Just to match a face with a name, this is Steven A Cohen, the subject of much of the SEC’s scrutiny as of late. Read on to find out exactly what he allegedly did.
An important piece of news in the financial world has involved SAC Capital: SAC is being pursued by the SEC on insider trading for $1.2 billion, and the head of SAC, Steven A Cohen, is facing a civil lawsuit for failing to supervise his employees, which could ultimately lead to him being legally forbidden from working in finance ever again, not to mention facing potentially hefty fines and jail time.
Sound complicated? It is. The news has been covering the story for quite some time, so it is rather difficult to understand a random article about the latest development if you have not been following the story from the beginning. My goal is to enlighten you about this important current event so that you will be able to have an opinion on the matter should someone ask you about it, or if you just want to be well-informed. (In my attempts to make this piece informative, accurate, and interesting, I conducted some research regarding the information I will be discussing. While I will not write a works cited page, I do not want to plagiarize. Therefore, I note here that the origin of many important details is Wikipedia.com. Thank you very much, and please continue to provide your services to your large following of students who procrastinate.)
A hedge fund is comprised of many different types of companies, from its finances to the types of goods and services offered.
Steven A Cohen founded SAC Capital, a hedge fund, in 1992. (If you cannot tell, the etymology of the company name is his initials, a humble gesture on his part, I’m sure.) A hedge fund is a “pooled investment vehicle.” What does this mean? Two words: making money. People who want to invest buy shares in a company in order to make more money. Putting all your cash in one place, however, is risky. What if the company declares bankruptcy? Then you lose everything! The key to investing wisely is by diversifying. Just like the Queens College students are diverse, so too your investments should show variety. A hedge fund enables you to invest your money in a plethora of companies (that are either different types or have different ways of raising capital), so that the risk of losing money is slim.
Let’s just say Steven A Cohen is a tad higher than most of us on the Forbes Top 400 list. Slash he is actually on the list, which speaks volumes about the amount he holds in his bank account.
So what’s wrong with starting a company that wants to make more money? This is capitalist America, after all! SAC is a relatively young company at 21 years old. In this short amount of time, SAC has grown substantially, to the point where it is now worth $9.3 billion. That is an astronomical value; it is not surprising, then, that Cohen is #43 on the Forbes 400 list of the wealthiest people in America. On the surface, this does not seem to be a problem. Perhaps Cohen has a knack for detecting companies that are valuable, and consequently invested in those. Yet others are more cynical. For example, the SEC, essentially a police force exclusively dedicated to keeping the finance aspect of the business world in check, thinks that something is fishy as to how SAC conducted their investments. Being able to amass such an incredible amount of wealth in such a short time frame is perhaps too good to be true. (Note: do not mix up the SEC and SAC- the former is the prosecutor, and the latter is being prosecuted.)
In 2004, Martha Stewart was famously charged with obstruction of justice and was sentenced to jail. While not explicitly convicted of insider trading, she essentially did so. (Her decision to suddenly sell stocks whose value subsequently plummeted, in addition to other evidence, indicated that she had acted on information that the laymen did not know). I personally find it rather shameless that she used this opportunity in the limelight to highlight her crocheting skills; the crocheted poncho immediately became a fashion fad.
It is important to note that the SEC does not go after lucrative companies (or it is not supposed to) unless they do something illegal. In the case with SAC, the SEC has found evidence of insider trading. (It is not alleged because 6 employees have already pleaded guilty to doing so.) Insider trading means having information that others are not privy to, and consequently acting upon this knowledge. That way, you can invest in something that is currently low in price and that you will reap the monetary benefits when it increases in value; similarly, if you know stocks will decrease in price, you will sell them while they are still valued highly. In short, insider trading is illegal because it is unfair. Despite the dog eat dog nature of business, America tries its best to regulate this unfair type of business behavior.
The insider trading in this case involves a doctor who told SAC investors about a trial for a drug that did not have terrific results. Knowing this information, one would automatically want to sell their shares in the company because it is not doing so well. However, only SAC knew of the unsuccessful results of the trial, and consequently were the only ones to sell their shares in the company, while it was still valued highly. By selling at the perfect time, they avoided losses of $276 million.
The ultimate goal is to catch the top person who orchestrated the insider trading. In building its case, the SEC has slowly been interrogating, and often indicting, different employees of higher and higher ranks, figuring that someone will finally spill the beans and disclose information that proves that Cohen is guilty. The workers,however, have all remained mum on the subject. Cohen has remained adamant in his claim that his employees were the ones who, out of their own volition, acted unethically. By agreeing to pay the SEC about $600 million, he did not admit to being guilty; rather, he wanted to put an end to the SEC’s continuously pursuing the company. After all, knowing that the SEC is determined to bring about your downfall is both extremely burdensome and bad for business.
The SEC theorizes that there is a web of unethical insider trading, all stemming back to Steven A Cohen. It has been desperately trying to find a solid connection back to him in order to piece the puzzle together.
The reason the SEC is so adamant to achieve this win against the SAC is because of what happened in the Financial Crash of 2007. In going after large businesses, it is trying to prevent such a widespread economic travesty from happening again. Should SAC concede defeat, SEC would achieve its largest win, in terms of how much the company would be fined: in total, over $1.8 billion. Sometimes, however, it seems that the SEC simply has a vendetta against the success of large businesses. Granted, some arrogant businesses still believe in the mantra that flew around during 2007 of being “too big too fail”; nonetheless, they are well within their rights to try to expand their success. Whatever ultimately happens, this is an important current event to be aware of because it is sure to have many legal and financial consequences as to how businesses will conduct themselves in the future.
Update: Literally as I was putting the finishing touches on this post, I checked NYTimes.com and saw breaking news: “SAC to Plead Guilty and Pay $1.2 Billion for Insider Trading.” While at first I was upset that this happened before I posted, I saw a silver lining for my readers. After reading this piece, you will have a thorough background of the story, and will be able to follow the ensuing legal drama that will take place.
