FBI: “Manhattan U.S. Attorney and FBI Assistant Director in Charge Announce Insider Trading Charges Against Four SAC Capital Management Companies and SAC Portfolio Manager”

July 25, 2013

The Federal Bureau of Investigation (FBI) on July 25, 2013 released the following:

SAC Management Companies Allegedly Engaged in Decade-Long Insider Trading Scheme on a Scale Without Known Precedent in Hedge Fund Industry; SAC Portfolio Manager Responsible for $1.25 Billion “Special Situations” Fund Has Pled Guilty to Insider Trading

Preet Bharara, the United States Attorney for the Southern District of New York, and George Venizelos, the Assistant Director in Charge of the New York Office of the Federal Bureau of Investigation (FBI), announced today the unsealing of insider trading charges against four companies—S.A.C. CAPITAL ADVISORS, L.P. (SAC Capital LP), S.A.C. CAPITAL ADVISORS, LLC (SAC Capital LLC), CR INTRINSIC INVESTORS, LLC (CR Intrinsic), and SIGMA CAPITAL MANAGEMENT, LLC (Sigma Capital); (collectively the SAC Companies). The SAC Companies are responsible for the management of a group of affiliated hedge funds (collectively the SAC Hedge Fund or SAC). Charges were also unsealed today against RICHARD LEE, a portfolio manager employed by SAC Capital LP, who focused on “special situations” like mergers and acquisitions, private equity buy-outs, and corporate restructurings in publicly traded companies across various industry sectors. LEE pled guilty on July 23, 2013, before U.S. District Judge Paul G. Gardephe, to conspiracy and securities fraud charges in connection with his work at SAC Capital LP.

The SAC Companies are charged with criminal responsibility for insider trading offenses. These alleged offenses were committed by numerous employees, occurred over the span of more than a decade, and involved the securities of more than 20 publicly-traded companies across multiple sectors of the economy. It is charged that the acts of these employees were made possible by institutional practices that encouraged the widespread solicitation and use of material, non-public information (Inside Information). This activity allegedly resulted in hundreds of millions of dollars in illegal profits and avoided losses at the expense of members of the investing public. The SAC Companies are expected to be arraigned on the charges on tomorrow at 10:00 a.m. before U.S. District Judge Laura Taylor Swain.

Manhattan U.S. Attorney Preet Bharara said: “A company reaps what it sows, and as alleged, SAC seeded itself with corrupt traders, empowered to engage in criminal acts by a culture that looked the other way despite red flags all around. SAC deliberately encouraged the no-holds-barred pursuit of an ‘edge’ that literally carried it over the edge into corporate criminality. Companies, like individuals, need to be held to account and need to be deterred from becoming dens of corruption. To all those who run companies and value their enterprises, but pay attention only to the money their employees make and not how they make it, today’s indictment hopefully gets your attention.”

FBI Assistant Director in Charge George Venizelos said: “Our aim all along has been to root out the wrongdoers and send a message to anyone else inclined to break the law. If your information ‘edge’ is inside information, you can’t trade on it.”

According to the allegations in the five-count indictment and the criminal information to which LEE pled guilty, both of which were unsealed today in Manhattan federal court:

The SAC Hedge Fund operated as a collection of dozens of individual trading portfolios that covered nearly every trading sector of the economy. Each portfolio was headed up by a portfolio manager (PM), and supported by one or more research analysts (RAs). SAC PMs had substantial discretion in managing the investments in their own portfolios, and were required by the SAC Companies to share the investment recommendations in which they had the greatest confidence with the owner of the SAC Companies (the SAC Owner). The SAC Owner managed the largest trading portfolio at SAC.

From 1999 through at least 2010, numerous employees of the SAC Companies obtained and traded on Inside Information, or recommended trades based on such information to SAC PMs or the SAC Owner. To date, eight SAC Company PMs and RAs have been charged and/or convicted in insider trading cases involving the SAC Hedge Fund, including LEE, who was charged and pled guilty earlier this week.

The systematic insider trading engaged in by SAC PMs and RAs was the predictable and foreseeable result of an institutional failure. The SAC business culture encouraged and tolerated the relentless pursuit of an information “edge,” with no meaningful commitment to ensuring that such an “edge” came from legitimate research and not Inside Information.

