Saturday, March 30, 2013

A Week In the Life of SAC

A Week In the Life of SAC

Earlier this week, Stephen A. Cohen purchased Picasso’s “Le Rêve” from casino owner Steven A. Wynn for $155 million. A day later we learned that Mr. Cohen had acquired a new place in East Hampton for $60 million.  Mr. Cohen already owns a place on the same street, but it doesn’t have an ocean view; hence the upgrade.  Then on Thursday, SAC and the SEC went into court to obtain approval of a $616 settlement over insider trading charges.  Early Friday morning, Michael Steinberg, one of SAC’s senior portfolio managers, was arrested by the FBI and charged with trading on inside information.  All in all, this is what passes for a typical week at SAC.

Off-Site (2008)

However, SAC hit a small speed bump when Judge Victor Marrero did not approve SAC’s settlement with the SEC.  The judge could not get past the fact that SAC was neither admitting nor denying that it had done anything wrong.  Martin Klotz, the attorney representing SAC, explained his client’s willingness to settle:

“We’re willing to pay $600 million because we have a business to run and don’t want this hanging over our heads with litigation that could last for years.”

Mr. Klotz’s statement encapsulates the moral corruption that is at the heart of SAC’s and Mr. Cohen’s world.  Everything Mr. Cohen does is simply a matter of money, whether it’s collecting fine art, acquiring houses, or settling legal matters.  Everything has a price.  As a result, settling insider-trading charges is just a cost of doing business.  Sadly, investors may be willing to go along with Mr. Cohen’s philosophy.  So long as SAC doesn’t admit that it did anything wrong, a good number of investors seem willing to leave their capital under SAC’s care.

The SEC routinely settles cases with the financial services industry in which the accused party “neither admits nor denies” the charge.  I’ve written repeatedly about this practice (see, “Mad Libs: The Financial Settlement [January 16, 2013]”, “Bank of America: It Failed Long Ago [January 9, 2013]”, and “Ferociousness Contained: Banks Settle Money Laundering Charges [December 12, 2012]”).  The SEC also inserts a “keep your nose clean, or else” provision, which is meant to warn that the settlement will be overturned if there are future transgressions.   Serial settlers have agreed to include this language time and again.  Understandably, it’s easy to agree to put the “keep your nose clean, or else” in a settlement agreement because the SEC never enforces it.

If you can charge high enough fees so that your financial or money management business is very profitable and powerful, then running afoul of the law is just another business expense.  As a result, SAC has learned that they operate in a privileged space in our society where you can break any number of rules as long as you always obey one rule.  The one rule you have to obey obliges a financial institution to write out a big check and allow the regulator to publish a stern press release.  If that rule is followed, then the financial institution is relatively free to commit insider trading, ignore money-laundering rules, manipulate LIBOR, or otherwise fleece their clients and the public.

Judge Marerro is the latest Federal District Court judge to cast doubt on the practice of respondents paying sizable penalties without acknowledging their improper conduct.  Since the SEC isn’t likely to change its mind and risk having to litigate, the judge or some other court will eventually bless SAC’s settlement with the government.

In the end, it will be another routine week for Mr. Cohen.  He added to his art collection, acquired another 10,000 square-feet of house, saw yet another of his employees arrested, and tried to settle a $616 million legal matter with the SEC.

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