Evaluating second-day coverage of the SAC deal

After hedge fund SAC Capital pled guilty to criminal and civil charges of profiting from inside information, the real stories examining the deal came out on Tuesday. Some of them were interesting.

Bloomberg Businessweek ran a story asking the question if the deal was actually good for the government:

During a press conference yesterday announcing a record settlement for insider trading with hedge fund SAC Capital, a reporter in the room asked the question that was on everyone’s mind: Is the fact that the fund’s founder Steven Cohen hasn’t been charged with anything a major disappointment?

Preet Bharara, the U.S. Attorney for the Southern District of New York and the man behind the podium, looked a touch peeved: “What has happened today is a very substantial and important thing—it is a rare thing for an entity to be held to account, and also rare to have it plead guilty, and also rare and unprecedented to pay the penalty,” he said. “We are not shy and retiring people, we are not unaggressive …”

Few people would argue that the government has been unaggressive in its pursuit of Cohen, whom the U.S. Securities and Exchange Commission, FBI, and U.S. Attorney’s Office have been investigating for years. But even after Cohen agreed to pay an additional $1.2 billion fine (on top of $600 million already owed to the SEC) to settle criminal charges that his firm engaged in insider trading, with SAC pleading guilty to all charges, Cohen faces no time behind bars. Instead the public may be left considering that a very wealthy individual is paying a large sum of money to the government and then going on with his life.

Unlike earlier times, think Michael Milken or more recently Raj Rajaratnam, Cohen isn’t going to jail and he isn’t going on trial. Businessweek makes a good point. The New York Times argued that corporations have been treated like individuals for a while, indicating that justice was served:

While Professor Burton is correct that only human beings can commit crimes, the notion that corporations are the same as individuals in the eyes of the law dates at least to an early 19th century Supreme Court case, which held that corporations, like people, can enter into contracts. That view was reaffirmed in the recent Citizens United case, which held that corporations are entitled to the free speech guarantees of the First Amendment.

The federal government has long prosecuted corporations whose managers engaged collectively in criminal behavior. “Corporations should not be treated leniently because of their artificial nature nor should they be subject to harsher treatment,” the Justice Department principles state. “Vigorous enforcement of the criminal laws against corporate wrongdoers, where appropriate, results in great benefits for law enforcement and the public.”

These benefits, according to Professor Friedman, include protecting the public, deterring similar unlawful conduct and what he called “expressive value,” which is the public statement that certain behavior should be subject to criminal sanction.

“There are many critics who will say, ‘You can’t incarcerate a corporation, so what’s the point?’ My view is, what they did, it was just as wrong, and by treating it as a criminal rather than civil matter, it makes an important statement about the seriousness of the wrongness.”

There’s surely no dispute that SAC Capital was the site of some of the most brazen and widespread insider trading in Wall Street history. In its plea agreement, the firm admitted committing five felonies. Six of the firms’ traders have pleaded guilty to securities fraud charges, and two more are awaiting trial in what the prosecutors have called a systemic insider trading scheme that spanned more than 10 years.

The Wall Street Journal chose to focus on the judge’s approval of the deal. If the deal is rejected, then SAC has the option to pull back its guilty plea:

When Judge Laura Taylor Swain examines the agreement as soon as Friday — the date of the next hearing – her only option will be to give the deal a thumb’s up or a thumb’s down. If she rejects the deal, SAC Capital can withdraw its guilty plea.

Yes, you heard that right. If Judge Swain decides the penalties aren’t stiff enough, SAC Capital can pretend the last two days never happened, re-assert its not-guilty status, and push on to trial.

But before we continue this discussion, let’s back up a second. The agreement reached on Monday was technically two separate deals – a criminal plea deal to be heard by Judge Swain on Friday, and a civil settlement to be heard by Judge Richard J. Sullivan at a hearing on Wednesday. As part of each deal, SAC has agreed to cough up $900 million. In the criminal case, that amount is cast as a fine and in the civil case it’s cast as an amount to be forfeited.

(One further note: SAC will get a credit against the $900 million civil forfeiture for $616 million that it’s already agreed to pay to settle related civil suits with the Securities & Exchange Commission.)

There’s more: In order for the criminal deal to make it to Judge Swain’s desk on Friday, Judge Sullivan has to first approve the civil settlement. That contingency is laid out in the plea agreement. While legal experts following the case say that Judge Sullivan’s approval is highly likely, Judge Sullivan himself threw some doubt into things on Tuesday when he said he would not necessarily rubber-stamp the civil deal.

But the story points out SAC isn’t off the hook if the deal is rejected. It just means that it can go back and renegotiate or head to trial. The saga continues as we wait to see what the judges will decide.