As charged in the indictment, these institutional failings fell into three main categories:

First, the SAC Companies focused on recruiting SAC PMs and SAC RAs who had proven networks of public company contacts. The SAC Companies, however, did not make any corresponding effort to ensure that prospective SAC PMs and SAC RAs did not use these contacts to obtain illegal Inside Information. For example, in a November 16, 2008, e-mail forwarded to the SAC Owner, an SAC PM candidate in the industrial sector was recommended in part because he had “a house in the Hamptons with the CFO” of a Fortune 100 industrial sector company. In another instance, the SAC Companies hired LEE despite a warning to the SAC Owner from LEE’s prior employer, that LEE had been a member of an insider trading group at that hedge fund. LEE ultimately traded on Inside Information in the $1.25 billion “special situations” SAC portfolio he jointly managed with a second SAC PM.

Second, employees of the SAC Companies were financially rewarded for recommending to the SAC Owner “high conviction” trading ideas, in which the SAC PM had an “edge” over other investors. In many cases, the employees were not questioned when making trading recommendations that appeared to be based on Inside Information. On numerous occasions, the SAC Owner failed to follow up with SAC employees who were promoting trading sourced to an “edge” from a contact at a public company or with similar language suggesting potential insider trading. On one occasion, the SAC Owner participated in a discussion with his employees on the topic of confidential information the SAC employees had said that they learned during a paid consultation session from a clinical investigator for a drug trial. During the discussion with his employees, the SAC Owner, a sophisticated trader with over three decades of experience, never questioned whether the drug trial data constituted Inside Information. In addition, the SAC Owner and SAC Companies cultivated an environment that emphasized not discussing Inside Information openly rather than not seeking or trading on it in the first place.

Third, the SAC Companies employed limited compliance measures designed to detect or prevent insider trading by SAC PMs or SAC RAs. They failed to routinely monitor employee e-mails for indications of insider trading until late 2009, even though SAC’s head of compliance had recommended such monitoring to SAC management four years earlier. Indeed, despite numerous documented cases of insider trading at SAC—established by, among other things, guilty pleas of six former SAC PMs and RAs, each predicated upon repeated insider trading over substantial periods of time—SAC’s compliance department contemporaneously identified only a single instance of suspected insider trading by its employees. In that one case, the SAC Companies permitted those involved to continue working at SAC and failed to report the conduct to regulators or law enforcement.

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In addition to the indictment, today the government filed a civil forfeiture action (the forfeiture complaint) in Manhattan federal court, seeking the forfeiture of assets held by investment funds to which the SAC Companies served as investment advisors, assets held by affiliated investment funds, and assets held by the SAC Companies themselves. The Forfeiture Complaint alleges that the SAC Companies engaged in money laundering by commingling the illegal profits from insider trading with other assets, using the profits to promote additional insider trading, and transferring the profits with the assistance of financial institutions.

The SAC Companies are charged together in count one of the indictment with wire fraud, and each of the four SAC Companies is charged separately in counts two through five with securities fraud. Each of the SAC Companies faces a maximum fine for the securities fraud charges of the greater of $25 million, or twice the gross gain or loss derived from the offense on each charge.

The criminal information unsealed today, to which RICHARD LEE pled guilty earlier this week, charges LEE with one count of conspiracy and one count of securities fraud in connection with insider trading between April 2009 through 2010, while he was employed by SAC Capital LP. LEE faces a maximum penalty of 20 years in prison for the securities fraud charge and five years in prison for the conspiracy charge. He also faces a maximum fine of $5 million for the securities fraud charge and $250,000 or twice the gross gain or loss derived from the offense on the conspiracy charge.

Of the seven other SAC Company portfolio managers and research analysts previously charged in insider trading cases involving the SAC Hedge Fund, five have pled guilty and await sentencing. They include:

  • Jon Horvath, who pled guilty on September 28, 2012;
  • Wes Wang, who pled guilty on July 13, 2012;
  • Donald Longueuil, who pled guilty on April 28, 2011;
  • Noah Freeman, who pled guilty on February 7, 2011; and
  • Richard Choo-Beng Lee, who pled guilty on October 13, 2009

Charges are still pending against the remaining two defendants previously charged in connection with SAC, Michael Steinberg and Mathew Martoma, who are presumed innocent unless and until proven guilty.

