Manhattan US Attorney Preet Bharara hit hedge fund behemoth SAC Capital Advisors with criminal charges, accusing the firm of making “hundreds of millions of dollars in illegal profits” during a decade-long insider trading scheme.
The indictment, which charges SAC and several affiliates, alleges one count of wire fraud and four counts of securities fraud relating to allegations of “systematic” insider trading dating back to 1999.
SAC cultivated an “institutional indifference” to unlawful conduct, resulting in “insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry,” according to the complaint.
The government is seeking the forfeiture of any ill-gotten gains and fines. At its peak, the Stamford, Conn., firm founded by Steve Cohen had $15 billion under management. Cohen wasn’t personally charged in the indictment.
At a news conference to discuss the case, Bharara said insider trading was “rampant” at SAC and that it had become a “veritable magnet for market cheaters.”
The indictment against SAC is the most high-profile corporate prosecution in a decade and caps a seven year-long probe into the firm, considered one of the most profitable and powerful on Wall Street.
Prosecutors also revealed insider-trading charges against portfolio manager Richard Lee, who pleaded guilty earlier this week to illegal trading in Yahoo! and 3M Corp.
The complaint alleges that SAC hired Lee — not to be confused with Richard C.B. Lee, another SAC trader who has pleaded guilty — despite knowledge that he had a reputation for insider trading at a former firm. Sources identified that firm as Ken Griffin’s Citadel.
Katie Spring, a spokeswoman for Citadel, said Lee was terminated for cause in 2008, but that it not tied to insider trading. Prior to Citadel, Lee worked at Noonday Asset Management, a unit of San Francisco hedge fund Farallon Capital Management.
Lee is the eighth SAC employee to have pleaded guilty or been charged with insider trading, including Mathew Martoma, who faces trial in November for trades tied to drug companies Elan and Wyeth.
“SAC has never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously,” the firm said in a statement. “The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years.
“SAC will continue to operate as we work through these matters.”
In a separate civil action filed last week, the Securities and Exchange Commission is seeking to ban Cohen from managing client money, saying he should have known his subordinates were engaging in insider trading.
Today’s indictment doesn’t name Cohen, referring to him only as “the SAC owner.” Prosecutors contend that Cohen fostered a culture of insider trading and that he and other managers actively looked to hire employees who were likely to possess insider information.
The complaint alleges that the search for those with inside information started during the recruitment process and pointed to an assessment of a candidate specializing in the industrial sector that was forwarded to Cohen in November 2008.
The assessment described the candidate as “the guy who knows the quarters cold, has a share house in the Hamptons with the CFO of [a Fortune 100 industrial sector company], tight with management.”
SAC employees were also incentivized financially to refer to Cohen “high conviction” trading ideas in which traders had an “edge” over other investors, according to the complaint.
For example, prosecutors allege that in October 2007, former SAC analyst Jon Horvath emailed a trading recommendation concerning Sun Microsystems to Cohen.
“My edge is contacts at the company and their distribution channel,” Horvath said.
Cohen did not ask Horvath whether his “contacts at the company” were permitted to share the information, prosecutors said.
Prosecutors said SAC also failed to employ compliance systems to stop the practice.
“At bottom, the encouragement by the SAC entity … to pursue aggressively an information “edge” overwhelmed limited SAC compliance systems,” said the indictment.
The complaint cited Cohen’s sale of some $12 million of Dell shares in August 2008 after receiving an email from Horvath, in which he claimed to have a “2nd hand read from someone inside the company” that gross margins would disappoint.
Cohen has denied seeing the email.
“The predictable and foreseeable result, as charged herein, was systematic insider trading by [SAC] resulting in hundreds of millions of dollars of illegal profits and avoided losses at the expense of members of the investing public,” according to the complaint.
At SAC’s headquarters, workers were seen leaving the main office, carrying their lunches from SAC’s cafeteria. Most declined to talk to the press, although one maintained it was business as usual.
“I am here. I am doing my job,” he said.
Additional reporting by Michelle Celarier
kwhitehouse@nypost.com