Since the U.S. Department of Justice filed charges of “rampant insider trading” against SAC Capital Advisors and three of its subsidiary hedge funds last week, the financial media has been flooded with stories about the case. Announcing securities and wire fraud charges against the companies themselves as well as against individuals working there, the U.S. Attorney’s Office said the alleged criminal activity was “substantial, pervasive and on a scale without known precedent in the history of hedge funds.”
According to analysts for The New York Times’ DealBook blog, the most significant part of this indictment may be that the government charged the companies directly. While white collar criminal charges against organizations are not a new idea, the Securities and Exchange Commission and the Justice Department have been under fire since the 2008 financial meltdown for being too lenient toward financial institutions accused of wrongdoing.
In filing these charges, Justice is making a point, and that point could bring down a major Wall Street firm and its embattled founder. Interestingly, the founder was not charged criminally, although the SEC has filed a civil enforcement suit against him for failure to properly supervise his employees.
The 41-page indictment, which came after a decade of regulatory scrutiny of SAC Capital and an FBI investigation, consists of a single count of wire fraud against SAC Capital and the three subsidiaries, which the FBI alleges took place over the period between 1999 and 2010. Each company was then individually charged with securities fraud based on the specific allegations of improper trading by that company. Finally, eight former SAC Capital employees were charged, and six of them have already pled guilty and are expected to testify for the prosecution.
Unfortunately, according to one DealBook analyst -- a law professor and former SEC enforcement lawyer and prosecutor for the Justice Department -- SAC Capital essentially has no effective defense against these charges. Why? The charges are brought under the theory of “respondeat superior,” which means that the company is legally responsible for criminal acts by its employees if those acts were undertaken on the company’s behalf. Basically, if Justice can prove that the funds’ employees committed securities and wire fraud, the companies would also be convicted.
SAC Capital Management and its subsidiaries have denied any wrongdoing. “SAC has never encouraged, promoted or tolerated insider trading,” said a company spokesperson. “The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years.”
- The New York Times’ DealBook blog, “What’s Next in the Case Against SAC,” Peter J. Henning, July 25, 2013
- The New York Times’ DealBook blog, “SAC Capital Is Indicted, and Called a Magnet for Cheating,” Peter Lattman and Ben Protess, July 25, 2013