Mr. Bharara praised the efforts of the FBI and also thanked the U.S. Securities and Exchange Commission for its assistance in the investigation. He added that the investigation is continuing.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions, and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit http://www.StopFraud.gov.

This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Arlo Devlin-Brown, Antonia M. Apps and John T. Zach are in charge of the prosecution, and Assistant U.S. Attorney Micah Smith is responsible for the forfeiture aspects of the case.

The charges contained in the indictment are merely accusations and the defendants are presumed innocent unless and until proven guilty.”

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Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

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To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


Federal “Criminal Indictment Is Expected for SAC Capital Advisors”

July 24, 2013

The New York Times on July 23, 2013 released the following:

“BY BEN PROTESS AND PETER LATTMAN

Federal authorities are poised to level a criminal indictment against SAC Capital Advisors, the hedge fund run by the billionaire Steven A. Cohen, capping a nearly decade-long insider trading investigation into one of Wall Street’s most prominent firms.

Prosecutors and the F.B.I. in Manhattan are expected to announce the charges in the coming days, according to people briefed on the matter, who spoke only on the condition of anonymity. The move, a rare aggressive action against a big company, could cripple SAC.

It is unclear whether SAC’s lawyers will try to settle at the last minute, though that is an unlikely option at this point. Mr. Cohen is not expected to be charged criminally, though authorities are still contemplating bringing charges against other employees at SAC.

While the legal deadline for filing some insider trading charges may have already passed, authorities are planning to navigate around that requirement by filing a broader criminal conspiracy case against SAC, these people said. As long as one of the trades cited in the case took place in the last five years – and some did – then the government has the power to sweep in older trades to highlight a continuing scheme.

Representatives for the government and SAC declined to comment.

The indictment would come on the heels of the Securities and Exchange Commission’s filing a civil action last week. It accused Mr. Cohen of failing to supervise employees suspected of insider trading. Those employees, Mathew Martoma and Michael S. Steinberg, had been charged with criminal wrongdoing.

In its order, the S.E.C. cited a 2008 e-mail forwarded to Mr. Cohen in which an SAC analyst explicitly stated that he had a “2nd hand read from someone at” the computer maker Dell, a source who provided financial information about the company before its earnings announcement. Minutes after receiving the e-mail, Mr. Cohen sold his entire position in Dell, the S.E.C. said.

In a 46-page document responding to the S.E.C.’s charges, Mr. Cohen’s lawyers said there was an innocent explanation for his not reacting to the suspicious e-mail: he did not read it.

“Cohen has no memory of having seen it and no witness will testify that they discussed it with him,” the lawyers said in the document, circulated internally at SAC and reviewed by The New York Times and referred to earlier in The Wall Street Journal.

Mr. Cohen, the lawyers argued, received an average of 1,000 e-mails each day in 2008. At the time, he apparently opened only 11 percent of the e-mails, though the lawyers did not disclose how they arrived at that figure.

To locate an incoming message, Mr. Cohen would have to look at the only one of his seven computer screens that displays e-mail, a monitor that happened to be “to the far left” of the others, his lawyers argued. Then he would have to “minimize one or two computer programs” to call up his Microsoft Outlook window, which was “reduced” so that Mr. Cohen could see, at most, only five messages at once.

While the document makes a strong case that Mr. Cohen was not knowingly trading on inside information, it is unclear whether it will rebut the S.E.C.’s claims that he did not prevent employees from doing so. The S.E.C. must show that Mr. Cohen did not “reasonably” supervise them.

Mr. Martoma, 39, and Mr. Steinberg, 40, have each pleaded not guilty to criminal insider trading charges and face separate trials in November.

Mr. Cohen’s civil case will play out before an administrative law judge at the S.E.C. rather than in a federal court. On Tuesday, Chief Judge Brenda P. Murray was assigned to the case, and a hearing was scheduled for Aug. 26.

The SAC document, people briefed on the matter said, was adapted from the lawyers’ response to the S.E.C.’s so-called Wells notice that warned of potential charges. It also outlined the arguments that SAC most likely presented in an effort to persuade the Justice Department not to bring a criminal indictment of the fund.

