Bloomberg News

SAC Capital Judge Delays Decision to Accept Insider-Trading Plea

November 09, 2013

SAC Capital General Counsel Peter Nussbaum

SAC Capital Advisors LP's General Counsel Peter Nussbaum leaves federal court after entering a guilty plea to securities fraud and wire fraud on behalf of the hedge fund in New York on Nov. 8, 2013. Photographer: Victor J. Blue/Bloomberg

The U.S. judge overseeing SAC Capital Advisors LP’s guilty plea to securities fraud said she wouldn’t immediately decide whether to accept it, saying she wanted to review the documents first.

The hedge fund yesterday entered a plea through its general counsel, who appeared in Manhattan federal court before U.S. District Judge Laura Taylor Swain. Insider-trading trials of two SAC fund managers are scheduled over the next three months in the same courthouse -- trials that could still put the hedge fund’s founder, Steven A. Cohen, in jeopardy, should either defendant seek a plea bargain and cooperate with the U.S. in its continuing probe of the firm’s employees.

Cohen didn’t attend yesterday’s hearing, at which SAC General Counsel Peter Nussbaum entered the plea to four counts of securities fraud and one count of wire fraud. Swain said she wanted time to review a pre-sentence report and the sentencing submissions from the government and SAC before deciding whether she would accept the plea. She set sentencing for March 14.

“On behalf of SAC, I want to express our deep remorse for the misconduct of each individual who broke the law while employed at SAC,” Nussbaum said in court. “This happened on our watch, and we are responsible for that conduct.”

Jonathan Gasthalter, a spokesman for SAC, and lawyers for SAC declined to comment after court on the judge’s decision.

Manhattan U.S. Attorney Preet Bharara said in a statement that “financial institutions should know that they are not automatically immune from prosecution, and we will hold companies, as well as individuals, accountable wherever appropriate.”

Shutter Business

SAC has agreed to pay a record $1.8 billion and shutter its investment advisory business as part of an accord announced Nov. 4 to end both a prosecution and a federal money-laundering suit brought by the Justice Department.

Assistant U.S. Attorney Arlo Devlin-Brown told Swain the government had amassed more evidence against the hedge fund and other SAC employees who haven’t pleaded guilty that could have been presented if the case had gone to trial.

The case includes illicit trading by SAC fund managers and analysts dating back to 1999, Devlin-Brown said, and involves evidence of “institutional failures” regarding compliance and oversight of employees.

“The defendants engaged in conduct that was facilitated by institutional practices that encouraged SAC employees to pursue an informational edge,” Devlin-Brown said. “SAC exhibited an institutional indifference on whether that information was lawfully obtained.”

Pending Action

Cohen, 57, who founded SAC in 1992, wasn’t charged in the indictment of the Stamford, Connecticut-based firm. He still faces an administrative action filed by the U.S. Securities and Exchange Commission for his alleged failure to supervise the hedge fund’s activities.

Nussbaum yesterday cited the illegal trading committed by former SAC employees Noah Freeman, Donald Longueuil, Wesley Wang, Richard Choo-Beng Lee, Jon Horvath and Richard Lee, who have all pleaded guilty to insider trading.

Earlier yesterday, Sandeep Aggarwal, a former research analyst with Collins Stewart LLC, pleaded guilty to passing inside information about a deal involving Yahoo! Inc. (YHOO:US) and Microsoft Corp. to former SAC fund manager Richard Lee and others. Aggarwal, who faces as much as 25 years in prison when he’s sentenced, is cooperating with the government.

Illicit Tips

SAC portfolio manager Michael Steinberg is scheduled to go on trial Nov. 18 for allegedly engaging in insider trading in Dell Inc. and Nvidia Corp. (NVDA:US) based on illicit tips provided by Jon Horvath, his analyst. Horvath, who has pleaded guilty and is cooperating with the U.S., is scheduled to be a witness against Steinberg, the longest-serving SAC employee of those the U.S. has charged in its insider-trading probe.

Steinberg’s lawyer has asked the judge presiding over that case to allow evidence about how other SAC fund managers traded on information provided by Horvath, showing they didn’t think it was improperly obtained.

Prosecutors said they had evidence that in August 2008, Cohen liquidated his entire long position in Dell within minutes after Horvath sent Cohen and Steinberg an e-mail that the computer maker would miss Wall Street estimates. Cohen hasn’t been charged with wrongdoing in those trades. Prosecutors said Nov. 7 that they didn’t intend to use that evidence at Steinberg’s trial.

Mathew Martoma, a former fund manager for a unit of SAC, is scheduled to go to trial as early as Jan. 6 for allegedly using inside information from two doctors who were involved in the clinical trial of an Alzheimer’s drug to trade shares of Elan Corp. and Wyeth.

Clinical Trial

Prosecutors claim Martoma used illegal tips to help SAC make profits and avoid losses of $276 million -- the biggest insider-trading case in history. The U.S. said Cohen traded on the stocks after receiving the information from Martoma about the clinical trial’s disappointing results.

After SAC’s guilty plea, Ethan Wohl argued on behalf of investors in Elan and Wyeth who are suing the hedge fund over its alleged insider trading in those stocks. Wohl said investors are victims of SAC’s crime and urged Swain to reject the plea because of SAC’s failure to take responsibility for its Elan and Wyeth trades.

“The allocution made no reference to these trades and no acknowledgment of fault in any of the crimes pled to,” Wohl said, referring to Nussbaum’s statement.

‘Careful’ Judge

Anthony Sabino, who teaches law at St. John’s University in New York, said he wasn’t surprised by the judge’s decision not to rule immediately.

“She’s very thoughtful, very articulate, very careful,” Sabino said. “She’s going to give this a lot of thought.”

Sabino said that while Swain may question parts of the agreement, he doesn’t think she will reject it outright.

“You really can’t quibble with the fine,” Sabino said. “It’s a vast amount of money.”

Swain may require SAC to be more forthcoming in the criminal conduct it’s willing to admit or require changes to other details of the agreement as a condition for her approval, he said. The general terms of the deal will probably remain intact, he said.

The criminal case is U.S. v. SAC Capital Advisors LP, 13-cr-00541, U.S. District Court, Southern District of New York (Manhattan). The civil case is U.S. v. SAC Capital Advisors LP, 1:13-cv-5182, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in federal court in Manhattan at pathurtado@bloomberg.net; Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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