The hedge fund was so desperate for an upper hand that four of its employees pleaded with a Wall Street analyst one morning to reveal private insights.
Clamoring, too, for a peek inside a Taiwanese company that manufactures Apple smartphones, a fifth employee of the same hedge fund e-mailed the analyst to seek a conference call “today urgent.” The analyst, a Citigroup employee in Taiwan, gave in and offered a preview of his research.
The hedge fund traded on Apple’s stock that day and the next. The Citigroup analyst did not publicly reveal the research until that next day.
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VideoThe hedge fund — SAC Capital — is no stranger to aggressive trading tactics. It was criminally indicted in July on charges that it permitted a “systematic” insider trading scheme to unfold from 1999 to 2010.
The latest details about SAC, which emerged on Thursday as part of an action that a Massachusetts regulator took against Citigroup, illuminate the hedge fund’s relentless pursuit of an edge in stock trading. Prosecutors condemned that pursuit when indicting the hedge fund, which is owned by the billionaire investor Steven A. Cohen.
In the case announced on Thursday, William Francis Galvin, the Massachusetts secretary of the commonwealth, ordered Citigroup to pay a $30 million fine for allowing the analyst to share the unpublished research with SAC in violation of securities rules. The analyst also leaked the information to employees at T. Rowe Price and the hedge fund Citadel, which then traded in Apple shares. A third hedge fund, GLG Partners, also got the information.
Although Mr. Galvin did not penalize SAC, whose appeals appeared to be particularly numerous, his investigation is now turning to the hedge fund.
In an interview, Mr. Galvin called SAC’s tactics “extremely aggressive,” adding that he was exploring whether he had legal jurisdiction over the hedge fund, which is based in Stamford, Conn. He could also share the details of his inquiry with federal prosecutors and the Securities and Exchange Commission.
“We’re looking at whether there are other enforcement actions possible,” Mr. Galvin said.
He added, however, that the hedge fund’s tactics did “not excuse” the bank’s conduct. Citigroup’s release of private information to the hedge funds, he said, underscored a fundamental unfairness in the markets. “The average citizen can’t get access to the same information,” he said.
Citigroup said on Thursday that it was “pleased to have this matter resolved,” adding, “We take our regulatory compliance requirements very seriously and train all of our employees about these obligations.”
A spokesman for SAC declined to comment. The hedge fund, according to people briefed on the matter, is in talks with federal prosecutors to settle the criminal insider trading charges.
The order filed by Mr. Galvin traces the history back to Nov. 13, 2012, when the Citigroup analyst published a report with a buy rating on Hon Hai Precision Industry, a Taiwanese company that is the world’s largest manufacturer of iPhones and iPads, also known as Foxconn.
The analyst, Kevin Chang, estimated that Apple iPhone shipments would increase from the third quarter to the fourth quarter of the year.
But when Macquarie, a competing investment bank, issued a report on Dec. 13 that highlighted “structural risks” to demand for iPhones and downgraded its rating on Hon Hai’s stock, a flurry of internal e-mails began to fly within Citigroup, questioning Mr. Chang on the new numbers.
Then came the onslaught of e-mails from SAC.
“Hello Kevin, do you have some time to speak?” asked an employee from the SAC Capital LP division, according to Mr. Galvin’s order. Mr. Chang also heard from an employee of SAC’s Sigma Capital division who said: “A competitor had a negi note on HH today,” referring to a negative rating.
Under pressure from SAC and the other clients, Mr. Galvin said, Mr. Chang sent some of them “previews” of a new research report he was planning. He shared the information, including his estimates of cuts in Apple iPhone production numbers, a day before publishing it for all of Citigroup’s clients.
Mr. Chang’s action, Mr. Galvin said, breached state and federal securities laws that require banks to prevent the disclosure of confidential information. It also violated a 2012 agreement Mr. Galvin struck with Citigroup to not offer sneak peeks of its unpublished reports.
Mr. Chang appeared to recognize that his disclosures might cause problems for the bank. Although he and another Citigroup analyst initially agreed to “coordinate public dissemination” of updated reports on both Apple and Hon Hai for Dec. 16, Mr. Chang suddenly switched gears. Citing “an issue that forced me to publish” a report on Hon Hai “right away,” Mr. Chang released the document on Dec. 14.
Mr. Chang has since left the bank.
Citigroup was also censured for the activity and will have to undertake a three-year review of its policies and procedures. The fine comes nearly a year after Citigroup paid $2 million to Massachusetts to settle charges that two other analysts shared nonpublic information about Facebook.
“It seems that the concept that investors are to be presented with a level playing field when it comes to the product of research analysts is a lesson that must be learned over and over again,” Mr. Galvin said. “But it’s important that it should be taught as often as necessary.”