SAC agrees to plead guilty to insider trading

NEW YORK — Steven A. Cohen faces what could be an end to his career as one of Wall Street's most profitable money men after his hedge fund agreed to plead guilty to charges of criminal insider trading.

SAC Capital Advisors becomes the first major financial firm in a generation to admit criminal conduct and agreed to pay a record $1.2 billion in penalties. The government's dogged pursuit of Cohen's hedge fund essentially puts the company out of the business of managing money for outside investors.

Although prosecutors stopped short of charging Cohen himself, his fund's guilty plea — announced Monday in New York — marks a stunning reversal of fortune for one of Wall Street's most successful stars. He may still be able to manage his own money in the fund.

"This guy was a titan," said Dominic Auld, a securities lawyer at Labaton Sucharow in New York. "That reputation is now utterly in tatters, whether or not they get him."

The high-profile takedown of SAC sends another salvo to Wall Street that federal prosecutors and regulators will continue their crackdown on financial fraud. The government has been blamed for not being aggressive enough against bankers and traders after the financial crisis, or catching wrongdoers like Bernard Madoff in the early stages of his epic Ponzi scheme.

The Justice Department is said to be just days away from finalizing a $13-billion settlement with JPMorgan Chase & Co. over questionable mortgage-backed securities it sold in the run-up to the financial crisis.

There are also reports that U.S. attorneys launched three more civil probes into Bank of America Corp.'s mortgage-backed securities business, according to reports. Two weeks ago, a federal jury in New York found BofA liable for civil fraud over conduct by Countrywide Financial Corp., the Calabasas lender it acquired during the housing crisis.

"No institution should rest easy in the belief that it is too big to jail," said Preet Bharara, the U.S. attorney in Manhattan whose office brought the indictment against Cohen's firm. "That is a moral hazard that a just society can ill afford."

Under the plea deal unveiled Monday, SAC Capital would plead guilty to five charges of wire and securities fraud. The agreement requires new compliance procedures to be approved by a government-appointed consultant.

The deal, which must be approved by federal judges, calls for a total of $1.8 billion in penalties to resolve the criminal case as well as a parallel civil case. SAC Capital is on the hook to pay $1.2 billion of that; the firm received a $616 million credit for penalties already paid to the SEC in a related civil insider-trading case.

SAC Capital is banned from handing down any of the penalty costs to its investors, according to the deal. It also calls for an "orderly wind down" of SAC's investments to "minimize any market disruption."

Bharara was careful to note that the agreement provides no one immunity from prosecution, and he said the investigation was continuing.

The Stamford, Conn., hedge fund said in a statement that it takes "responsibility for the handful of men who pleaded guilty and whose conduct gave rise to SAC's liability."

"These wrongdoers do not represent the 3,000 honest men and women who have worked at the firm during the past 21 years," the statement said. "Even one person crossing the line into illegal behavior is too many and we greatly regret this conduct occurred."

The firm previously admitted that several employees were fired after being accused of trading stocks based on insider tips. Those allegations were the crux of the government's investigation that culminated in a 41-page indictment filed against SAC Capital in July.

The Justice Department accused the $15-billion hedge fund of an unprecedented "deep and wide" illegal trading operation that cheated the investing public of "hundreds of millions of dollars." At the time, Wall Street analysts said the move sounded a death knell for a firm that had been posting blockbuster average annual returns of nearly 30% since 1992.

The stratospheric success of SAC — which are Cohen's initials — made a rich man out of the money manager. The stellar returns helped the man who grew up in blue-collar Long Island amass a personal wealth estimated at $9 billion, and all the perks that go along with it. He lives a lavish life even by billionaire standards. His 35,000-square-foot Connecticut mansion has an ice skating rink with a Zamboni machine.

His influence extends to the West Coast. Cohen, a major art collector, sits on the Museum of Contemporary Art's board. He helped bankroll an unsuccessful bid to buy the Los Angeles Dodgers two years ago.

Cohen himself has not faced the threat of prison, and he has repeatedly denied wrongdoing. His spokesman did not respond to requests for comment.

But although the government has not accused him of participating in insider-trading, legal experts say prosecutors do not appear to be finished trying to snag Cohen.

"They've been on the hunt, for sure," said Richard Holwell, a former federal judge who oversaw major insider-trading cases before leaving the bench to start his own law firm in New York. "They don't have the goods to go after and indict Mr. Cohen, but that's hardly an insurance policy for Mr. Cohen."

The federal government's pursuit of SAC Capital carries echoes of prosecutors' epic campaign two decades ago against investment firm Drexel Burnham Lambert and junk-bond guru Michael Milken in Beverly Hills. Drexel pleaded guilty and wound up folding.

Milken eventually pleaded guilty to six felonies, but not to insider trading. He spent two years in prison for the crimes and emerged to rehabilitate his reputation with philanthropic work.

Like Milken, Cohen certainly might be able to orchestrate his own comeback regardless of whether the government pursues criminal charges against him.

Although SAC Capital will no longer invest others' money, the plea deal would effectively transform the mammoth hedge fund into a so-called family office managing Cohen's own fortune.

"He's going to happily play the market on his own," said John Coffee, a securities law expert at Columbia University. "There are worse fates. He won't starve."

Cohen's future might hinge on two of his former SAC portfolio managers who are set to go on trial in coming weeks on insider-trading charges of their own. Either of the former managers — Michael Steinberg and Mathew Martoma, who have pleaded not guilty — could potentially strike a deal with prosecutors in exchange for cooperating against Cohen, if there is indeed anything to offer.

andrew.tangel@latimes.com