SAC Capital Insider Trading Scandal Explained

SAC Capital, a hedge fund founded by Steven A. Cohen, was at the center of a massive insider trading scandal in the early 2010s.

The firm was accused of engaging in widespread insider trading, with many employees and associates allegedly using non-public information to make trades.

The scandal began to unravel in 2009 when the FBI launched an investigation into SAC's activities.

The investigation led to the arrest and conviction of several SAC employees and associates, including Mathew Martoma, who was sentenced to 9 years in prison for his role in the scandal.

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SAC Capital Advisors, a hedge fund founded by Steven A. Cohen, was at the center of a major insider trading case in 2013.

The case began in 2009 with a probe into SAC's trading activities, focusing on several high-profile cases of insider trading.

SAC's portfolio manager, Mathew Martoma, was accused of trading on confidential information about the drug company Elan Pharmaceuticals.

Martoma allegedly received tips from a doctor about the results of a clinical trial for a new Alzheimer's treatment.

In 2014, Martoma was convicted of insider trading and sentenced to 9 years in prison.

The case also involved another SAC portfolio manager, Michael Steinberg, who was accused of trading on confidential information about Dell's financial performance.

Steinberg was convicted of insider trading in 2016 and sentenced to 3 years in prison.

The SAC case led to a major overhaul of the firm's operations and a significant reduction in its assets under management.

SAC Capital ultimately pleaded guilty to insider trading charges and agreed to pay a $1.8 billion fine.

The guilty plea of SAC Capital is a significant development in the case against the hedge fund.

April Brooks, a senior F.B.I. official, stated that the plea demonstrates the fund's culture of cheating and law-breaking.

The F.B.I. official's statement suggests that the fund's actions were not only tolerated but also allowed to persist.

The Dodd-Frank Act took an important step in strengthening internal governance by eliminating the exemption of advisory registration for hedge funds.

Starting from March 2012, all hedge funds were required to file form ADV with the SEC, which requires information on their organisational structure, compensation, and governance.

This increased transparency helps manage potential operational risks and allows the SEC to better monitor hedge fund activities.

The form ADV also requires hedge funds to designate an independent chief compliance officer (CCO) to oversee insider trading compliance policy.

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Insider trading has both costs and benefits, and economists and jurists are still debating which side weighs more.

Insider trading decreases market liquidity due to greater adverse-selection costs of asymmetric information imposed on outside investors.

It also reduces investors' confidence in capital markets, increasing the cost of capital and lowering firms' value.

On the other hand, some studies suggest that insider trading could improve market efficiency by quickly impounding certain strategic non-public information into prices.

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Strengthening internal governance is crucial in preventing insider trading. The Dodd-Frank Act took an important step in this direction by eliminating the previous exemption of advisory registration for hedge funds.

In 2012, all hedge funds were required to file form ADV with the SEC, which improves transparency and helps manage operational risks. This form requires information on the hedge fund's organisational structure, compensation, assets under management, clientele, disciplinary history, and governance.

The board of a hedge fund must designate an independent chief compliance officer (CCO) to supervise all portfolio transactions and oversee the implementation of insider trading compliance policy. This policy must include an affirmative statement of prohibition against insider trading.

US mutual fund advisors have been filing form ADV since the introduction of the Investment Advisers Act of 1940. Many of the targets of the SEC's insider trading investigations are managers of hedge funds, rather than mutual funds.

The new provision of the Dodd-Frank Act represents an interesting experiment to study whether designating a Chief Compliance Officer (CCO) within a hedge fund organisation will provide various ex-ante and ex-post mechanisms to prevent managers from exploiting inside information.

The SEC has been pummelled for not always holding Wall Street accountable for misconduct, making this a critical moment for the regulatory body.

This experiment will likely lead to more enforcement actions against hedge fund managers who engage in misconduct, making it a crucial time for the industry to adapt and change its ways.

The SEC's "name and shame" enforcement action policy will continue to be a major focus, with hedge fund managers facing consequences for their actions.