Hedge fund giant SAC Capital agreed to pay $1.8 billion in fines to the government as the firm pleaded guilty to multiple counts of insider trading last week.
The penalty is the largest a Wall Street firm has ever had to pay for insider trading. According to The New York Times, SAC founder Steven A. Cohen offered to pay $700 million previously, but the government turned down his offer, wanting to send a message to firms on Wall Street.
“Sometimes, blameworthy institutions need to be held accountable too,” Manhattan U.S. Attorney Preet Bharara said, whose office was in charge of the inquiry. “No institution should rest easy in the belief that it is too big to jail. That is a moral hazard that a just society can ill afford.”
According to the U.S. Securities and Exchange Commission, illegal insider trading occurs when a person or company buys or sells stock based on information that isn’t available to the general public.
Because the practice “undermines investor confidence in the fairness and integrity of the securities markets,” the SEC is diligent about monitoring it and enforcing any violations. The government case against SAC Capital alleged that portfolio managers under the direction of Cohen traded on material, non-public information, which they gathered in networks they formed with insiders at other firms.
Cohen, however, escaped charges himself, leading many to question whether this case will result in any significant changes to the culture of Wall Street.
“I do not think this will affect the culture on Wall Street any more than the $600 million fine paid by Michael Milken during the junk bond boom in the 1980s (for similar charges of insider trading),” Professor Thomas Jacobs, an expert on finance, said. “Mr. Cohen has escaped any direct charges so far and his firm immediately made a public statement which it then had to retract about not tolerating wrong-doing in contradiction to the agreement reached with authorities.”
After the agreement was reached, SAC Capital released a statement: “We take responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC’s liability. The tiny fraction of wrongdoers does not represent the 3,000 honest men and women who have worked at the firm during the past 21 years. SAC has never encouraged, promoted or tolerated insider trading.”
Hedge funds by definition are lightly regulated entities that are purported to provide sophisticated analysis, trading expertise and unconventional strategies made available usually only to wealthy investors. With the high cost of investing in these firms, pressure is great for them to add value, which can lead to fraud.
“If such pressure leads to the same kind of behavior that SAC was caught doing, it calls into question the light regulation and exemptions that such funds receive compared to mutual funds which are regulated by the Securities and Exchange Commission per the Investment Company Act of 1940 as well as other Depression-era legislation,” Jacobs said.
While the actions of members at the firm were illegal, admitted even by the company, Jacobs believes that more regulatory power would not be effective in stopping further wrongdoing.
“The regulators gain new powers but are rarely held to a high standard in using them. Indeed, each regulatory failure seems to simply bring a chorus of cries for more regulatory power,” he said.
The government, however, has declared victory in this instance.