Updated, 9:40 p.m. |
In the span of a week, Steven A. Cohen's investment firm changed its name, hired a former federal prosecutor and became a felon.
Breaking months of suspense, a federal judge on Thursday approved the firm's plea deal that resolved criminal insider trading charges and required a $1.2 billion penalty, closing a searing chapter in the 22-year history of Mr. Cohen's once-mighty hedge fund.
Now the 57-year-old investor is hoping for a less litigious transition for his firm, as it becomes a so-called family office, rechristened Point72 Asset Management, that will manage about $9 billion of his own fortune.
Federal authorities, speaking on the condition of anonymity, privately acknowledge that additional charges against SAC employees are unlikely unless new evidence surfaces. And the authorities, who still have a smattering of insider trading cases to file against other hedge funds, have seen a slight downtick in reports of suspicious trading.
But to shake fully its tainted past — and steer clear of the spotlight — Mr. Cohen's firm will have to do more than plead guilty and change its name. And for Mr. Cohen, who has not been criminally charged despite spending the better part of a decade under investigation, a few legal hurdles remain before he can exhale.
Mr. Cohen still faces a civil action from the Securities and Exchange Commission, which during the course of the case could identify additional wrongdoing and permanently bar him from managing money for outside investors. The Federal Bureau of Investigation, authorities say, also continues to examine a handful of stocks for signs of insider trading at SAC, while several former employees who cooperated with the investigation have yet to be sentenced, a sign the case is not officially closed.
Prosecutors will now scrutinize whether Mr. Cohen has adopted compliance measures at his firm that amount to more than a symbolic gesture.
The SAC case provided prosecutors and the F.B.I a capstone to their sprawling insider trading investigation, which swept into some of Wall Street's most vaunted trading floors and board rooms. Under Preet Bharara, the United States attorney in Manhattan, prosecutors have secured some 80 insider trading convictions since 2009, though Mr. Cohen has never been charged.
"They pushed him out of the hedge fund business, even if not out of his mansion," said Erik M. Gordon, a professor at the University of Michigan Business School.
Even if Mr. Cohen is never charged, the indictment of a firm he founded in 1992 with $25 million and expanded to $14 billion last year, has left a lasting reputational stain. The initials on the door were his, and he was the undisputed boss.
Judge Laura Taylor Swain of the Federal District Court in Manhattan, in accepting the firm's guilty plea on Thursday, made clear that this was no garden-variety Wall Street criminal case. Under the terms of the deal, SAC agreed to pay the penalty, the most ever in an insider trading case, and shut its doors to outside investors. "The defendants committed very serious financial crimes," the judge told a packed courtroom, adding that "these crimes were clearly motivated by greed."
She also took a swipe at the top rungs of SAC, saying that its management "ignored blatant red flags" and "rewarded this illegal behavior."
Judge Swain, known for her meticulous attention to detail, had declined to approve the plea deal in November, when SAC pleaded guilty. This week, she expressed lingering questions about the fine and the "qualifications" of the outside compliance consultant picked to keep an eye on Mr. Cohen's firm.
At the hearing, the judge asked prosecutors about a potential conflict that had arisen with the outside compliance consultant, Bart M. Schwartz, and his consulting firm, where one executive has a son who works as a trader for Mr. Cohen. Antonia Apps, an assistant United States attorney, said authorities had vetted the situation and were convinced it created no conflict for Mr. Schwartz, a former federal prosecutor with a long history of serving as a monitor in government investigations.
If Judge Swain had balked at the deal, SAC could have withdrawn its guilty plea and sent the negotiations back to Square 1.
The judge's approval of the plea deal, and the firm's ability to continue to trade as Point72, could embolden prosecutors to file other criminal cases on Wall Street.
When weighing charges against a company, prosecutors often fear job losses and threats to the broader economy — Arthur Andersen, Enron's accounting firm, shut down after its indictment. But the rare show of criminal force against SAC demonstrated that such charges were not an automatic death sentence, given the firm's transition to Point72.
On Thursday, Mr. Bharara said in a statement, "Today's sentence affirms that when institutions flout the law in such a colossal way, they will pay a heavy price."
While Mr. Bharara did not attend the hearing on Thursday, some of the architects of the SAC case were in the courtroom. They included David Chaves, a senior F.B.I. official; Lorin Reisner, the head of Mr. Bharara's criminal division; and Anjan Sahni, another senior prosecutor. For SAC, four lawyers from the firms Willkie Farr & Gallagher and Paul, Weiss, Rifkind, Wharton & Garrison gathered at the defense table.
The investigation into SAC traced to long-held suspicions about Mr. Cohen's investment returns. As the fund posted average annual returns of more than 25 percent, competitors and regulators alike questioned whether the results were just too good to be true.
When indicting SAC last July, prosecutors attacked its pursuit of "an edge" in trading. Some of the firm's traders cozied up to corporate insiders, prosecutors said, while others collected tips from secret drug trials run by the pharmaceutical company Elan.
Elan had filed a motion seeking to be declared a "victim" and recoup the $1.5 million in legal fees it spent to comply with government document requests during the investigation, but a lawyer for the company said at the hearing on Thursday that SAC had agreed to reimburse the company in full.
The trading tactics of individual employees underpinned the indictment of the firm. Referring to the eight former SAC employees criminally charged with insider trading, prosecutors called the firm a "veritable magnet of market cheaters." Under corporate liability law, the government can attribute the acts of employees to a firm as long as the employees acted "on behalf of and for the benefit of" the company.
Of the eight SAC employees charged, six cooperated with the government's case. The remaining two, Mathew Martoma and Michael Steinberg, were convicted in recent trials.
"To have eight criminal convictions in a single institution is remarkable," said Ms. Apps, the prosecutor, noting that SAC had fewer than 1,000 employees.
The plea deal and the penalty — a $900 million fine and roughly $300 million in forfeited profits — is one element of Mr. Cohen's broader strategy to put the case behind him and build good will with the government.
This week, he also hired another former federal prosecutor, Vincent Tortorella, to fill the newly created role of chief surveillance officer and signed a deal with a software company backed by the Central Intelligence Agency to monitor trading.
At the hearing on Thursday, the firm's general counsel, Peter Nussbaum, said the firm "accepted responsibility" for the misdeeds of its employees.
Later on, a top lieutenant to Mr. Cohen circulated a memo to Point72 employees saying, "We will do whatever we can to make sure this doesn't happen again."
Judge Swain, ending the proceeding with a forward-looking thought, noted that Mr. Cohen's new family office would continue to trade billions of dollars, employ hundreds of people and remain a prolific force in the stock market.
Looking up, Judge Swain expressed hope that Point72 will operate with "respect and compliance with the law."
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