Will SAC Capital’s Record $1.8 Billion Plea Deal Deter Insider Trading?
Following an insider-trading probe spanning a decade, SAC Capital Advisors has pleaded guilty to fraud, agreed to pay a record $1.8 billion in fines and penalties, and will close its investment advisory business.
While the deal — the largest insider-trading settlement in history — isn’t necessarily the final chapter for one of the most famous U.S. hedge funds (it leaves open the possibility SAC chief Steven Cohen could still face criminal charges,) it does signal a new chapter in the federal government’s crackdown on insider trading.
“No institution should rest easy in the belief that it is too big to jail,” U.S. Attorney Preet Bharara said in a statement. “That is a moral hazard that a just society can ill afford. Today, SAC Capital, one of the world’s largest and most powerful hedge funds, agreed to plead guilty, shut down its outside investment business, and pay the largest fine in history for insider trading offenses. That is the just and appropriate price for the pervasive and unprecedented institutional misconduct that occurred here.”
Following the settlement, SAC Capital issued the following statement: “We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. These wrongdoers do not represent the 3,000 honest men and women who have worked at the firm during the past 21 years. Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred.”
In reality, criminal charges against a financial firm are relatively rare, given the potential impact on that firm’s employees and the larger economy. However, some industry watchers say it could embolden prosecutors to bring criminal charges against other firms.
The question is whether SAC’s criminal sanctions — and subsequent fall from grace — will ultimately deter insider trading. Forbes writer Michael Bobelian sums up the potential deterrent effect in this way:
“The prosecution of SAC Capital as a corporate entity rather than Cohen as an individual also sends a message to others engaged in on-going insider trading conspiracies. Even if participants manage to shield themselves from personal prosecution, their companies could still be crippled if not put out of business. There is nothing worse than imprisonment. But paying out a huge fortune and losing one’s business are far stiffer penalties than the proverbial slap on the wrist.”
Although Cohen will remain under a cloud of uncertainty — he is still under criminal investigation — it’s unlikely that, given his vast personal wealth, he’ll have difficulty picking up the $1.8 billion tab for his firm. However, for smaller financial firms, a hefty fine would take a more devastating toll. So even if the government’s limited resources force it to focus on only high-profile targets, as Bobelian writes, “it’s fair to assume that the size of the payment combined with the intensity of the scrutiny Cohen endured will also serve as a deterrent to others in the financial world.”
Perhaps more importantly, the SAC Capital case has reignited the debate on what constitutes insider trading and whether it should be prosecuted. As the Wall Street Journal notes in a recent article, when Mr. Bharara was asked whether there are any victims to SAC’s crimes at a recent press conference, “the prosecutor spoke of people who believe the markets are fair and that investors all play by the same rules.”
“Others would argue that investors view as most fair a market in which prices reflect all available information and are therefore more accurate, or perhaps one in which investors, not regulators, decide what kind of disclosure they require,” the article continues.
When viewing insider trading through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct, we see very clear victims — average investors who have lost confidence that the financial markets are not rigged against them, leading to a reduction in invested assets and, potentially, a lack of retirement security. Given the potential impact on market integrity and the actions of individual investors, this is hardly a victimless crime.
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