Well played, sir. Well played. Photographer: Amanda Gordon/Bloomberg
Well played, sir. Well played. Photographer: Amanda Gordon/Bloomberg

Turns out that there was insider trading at SAC Capital. I know, right? I'm as shocked as you are. You are not shocked, I take it. This is not new news.

In March SAC announced its $616 million Securities and Exchange Commission settlements and was all "let's put this behind us," whoops. In July the SEC brought a separate case against Steve Cohen himself, and then the Justice Department indicted the firm. Today the firm put that indictment behind it, with a plea agreement that involves SAC paying $1.8 billion -- but it gets credit for the $616 million it's already paid the SEC, so it's more like $1.2 billion -- and agreeing not to manage any outside money. That's sort of a hedge-fund death penalty, though it's a death by natural causes since SAC was pretty much down to running $9 billion of Cohen's personal fortune anyway. $8 billion now I guess.

One particularly arid avenue of inquiry is: Is SAC's $1.8 billion in total penalties too little, too much, or just right? It's the biggest insider trading fine ever by quite a bit, and the indictment says that "Unlawful conduct by individual employees and an institutional indifference to that unlawful conduct resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry."

Which sounds bad, no? But SAC has only ever been charged with one really big insider trade: Its trading in Elan and Wyeth stock on advance knowledge of drug trial results, which according to the Justice Department was "the most lucrative insider trading scheme ever charged" and made SAC around $275 million. The rest of the trades are a million here, a million there, but orders of magnitude smaller than Elan. They add up, but not that fast. You can get a rough sense from the plea agreement of what prosecutors think SAC did and what SAC is admitting to. I get a range of about $296 to $322 million -- including that $275 million -- though I wouldn't swear to that.* This for a hedge fund that regularly made billions of dollars a year in investment returns.

For that $300 million and change in profits SAC is paying a total of $1.8 billion in fines and civil penalties and forfeiture and disgorgement and other words. Obviously if you get caught insider trading your punishment should be something greater than just giving back the money you made, but how does that 6x return sit with you? It seems … pretty okay to me? I don't know, this does not seem particularly susceptible to rational analysis, but 1x seems too low and 10x seems a bit high, so 6x, sure, fine.**

But of course that's not the analysis that anyone will do. Not Steve Cohen, who has "said he thinks it is unfair that he is paying nearly $2 billion in penalties out of his pocket for the crimes of what he believes are rogue employees."

But also not anyone who believes the vivid and occasionally hilarious picture of SAC that the government has painted with all its substantials and pervasives and stories of how SAC hired people because they had Hamptons share houses with corporate chief financial officers. In this story, SAC was an insider-trading firm with a thin veneer of hedge-fund legitimacy: a place that hired, trained and evaluated employees more or less purely for their ability to find and trade on illegal inside information. That story of pervasive cultural corruption is what justifies the criminal charges against the firm (instead of just the individual insider traders), the failure-to-supervise case against Cohen himself, and the civil forfeiture case, settled today for $900 million, that originally sought "the forfeiture of any and all assets" of SAC and its investment funds, which is a lot of assets. Once it was $15 billion.

That's the disappointment that goes unacknowledged here. SAC is pleading guilty to every count and admitting to the specific trades that the government has charged. But while its fine is an order of magnitude bigger than its admitted conduct, it's also an order of magnitude less than what the government has hinted at. I suppose it's in the nature of plea agreements that no one is entirely satisfied, but it's still odd that this one is a complete admission of guilt and still lets you believe whatever you want about the essential truth of what SAC was up to. If you buy the government's story of pervasive criminality, leaving Cohen with most of his billions seems way too lenient. If you buy Cohen's theory of a few rogue traders, then taking billions of his dollars and shutting down his firm seems way too harsh. Either view is consistent with the plea.

One other obvious avenue of inquiry is: What's next? The plea agreement has some hints. For one thing, while the March SEC deal settled only a few particularly intense days of insider trading, this plea agreement contains a blanket release for SAC as a firm from all insider trading from 1999 through the end of 2012, which, I'd be really impressed if they kept insider trading into 2013, that would be a culture of insider trading.

