The $10 million AML compliance plan that cost a hedge fund $1.8 billion

By Christine Duhaime | November 4th, 2013

Largest insider trading settlement ever

SAC Capital Advisors has reached a global settlement (the “Settlement“) with the U.S. Department of Justice to plead guilty to insider trading, pay a record US$1.8 billion penalty, and agree to a term of probation of five years. The Settlement is the largest financial penalty in history for insider trading.

The Settlement resolves the criminal action for wire and securities fraud and the civil forfeiture and money laundering action, both filed against certain SAC Capital entities in the Southern District of New York.

Hedge fund must close to outside investors & have new compliance procedures

Pursuant to the Settlement, four SAC Capital entities will plead guilty to all of the charges alleged against them and in addition to paying US$1.8 billion, will terminate their investment advisory business. That means that the hedge funds will be closed to outside investors. Any remaining SAC Capital operational entities will be required to have effective anti-money laundering and financial crime compliance procedures in place prepared by outside qualified persons.

The payment of $1.8 billion is comprised of a $900 million penalty in respect of the criminal action, and $900 million to settle the money laundering forfeiture action.

Settlement subject to Court approval 

The Settlement contains a plea agreement which is subject to approval by the Court. If the Court imposes a higher penalty, the SAC Capital entities may withdraw their guilty pleas. The Court is unlikely to do so because the penalties are higher than the U.S. Federal Sentencing Guidelines.

The Settlement expressly does not apply to SAC Capital employees, owners or shareholders. Certain employees are already being prosecuted in connection with the case and whopping bonuses paid to some of them may be claimed by the government as alleged proceeds of crime.

The case was novel for several reasons, including that it was only the second time in history that a corporate defendant was criminally indicted in the U.S., the first being Arthur Anderson.

It is also the first time a major Wall Street firm pleaded guilty criminally in many years, the last being Michael Milken’s firm which paid $1 billion in penalties.

The $10 million compliance plan & its adequacy

It was also the first time that the court battle, had it progressed, would have centered on the adequacy or not, of a compliance program, whose purpose is to detect and deter financial crimes, like insider trading and money laundering. The prosecution was being closely watched by compliance experts and financial institutions globally, including banks, brokers, foreign mutual funds and other managed funds, commodity pools and hedge funds, which grapple with issues related to the adequacy of compliance regimes, and whether they will pass muster in the face of a prospective prosecution.

SAC Capital maintained that it spent millions of dollars annually on its compliance function, including an astounding $10 million to have a compliance plan prepared. It’s hard to fathom paying $10 million to a firm for an AML compliance plan that, at the end of the day, was not the least bit effective and cost the company $1.8 billion.

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