Sac Capital Insider Trading

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In order for a company to be deemed ethical the hierarchy of management needs to be ethical. Every company has their own moral responsibility codes what they follow. Each corporation has a different purpose for the policy. A definition of ethical behavior can be describe as what the director’s duty is, what their perception on conflict of interest are, outlines post service restrictions, the responsible way of using authority, what is acceptable compensation and reimbursement, acceptable circumstances of giving and receiving a gift, keeping financial information in the company, and possible punishment for not upholding the ethical policy.

SAC Capitals is a hedge fund group founded by Steven A. Cohenin 1992. SAC Capitals has been investigated for insider trading since 2008. The people in charge of these investment companies need to respect the private information and not use it to their own advantage. Common courtesy is called in which is an example of ethical practices. However asking people to play the rules aren’t the most realistic thing to do, but harsher punishment can make up for that. Business Ethics are business society’s ideas about what actions are right and what actions are wrong. With that being said every business have different ethical standard.

And these standards should not be confused with rules and regulation, because if rules are broken then consequences can be faced from a monitoring agency. If an ethical standard is broken then depending on what was done, one of the few consequences faced can be severe. One great example of an universal ethical standard is ‘Do to others as you would have done to you’ (Parrino, Kidwell, & Bates, 2012). In the text it states that there are three main ethical problems that arise in business dealing. Those problems are Agency Cost, Conflicts of Interest, and Information Asymmetry.

Agency Cost is an internal cost that arises from having to pay an agent who is acting on behalf of a principal. Agency costs take place because conflicts of interest between shareholders and management. This directly relates to the next ethical problem, conflicts of interest. Conflict of interest is when two or more parties do not agree on something that can benefit to one party but can hurt the other parties. Finally there is information asymmetry which is when one party has information in a business transaction and has information that is unavailable to the other parties in the transaction.

A common example of this is insider trading. Throughout the company from top to bottom, no one should use exclusive trading information to their advantage. If a policy in place was either voted for or agreed upon, all of these employees need to have morality and choose to do the right thing. There should be a page dedicated in the contract stating if caught in an act of unethical practice the company is allowed to sue, and collect all the money earned and gained by the unethical practice. Now for some companies there should be a person in charge who sees ethical practices.

HR is usually the one responsible for this, however there needs to be someone tailored in overseeing all levels of ethical practices in management, and also monitor who is communicating with who in a daily basis. This may sound like an unnecessary investment for the company, but they may consider this to be just like insurance. It is better to have it and not need it than need it and not have it. Having someone in payroll to specifically monitor ethics could avoid all kinds of potential lawsuits that could save millions of dollars for the company.

Periodically reports may sound interesting but just like anything that deals with sensitive information there needs to be necessary precautions to avoid possible leaks in the system. The team who are responsible for the reporting should be an external agency, very much like an external auditing would operate. And to even further more limit possible cover ups or collusions the company should request a random rotation on team personnel to handle the ethical reporting as well. This will be a good practice so that there aren’t any long lasting relationships between the employees and the people monitoring the employees.

Also the person in charge shouldn’t be known to everyone to avoid possible dilemmas, instead the person should be secretly chosen, but the chairman of the company will have the awareness about this chosen person. Now many of these suggestions sound feasible but how can this actually help a company when they are in turmoil, and also how implementing my suggestion can avoid this situation to occur at the first place. On March 29, 2013, The Securities and Exchange Commission (SEC) charged Michael Steinberg with trading on inside information ahead of quarterly earnings announcements by two corporations.

Michael Steinberg was a portfolio manager for a New York-based hedge fund advisory firm called Sigma Capital (SEC, 2013). The SEC states that Steinberg illegally modified hedge funds managed by Sigma Capital and its associate the S. A. C. Capital Advisers to make more than $6 million in profits. They also use that same information to avoid any possible losses. Michael received illegal tips from Jon Horvath. Jon is an analyst who reported to Michael at Sigma Capital. He was also charged last year with a few other hedge fund managers and analysts due to the SEC’s broader investigation.

The SEC’s broader investigation is specifically tailored to examine expert networks and the trading activities of hedge funds. Sigma Capital and two affiliated hedge funds agreed to a $14 million settlement with the SEC for insider trading charges in early march. Now let’s assume that there was someone in charge of monitoring personal in the higher levels of management. If the emails exchanged between Michael and Jon were done in the company email, the person in charge would have had access to those emails, and also would have saw the red flags from miles away.

