Once upon a time there was a settlement between the SEC and Citigroup over some bad stuff that Citi did, or maybe did, since the settlement did not require Citi to admit any guilt. But then the judge overseeing the case, Jed Rakoff of the Southern District of New York, bravely stood up and said: No, this settlement is Not Right, in small part because of that not-admitting-guilt thing.1 And lo he was a hero throughout the land, except in the Court of Appeals for the Second Circuit, which will likely reverse him.
I'm sure Judge Rakoff's colleague Victor Marrero didn't hold up SAC Capital's proposed settlement with the SEC last week with the express goal of getting financial bloggers to say on Twitter that "Victor Marrero is the new Jed Rakoff," but ... kind of, right?
Here you can read the New Yorker's John Cassidy getting all exercised about the settlement, saying that "To his credit, Judge Marrero has, at least for now, refused to go along with this travesty." I guess a lot of people don't like this not admitting or denying thing that's all the rage in SEC settlements these days (and, to be fair, always). But there's an important difference between the two cases; Judge Rakoff had a reason for rejecting the Citi settlement, and Judge Marrero doesn't particularly seem to have a reason for rejecting the SAC one.2
The Citi settlement, for instance, will make it harder for the private victims of Citi's unadmitted RMBS fraud to figure out if they've got a case for more damages. It will put an end to the SEC's investigation of Citi over RMBS sales practices - the universal assumption seems to be that you settle one RMBS case with the SEC and you're out of the woods. It punished Citi - meaning its shareholders - rather than the individuals responsible for the fraud. And, as Judge Rakoff asked, "Given the S.E.C.'s statutory mandate to ensure transparency in the financial marketplace, is there an overriding public interest in determining whether the S.E.C.'s charges are true?"
Here ... here there are no victims, for one thing. And while it's hard to see the case for an "overriding public interest in determining whether the SEC's charges are true," even if there is, that public interest will be served by the criminal cases against individuals who actually (allegedly!) did the stuff that got SAC in trouble. And those individuals are the ones who are mostly being punished. SAC is settling over two bits of insider trading - trades in Elan and Wyeth by Mathew Martoma, and trades in Dell and Invidia by Jon Horvath and Michael Steinberg - and all of those actual humans have been arrested. SAC investors aren't paying the fines - they're not even paying back their ill-gotten gains, since SAC has said it (meaning the firm and thus its employees and, mostly, Steve Cohen) will cover any settlements.
And will this end the investigation of SAC's insider trading practices? Cassidy seems to think it might, but why? We've had fun in the past making insider-trading graphs so here is one for the SAC settlement, indicating what part of SAC's 21-year history, ~2,000-stock portfolio, and large set of affiliated people and entities are and are not covered by the settlement:
The settlement was arguably the trade of his [i.e. Steve Cohen's] life. For 6.5 per cent of his fortune—the equivalent of four Picasso paintings—he has gone a long way toward removing a threat that could have destroyed his firm and possibly seen him facing charges.
Umm? He removed those two wee purple chunks from a sea of potential liability, at a fairly full price (~2.5x what he made). He has gone those purple chunks of the way toward removing a threat that could have destroyed his firm etc. If they're all there is - if the only nefariousness ever done at SAC was those nine days of Mathew Martoma insider trading all on his lonesome with no higher-up involvement, and Jon Horvath doing some insider trading in Nvidia and Dell again without any adult supervision or culpable lack of supervision other than that of Michael Steinberg - then sure he's gone a long way. But if that's all there is then who cares?
If that's not all there is, then Cohen and SAC are still at risk. Cassidy goes on:
In his press conference announcing the settlement, the S.E.C.’s Canellos said the deal didn’t mean that the Justice Department couldn’t bring criminal charges against more SAC employees in the future. Legally, that’s true. But the S.E.C. and the Justice Department usually coöperate on settlements of this sort. ...
In cases of this nature, the defendant’s lawyers usually deal with the possibility of criminal charges first, because that is the biggest danger. It’s only when the criminal issue has been resolved that they go ahead and try to resolve any civil charges.
