It began with Richard Choo-Beng Lee.
Since October 2009, the U.S. Securities and Exchange Commission (SEC) has filed 175 insider trading actions involving more than 400 individuals and entities for trading activities. These activities resulted in more than $875 million in illicit profits, with many of the recent charges involving so-called expert networks, which connect traders and analysts with sources employed by publicly traded companies.
U.S. Attorney Preet Bharara, who has been a central figure in the prosecution of many high-profile securities fraud cases, frequently describes insider trading as “rampant” within the financial services industry.
Including Lee, at least six individuals charged by the SEC in insider trading schemes since mid-2009 are former employees of Stamford hedge fund giant SAC Capital Advisors L.L.C., with a seventh SAC Capital employee named but not charged with wrongdoing in a January 2012 case.
The charges include the largest-ever insider trading case brought by the SEC, which implicates former SAC Capital employee Mathew Martoma and independent medical consultant Sydney Gilman in an alleged $276 million scheme.
Despite the federal scrutiny surrounding several of its former employees, SAC Capital and its billionaire founder Steven A. Cohen have not been charged with any wrongdoing.
Founded two decades ago with $25 million in assets, SAC Capital today manages $14 billion in assets, while Cohen has seen his personal fortune grow to nearly $9 billion, making him one of the five or six wealthiest hedge fund managers in the country, according to Forbes.
SAC Capital, which is known for the high trading volume executed by its various funds, has delivered average annual returns of 30 percent since its establishment. In 2011, while the industry as a whole experienced average returns of negative 5 percent, SAC Capital funds saw average returns of 8 percent.
However, Cohen and SAC Capital have not altogether escaped the attention of investigators.
In November 2010, SAC Capital told its investors that it had received an “extraordinarily broad” subpoena from federal regulators, but no charges ensued.
In the days following the Martoma charges, Cohen reportedly told investors participating in a Nov. 28 conference call that SAC Capital recently received a formal Wells notice from the SEC, indicating that civil securities charges could be forthcoming.
SAC Capital spokesman Jonathan Gasthalter declined to comment on the reports.
The first of the post-Great Recession securities fraud cases against a former SAC Capital employee was launched in 2009.
In the 1990s, Lee worked at New York City brokerage firm Needham & Co. alongside Raj Rajaratnam, infamous for his conviction in an insider trading scheme surrounding The Galleon Group, a hedge fund he helped to found.
Lee’s next stop was the Stamford hedge fund SAC Capital, where he worked from 1999 to 2004 before founding his own hedge fund, Spherix Capital, in 2008.
In October 2009, Lee pleaded guilty to charges that he participated in an insider trading scheme after leaving SAC Capital.
According to court documents, Lee agreed as part of his plea deal to cooperate with prosecutors as part of a nationwide crackdown by the U.S. Department of Justice and the SEC on individuals and firms suspected of passing and/or trading on nonpublic information.
Through those discussions, Lee is said to have shared information with investigators about alleged illegal activities he witnessed while with SAC Capital, according to multiple published reports.
In a subsequent case, Noah Freeman and Donald Longueuil pleaded guilty to securities fraud charges in February 2011, admitting to participating in an insider trading scheme while employed at SAC Capital, according to court documents.
At a press conference coinciding with the charges, Bharara said “We are not talking simply about the occasional corrupt individual — we are talking about something verging on a corrupt business model, for the defendants seem to have taken the concept of social networking and turned it into a criminal enterprise.”
Among the other cases involving current or former SAC Capital employees, Robert Feinblatt, founder of New York City-based Trivium Capital Management, was charged by the SEC in January 2011 with participating in an insider trading scheme after he left SAC Capital, where he was employed until 2002.
Jon Horvath likewise pleaded guilty to securities fraud charges this past September, admitting to engaging in insider trading activities while employed by Sigma Capital Management, an SAC Capital subsidiary.
Horvath was charged as part of a larger scheme that involved employees of Diamondback Capital Management L.L.C., based in Stamford and founded by three former SAC Capital employees; Level Global Investors L.P., based in Greenwich and also founded by former SAC Capital employees; Whittier Trust Co., based in California; and the Manhattan office of Neuberger Berman.
The remaining two individuals who were charged as part of the latter scheme and who had yet to plead guilty, Todd Newman, a former Diamondback portfolio manager, and Anthony Chiasson, a former Level Global portfolio manager, were found guilty of securities fraud Dec. 17 for a scheme that involved nonpublic information about Dell Inc. and Nvidia Corp.
SAC Capital employee Michael Steinberg was named in court documents corresponding to the scheme as a participant, but has not been charged with any wrongdoing.
With the Dec. 17 verdicts, Newman and Chiasson “join the ranks of high-level investment fund managers who are being made to answer for their extraordinarily bad risk-reward analysis about what is right and what is wrong,” said U.S. Attorney Preet Bharara in a statement after the ruling was handed down.
“Like scores of privileged professionals before them, Newman and Chiasson are finding out the hard way that the opportunity cost of gaining an illegal edge in the market is the loss of one’s liberty,” Bharara said.
SAC Capital has not been alone in facing questions from regulators over its trading activities.
Diamondback Capital Management, which had assets of more than $5 billion as recently as two years ago, announced Dec. 6 that it would close down after experiencing a larger-than-anticipated pullout of clients’ funds.
The firm’s assets have declined since a 2010 raid by the FBI as part of a larger insider trading investigation.
Though Diamondback was never charged with wrongdoing, the firm in January agreed to pay $9 million to settle insider trading charges brought by the SEC Jan. 18, entering into a non-prosecution agreement as part of the settlement.
Including requests by investors to withdraw $520 million in funds, Diamondback’s assets have reportedly declined to $1.45 billion.