Among recent enforcement actions were: a criminal indictment filed against SAC Capital for insider trading; charges by the Securities and Exchange Commission against the City of Miami and its former budget director over fraud in municipal bond offerings; and the agreement by the trustee of a defunct New York garment company’s pension plan to restore missing funds to the plan in settlement of a Department of Labor suit.
Cohen’s SAC Capital Faces Criminal Charges; Cohen May Also
While Steve Cohen faced SEC administrative charges last week for failing to prevent insider trading at the hedge fund firm he founded, SAC Capital Advisors, the firm itself was indicted on criminal charges filed Thursday. Unrivaled by any case since the charges against former Goldman Sachs director Rajat Gupta, the SAC controversy promises plenty of revelations, since according to the government it involves some 20 companies and spans 14 years, going back to 1999.
Although the SEC declined to file civil fraud charges against Cohen, federal prosecutors are reportedly continuing to explore their options against him. They had no such reservations about pursuing his company.
The result of a six-year-long crackdown on insider trading, the indictment of SAC Capital from a grand jury included four counts of securities fraud and one count of wire fraud.
The federal indictment could sound the death knell for the $15 billion hedge fund whether the government makes its case or not, since investor withdrawals from the fund have mounted along with the reputational damage to the firm, already facing criminal cases against two employees. In addition, in a parallel civil action, the government said that SAC must forfeit “all property, real and personal, which constitutes or is derived from proceeds traceable to the commission of those offenses.”
Cohen was charged by the SEC with failing to supervise employees and with failing to recognize “red flags” allegedly indicating insider trading by two of those employees, portfolio managers Michael Steinberg and Mathew Martoma. Both Steinberg and Martoma face criminal insider trading charges, and both have pleaded not guilty.
The SEC said: “On at least two separate occasions in 2008, [Steinberg and Martoma] provided information to Cohen indicating their potential access to inside information to support their trading. However, Cohen stood by on both occasions instead of ascertaining whether insider trading was taking place.” In fact, the agency added, “instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work.”
According to a Reuters report, a company spokesman said in a report that Cohen plans to vigorously defend the SEC’s failure to supervise charge.
SEC Charges City of Miami, Former Budget Director on Muni Bond Fraud
The SEC has announced charges against the City of Miami and its former budget director, Michael Boudreaux, for making materially false and misleading statements and omissions about some interfund transfers in three 2009 bond offerings totaling $153.5 million. They were also alleged to have provided false and misleading information in the city’s fiscal 2007 and 2008 comprehensive annual financial reports (CAFRs) received by investors, particularly those who have invested in previously issued city debt.
According to the SEC, Boudreaux initiated a transfer of approximately $37.5 million in city money between the funds, so that city bond offerings would get favorable credit ratings from rating agencies. The transfer was necessary so that Miamic ould meet, or come close to meeting, its own requirements for reserve levels in the general fund. The city was experiencing increasing deficits in its general fund, which is regarded as a major indicator of financial health. Boudreaux’s transfers of money from Miami’s capital improvement fund to the general fund masked the situation, and the city kept quiet about them, the SEC charges.