What's up guys and welcome to wall street millennial, hedge funds sit at the apex of the global financial system. They employ secretive and complex investment strategies to extract as much money as they can from the stock market. Running a hedge fund can be an extremely lucrative business, with the top fund managers amassing billions of dollars of personal fortune. However, there is a dark side to the hedge fund industry, with many of them, making their billions through less than legitimate means.

One of the most shocking examples of this is the mega hedge fund, sac capital, which was forced to shut down after their shocking illicit behavior was uncovered by federal regulators started by investing legend. Stephen, a cohen sac capital was the most successful hedge fund in the world. During the 1990s and 2000s, it achieved an annualized return of 30 during its operations and managed 16 billion dollars at its peak. However, it turns out that these impressive returns were at least partly through illegal activities once their illegal activities were exposed.

The once mighty hedge fund was forced to shut down its business and pay a record fight of 1.8 billion dollars in this video we'll go over the rise and epic downfall of the hedge fund, sac capital. In 1992, a young man named steven, a cohen, left his job to start his own hedge fund. He previously worked as an options trader at an investment bank. He had a successful career, making the bank about 100 000 per day trading options.

He took 10 million of his own personal fortune that he made at the bank, as well as an additional 10 million dollars of outside capital to start his own hedge fund. He named it sac capital, which stood for his initial stephen, a cohen right off the bat saks started experiencing massive success, making returns of up to 50 per year. In the early years, there were a few main keys to cohen's success. Firstly, he had extremely short holding periods.

He would buy a stock for a very specific catalyst, such as an earnings release with his typical holding periods ranging from 2 to 30 days. This was very different from the prominent long-term buy and hold investing style. That was prominent at the time long-term value. Investors such as warren buffett perform deep fundamental analysis on businesses.

They come through financial reports and do industry research to identify a company's fundamental value in the long term. Cohen's strategy of day trading was very different and required. A very different type of information: he used a mosaic style of information gathering. This involves calling a wide range of industry professionals to ascertain the current state of the company's business in real time.

For example, if you are trading stocks in the construction industry, you can have paid consulting calls with a bunch of construction managers asking them how the business has been for the past few months. If they say the business has been booming recently, you could deduce that construction companies will be likely to exceed their earnings estimates in the next quarter. You can buy long construction stocks. Conversely, if business conditions have been deteriorating, you can sell the stocks short through this method.

Sac capital could predict if a company would beat or miss earnings expectations and make a short term position in the stock right before the earnings release. If done correctly, this strategy can be extremely profitable because you only have to hold a position for a few days. You can make hundreds of trades per year, so even if you only make a few percentage points of profits on each trade, it adds up and yearly returns can be astronomical. Another key to sac success was leverage.

They employed a long short investing strategy where they would be both long and short different stocks. At the same time, when you short sell a stock, you get cash up front and you can use this to fund your long positions. Sac capital returned an average return of 30 per year from 1992 through 2013 net of fees. The high returns of the hedge fund allowed them to charge extremely high fees.

They charge a 3 management fee on invested equity, as well as taking 50 percent of the profits by 2013. Their assets under management grew to an astounding 16 billion dollars, and steve cohen made a personal fortune of more than 10 billion dollars. This made him one of the most successful hedge fund managers in history. While sac strategy of mosaic information gathering was legal, it sits somewhat in a gray area of the law.

When you talk to an industry professional about the current state of various businesses, he is technically telling you non-public information. This was the source of sac's edge in the markets. They had access to information that other investors did not have. As long as an industry expert you were talking to is not violating any duty or obligation that they have to their employer them telling you non-public.

Information is perfectly legal, however, if they tell you something that their company did not authorize them to disclose. This constitutes insider trading in the us is a crime. Hedge funds, that use the mosaic style of information gathering must walk a very fine line of what information they can collect to make sure that they stay on the right side of the law, as we will see later on. This eventually got sacked into huge trouble.

