SAC Capital Indictment Does Not Mean The End Of 'Too Big To Jail'

The feds finally seem to have gotten over their fear of bringing criminal charges against a financial company -- but that doesn't mean they have lost their anxiety that some companies are just "too big to jail."

The U.S. Attorney for the Southern District of New York on Thursday filed a grand-jury indictment against SAC Capital Advisors, the $15 billion Stamford, Conn., hedge fund run by billionaire Steven A. Cohen. The indictment accuses SAC Capital of "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry."

The government says SAC made "hundreds of millions" of dollars on insider trading over more than a decade, and it wants all of that money back. The charges could well mean the end of SAC, which employs about 1,000 people, according to Reuters.

SAC, in a statement sent to the New York Times and other news outlets, said 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."

These charges are the culmination of a decade-long federal investigation and the biggest moment so far in a wide-ranging crackdown on insider trading that has already resulted in 73 convictions or guilty pleas.

It is also the first against a well-known U.S. company since the government charged the accounting firm Arthur Andersen with crimes associated with its bookkeeping for Enron. That indictment essentially destroyed Arthur Andersen, which at its peak was a "Big Five" accounting firm that employed about 85,000 people. The company's conviction was later overturned on appeal, too late to save all those jobs.

Since then, the government has been profoundly skittish about bringing charges against other companies, especially any of the big banks that were involved in fraud that led to the financial crisis. Federal prosecutors, including Attorney General Eric Holder, have warned that criminal charges against banks could rock the financial system and the economy. Many of those same big banks have been willy nilly manipulating markets in interest rates, oil, electricity and more -- again, with no indictments. Yet.

In what you could read as a hopeful sign, the government has gotten unusually tough with SAC Capital and Steve Cohen. So far, six former SAC employees have pleaded guilty to or been convicted of insider-trading, and two more are awaiting trial. The Securities and Exchange Commission in March extracted a $600 million penalty from the company in a settlement that let the company get away with neither admitting nor denying wrongdoing. In the old days, that would have meant the unsatisfying end of the story. Instead, the SEC came back later and filed civil charges against Cohen personally last week. Though Cohen will probably not be charged criminally, the combination of civil charges against him and criminal charges against his firm will likely mean that he will spend the rest of his days playing with his own money. (Of course, that is better than going to jail or, you know, not having any money.)

In fact, though, that is mostly what SAC Capital is doing these days -- playing with Stevie Cohen's own money. The Wall Street Journal's Jenny Strasburg reported in June that clients had asked to pull more than $5 billion from SAC so far this year, meaning there is not much more left under management than the $8 billion or so that belong to Cohen and his employees.

Even at its peak of about $15 billion, SAC was not in the top 10 of the world's biggest hedge funds. It is a much smaller player now. Its end as a going concern will not threaten the safety of the financial system -- this is no Long Term Capital Management situation by any stretch. This could be bad news for its 1,000 employees, but many of them will find other jobs in the hedge-fund industry, and Cohen could keep some of them on to help him manage his money, clean his formaldehyde shark, etc.

In other words, SAC Capital is hardly the test case for whether the government will indict a big, important financial firm.

A week ago U.S. attorney for the Southern District of New York Preet Bharara, who brought Thursday's indictment, bragged that no firm was too big to jail. Hopefully that was more than a mere warning shot at SAC Capital. Because until the feds actually go after a firm that truly is big and important, this sort of bragging will ring hollow, and the too-big-to-jail set will continue to act with impunity.

CORRECTION: This article originally stated Preet Bharara is a U.S. attorney general instead of the U.S. attorney for the Southern District of New York.



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