Sure, usually! Demonstrably untrue in this case! Demonstratedly: Michael Steinberg, the SAC portfolio manager responsible for those Dell and Nvidia trades, was arrested shortly after Marrero questioned the settlement. So the settlement here didn't close off the possibility of criminal charges against senior SAC employees even over the particular conduct - some Dell, Nvidia, Elan and Wyeth trades - subject to the settlement. And every other stock that SAC ever traded is still fair game.
Of course none of that means that they'll charge Cohen but ... I mean, look, here you can read what I suspect will be one of zillions of articles speculating about whether Steinberg will cooperate with the authorities to try to prove a case against Cohen. Will he? I dunno. If he does, will there be enough evidence to bring a case? I dunno. If Steinberg turns over like videotape of Steve Cohen saying "Hi, I love insider trading, I do it all the time and so should you, this is not a joke, I'm serious, all of our trading is insider trading," or even let's face it considerably less ironclad evidence, will the Feds refused to prosecute Cohen because they are lazy or cowards or - as Cassidy amazingly suggests! - because Steve Cohen bribed them?
No! Here is the thing: the SEC and the DOJ want to prosecute Steve Cohen for insider trading. Want it more than anything. White whale levels of wanting. The only thing stopping them is that they don't have much evidence that he committed a crime, but they're working on that, every waking hour.
Cassidy goes on that "this may be just one more case of 'too big to jail,'" and while this is totally wrong it's also usefully wrong. "Too big to jail" is a thing that people like to say because it rhymes with another thing that people like to say, but it has a specific meaning. Steve Cohen, and SAC Capital, are the definition of not too big to jail. SAC is a ~3x levered equity hedge fund largely running its employees' money. If it vanished tomorrow the world financial system wouldn't blink. Citi on the other hand is rather more interconnected, rather more fragile, vastly more levered, and significantly more likely to contribute to systemic fragility.
So I guess the point is that if you're worried that the SEC and Justice Department are somehow letting SAC off easy, or not fully pursuing every lead in this insider trading case: don't be! They've got this one. This one is different from Citi! Citi (maybe!) defrauded dozens of investors out of billions of dollars on mortgage-backed securities that contributed to a significant economic crisis and settled one of those cases with the SEC for a relatively small sum, paid by shareholders, with the implicit understanding that all SEC investigations of other similar RMBS behavior would cease and no individual humans would be punished. SAC (maybe!) committed the victimless-ish crime of insider trading to the tune of hundreds of millions of dollars without doing much harm to the economy and settled two of those cases with the SEC for the largest insider-trading penalty ever, paid by the humans in charge of the firm, with the understanding that the SEC had a free hand to continue investigating other instances of insider trading and that the DOJ would continue to try to put those humans in jail. Oh, but: neither Citi nor SAC admitted guilt, so whatever.3
That's the wrong worry. The right worry is the drunk-and-the-lamppost worry. The SEC's and DOJ's pursuit of SAC is so vicious because the stakes are so low. The SEC is sort of optimized around insider trading investigations, even though they're sort of pointless, so it's really good at doing them, and it can follow this investigation wherever it leads, because the highest it can lead is to Steve Cohen. Who's a big scalp for investigators because he's an important guy, but who's also a possible scalp because he's not a systemically important guy.
If the SEC and DOJ had sat down, made a list of the most important people in the financial industry, and asked the question: "who is the most important person on this list whose downfall would not run the risk of damaging the financial system as a whole?," they might well have landed on Steve Cohen. The fact that they're pursuing him doesn't seem like favoritism to him. Whoever was just above him on the list should be pretty relieved though.
1.But also substantive things like its relatively light penalty compared to the earlier settlement with Goldman over similar conduct, and its failure to develop a record to help the public understand what happened and to help private victims determine whether they had a case against Citi.
3.Who made that a thing? Settlements are compromises; why should the compromise be "the SEC wins on every point"?