Academic journal article American University Business Law Review

Sac Capital: Firm Criminal Liability, Civil Fines, and the Insulated CEO

Academic journal article American University Business Law Review

Sac Capital: Firm Criminal Liability, Civil Fines, and the Insulated CEO

Article excerpt


Since 2009, the business pages of many major newspapers have been rife with stories about insider trading. The name most often in the headline of these stories is Preet Bharara, U.S Attorney for the Southern District of New York.1 Since taking on the job of fighting insider trading on a large scale, he boasts a 78-1 record for convictions.2 However, one man has evaded that scorecard even though his company and several employees have earned criminal and civil convictions.

S.A.C. Capital Advisors, L.P. ("SAC") was once a $ 14-billion hedge fund with one of Wall Street's best records for performance.3 Steven A. Cohen, the owner and namesake of SAC, was the subject of admiring profiles in everything from the New York Times' to Vanity Fair.5 He was once number thirty-six on Forbes' list of richest Americans worth an approximated $11 billion;6 Mr. Cohen was called "the king of hedge funds."7 Mr. Cohen received attention for his art collection (valued at $1 billion) and his thirty-room mansion in Connecticut.8 However, as his wealth and successes increased, there was attention building and many questioned, "How does he do it?" The two questions that swirled around SAC were: (1) How did the hedge fund outperform every other fund?; and (2) Why were so many current and former SAC traders being indicted, convicted, or entering guilty pleas for insider trading?

As a result of these questions, the Financial Industry Regulatory Authority ("FINRA") began making referrals to the United States Securities and Exchange Commission ("SEC") in 2010 for possible insider trading by SAC. In July 2013, the Department of Justice ("DOJ") filed a criminal indictment against SAC Capital.9


SAC lawyers originally entered a not guilty plea to the charges.10 Employees and investors were sent an email saying that it would be business as usual for SAC's 1000 employees and its offices in eight cities around the world.11 Eventually, SAC's strategy would shift from complete denial to acceptance as the company agreed to plead guilty to settle criminal and civil charges.12 It is a rare move for federal prosecutors to indict a corporation, but as of mid-July 2013 (the time of the charges), SAC's main portfolio was up eleven percent when most hedge funds were up approximately 3.2 percent.13 As more individual traders from SAC began to face individual criminal convictions and details of the pervasive criminal corporate culture began to surface, it became clear the investigation into SAC would continue.

In November 2013, there was an announcement of the settlement of the SAC criminal charges.14 The government outlined the terms. SAC agreed to pay $900 million in forfeiture and a $900 million fine.15 The firm received credit for a $616 million already paid to the SEC to settle civil charges, bringing the total fine to just under $1.2 billion.16 SAC, and by extension Mr. Cohen as the owner of the firm, agreed to pay the fine.17 However, Mr. Cohen was not charged criminally, and in statements released after the settlement, SAC pointed the finger at a small group of employees.18 He maintains that he bears no personal criminal responsibility.19 Mr. Cohen wisely seized on the weakness that the appellate court found in a previous case;20 that the government needs to show that Mr. Cohen actually knew that the information his traders and managers were using was nonpublic.21 Again, since the traders and managers gathered the information from different sources, including other brokers, traders, and managers, that direct line to nonpublic information is not easily established.

The case presents a series of unresolved legal questions about civil and criminal liability of financial firms, how the two types of cases are intertwined, and the role and culpability of firm leadership in these charges. …

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