DOJ Accuses Hedge Fund SAC Capital Of Major Insider Trading

Federal prosecutors finally brought their case against SAC Capital, the giant hedge fund that for years has outperformed almost all of its competitors. Prosecutors say they know why. The firm encouraged the use of illegal insider information and trading on that information became a part of the firm's culture, according to the indictment.

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Criminal charges were filed today against SAC Capital, one of the country's biggest and most successful hedge funds. The government says SAC was for years a hothouse of insider trading, where illegal activity was not only tolerated, but encouraged. And it says the firm's billionaire founder, Steven Cohen, routinely chose to look the other way. SAC is denying the charges. NPR's Jim Zarroli tells us more.

JIM ZARROLI, BYLINE: For years, U.S. officials have been building a case against SAC, ultimately charging eight separate people at the firm with insider trading. Most of them have gone on to plead guilty. And there has long been speculation that the government would indict the firm's founder, Steven Cohen. Instead, U.S. officials decided to take the unusual step of bringing charges against the firm itself. U.S. Attorney Preet Bharara said the scope of illegal trading at SAC Capital was deep and wide.

PREET BHARARA: It spanned more than a decade in time, involved securities of at least 20 public companies, extended across multiple sectors of the economy and benefited SAC to the tune of at least hundreds of millions of dollars.

ZARROLI: The indictment describes a firm with dozens of portfolio managers, each of whom reported to Cohen directly. It says they were encouraged and expected to bring in investment tips on a regular basis. Most of these portfolio managers came with extensive contacts in the industries they covered. And, in fact, the government says Cohen often hired them for that reason. The government says the firm became a magnet for cheaters. Dan Richmond is a former federal prosecutor.

DAN RICHMOND: The way the indictment identifies them as crossing the line is, you know, not just having bad apples, in fact, picking bad apples.

ZARROLI: The indictment says the firm's portfolio managers often solicited inside information from their contacts. They allegedly used it to trade for their own portfolios and they gave it to Cohen himself so he could use it in his trades. Officials said the firm had a compliance department that was supposed to look out for illegal activity, but it was remarkably weak.

The government said that when compliance department officials came upon an email that described illegal activity, they almost never took action against the employee. Instead, U.S. officials said they would ask the employee to rewrite it, saying it was poorly worded. Overall, the corruption at SAC was unprecedented, says Preet Bharara.

BHARARA: When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence. It is instead the predictable product of substantial and pervasive institutional failure.

ZARROLI: SAC and Cohen himself have repeatedly denied the government's charges and they did so again today. A spokesman said the handful of men who have admitted they broke the law does not reflect the honesty and character of the thousands of people who have worked at SAC over the years.

Whatever the outcome of the case, the investigation has left SAC badly wounded. Once, it had assets of more than $15 billion. Jay Rogers of the hedge fund advisory firm Alpha Strategies says many of its institutional investors have pulled their money out. Roger says some other investors have stayed out of loyalty to Cohen.

JAY ROGERS: But I think at this point, with the announcements today, I think that maybe some of those other investors that had been loyal to him up until this point may be now looking for the door.

ZARROLI: There are also big questions about what will happen to the remaining money at the firm. U.S. officials said they would try to seize the illegally obtained money but wouldn't freeze the firm's funds. SAC said today it was working with prosecutors to come up with an agreement that would protect the legitimate interests of all parties and also allow SAC to stay in business until the case is resolved. Jim Zarroli, NPR News, New York.

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