The PBS television show, Frontline, made public a video deposition in which hedge fund manager Steven A. Cohen is interviewed concerning the Securities and Exchange Commission’s rules on insider trading. In it, Mr. Cohen described his understanding of US federal law as “very vague.” And when asked about Rule 10b5-1 particularly, further explanation was requested as if he was unfamiliar with it.
Lastly, when explained the rule limits the use of non-public information for trading purposes, he added, “That is not the way that is explained to me.”
SAC Capital is in the eye of US prosecutors for the practice of insider trading “on a scale without any known precedent in the history of hedge funds.” In addition to criminal charges, the hedge fund has paid a fine worth $1.8 billion, setting a high standard for future violators. The question remains on whether the fine is congruent with reported earnings by SAC Capital, taking into account that in 2005 alone Mr. Cohen received $1 billion in compensation.
Mr. Cohen, however, has not been charged by prosecutors in relation to this case but has not escaped the claws of the US Justice Department. The hedge fund is being accused of failure to supervise employees and preventing misconduct. Accusations can be put on solid ground given Mr. Cohen’s lenient interpretation of internal guidelines concerning insider trading. He is very straightforward about this issue when calling company policies concerning insider trading a “manual of guidelines,” forgetting they must comply with federal law.
Much disregard for fair trading is shown during the interview, as Mr. Cohen goes to the extent of admitting to have never read insider trading law and relying on counseling to comply with current regulation. In the end, Mr. Cohen is asked whether he would divulge false information, to which the answer was positive.
Illegal insider trading is a known practice on Wall Street, but has been hard for prosecutors to prove it consistently.
This is the first time that a hedge fund was accused and accepted the charges of insider trading, in open violation of federal law. Whether the fine and criminal proceedings will be enough to discourage others from unfair trading is not known, but traders will certainly be more careful when using material not available to the public.