FORTUNE — Perhaps the government should have charged Steven Cohen with failure to supervise himself.
On Thursday, the Justice Department filed criminal charges against SAC Capital. The case follows one recently brought by the Securities and Exchange Commission against Cohen himself for failing to stamp out insider trading at his firm.
Still, it’s all a little unsatisfying. The SEC’s case will be heard in a type of administrative law proceeding usually reserved for low-level crimes. It’s not clear the Justice Department case, even if it is successful, would put Cohen and SAC out of business. And none of the cases would land Cohen in jail.
Yes, the line for what constitutes insider information is not so clear. But take a look at the evidence in the Justice Department suit, and you have to ask yourself why the heck didn’t the government go after Cohen directly and try to put him behind bars?
The Justice Department’s case says SAC recruited people with track records of trading on insider information, and looked the other way when they did. Cohen’s firm’s orientation appears to have included training on how to artfully craft e-mails to tip off coworkers that you had insider information, without — hopefully — landing you in jail. Eight former SAC employees are accused of insider trading, six of whom have pleaded guilty. So, I guess, that might be something to work on for future employee handbooks.
In all, the indictment is pretty damning, not just against against SAC, but against Cohen himself. Here are five signs, according to the indictment, that should have tipped Cohen off to the fact that he and his firm were trading on insider information:
1) When Cohen asked where the info was coming from, SAC traders routinely said insiders.
The HR team noted that one candidate had a summer share with a company’s CFO. Hired! But Cohen also wanted to know where the info was coming from before he traded.
In one instance, an SAC trader wrote Cohen in an e-mail from mid-2008 about a drug company, “I am very comfortable that this qtr is going to be solid vs. current consensus and guidance. I am getting coffee on tues afternoon with the guy who runs north America generic business.” Cohen replied, “Let’s talk later.”
Another trader wrote Cohen in October 2007 about Sun Microsystems: “My edge is contacts at the company and their distribution channel.”
According to the Justice Department, there is no evidence that Cohen ever asked whether said insiders were permitted to share such information. They weren’t.
2) Cohen hired employees whose main job was to make sure he saw the best insider information.
In August 2008, the same trader that had tipped Cohen off about Sun Microsystems, Jon Hovath, sent information about Dell (DELL) that made its way to Cohen. Hovath wrote in an e-mail that his recommendation to sell Dell in advance of its earnings report was based on a “2nd hand read from someone at the company” who had “been very good in the last two quarters.”
The same e-mail is referenced in the SEC’s “failure to supervise” case against Cohen. Reportedly, SAC lawyers plan to say that Cohen gets a lot of e-mail and he only reads 11% of them. But according to the Justice Department suit, one of Cohen’s internal spies — official job title “research trader” — called Cohen a few minutes after Hovath sent the e-mail to make sure Cohen had seen it. Within 10 minutes, according to the Justice Department, Cohen had sold his entire $12.5 million stake in Dell.
3) Cohen hired people to coach employees on how to write e-mails that didn’t sound so insider trader-y.
According to the Justice Department’s suit, in mid-2009, a new recruit sent Cohen an instant message that, due to some “recent research,” the new portfolio manager planned to bet against Nokia’s (NOK) shares when he started at SAC 10 days later. He then apologized for being “cryptic” about the source of his info. The new recruit wrote that the head of SAC compliance “was giving me Rules 101 yesterday — so I won’t be saying much[.] [T]oo scary.”
4) SAC recruited people who included insider trading on their resume, maybe.
Several sections of the suit focus on SAC employee Richard Lee, who pleaded guilty this week to insider trading. According to the government, Richard Lee had worked at another hedge fund where he was known for being part of that hedge fund’s “insider trading group.” SAC’s lawyers even advised against hiring Lee, but that didn’t stop the firm’s insider trader recruitment machine.
Lee came from Chicago-based Citadel, which denies having an “insider trading group,” but after this indictment, you kind of have to wonder who on Wall Street doesn’t.
5) One trader regularly called the info that he got on companies his “black edge.”