In 2012, the general counsel for embattled hedge fund giant SAC Capital was described by one newspaper as “shark repellent” against the U.S. prosecutors circling the firm on suspicions that its “expert networks” had been used for unbridled insider trading. Notably, the GC was also responsible for ramping up the fund’s compliance program in the shadow of ongoing government investigations.
But after last week’s 41-page criminal indictment of the firm, with at least six former SAC employees already admitting to insider trading, a few things are clear:
- At least one big shark, relentless mother-of-all-prosecutors Preet Bharara, has not been deterred.
- Headcount and press statements do not a real compliance program make.
- At least for SAC, culture trumps compliance by 38:1.
In happier times, SAC boasted to its investors of "tens of millions of dollars developing and implementing a robust and constantly improving compliance program." That included at least 38 full-time compliance professionals staffing one of the most rigorous and “cutting-edge” hedge fund compliance programs in the country, as outlined in a recent column by New York Times writer James B. Stewart, “At SAC, Rules Compliance with an Edge.” According to Stewart, the firm deployed at least two separate forms of compliance surveillance, at “enormous cost,” designed to detect insider trading.
What could possibly go wrong? Apparently, a lot.
As compliance professionals know, all degrees of compliance start at the top and become a pervasive culture that spreads through the organization by management deeds, more than words. SAC’s namesake founder and sole owner, Steven Cohen, has been slammed by the Securities and Exchange Commission for “willful blindness” and “failure to supervise” his traders. According to Anthony Sabino, a professor of business law at St. John's University, SAC’s ramped-up compliance efforts were “like closing the barn door after the horse has already left." It’s also not a good sign that one of the firm’s guest compliance lecturers, no less a luminary than former SEC Chairman Harvey Pitt, recently pronounced SAC’s compliance program as a “check-the-box mentality, not a serious commitment.” (Ouch . . . no word on whether SAC’s new “clawback” policies extend to guest speaker fees.)
In his Times column, Stewart goes on to detail the stark contrasts between the firm’s “avowed” compliance policies and how those policies were actually implemented (or not implemented) on the ground. It’s well worth a read for the juicy details on the firm’s actual practices in hiring, training, monitoring (of how traders used their expert networks), and compliance investigations, and the scoop on whether Cohen actually attended any of the compliance training lectures himself. (The big hint might be this quote from Cohen: "I've read the compliance manual but I don't remember what it says.")
Meanwhile, that celebrated compliance team now appears to have gone “from hero to zero” in the still-unfolding tale, with one commentator suggesting its focus was less on preventing and detecting misconduct than “coming up with euphemisms for insider trading.” According to Stewart, in its history, the SAC compliance group reportedly found only a single case of potential insider trading, never reported any incidents to authorities, and conducted only “a few” internal investigations that were “weak” and dedicated to “confirming” that suspicious communications were in fact “innocent.” This is not altogether surprising for a firm that now stands accused of “an institutional indifference” to wrongdoing resulting in “insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
But one of the most fascinating insights into SAC’s culture can be found in a 2010 Reuters article by Matthew Goldstein, “In the Rough With SAC Capital.” Apparently the firm was unique in the industry for having on staff one full-time “unofficial golf pro” whose “to die for” job involved no computer screens or stock charts, but rather top golf skills and a “big rolodex of corporate executives"—useful assets in organizing firm-sponsored golf outings and collecting valuable company information. File that job under “Someone’s Got To Do It.”
No one has implicated the golf pro in any wrongdoing. But the firm’s very public institutional commitment to obtaining information with an “edge” and the unmistakable impact of that on the organizational culture should not be underestimated. By my count, that’s 38 compliance professionals up against one very busy golf pro, and what prosecutors are now calling “a culture of rule breaking” and “a veritable magnet for market cheaters.”
Moral of the story: you can have all the compliance professionals in the world but, in the end, culture trumps compliance. In the case of SAC, that appears to be by a factor of 38:1.
Donna Boehme is an internationally recognized authority and practitioner in the field of organizational compliance and ethics, designing and managing compliance and ethics solutions within the U.S. and worldwide. As principal of Compliance Strategists LLC, Boehme is the former group compliance and ethics officer for two leading multinationals and currently advises a wide spectrum of private, public, governmental, academic, and nonprofit entities through her NJ-based consulting firm. She was named by ComplianceX to its list of "Who Compliance Professionals Should Follow on Twitter in 2013," so follow her on Twitter @DonnaCBoehme.
