and the feds should be ashamed of themselves. They really wanted to jail Cohen but for all the tough talk, this showbiz settlement proves how well crime pays. And you can rest assured, those Wall Street banks will continue prostituting themselves, bending over backward to do business with the perfect hedge fund predator. It's all a farce, the only thing missing is a Hollywood movie, which I'm sure is in the works.
Below, Bloomberg View columnist William Cohan and Bloomberg Contributing Editor David Kirkpatrick discuss the impact on the hedge fund industry of SAC Capital Advisors pleading guilty to securities fraud and wire fraud and paying a record $1.8 billion fine. They speak on Bloomberg Television’s “Bloomberg Surveillance.”
And Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, talks about the agreement by billionaire Steven A. Cohen’s hedge-fund SAC Capital Advisors LP to plead guilty to securities and wire fraud, pay a record $1.8 billion fine and close its investment advisory business. Levitt, speaking with Sara Eisen and Tom Keene on Bloomberg Television's "Surveillance," also talks about the outlook for Wall Street.
I don't share Arthur Levitt's opinion. Not surprisingly, he's talking up the role of regulators but mark my words, the shenanigans on Wall Street will only get worse as hedge funds cannibalize each other to gain an edge in an increasingly tougher environment to generate alpha.
Finally, PBS' FRONTLINE has posted videos of Steve Cohen stumbling over insider trading rules. Under questioning in a video deposition obtained exclusively by FRONTLINE, Cohen is asked whether he is familiar with Rule 10b5-1. Watch the videos here as I cannot embed them.