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Potential Loophole in Insider Trading Criminal Case

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Written by Nika Simonson
Edited by Sarah Mejia

SAC Capital Advisors LP is a hedge fund giant that was founded by Steven Cohen in 1992 that has offices located in Connecticut and New York City. “SAC [was] one of the most profitable hedge funds on Wall Street” and was managing $15 million as of January 2013 (Eaglesham).  The company had previously seen lawsuits filed against them in 2006 by two different companies, including Biovail and Fairfax Financial Holdings, accusing SAC Capital of deliberately trying to drive the stock prices of the companies down. In both cases, the charges were dismissed against SAC Capital. In Nov. 2010, however, the SEC raided the offices of investment companies run by former SAC traders and in July 2013 the SEC filed for a civil suit against SAC Capital the same day as prosecutors filed a criminal law suit for insider trading.

U.S. District Judge Richard Sullivan approved the civil piece of the case, deciding on a $284 million settlement. The settlement was reduced from $900 million to $284 million since SAC Capital had come to a $616 million civil insider trading settlement with the Securities and Exchange Commission in March. Judge Sullivan’s decision was crucial because if he had denied the civil dispute, the criminal portion of the case would have been dismissed entirely.

SAC Capital Advisors LP “pleaded guilty to securities fraud as part of a landmark criminal insider-trading settlement” (Eaglesham). U.S. District Judge Laura Taylor Swain decided on Friday Nov. 8 that a pre-sentencing report will be filed before she decides whether to accept SAC’s guilty plea (The Guardian). Her decision is also crucial because if she rejects the deal then “SAC Capital can withdraw its guilty plea because of a unique clause in the settlement terms” (Matthews).

Insider trading involves an individual who has access to asymmetric information, or information that is not available to the general public, and acts on it through the trading of a public company’s stock or other securities and reaps a profit. The United States has the strictest laws and enforcement against insider trading, even though it can sometimes be difficult to prove that a certain company or person is responsible for a trade.

Insider trading is an immoral act that can be committed for multiple reasons. A spokesperson for SAC Capital stated that the firm “never encouraged, promoted or tolerated insider trading and takes its compliance and management obligations seriously” (Eaglesham). If that was in fact the case, then there is an agency problem that occurs if an employee goes against the goals of the company and acts in a manner that is most beneficial for them. Other reasons companies or employees find themselves in ethical trouble include being lured in by promises of rich rewards and then getting caught, or they may even feel pressured and are in fear of losing their job. SAC has also been accused of actively recruiting people who worked for volatile companies in the market and would have inside connections to information at the firm. Those employees may have felt pressure to perform well in the company and thus used their connections in order to have positive results and keep their job.

The Securities and Exchange Commission has been increasing the number of insider trading cases they file suits against; however, many still end in settlements that affect the company or individual who did the wrongdoing in a minor way. The criminal lawsuit against SAC Capital is an additional step that involves much more serious jurisdiction and is necessary in order to handle offenses such as insider trading. However, the fact that SAC Capital can withdraw its guilty plea because of a unique clause in the settlement terms if the judge declines the deal is a loophole that needs to be adjusted. The company has already pleaded guilty to stealing millions of dollars, and if a single judge does not agree with the terms of the case it does not take away from the fact that the accused partook in illegal activity or already admitted to the wrongdoing. In order to reduce insider trading offenses, regulation needs to be stricter and punishments should be indicted quicker and without loopholes for companies to escape.

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**Due to technical difficulties, we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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Eaglesham, Jean, and Michael Rothfeld. “SAC Set To Admit Insider Trading.” The Wall Street Journal.       N.p., 30 Oct. 2013. Web. 14 Nov. 2013.
Matthews, Christopher. “SAC Settlement Passes Its First Test.” The Wall Street Journal. N.p., 7 Nov.       2013. Web. 14 Nov. 2013.
“SAC Pleads Guilty to Fraud in $1.2bn Settlement Deal.” The Guardian. The Guardian News and Media Limited, 8 Nov. 2013. Web. 14 Nov. 2013.

 

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