$614M SAC Capital Settlement a Sign of Wall Street’s Cynical Calculus
Late Friday afternoon, this year’s budget deficit instantly shrank by more than $600 million through an extraordinary tax levied on a few very rich people.
The payment will flow into Treasury’s coffers because SAC Capital, the huge hedge fund run by billionaire Steven A. Cohen, agreed to settle. Securities and Exchange Commission charges that SAC and its affiliates had profited by trading on insider information. The charges, outlined last November, were relatively simple. The government alleged that an SAC trader, Mathew Martoma, received inside information on trials of drugs made by two companies, Elan and Wyeth. A doctor who helped run the trials had admitted to passing on the information in exchange for cash. When the fund learned the trials wouldn’t be successful, the government alleged, the hedge fund sold its large position and then bet the stock would go down—saving it from huge losses and allowing it to reap big profits.
The $614 million settlement, the largest in the SEC’s long history, is worth celebrating for its contribution to deficit reduction. It also should bolster the confidence of millions of ordinary shareholders. The regulators showed an ability to detect misbehavior, to find and act legally against those who carried it out, and to recover large sums of money.
But we shouldn’t let the large figure cover up the deep cynicism at work here. Indeed, the culture of settlement that the SEC and Wall Street have constructed over the years is deeply corrosive. Here’s why.
Reviewing the complaint, it sure seemed as if the government had the goods on Mathew Martoma and, by extension, SAC. The doctor who provided the information had already agreed to cooperate. The timing of the trades appeared highly suspicious. But the SEC was happy to settle—at the right price. Why? An enforcement action is an enforcement action, and this is a volume business. A Wall Street Journal article on Monday noted that the number of SEC enforcement actions seems to be going down—at a time when the public is still thirsty for blood. Settlements don’t chew up the time and manpower that trials do. They allow regulators and prosecutors to escape the potential hazards of a trial, in which a mistake, a well-constructed defense, or simply a few stubborn jurors can mean a person suspected of wrongdoing gets off free. So the SEC settles. For the right price, the settling party enters a kind of existential limbo—it is allowed to deny guilt while also being prohibited from declaring its innocence. The SEC adds the case to the list, sends the money to the Treasury, and winks at the public. Sure, the party settling the case gets to say he didn’t do anything wrong. But really, if he hadn’t done anything wrong, why would he be paying this huge fine?
For the settling party, a different cynical calculus is at work. Wall Street is a world in which everything has a price—even the ability to walk around saying you didn’t do anything wrong. For SAC Capital in this instance, that price turned out to be $614 million. Far from being embarrassed, the company is officially glad. “We are happy to put the Elan and Dell matters with the SEC behind us,” spokesman Jonathan Gasthalter said in a statement to the press on Friday. “This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”
Happy? People who run hedge funds are never happy about doing something that causes their net worth to decline by more than $600 million—or even by $6 million. These are people who live and die, and measure their status, self-worth, and manhood by the size of their bank accounts. Even for a billionaire like Cohen, who owns much of SAC and hence will foot much of the settlement bill, $614 million is a lot of money.
But the company is happy to have these particular charges put to rest. (Martoma is still being pursued by the federal government, and the SEC may still be looking into other trading matters relating to SAC.) It is happy that it can say, with a straight face, that it didn’t do anything wrong. After all, these settlements generally allow the party entering them to deny guilt.
In effect, financial firms that run afoul of regulators can chalk up the fines and settlements they pay as a cost of doing business—like the occasional speeding ticket. One SAC investor told the Financial Times that pulling money out of SAC over this settlement is “like saying you would drop Michael Jordan from your team because of a technical foul.” (Only in this instance, instead of taking one or two free throws, the opposing team gets to shoot 614 million.)
And that means everybody else can breathe a deep sigh of relief: the other investors who have put their money, and their clients’ money, into SAC; the employees and service providers who depend on SAC for their livelihoods; hospitals that have put the hedge-fund manager’s name on their buildings in exchange for large charitable donations.
For the last few years, Washington has been a place in which it has been difficult for people to meet in the middle, to split the difference, in large measure because Republicans aren’t willing to do so. But the SEC and Wall Street traders are far more practical. At the right price, a deal is always to be had. In the case of SAC, that price was $614 million.