A criminal charge against SAC would likely serve as a death blow to the firm. SAC has already been hobbled by the government’s investigation, with investors in the fund pulling about $5 billion from the fund since the beginning of the year. But an indictment may pressure more investors to pull their money. It could also force SAC’s trading partners, which include nearly all of the largest Wall Street banks, like Goldman Sachs and Morgan Stanley, to suspend business with the firm.

Criminal charges against companies are extremely rare, and the government is reluctant to bring them given the potential collateral consequences. After the Justice Department indicted Enron’s accounting firm, Arthur Andersen, the firm was forced to close and 28,000 jobs were lost. SAC, which is based in Stamford, Conn., has about 1,000 employees.

Before bringing indictments against companies, federal prosecutors consider a number of factors when deciding to bring a case, including the pervasiveness of wrongdoing and the company’s level of cooperation in the investigation.

The Dell e-mails are expected to play a central role in the criminal case.

Even if he was a vigilant e-mail consumer, the lawyers say, Mr. Cohen could argue that the 2008 dispatch did not identify the source of the information about Dell, suggesting that it could have “lawfully” come from an authorized person at the company. The source, the lawyers note, did in fact turn out to be someone from the investor relations department, who has not been accused of any wrongdoing. The lawyers also note that the information in the e-mail “turned out to be wrong.”

Still, SAC made profits and avoided losses of $1.7 million. And once Dell released its earnings, Mr. Cohen sent an e-mail to Mr. Steinberg that said, “Nice job on Dell.”

Mr. Cohen sold his stake in Dell, the lawyers argue, with “good reason.” Mr. Cohen, they said, took the position based on the recommendation of a portfolio manager at SAC, whom people briefed on the matter identified as Gabe Plotkin. Minutes after Mr. Plotkin started selling, so did Mr. Cohen.”

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Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

Federal Crimes – Detention Hearing

Federal Mail Fraud Crimes

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To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


An Insider Trading Case That Puts 2 Defendants at Odds

October 22, 2012

The New York Times on October 22, 2012 released the following:

“BY PETER J. HENNING

The insider trading charges against Anthony Chiasson, a co-founder of Level Global Investors, and Todd Newman, a former portfolio manager at Diamondback Capital Management, has put the two defendants at odds and may end up with one implicating the other as part of a defense strategy.

The government has accused the two men of receiving inside information through a “circle of friends” who exchanged information about technology companies. Mr. Chiasson is charged with reaping the largest profits for his hedge fund — about $57 million — by shorting Dell shares before a negative earnings announcement in August 2008. Mr. Newman is also accused of trading in Dell at the same time, but in much smaller amounts.

The information was passed around among a group of analysts who have pleaded guilty and agreed to cooperate in the case. Unlike other recent insider trading cases, however, the government does not have wiretaps or other consensual recordings to show how the tips made their way to Mr. Chiasson and Mr. Newman. Thus, the case will ride on whether analysts who worked for the two defendants are believable witnesses for the prosecution.

One quirk in the case is that there is no direct connection between Mr. Chiasson and Mr. Newman, although they are charged with being members of the same conspiracy. They worked at different firms, and the information reached them by different paths. Neither has much incentive to cooperate by putting up a united front.

For the case against Mr. Chiasson, the indictment accuses him of receiving the inside information from Spyridon Adondakis, an analyst at Level Global who pleaded guilty to passing inside information.

According to recent filings in the case, one way Mr. Chiasson’s lawyers plan to attack Mr. Adondakis’s credibility is by showing that he rarely shared confidential information with Mr. Chiasson. To that end, the defense plans to introduce nearly 1,000 e-mails sent by the analysts containing corporate information in which Mr. Chiasson was rarely listed as a recipient on the chain of messages.

Defense lawyers are likely to argue that Mr. Adondakis is someone who is an admitted criminal who never shared inside information with his boss. It was only after being caught did he offer up a prominent hedge fund manager in the hope of getting a significant reduction in his sentence.

The problem for Mr. Newman is that a few hundred of those e-mails included him as a recipient. Many were sent by an analyst at Diamondback who has also pleaded guilty to being Mr. Newman’s source of inside information.

