$10 billion hedge fund SAC indicted on fraud charges

One of Wall Street’s top stock trading firms was handed a huge defeat on Thursday after a federal grand jury indicted SAC Capital Advisors on fraud charges.

According to the indictment SAC both obtained on inside information and traded on it between 1999 to 2010, boosting returns for investors along with fees for the firm. The charges also allege that the insider trading scheme ran into the very core of the firm, involving portfolio managers, research analysis and dozens of publicly traded companies.

The case has been closely followed by the finance world due to the potential blowback against SAC founder Steve A. Cohen, the billionaire hedge fund manager that has so far eluded indictment, including in today’s filing in a Manhattan federal court.

The US Securities and Exchange Commission has, however, already filed civil charges against Cohen, the 35th richest man in the US according to a 2011 Forbes ranking, for what it said was a failure to adequately supervise the people at his firm.

US Attorney Preet Bharara said at a news conference on Thursday that SAC was "a magnet for market cheaters."

FBI Assistant Director George Venizelos echoed that sentiment, saying that "this is a case about corporate conduct and corporate responsibility. SAC Capital and its management fostered a culture of permissiveness. SAC not only tolerated cheating, it encouraged it."

The indictment against SAC, which oversees some $10 billion worth of assets, alleges that the firm intentionally recruited portfolio managers and analysts that had proven access to public company contacts with insider information. Those managers and analysts were then not second guessed when they made trading recommendations that seemed clearly rooted on insider information.

The "relentless pursuit of an information 'edge' fostered a business culture within SAC in which there was no meaningful commitment to ensure that such 'edge' came from legitimate research and not inside information," reads Thursday’s court filing.

"The predictable and foreseeable result, as charged herein, was systematic insider trading by the SAC entity defendants resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public."

With the indictment, analysts believe that SAC is essentially being put out of business by federal investigators. Along with the charges the government is also looking to force SAC to surrender any fraud-related profits.

Though Cohen still retains a personal fortune of around $9 billion, according to Charles Gasparino, author of the book Circle of Friends which follows the federal investigation trailing Cohen, that fortune may not remain intact for long.

“Since most of the money now in SAC is Cohen’s, that means his net worth could take the hit and that hit could amount to billions,” wrote Gasparino on Thursday.

The indictment filed on Thursday does seem to indicate that federal investigators have every intention of pursuing Cohen in the future.

“In particular, at all relevant times the SAC Owner required each [portfolio manager] to share ‘high conviction’ investment ideas–i.e., the investment  recommendations in which the SAC [portfolio managers] had the greatest confidence –with the SAC Owner. In fact, providing such ideas to the SAC Owner was an express part of a SAC PM’s duties and was emphasized to SAC [portfolio managers] in the hiring process and once working at SAC.”

The case is said to be the most aggressive yet by the top federal prosecutor in New York, Preet Bharara, who has overseen a crackdown on insider trading cases.

Though grassroots movements like Occupy Wall Street have long demanded that bankers be held accountable for corruption, claiming that the federal government is not doing enough to prosecute white collar criminals, Wall Street was stunned nonetheless when a series of criminal insider trading charges emerged in 2009.

In one of the biggest cases involving insider trading Raj Rajaratnam, the founder of the Galleon Group hedge fund, was sentenced to 11 years in prison on October of 2011. Prior to its collapse in 2009 on the heels of an insider trading investigation, Galleon was one of the largest hedge fund management firms in the world, managing over $7 billion worth of investments.

In light of guilty pleas made by former SAC employees following a series of civil actions pushed by the SEC, the firm had already lost between $5 and $6 billion from major financial players including Blackstone Group and Citigroup. Now that the indictment has been filed, that exodus is only expected to accelerate.

SAC, which is based in Stamford, Connecticut, currently has 1,000 employees around the world. As recently as Wednesday the company was still putting on a brave face despite news of the looming indictment emerging earlier in the week, reported the Times.

“The firm will operate normally and we have every expectation that will be the case going forward,” read a memo to employees on Wednesday.