SAC Capital Advisors LP, the hedge- fund firm that agreed in March to pay more than $600 million to settle insider-trading allegations, is strengthening compliance rules, including clawing back compensation for portfolio managers and analysts who violate securities laws.
The firm, based in Stamford, Connecticut, also is limiting the use of industry consultants, restricting contact with public-company employees and hiring additional compliance staff, founder Steven Cohen said in a letter today to clients.
“These reforms send an unmistakable message: we have zero tolerance for wrongdoing and if you are caught breaking the rules, it will cost you,” Cohen wrote in the letter, a copy of which was obtained by Bloomberg News.
SAC Capital, which oversees $15 billion, has defended its compliance standards as among the industry’s best even as a multiyear U.S. investigation has linked at least nine current or former employees to allegations of profiting from improperly obtained information while at the firm. The U.S. Securities and Exchange Commission in March reached a record settlement with Cohen’s firm over claims that it profited from illegal tips about drugmakers received by former portfolio manager Mathew Martoma. A federal judge signed off on the agreement last month, pending approval of a case unrelated to SAC Capital.
Jonathan Gasthalter, a spokesman for SAC Capital at Sard Verbinnen & Co., declined to comment on the letter.
SAC Capital will implement its clawback rule starting Jan. 1, Cohen said in the letter. If portfolio managers or analysts are sanctioned by regulators or found guilty on criminal charges, their compensation will be subject to recovery. If an employee departs while there is a regulatory or criminal investigation, the firm will withhold deferred payments pending the outcome.
The new rule would not apply to Martoma or any other current or former employees who have been charged with insider trading while at the firm, according to a person familiar with SAC Capital, who asked not to be identified because the information wasn’t in Cohen’s letter.
Hank Higdon, head of New York-based executive-recruiting firm Higdon Partners LLC, said the clawbacks may be more about improving SAC Capital’s image than stopping trading abuses.
“Do you really need additional disincentive for doing something wrong?” he said. “Isn’t a fine and 10 years in jail enough?”
Steven Nadel, a partner at New York-based law firm Seward & Kissel LLP, said clawbacks are common at hedge funds.
“If you are fired for cause you lose your deferred compensation,” said Nadel, whose firm advises hedge funds.
Cohen said in his letter that the clawback would serve as a warning to new recruits.
“We want to let job applicants know that if they do not intend to play by the rules they should not come to SAC,” Cohen wrote. The letter didn’t say whether Cohen would be subject to the provisions.
Wall Street banks made compensation changes following the 2008 financial crisis to align pay more closely with results and discourage improper risk-taking. Goldman Sachs Group Inc. and Morgan Stanley said earlier this year that they will expand clawback policies to include supervisors as well as employees who take excessive risk or engage in improper conduct.
Martoma, who has pleaded not guilty and awaits trial, received a bonus of $9.38 million in January 2009 based largely on his trading in two pharmaceutical-company stocks, the government said. He allegedly got information the previous year about a drug trial from a University of Michigan neurologist, Sidney Gilman, who worked for Gerson Lehrman Group Inc., an expert-network firm that links investors with industry specialists. Gilman earned almost $108,000 for 59 consultations with Martoma and SAC starting in 2006, according to the SEC.
SAC Capital is limiting the use of any one expert-network consultant by a portfolio team to four calls a year without pre- approval from compliance, Cohen said in the letter. The hedge fund is increasing the “chaperoning” of expert-network phone calls and is adding professionals trained in medical science to its compliance group to help better analyze its health-care team’s communications, he said.
The U.S. government’s crackdown on insider trading has targeted hedge funds’ use of expert networks to obtain nonpublic information. Some other firms have said they’ll no longer use the consultants in their research.
SAC Capital is banning contact with public-company employees other than senior management or investor-relations staff. Personal or incidental communications aren’t covered by the rule and company executives can grant exceptions, Cohen said.
SAC Capital, founded by Cohen in 1992, has more than 1,000 employees, including 350 people focusing on investments who are organized into 130 teams.
The firm plans to increase its 36-person compliance group by 25 percent this year, Cohen said in the letter. SAC Capital, whose compliance team has grown from 10 employees in 2008, will increase its investment in technology to improve oversight, he said.
The compliance group, run by Steve Kessler, monitors communications such as instant messages and e-mails, including those sent and received by Cohen.
SAC Capital, whose clients asked in the first quarter to pull $1.68 billion, last week gave investors more time to decide on further redemptions for this year as they await final approval of the regulatory settlement and Martoma’s trial.
Investors will have until mid-August to tell the firm if they want to withdraw, three months later than previously required, according to a person with knowledge of the plan. They will be able to get 50 percent of their money in each of the third and fourth quarters, said the person.
If clients choose not to wait, they need to tell SAC Capital they want to redeem by May 15, after which they will get one-third of their money in each of the next three quarters.
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