A major plea agreement in the Southern District of New York, which imposed the largest insider trading penalty in history, indicates federal prosecutors aim to follow through on long-standing promises of cracking down on insider trading by demonstrating the high price to be paid by corporate offenders targeted for indictment.
On November 4, 2013, SAC Capital Advisors LP (SAC Capital LP), SAC Capital Advisors LLC (SAC Capital LLC), CR Intrinsic Investors LLC (CR Intrinsic) and Sigma Capital Management LLC (Sigma Capital) (collectively the SAC companies) entered into a plea agreement, pleading guilty to all counts of a July 2013 indictment charging the SAC companies with securities fraud and wire fraud in connection with an insider trading scheme pursuant to 18 U.S.C. § 1343 and 17 C.F.R. § 240.10b-5, 240.10b-5(2). The agreement also includes a historic penalty amount of $1.8 billion and five years of probation, and prohibits the companies from engaging in any operations as investment providers.
The SAC companies managed a group of affiliated hedge funds. According to the indictment, the SAC companies’ employees obtained and traded on material, non-public information and/or recommended trades based upon that information to portfolio managers or the SAC owner. The indictment charged wide-scale insider trading offenses committed by employees from 1999 through 2010 involving the securities of more than 20 publicly traded companies across numerous industries. The indictment alleged that the SAC companies engaged in systematic insider trading that was a predictable and foreseeable result of multiple institutional failures. These failures, according to the indictment, included hiring practices heavily focused on recruiting employees with networks of public company insiders, SAC management not questioning employees about trades that appeared to be based on inside information and ineffective compliance measures that did not prevent or detect such trading, particularly prior to late 2009. The case was brought by the U.S. Attorney for the Southern District of New York, in coordination with President Obama’s Financial Fraud Enforcement Task Force.
The Plea Agreement and Forfeiture Stipulation
The SAC companies pleaded guilty to the July 23, 2013, indictment, which charged them with multiple counts of securities fraud based upon systemic insider trading and wire fraud relating to the criminal insider trading scheme. Under the terms of the plea agreement, the SAC companies and their affiliates are further prohibited from accepting any outside investor funds and must completely cease all of their operations as investment advisors. Further, the SAC companies will each be sentenced to a five-year term of probation—the maximum allowed by law—with a provision to end probation earlier if the SAC companies cease operating entirely. This plea agreement does not cover any individuals associated with the criminal scheme, who may be subject to investigation and prosecution.
In the related civil complaint in the Southern District of New York, the SAC companies are accused of engaging in money laundering pursuant to 18 U.S.C. §§ 1956, 1957 for commingling illegal profits gained from the insider trading scheme with other assets, then using the profits to promote additional insider trading and transferring the illegally obtained profits through financial institutions. Under the plea agreement, pending approval by the judge, the U.S. Department of Justice and the SAC companies will resolve the civil and criminal claims for the highest penalty amount in the history of criminal insider trading, $1.8 billion, which includes $900 million in penalties and $900 million in forfeiture. As part of the agreement, the Department of Justice agreed to credit the SAC companies for the $616 million they will pay the U.S. Securities and Exchange Commission for related violations.
As a result of this historic plea, future insider trading corporate defendants may now face a new playing field where prosecutors will push for admissions of guilt to severe felony charges and impose probation alongside massive penalties as part of plea deals. In the wake of this outcome, plea deals absent felony pleas and criminal sentences for insider trading corporate defendants may become few and far between.