SAC Pleads Guilty, But Nothing Will Change
SAC Capital pleaded guilty to several counts of securities fraud and agreed to pay a $1.2 billion penalty on top of its $600 million settlement with the SEC. Steven A. Cohen could still face civil charges from the SEC for his failure to supervise various portfolio managers previously indicted for insider trading. Is Mr. Cohen chastened by the indictment? Will the indictment deter money managers from trading on inside information? Has anything changed on Wall Street? No, no, and no. And yet, the Department of Justice has probably done as much as it can to pursue SAC Capital.
Yesterday SAC issued a statement taking responsibility for the portfolio managers who had engaged in insider trading but showed no contrition. In fact, the DoJ had to demand that SAC release a second statement slightly broadening its admission of responsibility. From SAC’s perspective, rogue portfolio managers had infiltrated an otherwise exemplary organization. The various legal documents released in connection with the insider prosecutions of SAC’s former portfolio managers paint a very different picture of the firm. As best I can tell, SAC fostered a culture in which portfolio managers and analysts were incented and pressured to get close to, if not cross, the line into insider trading.
I doubt Mr. Cohen saw anything wrong with culture of SAC, since it helped to generate winning trades and attract clients willing to pay a 3% fee and 30% of the profits. Even after the government began to bring charges against SAC’s portfolio managers, I suspect Mr. Cohen didn’t second-guess his firm’s research methods. When the DoJ and SEC won convictions, I think Mr. Cohen continued to see his efforts to gather tradable information as appropriate. Mr. Cohen probably views himself as a victim. From his perspective, he was singled out because of his success at engaging in practices that happen with some frequency in many money management firms and Wall Street trading desks. I am sure his friends and closest colleagues are expressing sympathy.
I doubt this case will change any behavior. While SAC is paying a large penalty, Mr. Cohen gets to keep the vast majority of his wealth. Money managers are likely to see the fines as a cost of doing business. The conviction is good for the compliance industry, which will install more systems, checklists, and manuals. However, if the DoJ wanted to change behavior, they needed either to convict and jail Mr. Cohen or to seize a large portion of his assets. Apparently, DoJ didn’t believe it had the requisite evidence to pursue either of these options.
Trading on inside information retains its allure because beating the market is very hard and brings big rewards. While SAC has drawn big headlines, insider trading will probably go on as if nothing had happened. The penalties have increased, but the rewards are still huge.