In November 2013, SAC Management Companies, a hedge fund operated by new Mets owner Steve Cohen, agreed to pay $1.8 billion – with a B – to resolve insider trading and money laundering charges.
Under the Agreement, which is subject to Court approval, the SAC Companies will plead guilty to each count in which they are charged of an indictment (the “Indictment”) unsealed in July of this year charging the SAC Companies with securities fraud and wire fraud in connection with a large-scale insider trading scheme. The Agreement imposes a $1.8 billion financial penalty on the SAC Companies – the largest insider trading penalty in history – split between a $900 million fine in the criminal case (the “Criminal Case”), and a $900 million forfeiture judgment in a civil money laundering and forfeiture action (the “Forfeiture Action”) filed by the Government simultaneously with the criminal charges. It also provides that the SAC Companies and their affiliates will no longer accept outside investor funds and will shut down operations as an investment adviser.
The Agreement between the Government and the SAC Companies to plead guilty to all of the charges in the Indictment in which they are charged and resolve the Forfeiture Action is subject to judicial review and approval. The Government submitted the Agreement this morning to U.S. District Judge Laura T. Swain, who is presiding over the Criminal Case, captioned United States v. S.A.C. Capital Advisors, L.P., et al., 13 Cr 541 (LTS), and U.S. District Judge Richard J. Sullivan, who is presiding over the Forfeiture Action, captioned United States v. S.A.C. Capital Advisors, L.P., et al., 13 Civ. 5182 (RJS). The Agreement has no force unless and until it is approved by the district judges.
Three years later, Cohen and his companies settled a separate civil insider trading lawsuit for over $135 million. One of Cohen’s most senior employees, Matthew Martoma, was sentenced to nine years in prison for his role in “the most profitable insider trading scheme in U.S. history.” Cohen himself refused to answer questions from SEC investigators (including even what his name was) on Fifth Amendment grounds. Other guilty pleas for traders who cooperated with the investigation were later vacated.
Yet by then, Cohen had already moved on to other ventures, this time opening a hedge fund with UBS, avoiding charges in the biggest insider trading scandal in the country’s history. It helped, of course, that one of Cohen’s attorneys worked on the Trump administration’s transition team. Author Sheelah Kolhatkar detailed the saga at some length in her book Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, which I highly recommend to any Mets fan curious about their team’s new owner.
Cohen has become something of a test case in the legal world, with Frances Chapman, Marianne Jennings, and Lauren Tarasuk writing an excellent note for the American University Business Law Review called “SAC CAPITAL: FIRM CRIMINAL LIABILITY, CIVIL FINES, AND THE INSULATED CEO.” As they noted there, Cohen has a long history of testing the boundaries of what is legally permissible.
Mr. Cohen first drew the attention of regulators early in his career. In 1991, as a young trader, Mr. Cohen was censured by the New York Stock Exchange and barred from trading for four weeks because he was alleged to have made a trade that inflated the price of a stock in order to protect him from losses. The result of the inflation trade was that his position loss was cut in half. Mr. Cohen was terminated because of the trade, and SAC was born. Questions arose surrounding SAC, Mr. Cohen, and insider trading long before the current criminal indictment of the corporation. For example, in 2003, Holly B. Becker, formerly of Lehman Brothers, was investigated by the SEC for passing along advance information to her then husband, who was a principal in SAC. There were indications that the trading positions of Ms. Becker’s husband coincided with the information he may have received through advance copies of the reports, however, no charges were ever filed. Almost twenty years later, accusations still abounded. Mr. Cohen’s former wife, Patricia Cohen, filed suit alleging that Mr. Cohen had made $20 million in profit by trading in advance of General Electric’s (“GE”) purchase of RCA Corporation based on an insider tip regarding the acquisition that he had received in advance of the GE announcement. The case was peripheral to the couple’s divorce, and no charges were ever brought.
Why is this relevant to the billionaire’s recent transaction to assume ownership of the New York Metropolitans? Because the insider trading scandals which plagued Cohen were just par for the course in how he conducted business. Kolhatkar wrote for the New Yorker that the mercurial Cohen never focused on one venture for very long.
Cohen was a captivating figure on Wall Street. He was not the sort of investor who, like Warren Buffett, took a large stake in a company and held it for years, immersing himself in how the business worked. He was a short-term speculator, who had built a vast personal fortune by placing high-volume bets on small movements in stock prices; he was often driven by earnings announcements and other such events, and maintained high returns, against the odds, year after year. He was short and thick, had a fierce mind and a quick temper, and he lived in a thirty-five-thousand-square-foot mansion in Greenwich, Connecticut.
And John Gapper wrote for the Financial Times that Cohen “changed the notion of what “investment” meant. He bought shares not to hold them, like traditional mutual and pension funds, but to trade in and out of them rapidly. It was highly profitable but it stripped away Wall Street’s cover story of being an engine of growth for the economy. Whether or not it was legal, it was unambiguously dubious.”
So what we have in Cohen is a hedge fund billionaire whose career has been made out of rapid-fire purchases and sales of various investments, with many of those transactions of dubious legality. That’s not a good combination, although it’s perhaps unsurprising that the Wilpons, having lost money to Bernie Madoff, would do business to someone of a similar ilk.
In any event, Cohen’s acquisition of the Mets seems to be less about the team, and more the latest in a long line of swift-turnaround transactions made for the purpose of revenue generation. We’ve seen owners like that before. That, combined with his history of uncomfortable proximity to extralegal activities, makes me extraordinarily reticent to see this as a win for Mets fans. This isn’t to say that Cohen will necessarily be a bad owner for the Mets. It’s possible, I suppose, to see him invest in a higher payroll and better administration. That said, it would be well outside his established behavioral patterns to expect that kind of approach – and any optimism at this point should be accompanied by a hefty dose of skepticism.
Sheryl Ring is a litigation attorney and Legal Director at Open Communities, a non-profit legal aid agency in the Chicago suburbs. You can reach her on twitter at @Ring_Sheryl. The opinions expressed here are solely the author’s. This post is intended for informational purposes only and is not intended as legal advice.