A Guilty Plea and a Record Fine for SAC Capital


Three months ago, we wrote about the unprecedented indictment of SAC Capital, and a few months before that, we wrote about SAC’s record-setting $616 million settlement for insider trading. Today’s guilty plea combined with an additional $1.2 billion of fines was welcome news indeed. Perhaps most importantly, the plea deal requires that SAC shut down its investment advisory business, and it does not rule out future prosecutions of individuals connected with SAC’s insider trading activities. The SEC’s civil case against Steven A. Cohen (the billionaire founder of SAC Capital) for failure to supervise his employees will continue. Furthermore, for the upcoming criminal trials of SAC employees, it leaves open the possibility that one of those defendants could turn state’s evidence, resulting in a criminal prosecution of Mr. Cohen himself.

Although some people dismiss insider trading as a victimless crime, we at Index Fund Advisors believe that it goes to the heart of financial market integrity. As Manhattan U.S. Attorney Preet Bharara said in a press conference announcing the settlement, “The victims are everyone who believes that markets should be fair.” While we definitely count ourselves among the people who believe that markets should be fair, we have no reason to believe that our clients suffered any actual losses from SAC's insider trading activities due to the low frequency of trading by Dimensional Fund Advisors.

As we have said on many occasions, if you show us someone who has “beaten the market”, we will show you someone who most likely either got lucky or broke some laws. As Ron Ross remarked in The Unbeatable Market, “Wall Street’s favorite scam is pretending luck is skill.” He forgot to mention that Wall Street’s second favorite pastime is pretending that an ill-gotten informational edge used to scalp another trader is an entitlement that simply goes along with being a “Master of the Universe”, to borrow a phrase from Tom Wolfe.

If the combined forces of the SEC and the FBI result in the eventual takedown of a master of the universe who has More Money than God, the rest of the financial industry will indeed have learned a lesson—nobody is too big to jail. We wish them the best.