In 2007, the securities and exchange commission started to grow suspicious of sac capitals, practices and started investigating them for insider trading. The first target of the investigation was long-time sac portfolio manager, michael steinberg. He was trading in dell technologies stock and was tipped off by an insider about their quarterly performance. The dull insider violated a duty of confidentiality with his employer when he disclosed the information and has thus constituted illegal insider trading.

Based on this insider information, steinberg took a position in dell stock, which profited sack to the tune of 1.4 million dollars. The sec found out about this and charged him with insider trading sack claimed that steinberg was a rogue employee. Senior management at sac, including founder steve cohen, maintained that they had no knowledge of the insider trading, while 1.4 million dollars is a lot of money to the average person, it was rather insignificant from the perspective of sac capital, which was at the time managing more than 10 billion dollars, so it seems plausible that steinberg was acting on his own when he made the relatively small trade, but sac capital's troubles were just getting started. In 2008, a different sac portfolio manager named matthew martoma had a large long position in pharmaceutical company elan corporation with hundreds of millions of dollars.

This was a big position. Even for the giant hedge fund, elan was working on an alzheimer's drug which had the potential to become a major hit for the company. This situation led to a binary possibility: either the drug would be approved by the fda and the stock would skyrocket or it would be rejected. In the stockwood tank martoma contacted a doctor who had been working on the drug trial.

The doctor told martoma that the drug trial was not going well and elan would not receive fda approval. The doctor was bound to confidentiality agreements with his employer and was not allowed to disclose matters related to the drug trial before they are announced publicly. Martoma knew about this, but decided to act on the information anyway. He advised his boss, steve cohen, to sell their entire stake in elan stock and convert it to a short position.

This way they could benefit when the company announces the failure of the drug trial and the resulting decline in share price. If you combine the losses that sac avoided by closing their long position and the profits that they made from the short position, the total gains from the transaction was 276 million dollars, which represents the largest insider trading profit in recorded history. The sec quickly flagged the trade as suspicious. It seems quite strange that sac would do a complete 180 switching from a long to a short position right before unfavorable news was announced when the sec brought charges against martoma.

It was an open and shut case. Some insider trading cases have ambiguity and gray area, but this was not the case for martomo. He was an industry professional with many years of experience. He knew the doctor was telling him material, non-public information about the drug trial, and he knew that this was a violation of confidentiality, but he acted on the information anyway, for his own personal gain the same year.

That martoma did. The insider trading sack gave him a 9 million bonus for his performance. Martone was convicted of insider trading and is currently serving a nine-year prison sentence. Steve cohen claimed that he had no idea that martoma had access to the insider information and insider trading is strictly against sac's internal policies, but prosecutors were highly suspicious of this claim.

They found martoma send emails to steve cohen, about the position in elan explaining why they should short the stock. Some of these emails contain information indicating that mytomo had access to non-public information prosecutors argued that any reasonable person reading this email should have been suspicious and investigated. Further to determine how martoma got the information, however, steve cohen, didn't do any investigation. Cohen's lawyers claimed that he did not read the suspicious emails from mortoma as the head of sac kelly received hundreds of emails per day, and he only read about 10 of them.

Having such a massive information overload, it was impossible for it to guarantee that no insider training was going on among the hundreds of employees at the hedge fund, with cohen's crafty legal defense prosecutors had no way of definitively proving that he knew about his employees crimes. Therefore, cohen was never personally charged with any criminal wrongdoing unable to charge cohen himself with a crime. Federal prosecutors did the next best thing they charged the firm itself sac with gross negligence. In 2013, sac capital was indicated for securities fraud.

The government argues that sac had a responsibility to monitor their employees and make sure that they are not engaged in illegal activities, sac pled guilty and agreed to pay a record fine of 1.8 billion dollars. They were also banned from managing external money for three years after the three-year suspension was over cohen, reopened, the hedge fund and rebranded it to 0.72. Despite the troubled history of sac capital, point 72 has had quite the comeback and now manages 22 billion dollars, which is more than sac ever managed at its peak. Alright, guys that wraps it up for this video.

What do you think about sac capital and steve cohen? Let us know in the comments section below, as always. Thank you guys so much for watching and we'll see in the next video wall street millennial signing out.