The decision by US federal prosecutors to bring criminal charges against hedge fund SAC Capital Advisors rather than its billionaire owner Steven Cohen makes it more likely that the government will be able to secure a guilty verdict, lawyers say.
Lawyers following the case said they believed prosecutors had met the standard for convicting a corporation under United States federal law.
A corporation was liable for the criminal misdeeds of its employees if they were acting within the actual or apparent scope of their employment and if the intent of their actions - even in part - was to benefit the corporation, said Solomon Wisenberg, co-chairman of the white collar crime defence practice group at law firm Barnes & Thornburg.
"It's going to be a virtual slam dunk for the prosecution … you've got four guys that have already pleaded guilty. They're employees. End of story - they're going down," Wisenberg said.
The US Department of Justice indicted the financial firm on Thursday, accusing Cohen of presiding over a broken business where employees were encouraged to push the envelope to get that extra investing edge, with little regard for whether they were acting honestly and within the law. The result was "insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry", the government said.
Yesterday, SAC pleaded not guilty to the insider trading charges in federal court. General counsel Peter Nussbaum entered the plea before US District Judge Laura Taylor Swain in New York.
Prosecutors built their case against SAC with help from several former employees who pleaded guilty to charges of criminal insider trading.
Authorities allege the guilty pleas by the employees and other evidence establish a long-standing pattern of insider trading at the firm.
Antonia Apps, an assistant US attorney, told the judge yesterday that government-obtained evidence includes "court-authorised wiretaps" and "a large number of electronic recordings", including emails and instant messages. "In short, a tremendous volume," she said of the evidence.
Ted Wells, a lawyer representing SAC, said he was "most concerned" with obtaining statements that former employees of the US$14 billion hedge fund had provided the government.
The firm had earlier said it would continue operating as it dealt with the indictment.
A former federal prosecutor said he was impressed that prosecutors had been able to tie together so many disparate details into a cohesive whole.
It is unusual for federal prosecutors to target a large financial firm rather than just going after the employees who allegedly broke the law.
"The government has made a very broad sweeping assessment of the way business is conducted at SAC and determined that on balance, it's problematic," Michael Miller, a partner at law firm Steptoe & Johnson, said.
Wisenberg said SAC could try to portray those who had already pleaded guilty as "rogue employees" who were not acting in the interests of the fund.
Building the case
October 13, 2009: Former SAC fund manager Richard Choo Beng Lee secretly pleads guilty to securities fraud and wire fraud.
February 7, 2011: Former SAC fund manager Noah Freeman secretly pleads guilty to insider trading and securities fraud. He told FBI agents it was understood by SAC portfolio managers "that providing [SAC founder Steven] Cohen with your best trading ideas involved providing Cohen with inside information".
April 28, 2011: Former SAC analyst Jonathan Hollander settles SEC allegations of insider trading.
July 29, 2011: Donald Longueuil, a former SAC portfolio manager, is jailed for 30 months for his role in an insider trading scheme.
September 28, 2012: Jon Horvath, a former analyst at SAC's Sigma Capital, pleads guilty to forwarding inside information.
November 20, 2012: Former SAC health-care portfolio manager Mathew Martoma is charged with helping SAC get hundreds of millions of dollars in illegal profit on tips about a drug clinical trial.
December 17, 2012: Former SAC executive Anthony Chiasson is convicted for his part in an insider-trading scheme that reaped more than US$72 million.
January 9: Wesley Wang, a former analyst for Sigma Capital, is sentenced to two years' probation after pleading guilty to securities fraud.
March 15: SAC agrees to pay a record US$616 million to settle SEC charges regarding trades by Martoma and Michael Steinberg, a Sigma Capital fund manager.
July 19: SEC accuses Cohen of failing to supervise Martoma and Steinberg. It said Cohen received "highly suspicious" information that should have troubled any reasonable hedge fund manager.
July 23: Richard Lee, a former SAC portfolio manager, secretly pleads guilty to insider trading charges.