In the last two months, SAC Capital Advisors has turned into a $13 billion piñata.
Steven A. Cohen, 53, the founder of SAC Capital Management, is worth about $6 billion.
Since federal prosecutors began making arrests in a major insider trading investigation in October, SAC, which is based in Stamford, Conn., and owned by Steven A. Cohen, has been linked to the case.
Mr. Cohen, 53, is among the world’s richest hedge fund managers, with a personal fortune estimated at $6 billion. In the 1990s, he gained fame as a rapid-fire trader with an uncanny sense of short-term market moves.
Today, he spends much of his time running SAC but still trades actively. A collector of modern art, he prizes privacy for himself and his fund. He is rarely seen in public, and SAC employees must sign confidentiality agreements when they join the firm.
Now, the insider trading investigation has thrown an unwelcome spotlight on Mr. Cohen and the remarkable returns of his hedge fund firm.
No current employee or manager has been charged with wrongdoing in the investigation, which is continuing. But a former SAC analyst, Richard Choo-Beng Lee, has pleaded guilty on charges related to insider trading that occurred years after he left the firm and has agreed to provide any information he might have about insider trading that occurred when he was at SAC.
More or less by itself, that fact has stirred a flurry of articles trying to connect SAC to the investigation.
Mr. Cohen’s record is not entirely clean. In 1995, the New York Stock Exchange censured him for inflating the price of a penny stock to increase the value of a portfolio he managed. The manipulation took place in 1991, when Mr. Cohen worked at Gruntal & Company, a small investment bank.
As a penalty, Mr. Cohen agreed to a four-week ban from “employment or association in any capacity” with any broker-dealers on the exchange.
He left Gruntal three years earlier, so the penalty was effectively a slap on the wrist. He neither admitted nor denied wrongdoing as part of the settlement.
Despite the 1995 censure, former SAC employees say that Mr. Cohen does not tolerate wrongdoing and that the firm, which manages about $13 billion, is being unfairly smeared. Its compliance department has about 15 employees who watch for suspicious trading patterns and other potential violations. The firm neither encourages nor condones insider trading, these former employees said.
“There was a culture of compliance,” one former manager said. “People who couldn’t explain how they were doing things were let go.”
These former employees said many outsiders do not understand the way SAC operates. Some mutual and hedge funds have investment committees that review major investments. In others, a single manager runs the fund and makes every bet.
SAC works differently. The firm has about 100 portfolio managers who work independently, each making investments that are relatively small compared with SAC’s overall portfolio and each paid based only on his own results. Even Mr. Cohen manages less than 10 percent of the fund’s capital.
Under those circumstances, SAC has no reason to condone insider trading by individual managers, because doing so would risk the firm’s entire business for only minor upside. SAC’s pay structure, however, could drive individuals to take risks that are not in the firm’s overall interest.
Neither Mr. Cohen nor any current employees would discuss his fund’s trading practices or compliance policies. The former employees all insisted on speaking anonymously, citing clauses in their contracts with SAC that prohibit them from talking about Mr. Cohen or the firm.
Nonetheless, the former employees painted a consistent picture of SAC, which was founded in 1992 with nine employees and $25 million under management. The firm now has 800 employees, including about 300 portfolio managers, traders and analysts.
The firm’s stellar returns have driven its growth. Since 1992, SAC has produced average annual returns of about 30 percent, after fees, nearly four times the average return of the Standard & Poor’s 500-stock index, according to a person close to the fund.
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