And since the crime has occurred at the moment (theoretically), then there could have been someone who can talk with both Michael and Jon to avoid any major violations. And they would still be disciplined based on the conspiracy of inside trading. I would also recommend to try and connect the dots with the people who are passing on the piece of information that Jon took hold of. Those people and the people who knowingly benefited from it would have also been disciplined. Having someone in charge to monitor their actions would have saved millions of cooperate dollars.

A report on questionable interaction or conversation frequency could have also made the company more aware about the unfair advantage taken by the management. Monitoring email is a great way to find out who is communicating with whom. Jon wrote to Michael “I have a 2nd hand read from someone at the company – this is 3rd quarter I have gotten this read from them and it has been very good in the last quarters. . . Please keep to yourself as obviously not well known” (U. S Security and Exchange Commission). These lines clearly shows how unethical they both were, and taking advantage of their powers.

Let’s look at exactly what Michael did; basically he got an advance copy of Dell and Nvidia’s quarterly earnings announcements. This allowed him to trade with the anticipation of knowing what will happen tomorrow. That is insider trading and it is frowned upon. Joining with the SEC the U. S. Attorney’s Office decided to also take action for the Southern District of New York to bring criminal charges against Michael. The consequence does not end there. The possibility to lose business associates with Dell and Nvidia is very much possible as well. In this example the board of directors should eliminate all known traces of Michael and Jon.

Also to relieve the associates as well, and then they should implement a stronger ethical culture in the company. In the interview for the next portfolio manager, the questions should be heavily tailored toward ethical situations and how would they react. The board should be proactive to make sure this doesn’t happen again in the future. Just recently in July 19, 2013 the SEC bestowed hedge fund manager Steve Cohen with civil charges, accusing him of failing to supervise a pair of senior employees now is facing criminal prosecution for insider trading.

Steve Cohen is the founder of SAC Capitals and his net worth is at $9. 3 billion dollars. Based on the information that SEC has collected; Steve received highly suspicious information that should have caused him to investigate the rationale for trades. To Steve’s defense his representatives has stated that they believe that “the SEC’s administrative proceeding has no merit in accusing him, that Steve Cohen acted appropriately at all times and will fight this charge vigorously” (Schaefer, 2013).

Other than Michael, Matthew Martoma who was a portfolio manager for SAC Capitals is facing more serious charges. Both Matthew and Michael are facing criminal charges from SEC. Matthew allegedly illicit trades in pharmaceutical firms. Those trades been deemed “the most lucrative insider trading scheme ever” by prosecutors, while Michael faces accusations he traded on advance knowledge of results at technology stocks. In Matthew’s case, the SEC says Cohen was aware that he was was receiving tips from a doctor with insider knowledge of clinical trials on an Alzheimer’s drug in 2008.

According to the SEC, Matthew said that he was no longer comfortable with a particular investment in pharmaceuticals that CR Intrinsic and SAC held. Steve was fully aware of Matthew’s view. Despite that Matthew quickly changed his point of view. This should have been a red flag that he received confidential information about the clinical trials. Steve failed to take prompt action to determine whether an employee under his supervision was violating insider trading laws (Schaefer, 2013).

In Michael’s case, the SEC states Cohen was looped into a highly suspicious e-mail and that it should have provoked him to investigate whether the trader was engaging in illegal insider trading. Based on their investigation Steve instead chose to liquidate his Dell shares based on the recommendation of Michael, who continued short selling Dell shares in his Sigma Capital portfolio based on the confidential information. Dell’s stock price dropped sharply after its August 28 earnings announcement, and funds managed by Steve’s firms profited or avoided losses totaling at least $1. million.

Three hours after the earnings announcement. Supposedly Steve e-mailed Michael “Nice job on Dell” (Schaefer, 2013). Even though the SEC collected all these information, Steve will likely not face any jail time though he could face financial penalties and a ban from the securities industry. This is I allotted earlier that needs to change. These executives need to be more aware and responsible of their own actions and action taken by others. This case clear shows an example of people using information to their advantage and a person who choose to do nothing about it.

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