NORMAN — Even in the high-flying hedge fund world, where vast pools of capital dart in and out of markets with billions at stake, SAC Capital has stood out for its ambition and mammoth returns.
Of the roughly $15 billion in assets that SAC Capital managed as of earlier this year, about half belongs to Steven A. Cohen, the firm’s founder and guiding hand, and the firm’s employees. The other half is clients’ .
Were SAC Capital’s returns too good to be true?
The firm, based in Stamford, Conn., drew the attention of regulators as far back as 2003. That’s when the Securities and Exchange Commission investigated an employee for possible insider trading violations. No charges were brought.
Roughly three years ago, the Justice Department and the SEC launched a sprawling investigation of insider trading at hedge funds and the funds’ use of so-called expert network firms to glean confidential company information. The probe grew into what authorities called the biggest insider-trading prosecution in history. More than two dozen criminal convictions resulted.
At the center was Raj Rajaratnam, the one-time billionaire and founder of the Galleon group of 14 hedge funds. Rajaratnam is serving an 11-year prison sentence for illegally reaping up to $75 million through his trades.
In their investigation, the authorities came across several portfolio managers at SAC Capital whom they accused in criminal charges of using information from expert network consultants for illegal insider trades.
By November, the SEC had brought civil insider trading charges against an affiliate of SAC Capital. The $615 million paid to settle those charges represented the biggest insider trading deal ever, according to the agency.
In its indictment of the firm Thursday, the Justice Department said: “The relentless pursuit of an information ‘edge’ fostered a business culture within SAC in which there was no meaningful commitment to ensure that such ‘edge’ came from legitimate research and not inside information.”
In one case, it charged, SAC hired a candidate for portfolio manager in 2008 despite his “recognized reputation for insider trading” and over the objections of the firm’s legal department.
Hedge funds like SAC Capital are portfolios of investments that are aggressively managed with the goal of producing higher returns than the stock market as a whole.
Traditionally, the funds catered to institutional investors and wealthy individuals. In recent years, they’ve grown substantially and attracted many pension funds, university endowments and ordinary investors. That means that, at least indirectly, millions of people now invest through hedge funds.
The fund managers use a range of strategies, including some highly risky ones, in pursuit of outsize gains. They invest in nearly anything: commodities, real estate and complex derivatives as well as ordinary stocks.
The funds typically charge a 2 percent fee on assets under management to cover expenses and pay. Depending on the amount of assets the fund manages, that fee can generate tens of millions of dollars, if not more. On top of that, hedge funds typically collect 20 percent of the annual profit the fund delivers.