How much is $1.8 billion? That all depends on how you look at it. If you’re Steve Cohen, the director and sole owner of SAC Capital, a group of hedge funds, it’s about 20 percent of your personal net worth. Agreeing to pay the government 20 percent of your net worth isn’t usually ideal, but it could end up being great for Cohen if it avoids further legal action against himself and SAC.
If you believe the indictment from the Department of Justice, SAC Capital was basically an insider-trading shop masquerading as a hedge fund. Traders were implicitly expected to find and exploit inside information, and the firm is responsible for what the DOJ calls “the most lucrative insider trading scheme ever charged,” trading shares of pharmaceutical makers Elan and Wyeth with advance knowledge of clinical trial data. The trades netted SAC some $275 million. The settlement that was announced this week only holds SAC Capital liable, not Steve Cohen, which is sort of a contradiction. If you believe the logic of the DOJ, Cohen founded, owns and runs a criminal organization, but he hasn’t personally done anything criminally wrong.
This settlement by SAC is part of a larger shift in the way the government prosecutes wrongdoing. Remember when Martha Stewart went to prison for insider trading for avoiding $45,000 in losses? These days you can defraud or steal from basically whomever you like as long as you remember to be well connected and have a slush fund set aside from which you can write a check to the DOJ, Securities and Exchange Commission, or Office of the Comptroller of the Currency.
My personal favorite is the settlement that the government reached with HSBC for pervasive, long-lived money laundering for organizations such as Mexican and Colombian drug cartels, terrorists, and the Iranian government. In exchange for no criminal prosecution, HSBC agreed to pay $1.9 billion, about five weeks’ worth of its average revenue.
The U.S. has essentially decided that the big banks are too big to prosecute, which is an interesting way of regulating the financial system, but SAC certainly isn’t a systemically important institution. Neither is Johnson & Johnson, which agreed Nov. 4 to pay $2.2 billion for marketing several drugs off label, including paying kickbacks to doctors and Omnicare Inc., the nation’s largest pharmacy for elder care. J&J “recklessly put at risk the health of some of the most vulnerable members of our society — including young children, the elderly and the disabled,” Attorney General Eric Holder said in a news conference announcing the settlement.
This J&J fine is the latest in a string of DOJ settlements with pharmaceutical companies for various wrongdoings. Essentially, the world’s drug makers market their drugs however they want, dangerously or not, and then eventually get caught and agree to pay a fine. It’s a pattern that’s become a cost of doing business, and it’s spreading. Banks and financial institutions basically act with impunity, pharmaceutical manufacturers can get away with whatever they want, and other industries are going to start noticing. Do whatever you want, as long as you have some money stashed away to give the government if you get caught.
As long as the DOJ continues not to prosecute individuals, the deterrent effect of having laws is diminished. U.S. regulatory agencies have become collection agencies, no longer concerned with preventing illegal activity or inspiring confidence in markets but instead concerned with extracting token fines from companies when they break the law.
Tom Petri is a junior majoring in management information systems, finance and legal studies. He can be contacted at