Overview
This documentary examines the rise and fall of Steven A. Cohen and SAC Capital, detailing the firm's extraordinary returns, its aggressive pursuit of market "edge," and the extensive federal investigation into insider trading at hedge funds. It explores the culture, tactics, legal ambiguities, and eventual legal actions taken against SAC Capital and associated individuals.
Steven Cohen’s Background and SAC Capital’s Growth
- Steven Cohen started as an options trader, gaining a reputation for reading markets and generating significant profits.
- He founded SAC Capital in 1992, employing aggressive, information-driven trading strategies.
- SAC charged higher-than-standard hedge fund fees due to Cohen’s superior performance.
- Cohen’s returns averaged 30% after fees for years, with only three losing months in his first six years.
The Information Edge and Industry Practices
- SAC and similar funds sought information advantages ("edge") via networks of contacts in finance, business, and expert networks.
- Wall Street brokers prioritized clients like SAC who generated high commissions, rewarding them with early or exclusive market information.
- Traders actively cultivated relationships for information, blurring legal and ethical boundaries.
Emergence of Insider Trading Investigations
- The government began investigating hedge funds, focusing initially on Gallion Group and key figures including Raj Rajaratnam.
- Informants and wiretaps revealed widespread sharing and trading on material, non-public information.
- The probe revealed complex insider networks across many funds, including SAC.
Use of Expert Networks for Information
- Expert networks connected hedge funds with industry insiders, sometimes leading to illegal sharing of proprietary information.
- FBI used informants to record conversations showing consultants providing confidential details for compensation.
Key Cases and Arrests
- Arrests of SAC portfolio managers and consultants followed, including Donald Longueuil, Noah Freeman, and Michael Steinberg.
- SAC’s Matthew Martoma was accused of trading on inside information about an Alzheimer’s drug trial.
Regulatory and Legal Responses
- SAC’s compliance oversight and Cohen’s knowledge of insider trading laws were questioned in legal proceedings.
- In 2013, SAC Capital agreed to plead guilty to insider trading, pay $1.8 billion in fines, and cease operating as a hedge fund.
- Cohen himself was not charged with insider trading but faced civil charges for failing to supervise employees.
Legal and Industry Implications
- The case highlighted legal ambiguities around insider trading and limits of criminal liability for negligence in finance.
- Legislative changes would be required to prosecute criminal negligence in this industry.
Decisions
- SAC Capital to plead guilty to insider trading and pay a record $1.8 billion fine.
- SAC Capital to cease hedge fund operations as part of settlement with prosecutors.
Action Items
- TBD – Steven Cohen/SAC Legal Team: Defend against ongoing civil actions and potential further investigations.
- TBD – U.S. Department of Justice: Continue investigations into insider trading at hedge funds.