To the extent the e-mails show Mr. Adondakis and others engaged in wrongdoing, they implicate Mr. Newman in the same criminal conduct. He could suffer some rather significant collateral damage if Mr. Chiasson argues that the e-mails are evidence of violations of the federal securities laws by Mr. Adondakis and his cohorts. The e-mails might hurt Mr. Newman’s case, but that is of little concern to Mr. Chiasson because it has become a situation of “every man for himself.”

To avoid this problem, Mr. Newman has asked a United States District Court judge, Richard J. Sullivan, to sever his case so that he is tried separately from Mr. Chiasson, or to bar his co-defendant from using the e-mails as part of his defense. Mr. Newman argues that the e-mails would not be admitted as evidence if he had a separate trial, and that they are potentially prejudicial to his case if the jury misuses them despite any instruction the judge might give to consider them only with regard to the charges against Mr. Chiasson.

Mr. Chiasson naturally opposes the proposal to preclude his lawyers from introducing the e-mails because they can support his position that Mr. Adondakis did not tip him by keeping secret any inside information he received.

Federal prosecutors have told the court they are sitting this one out by not taking a position in support of either defendant.

This is not the first time the defendants sought separate trials. In the summer, they asked Judge Sullivan to sever their cases because they were not part of a single conspiracy as alleged in the indictment but instead there were multiple agreements, sometimes called “hub and spoke” conspiracies. If they were not part of the same agreement, then it would be improper to try them together.

Judge Sullivan denied their motions without explanation, although the likely reason is that there is enough overlap in the evidence that a jury could find a single conspiracy and therefore it would be more efficient to conduct a joint trial.

With the trial scheduled to begin on Oct. 29, this latest motion presents a significant challenge. At this late date, ordering separate trials could mean substantial inconvenience for the government because prosecutors will have to reorganize their case to concentrate on only one defendant after preparing for a joint trial.

The court would face the prospect of two trials about the same basic set of facts, with some of the cooperating witnesses testifying twice about the same inside information. Any inconsistencies in their testimony will be fodder for cross-examination in the second case, potentially giving the defendant who is tried later an unfair advantage.

Keeping the defendants together for trial, however, means Judge Sullivan will have to figure out whether to admit the e-mail evidence that goes to the heart of Mr. Chiasson’s defense that he did not trade on inside information, or to keep it out to prevent the evidence from harming Mr. Newman’s case. If he does not grant Mr. Newman’s severance motion and the defendants are convicted, then one will have a significant issue to argue in an appeal.”

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Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

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To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.


Ex-Home Diagnostics CEO admits to insider trading

August 9, 2012

Boston.com on August 9, 2012 released the following:

“TRENTON, N.J. (AP) — Federal prosecutors in New Jersey say a Connecticut man has admitted his role in an insider trading scheme related to the sale of a Florida-based medical products firm.

George Holley of Norwalk, Conn., interrupted his trial to plead guilty Wednesday to two counts of securities fraud. That came one day after prosecutors had rested their case against him.

Holley faces up to 40 years in prison when he’s sentenced Dec. 4.

Holley was chairman and CEO of Fort Lauderdale, Fla.-based Home Diagnostics Inc. Prosecutors said Holley disclosed inside information about a Japanese firm’s plan to acquire Home Diagnostics to his cousin and friend and told them to buy Home Diagnostics stock just three weeks before the merger was publically announced.”

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Douglas McNabb – McNabb Associates, P.C.’s
Federal Criminal Defense Attorneys Videos:

Federal Crimes – Be Careful

Federal Crimes – Be Proactive

Federal Crimes – Federal Indictment

————————————————————–

To find additional federal criminal news, please read Federal Criminal Defense Daily.

Douglas McNabb and other members of the U.S. law firm practice and write and/or report extensively on matters involving Federal Criminal Defense, INTERPOL Red Notice Removal, International Extradition Defense, OFAC SDN Sanctions Removal, International Criminal Court Defense, and US Seizure of Non-Resident, Foreign-Owned Assets. Because we have experience dealing with INTERPOL, our firm understands the inter-relationship that INTERPOL’s “Red Notice” brings to this equation.

The author of this blog is Douglas C. McNabb. Please feel free to contact him directly at mcnabb@mcnabbassociates.com or at one of the offices listed above.