Ethics begins by asking yourself if you would want to read it in the newspapers

11 Nov, 2013

Despite the admission of guilt by SAC Capital and a record $1.2 billion penalty the firm has paid to US regulators, the challenges facing the embattled hedge fund firm are far from over. A civil action filed by the Securities and Exchange Commission (SEC) against Steven Cohen, the founder of SAC, accuses him of failing to properly supervise his employees. In effect, the SEC is seeking to prevent Cohen from managing money ever again.

The Federal Bureau of Investigation (FBI) is also assessing whether it can bring insider trading charges against prominent figures at the firm. All of this comes several months after SAC agreed to pay $616 million to the SEC to settle two insider trading cases. Many in hedge fund circles feel what is happening to SAC has the hallmark of a regulatory witch-hunt.

The likeliest outcome is that SAC will be forced to return external capital, with the firm operating as a family office that runs the $9 billion fortune accumulated by Steven Cohen only. Redundancies are reported, and the London office of the firm is now closed. If what is happening to SAC marks an unhappy end to one of the most successful money management operations ever, it also serves as a dire warning to chief compliance officers (CCOs) everywhere.

Regulators and enforcement officials in the US are clearly feeling empowered. The successful prosecution of the top echelon at the Galleon Group, coupled with their latest success in toppling SAC, is emboldening senior figures at the regulator too.

Conversations with lawyers, general counsels, CCOs and chief operating officers (COOs) all point to the same conclusion. It is impossible to monitor constantly the actions of portfolio managers and analysts, but inculcating a pitiless culture of compliance is essential. This entails regularly updating compliance manuals, processes and training, to ensure no regulator can ever argue that a portfolio managers or analyst did not know the boundaries.

As was seen at SAC, an apparent lack of oversight and supervision by senior management can lead to awkward questions from the authorities.  Staff must be effectively monitored and their dealings with external parties such as expert networks and political intelligence firms closely scrutinised.

In addition, a simple and inexpensive litmus test can be applied to ascertain potential wrongdoings. A panel discussion held at the GAIM Ops conference in the Cayman Islands in April 2013 illustrates well what form it should take. It consisted of representatives from the United Kingdom regulator, the Financial Conduct Authority (FCA), the US Attorney General’s Office and a prestigious New York law firm.

For ten minutes, the Wall Street lawyer explained drily what may or may not constitute insider trading, throwing in a heap of technicalities and hypotheticals. The response of the official from the US Attorney General’s office, speaking immediately afterwards, was a lot blunter.

He urged managers to ask themselves how they would feel if an e-mail or telephone call they had made, or were about to make, was played back to them either in a court room or by a law enforcement official. If there is any hesitation, then the manager should think twice about sending that e-mail or making that telephone call.


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