As those of you who've read today's criminal indictment against SAC Capital know, prior to September 2008, the hedge fund had a policy to "automatically purge all instant messages after 36 hours and all e-mails not affirmatively saved after 30 days." Then, after September 2008, a "revised document retention policy" was adopted, wherein everything was saved. Furthermore, employees of the firm were also aware that somewhere in a SAC office sat a team of people whose job in part was to review all electronic communications, scanning them for words, phrases, or conversations that might propose a problem for the firm. Luckily for anyone doing anything less than kosher, and talking about it, "prior to approximately late 2009, SAC's compliance department rarely reviewed electronic communications by SAC employees for suspicious terms potential insider trading, notwithstanding the fact that the head of SAC compliance had recommended such searches to SAC management as early as 2005." (It's unclear what compliance was scanning IMs and emails for when it wasn't looking for evidence of securities fraud, but tasty lunch orders to be intercepted in the lobby and ribald recaps of weekends in Hamptons share houses seem like good possibilities.) As late as, say, December 2008, one could be forgiven for forgetting that everything he or she was typing was being stored in a warehouse somewhere, but after that, they probably should have taken pains to not say anything that could be construed as minorly to majorly shady. And yet!
- "Analyst 1 and Analyst 2 complained in e-mails between themselves that Martoma was 'telling ppl he has black edge'-- a phrase meaning Inside Information-- with respect to the outcome of the Drug Trial."
- "In a second email, dated May 3, 2009, CR-Intrinsic PM-1 wrote to the SAC Owner, referring to the same company: 'I am very comfortable that this qtr is goign to be solid vs current consensus and guidance. I am getting coffee on tues afternoon with the guy who runs north American generics business.' The SAC owner replied: 'Let's talk later.'"
- "...on or about July 29, 2009, a recently hired SAC PM (the 'New PM') sent an instant message to the SAC Owner and relayed that, due to some 'recent research,' the New PM planned to short Nokia when he started working 10 days later. The New PM apologized for being 'cryptic' but noted that the head of SAC compliance 'was giving me Rules 101 yesterday-- so I won't be saying much[.] [T]oo scary.'"
- "...Horvath's trading recommendation emailed to the SAC Owner concerning Sun stated "[m]y edge is contacts at the company and their distribution channel." Steinberg, who was copied on the e-mail, forwarded it to the SIGMA CAPITAL Chief Operation Officer (the "COO") with the comment: "I suspect the line about contacts at the company may wake up some of our legal eagles." The COO responded: "I think it might precipitate a general inquiry to confirm we are not in possession of non public information. This seems like an investment idea, not a trade and my interpretation of his comment is just that the developed good relationships with mgmt. that enhance his comfort level." The COO arrived this benign (and unsubstantiated) interpretation without anyone interviewing Horvath about his e-mail. In truth and in fact, Horvath's e-mail was based on confidential information about Sun earnings that Horvath had obtained from his contact at Sun.
Obviously the upside to using instant messenger and email with colleagues lies in its efficiency but the downside is that even though you think you're being smart about talking around insider trading, it still sounds like you're just talking around insider trading. So! Assuming SAC comes out of this whole thing unscathed (and some people think that might happen!), the old way of doing things cannot stand. Moving forward, SAC compliance would be wise to consider a new policy that dictates any employees who have something to share about their "contacts" or "second hand read" or "411" must so using an alternative to electronic communications that could later appear in a criminal indictment. Such as:
* Installing web cams at everyone's desk and communicating with colleagues using hard to crack hand signals. Cutting the sleeves off your fleece means you've received an earnings report ahead of time.
* Taking a long walk on the beach next to the Long Island Sound, where the information will be written in the sand. The person on the receiving end wipes it away with his or her foot. Evidence gone.
* Writing messages down on a sheet of notebook paper, balling them up and throwing them at the guy/girl you're having a dialogue with, who smooths out the crinkled piece of paper, reads, and destroys it.
* Carrier pigeons
* Everyone is assigned an intern who runs back and forth between groups delivering messages orally.
* Calling- but not speaking to each other- on the phone. Two rings means earnings have doubled. Half a ring means CEO is about to resign. Heavy breathing means that a well respected street analyst is about to upgrade the stock to "overweight."
* YOU TELL US