Monday, November 4, 2013

The Impact of the SAC Capital Advisors Criminal Guilty Plea

In what will surely be viewed as a controversial outcome, SAC Capital Advisors will plead guilty to criminal fraud charges, stop investing money for others and pay $1.8 billion — the largest financial penalty in history for insider trading — to resolve criminal and civil claims against the hedge fund giant, the government announced Monday.

The controversy will revolve around the impact of convicting a corporation of a crime. After all, you cannot put the corporation in jail. Further, since a criminal conviction effectively puts the corporation of out business, the impact of that conviction impacts all of the customers, employees and vendors of the corporation. 

While I firmly believe that it is a mistake to charge a corporation with a criminal offense - for exactly the reason stated above, this case is a bit different. 

First, many of its traders have been indicted for insider trading. Second, although Mr. Cohen was not indicted, he is, and remains, the subject of an SEC case for failing to supervise his employees. Third, with all of the negative publicity, the press conferences and Internet sites calling the firm "a magnet for cheating" and having "a culture of law-breaking" we can assume that the firm would not have lasted much longer, with or without an indictment. Finally, despite the marginal merit to the claims against Mr. Cohen personally, I would expect to see a settlement with the SEC any day now.

So, the firm was out of business, regardless of the indictment. But does that make it right? I will leave the academic discussion to the academics - I am just a securities litigator - but threatening to put a corporation out of business because of the wrongful conduct of employees - not necessarily the owners or executives - is not a path that we want to go down. The government has enough power over us - using the criminal process to force change inside of private companies by threatening to put them out of business is not a process that we should be encouraging.

The plea does end the case, and most of the related cases. Acccording to CNN,  prosecutors told the Judges presiding over the pending cases, that the "proposed global resolution" of the criminal and civil cases against SAC Capital Advisors and related companies also includes an agreement that SAC will cease operating as an investment adviser and will not accept any additional funds from third-party investors.

So, SAC Capital Advisors is out of business, with or without a criminal record. In addition, the company will pay a $900 million fine and forfeit another $900 million to the federal government, though $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.

For more information - Hedge fund giant SAC Capital to pay $1.8B penalty

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