| Harbinger Capital founder Philip Falcone. Photo: (Bloomberg) |
Next up in the Securities and Exchange Commission’s negotiations with SAC Capital Advisors: Will the regulatory agency push for CEO Steven Cohen to admit to some kind of wrongdoing?
Although the U.S. Department of Justice has charged SAC Capital with insider trading, Cohen himself does not face criminal charges. The SEC, however, has filed a civil action against Cohen accusing him of failure to supervise his employees diligently enough to stop them from allegedly trading on inside information about publicly traded companies. The SEC’s traditional “neither admit nor deny” policy has let many defendants settle without admitting to having done anything wrong, but Mary Jo White, who became the chairman in April, has made it clear she wants to require an admission of wrongdoing from more defendants.
In August, Philip Falcone, head of Harbinger Capital Partners, agreed to admit to wrongdoing in his more than $18 million settlement with the SEC over charges of using fund assets to pay his personal taxes, secretly favoring certain customer redemption requests and conducting an improper short squeeze. In September, JPMorgan Chase & Co. issued a terse statement saying the bank “admits to the facts set forth below and acknowledges that its conduct violated the federal securities laws” and paid a fine of $200 million to the SEC as part of a larger settlement that totaled $920 million in the so-called London Whale case.
Still, securities lawyers say there are plenty of reasons for a hedge fund CEO to fight against any admission of wrongdoing at all costs. For one thing, if the Department of Justice has been trying to build a case against the CEO, an admission of wrongdoing can be used as evidence. “The admission of wrongdoing can become in itself the foundation for a criminal case,” says Andrew Wise, vice chairman of the litigation department at the law firm Miller & Chevalier in Washington, D.C., who has defended clients in cases involving securities, tax and fraud allegations.
For another, the admission might be a cue to investors to sue the fund. “An admission of culpability puts the principal of the fund in a weakened position with litigious investors who may or may not have been harmed,” says Ron Geffner, a partner at Sadis & Goldberg in New York, which represents about 600 hedge fund clients, and a former staff attorney at the SEC.
And if investors sue a fund whose principal has admitted to intentional or criminal misconduct, the firm’s directors and officers liability insurance will not cover the damages. That is a reason in itself to keep fighting the SEC’s efforts until the last appeal, says Koji Fukumura, co-chair of the securities litigation practice group at the law firm Cooley in San Diego. He advises that anyone at the helm of a company should agree to an admission of wrongdoing only in extraordinary circumstances. “There have been cases where individuals have been convicted of a crime and the company was still required to indemnify the individual through all appeals or a new trial and any appeals of that trial,” says Fukumura. “The bill could exceed $100 million for a single individual.” The floodgates of insurance dollars could shut with an admission of wrongdoing, however.
The idea of forcing the principal players to acknowledge culpability might appease a populace that is frustrated with the financial services industry in general. That said, the SEC did not go after JPMorgan CEO Jamie Dimon. Falcone, on the other hand, will have to pay about $11.5 million of the settlement from his personal fortune and will be barred from the securities industry for at least five years.
“There’s still an outcry from the 2008 financial crisis that the financial industry continues to function while certain citizens had their lives destroyed, although it goes beyond hedge funds,” says Geffner.
A fund principal might decide to follow the example of Falcone, settling with a smallish fine, admitting to wrongdoing and moving on, rather than fighting and risking a larger fine. “It will all be case by case, but I have a feeling the SEC will be forced to take more cases to trial by insisting on an admission of wrongdoing,” says Wise.
But then, White herself has acknowledged the new policy could lead to more litigation. At the Bloomberg Markets 50 Summit in New York last month, she said the old “neither admit nor deny” policy could still help the SEC avoid the risk of losing — and make it possible to return money to aggrieved investors faster.
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