SAC Capital Advisors recently pled guilty to criminal fraud charges as part of a deal with the government that requires the Connecticut hedge fund firm to pay a record $1.8 billion to settle charges that it allowed, if not encouraged, insider trading to occur for more than a decade. The guilty plea follows a multi-year effort that FBI Special Agent in Charge April Brooks called "the largest insider trading investigation in history.”
The SAC case, which began with an investigation by the Securities and Exchange Commission in 2002, demonstrates an exceptional showing of criminal force against a large corporation. Under the law of corporate liability, the government is authorized to hold a company criminally liable for the bad acts of employees as long as the employees acted “on behalf of and for the benefit of” the company. However, for the past decade, prosecutors have generally been reluctant to indict major companies on the basis of this authority.
In a statement issued after the hearing, U.S. Attorney Preet Bharara stated that the settlement should send the message that "no institution should rest easy in the belief that it is too big to jail. Today four SAC Capital companies pled guilty to serious federal crimes that undermined the integrity of our securities markets. Financial institutions should know that they are not automatically immune from prosecution, and we will hold companies, as well as individuals, accountable wherever appropriate."
The plea agreement requires SAC companies to pay a $900 million fine and forfeit another $900 million to the federal government, though the $616 million that SAC companies have already agreed to pay to settle parallel actions by the U.S. Securities and Exchange Commission will be deducted from the $1.8 billion. The agreement also obliges SAC Capital to shut down all operations to outside investors. U.S. District Judge Laura Taylor Swain stated that she wanted time to review case documents and ensure the penalties are appropriate and deferred her decision on whether to accept the plea until March 14, 2014.
Peter Nussbaum, SAC’s longtime general counsel who entered the plea, publically stated that "SAC wants to express our deep remorse for the misconduct of each individual who broke the law while employed at SAC." He added, "This happened on our watch, and we are responsible for that misconduct." Mr. Nussbaum then described the crimes of six former SAC employees who had pled guilty to insider trading charges. "We at SAC regret terribly the misconduct of these individuals," the lawyer said. "We have paid, and are paying, a very steep price for their actions."
SAC Capital is the first large Wall Street firm in a quarter-century to accept and plead guilty to major criminal charges. The case represents a significant maneuver by the government to hold a major corporation criminally liable for ineffectively monitoring its employees. The case has resulted in uncertain fates of firms and principals and corporations need to amend their internal policies in order to limit potential liability.
If your institution has questions or concerns about this topic and you would like further information, please email Jim Ryan at jryan@cullenanddykman.com or call him at 516-357-3750. This article was written with Hayley Dryer, an associate at the firm.