This afternoon SAC Capital entered a guilty plea in court as part of the largest insider trading settlement ever. In connection with the five criminal counts of wire and securities fraud, SAC Capital agreed to pay approximately $1.2 billion (in addition to a $616 million SEC penalty already paid) and pledged never again to manage anyone else's money. U.S. Attorney Preet Bharara characterized the record-breaking penalty as "steep, but fair." According to Bharara, the penalty is "several orders of magnitude larger than the identified avoided losses and gains made by" SAC and is in excess of the maximum under the sentencing guidelines.
The government's complaint provides a little context for understanding the penalty, but not much. Over approximately a decade, eight SAC employees allegedly traded an unspecified number of times on information about companies that they got from employees at the companies or knowledgeable third parties. SAC allegedly encouraged this behavior, and, as the complaint explained, "the encouragement by [SAC] to pursue aggressively an information 'edge' overwhelmed limited SAC compliance systems." The government has obtained guilty pleas from some of the individual insider traders, but the complaint is a bit slim on specific facts to support a penalty of the size imposed. Some of the cited examples of offending conduct are not particularly incriminatory: for example, an SAC employee spoke with a tech analyst who had spoken to a Microsoft employee who had seen some of his colleagues at Microsoft talking to Yahoo employees, thus foreshadowing a partnership between Yahoo and Microsoft.
As Bharara noted, part of the purpose of the tough settlement with SAC was to act as a deterrent. That purpose would have been more effectively accomplished if the government had provided more details about the specific conduct it was trying to deter.