"When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence."  - -  Preet Bharara, Federal Prosecutor in Manhattan.

'THE WHOLE IS GREATER THAN THE SUM OF ITS PARTS.'

With that the Federal government launched its criminal case on Thursday against SAC Capital, the hedge fund run by the billionaire Steven A. Cohen. They opted for an unusually aggressive move that could take down one of Wall Street’s most successful stock trading firms.

The 41-page indictment includes 4 counts of securities fraud and 1 count of wire fraud.  Prosecutors charged SAC and its units with permitting a “systematic” insider trading scheme to unfold between 1999 and 2010, activity that generated hundreds of millions of dollars in profits for the firm. The case seeks to attribute criminal acts of several employees to the company itself, claiming that the fund “enabled and promoted” the illicit behavior.

Breakdown in Internal Controls and Ethics.   The problems at SAC, according to the indictment, partly stemmed from a breakdown in internal controls — and ethics. The indictment cited “an institutional indifference” to wrongdoing that “resulted in insider trading that was substantial, pervasive and on a scale without known precedent in the hedge fund industry.”

Yet, a SAC spokesperson countered, saying:  “The handful of men who admit they broke the law does not reflect the honesty, integrity and character of the thousands of men and women who have worked at SAC over the past 21 years.”

Culmination of an Investigation.   The case, announced by Mr. Bharara and the F.B.I. in Manhattan, is the culmination of an investigation that spanned a decade. As the federal government mounted a relentless crackdown against insider trading, an investigation that reached into corporate board rooms and trading floors across Wall Street, it zeroed in on SAC, which became one of the most prominent players in the stock market.

SAC aggressively bought and sold stocks around market-moving events like quarterly earnings announcements and big mergers and acquisitions. Its success – at the height of his powers in 2006 and 2007 Mr. Cohen is reported to have earned about $900 million each year – afforded the firm a certain mystique. But it also generated whispers about whether the fund routinely crossed the line, prompting the government to target employees who pumped sources for insights that might give them an investment edge.

The pursuit of this “edge” is at the heart of the government’s case. SAC, according to the indictment, sought to hire traders with “proven access” to corporate insiders likely to hold inside secrets. Those employees were often rewarded if they outperformed other investors, the government said, a problem that SAC’s lax controls failed to thwart.

In one instance cited in the complaint, Mr. Cohen was warned that a prospective employee, Richard Lee, was a known member of an “insider trading group,” at another hedge fund. But Mr. Cohen, overruling objections from his own legal department, hired Mr. Lee anyway.

Five onetime SAC employees have now admitted to insider trading while at the fund, including Mr. Lee, who was not publicly known until his name surfaced on Thursday in the SAC indictment.

The indictment said that Mr. Lee, who worked at SAC from April 2009 to June 2011 and again from September 2012 to March 2013, possessed inside information about Yahoo and 3Com Corporation. In his guilty plea, Mr. Lee acknowledged that he traded on some of the inside tidbits.

Without evidence directly linking Mr. Cohen to illicit trades, the government stopped short of criminally charging him. But the case is a blow to him all the same. Not only does the firm name bear his initials, but Mr. Cohen owns 100 percent of the company he founded with his own money more than two decades ago.

The indictment is also stacked with references to Mr. Cohen, though he is identified only as “the SAC owner.”

In a direct rebuke of Mr. Cohen, a 57-year-old collector of art and real estate, the indictment said he “fostered a culture that focused on not discussing inside information too openly, rather than not seeking or trading on such information in the first place.”

To buttress the argument, the government cited instant messages that a recently hired SAC employee sent Mr. Cohen in July 2009. The employee informed Mr. Cohen that, due to “recent research,” he planned to bet against Nokia’s shares. The employee apologized for being “cryptic,” explaining that SAC’s compliance chief “was giving me Rules 101 yesterday – so I won’t be saying much,” adding that the warning was “scary.”

In 2008, an SAC employee forwarded an e-mail to Mr. Cohen in which a job candidate is praised for his access to the industrial industry. The message described him as “the guy who knows the quarters cold, has a share house in the Hamptons” with a senior executive at a big industrial company and is “tight with management.”

While Mr. Cohen was not charged criminally, he still faces civil charges. The indictment on Thursday comes on the heels of a civil action filed by the Securities and Exchange Commission last week that accused Mr. Cohen of failing to supervise employees suspected of insider trading.

Thursday’s indictment against SAC, which seeks to recover the firm’s proceeds from illicit trades, represents a new phase in the investigation. Criminal charges against large companies are rare, given the collateral consequences for the economy and innocent employees. After the Justice Department indicted Enron’s accounting firm, Arthur Andersen, in 2002, the firm collapsed and 28,000 jobs were lost.

In the SAC case, the indictment could spook the fund’s investors. Already, amid several guilty pleas by former SAC employees and a series of civil actions brought by federal securities regulators, the fund’s investors have pulled about $5 billion of $6 billion in outside money from the firm. Those that have withdrawn money include big financial industry players like the Blackstone Group and Citigroup.

That exodus could accelerate in the wake of the indictment. SAC also must assuage concerns from Goldman Sachs and other large banks that trade with SAC and finance its operations. There is little precedent for what a criminal charge would mean for SAC and its banking relationships, but legal experts said that an indictment could trigger default provisions in the fund’s agreements with its trading partners, meaning that it would force brokerage firms to stop doing business with the fund.

But the charges did not spell immediate disaster for the firm. The SAC spokesman said that the firm “will continue to operate as we work through these matters.”

For the criminal case, the fund has enlisted Mark F. Pomerantz and Theodore V. Wells Jr. of Paul Weiss. Mr. Pomerantz has been involved in a number of insider trading cases, including the defense of Samuel D. Waksal, former chief executive of ImClone Systems, and Joseph Contorinis, a former portfolio manager at the Jefferies Group. Anthony Chiasson, a former SAC employee convicted last year, recently hired him to handle his appeal.

For further details, go to:  page 9 of C-I Story Board for 7/25/13 or Dealbook, 7/25/13 ] .