Importantly, Steve Cohen is not off the hook for any criminal or civil charges. The SEC's civil lawsuit against him personally continues, and he could still be prosecuted and sent to jail by the Justice Department. However he can't be fined any more, mostly: The U.S. Attorney's office

shall not assert claims for financial recovery against any present owner or shareholder of the SAC Entity Defendants predicated on insider trading by or on behalf of the SAC Entity Defendants or the SAC Affiliates at any time through December 31, 2012, except for criminal fines applicable to insider trading … together with forfeiture claims for disgorgement of insider trading profits and avoided losses … for insider trading activity after December 31, 2010.

There's only one present owner or shareholder of SAC, and his name is Steve Cohen, though I suppose there's some Voldemortesque value in not calling him by name. Since he's paying the $1.8 billion fine today out of his own fleece-lined pocket, the least they could do is make him immune from any more fines, at least for pre-2011 insider trading. Not jail, though. Not immune from jail.

Will he go to jail? I mean, my sense is that if they had the evidence to charge him with criminal insider trading, they'd have charged him with criminal insider trading. Prosecutors' offices aren't entirely susceptible to that sort of efficient-markets analysis but, really, they've been at it for a while, no? The public case against Cohen himself has long been suggestive but inconclusive. There's that one time he talked on the phone with an analyst who had inside information, and then he had SAC trade illegally on that information -- like, by SAC's own admission!*** -- but that's not conclusive proof that Cohen traded illegally. I guess? It melts the brain a little.

In March, I suppose it was possible to believe that SAC's settlement with the SEC might put an end to its insider trading troubles. Now, though, even though this plea deal puts an end to SAC, no one quite believes that its troubles are over. The government is having too much fun to stop this case just because it has recovered X dollars, for any X.

So you might wonder why SAC keeps agreeing to deals that end individual investigations but do nothing to shut down the broader machinery of governmental monkeying with SAC. I don't know. I guess one plausible theory is "they think that what they've admitted to is all there is, so surely the government won't keep dredging up more charges for them to settle." Another is "they know that the government has found them out as a massive insider-trading ring so they have no leverage to get a better settlement." Again, today's plea leaves you to believe whichever you want.

* See pages 4-6 of the plea agreement. The counts break down by entity (though Count 1 is against them all). Count 2, against SAC Capital Advisors LP, and Count 3, against SAC Capital Advisors LLC, have a range of profits from $7 to $20 million and not a lot of detail -- long lists of companies, mostly. Count Four, against CR Intrinsic Investors, has a range of $200 to $400 million, but that's just a category in the sentencing guidelines: it's about Elan, so I'm calling it $275 million. Similarly, Count Five, against Sigma Capital Management, is $7 to $20 million but seems to be about Dell and Nvidia, where the profits were a bit under $7 million. So I'm calling the total (1) $275 million for CR Intrinsic, (2) $7 million for Sigma, and (3) $14 to $40 million for miscellanea.

** I mean. You could do some expected-value math about the deterrent effect but that requires an estimate of the likelihood of getting caught. That likelihood is (1) hard to know and (2) probably systematically underestimated by the people who, y'know, insider trade.

Incidentally, the U.S. Sentencing Guidelines recommend a fine of $411 to $823 million, according to the plea agreement, though no one would call that a rational argument for anything.

*** Right? The indictment (pages 27-28) charges CR Intrinsic with insider trading in Elan stock because SAC analyst Mathew Martoma got information from a doctor involved in the company's drug trials and "spoke by telephone to the SAC Owner, who the next day began selling the entire $700 million position" to take advantage of the inside information. SAC/CR Intrinsic is pleading guilty to that count and admitting to the $200+ million gain there. So SAC -- which is controlled by Cohen -- would seem to be admitting that this action by Cohen was illegal insider trading. But what do I know. It is not a great fact. Peter Henning can wrap his brain around it, so go read him.