SAC Capital GC Runs Out of 'Shark Repellent'
Last November when federal prosecutors were circling SAC Capital Advisors over insider trading allegations, one newspaper referred to SAC General Counsel Peter Nussbaum as “a large supply of shark repellent.”
But Nussbaum’s brand of protection weakened on Thursday, when the feds indicted the company on five criminal counts. And now the GC is in a battle to save the Stamford, Connecticut, company and its owner, Steven Cohen, from losing everything. Cohen was not indicted.
The SAC indictment [PDF] by U.S. Attorney Preet Bharara in Manhattan charges various corporate entities—all part of the SAC group—with criminal responsibility for insider trading. It includes four counts of securities fraud and one count of wire fraud between 1999 and 2010.
A SAC spokesman said in a statement to The New York Times, “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.”
But six SAC employees have admitted to insider trading while working at the fund. Bharara countered in his own statement, “When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence. It is instead the predictable product of pervasive institutional failure.”
Nussbaum, who declined comment, joined SAC in 2001, from Schulte Roth & Zabel. And the New York Post “shark repellent” piece was just one of several articles over the years that praised Nussbaum for building a strong 30-person compliance department.
“They have as impressive a compliance infrastructure as we’ve seen in thousands of managers,” one investor told the Post.
“On paper, SAC Capital compliance is indeed second to none in the hedge fund industry,” wrote Reuters in 2011.
A former SAC employee once described Nussbaum as a “cross the t’s and dot the i’s” kind of attorney in an article in the Institutional Investor’s Alpha, an online newsletter about hedge funds. The employee said Nussbaum “is extremely cautious in his interpretation of the law and has applied his conservative approach to SAC’s oversight.”
But the feds were not impressed. In fact, the indictment and related documents make a point of criticizing SAC’s compliance efforts.
The indictment cites “institutional practices that encouraged the widespread solicitation and use of illegal inside information.”
And it goes on to allege that “unlawful conduct by individual employees and an institutional indifference to that unlawful conduct resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”
In a related action [PDF] seeking forfeiture of “any and all assets” of SAC, the prosecutors say the company “enabled and promoted the insider trading scheme by employing limited compliance measures designed to detect or prevent insider trading.”
The document goes on to allege, “Apparently aware that expert networks presented a risk of insider trading, the SAC compliance department failed to effectively monitor SAC employees use of expert networking firms.”
It criticizes internal investigations by the SAC compliance department as “generally weak,” and says such probes had a focus of “confirming” in an employee interview that “an email implying access to insider information was just an inartfully drafted email.”
Prosecutors said while they were investigating and charging at least six SAC employees with insider trading, that SAC’s compliance department “identified only a single instance of suspected insider trading by its employees in its history.”
They said the two employees involved in that instance were fined and allowed to keep their jobs, while SAC “failed to report the insider trading to regulatory or law enforcement personnel.”
Meanwhile, the Securities and Exchange Commission last week instituted administrative proceedings against Cohen [PDF]. It alleged he failed to supervise two senior employees and prevent their insider trading, while he ignored “red flags” of insider information. It seeks monetary penalties and aims to bar Cohen from overseeing investor funds.