By Kurt Schacht, JD, CFA
Could this really be “The End” of this saga? Not just to rotten movie sequels but to sequentially rotten treatment of investors. The ever-growing avalanche of news stories reporting mega-billion-dollar client withdrawals from Steven A. Cohen’s once proud $15 billion SAC Capital have reduced it to a mere shadow. To hear tell, nearly all outside client money is being pulled, reducing the once-stellar hedge fund to essentially the Cohen family office. Does this offer the tantalizing prospect that the times may be finally, and perhaps significantly, changing?
From mighty Blackstone (NYSE:BX) and its handling of $40 billion in pension funds to Magnitude Capital and the $3 billion in hedge funds it manages, several major investors have notified SAC of redemptions and withdrawals, as SAC navigates the treacherous shoals of federal prosecutions for alleged insider trading, news reports indicate. Prosecutions focus on insider information regarding Dell earnings and pharmaceutical trials for an Alzheimer drug developed by Elan and Wyeth (now Pfizer) in 2008 as the financial markets imploded, in which SAC is alleged to have profited illegally from advance intelligence.
Earlier, SAC was willing to pay $600 million to settle allegations of insider trading in one of the cases rather than spend an estimated $1 million in legal fees to defend itself. But that was just one case and, according to news reports, grand jury subpoenas reach to Cohen and the highest levels of SAC management.
Which brings us to our long-suffering question: Do bad actors and ethics in finance finally matter?
At issue is whether SAC and the financial services marketplace will no longer get the benefit of the doubt.
At the first sniff of scandal are clients out the door, or is this SAC scandal but a momentary diversion?
To his credit, Cohen is beefing up regulatory compliance, discontinuing expert networks, limiting portfolio manager contact with public company employees, and instituting clawbacks for employees involved in any aspect of illegal insider information. Within hedge funds, client defection is now almost an immediate companion to federal criminal and civil allegations. Firms as consequential as Blackstone are separating themselves from a hedge fund beclouded with allegations of ethical lapses and legal violations. But that is not always the case in financial services.
In odd ways, SAC both resembles and is distinct from British megabank HSBC, which settled just short of $2 billion and admitted no wrongdoing in connection with terror financing and narco-money- laundering charges in December 2012.
In HSBC’s case, those who allegedly perpetrated the illegal acts departed rich and unscathed. Its once top manager, individually untouched by the scandal, is now a minister in David Cameron’s coalition cabinet. Meanwhile, at least one SAC employee, charged in connection with the pharma plays and facing federal prosecution, has left with his bonus intact.
Yet, there is one glaring and gigantic difference in these two cases. HSBC pretty much chugs on, business as usual, handling the fine as little more than a regulatory cost of doing business. There are dozens of big finance firms with a similar Teflon coating. Clients and business seem to stay put.
Despite his current compliance initiative and sizeable settlement offer, Cohen doesn’t seem as smooth as the superbanks in extricating himself from either the tightening vices of federal authority or market discipline. In that turn of rustic phrase, “The chickens are coming home to roost.”
The coincidence with reports on Cohen’s latest travails coming within weeks of the Memorial Day weekend release of “The Hangover Part III” — the last in the film trilogy — metaphorically highlights the extent to which the ways of client loyalty and patience may likewise be headed.
Are withdrawals and subpoenas but blips for the resourceful Cohen, and will SAC re-emerge as a powerhouse minus outside investors?
Or is this “the end” more generally?
Do massive client defections signal a sea change for not just hedge funds but for the megaplayers like JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), any of those “too-big-to-fail” banking behemoths, rife with their own serial allegations and slap-on-the–wrist fines for regulatory violations?
The SAC scandal could constitute a Wall Street tipping point, that there are serious business consequences to bad behavior, particularly serial bad behavior, and that clients are no longer willing to let things slide.
Time will tell, but as summer 2013 makes its entrance, at the very least the SAC scandal has everyone in this industry thinking: Can this happen to us?
Here’s to bad movie trilogies and financial scofflaws, may they both see the sobering end.
Disclaimer: Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.