Record fine for American hedge fund billionaire

He owned a $US115 million Manhattan penthouse and spent millions on art works to hang on his walls. But now Steven Cohen will be spending his billions on record-breaking fines imposed on his hedge fund for insider trading.

He owned a $US115 million Manhattan penthouse and spent millions on art works to hang on his walls. But now Steven Cohen will be spending his billions on record-breaking fines imposed on his hedge fund for insider trading.

SAC Capital Advisors, fully owned by Cohen, has agreed to pay a $US1.2 billion ($1.26 billion) penalty for insider trading, becoming the first large Wall Street firm in a generation to confess to criminal conduct.

Cohen’s conspicuous consumption has made him an emblem of the new Gilded Age. But SAC’s admission that employees traded stocks based on secret information has coloured his astounding investment track record, which saw the fund post average annual returns of nearly 30 per cent since 1992.

Cohen has not been criminally charged but the plea deal is a devastating blow as the firm that bears his initials will acknowledge that it was a corrupt organisation. The $US1.2 billion penalty adds to the $US616 million in insider trading fines SAC agreed to pay to federal regulators earlier this year. Cohen will pay those penalties.

‘‘The scope and the pervasiveness of the insider trading that went on at this particular place is unprecedented in the history of hedge funds,’’ Preet Bharara, the US attorney in Manhattan, said of SAC.

Cohen, 57, has told his friends that he at all times acted appropriately, complaining the government was obsessed with destroying him and his firm. He thinks it unfair that he is paying nearly $US2 billion in penalties for the crimes of what he believes are rogue employees. Eight former SAC traders have been charged with securities fraud.

In recent weeks, friends say, Cohen’s spirits have been high in the hopes the SAC settlement will put his legal problems behind him.

The guilty plea and fine paid by SAC are part of a broader plea deal federal prosecutors in Manhattan announced on Monday, which will also impose a five-year probation on the fund and require SAC to terminate its business of managing money for outside investors. The firm will probably continue to manage Cohen’s fortune.

The demand that SAC stop managing client assets is largely symbolic. Nearly all the fund’s investors have already pulled out their money. But SAC was always more insulated than other hedge funds from the damaging effects of withdrawals because of the $US15 billion it managed at its peak, only $US6 billion was from outside investors.

The balance, about $US9 billion, belongs largely to Cohen, with a fraction consisting of employee money. In the wake of the guilty plea, SAC is likely to morph into a so-called family office, with Cohen managing his personal wealth.

SAC had an unusual structure, with Cohen sitting atop a decentralised firm in which about 140 small teams each had control over hundreds of millions of dollars to invest. The teams were all required to share their best investment ideas with Cohen, who managed the largest trading account with several billion in capital. SAC attracted ambitious, talented traders and promised them outsize compensation as long as they performed. In good years, the fund’s top talent earned tens of millions of dollars in a year in pay.

Cohen was able to pay so much because, on the strength of superior performance, he charged among the highest annual fees in the hedge fund industry – 3 per cent of assets and up to half of profits. The average hedge fund charges a 1.5 per cent management fee and 20 per cent of the gains.

Though it branched into other investment strategies, SAC’s stock-in-trade was its so-called mosaic style of investing, using disparate sources of information to buy and sell stocks around market-moving events such as quarterly earnings, big mergers and new products. His traders became known for aggressively pumping sources for insights that would give them an edge, and speculation persisted that the fund routinely crossed the line into trading on confidential information.

The total $US1.8 billion punishment of SAC sets a record for insider trading cases. Many have also drawn comparisons between Cohen and Michael Milken, the junk bond pioneer at Drexel Burnham Lambert who became synonymous with financial greed during the 1980s. After pleading guilty to securities fraud charges, Milken paid about $US1 billion in penalties, adjusted for inflation. To avoid an indictment a quarter century ago, Drexel pleaded guilty to securities fraud, the last big Wall Street firm to enter a guilty plea before SAC.

The resolution of the case against SAC comes more than three months after a grand jury indicted the fund for permitting a ‘‘systematic’’ insider trading scheme to unfold from 1999 through 2010.

A separate civil action the Securities and Exchange Commission brought against Cohen still stands.

Guilty pleas by financial institutions are rare, and lawyers say the case against SAC could embolden prosecutors to bring criminal charges against other Wall Street firms. The Justice Department has been reluctant to go after big companies in the wake of the 2002 indictment of Enron’s accounting firm, Arthur Andersen, which led to the firm’s collapse and the loss of 28,000 jobs.

Brandon Garrett, a professor at the University of Virginia school of law, said that that while environmental and antitrust inquiries frequently resulted in corporate indictments, financial fraud investigators were just now ‘‘starting to see the light’’.

"Prosecutors have increasingly been saying that no company is too big to jail, and now they can point to the SAC case and say, ‘We really mean it,’’’ Garrett said.

Cohen’s troubles have hardly slowed his prodigious buying and selling of real estate and art. This year, he bought a $US60 million ocean-front property in the Hamptons, at the same time putting his Manhattan penthouse on the market. Last autumn, he paid $US150 million for Picasso’s Le Reve, one of the highest prices ever for a painting. Next week, at the contemporary sales at Sotheby’s, he will put up for auction about $US80 million in art, including two Warhols and a Richter.

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