Bloomberg News

SAC Seen Facing Smoother SEC Accord Approval Than Citi

March 28, 2013

SAC Seen Facing Smoother Road to SEC Accord Approval Than Citi

At least six people who worked for SAC have been accused of insider trading, either criminally or by the SEC. Photographer: Victor J. Blue/Bloomberg

SAC Capital Advisors LP may have an easier time completing a $602 million settlement with the Securities and Exchange Commission than Citigroup Inc. (C:US) did in 2011, in part because it faces a different judge, according to securities lawyers.

Citigroup drew U.S. District Judge Jed Rakoff, who in 2009 rejected a $33 million SEC settlement with Bank of America Corp. (BAC:US), then two years later criticized the agency and ruled that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. As they seek approval today for a settlement of insider-trading claims, lawyers for SAC Capital and the SEC will face U.S. District Judge Victor Marrero.

Marrero, a colleague of Rakoff in the federal courthouse in Manhattan, will consider SAC unit CR Intrinsic Investors LLC’s deal to resolve claims over allegedly illegal trades by former portfolio manager Mathew Martoma by paying the biggest settlement ever in an SEC insider-trading lawsuit.

“I would expect that Judge Marrero will consider the terms of the settlement, listen to the parties and I think he will approve,” said Thomas Gorman, a former SEC lawyer who is now a partner with the firm Dorsey & Whitney LLP. “This is a very straightforward insider-trading settlement.”

At least six people who worked for SAC, the Stamford, Connecticut-based hedge fund run by billionaire Steven A. Cohen, have been accused of insider trading, either criminally or by the SEC. They include Martoma, who’s been charged in what prosecutors said is the biggest insider-trading scheme in history.

Cohen Denial

Prosecutors claim Martoma shared inside tips on an Alzheimer’s drug with Cohen, helping SAC make $276 million in illegal profit and in losses avoided on shares of Elan Corp. and Wyeth LLC. Cohen, who hasn’t been charged or sued, has denied any wrongdoing. Martoma has pleaded not guilty.

The SEC announced the settlement March 15. SAC didn’t admit or deny wrongdoing as part of the agreement.

Similar provisions proved to be a sticking point in earlier SEC agreements for Rakoff, who like Marrero was appointed to the bench by President Bill Clinton, a Democrat.

In a 2011 case involving Vitesse Semiconductor Corp. (VTSS:US), Rakoff approved a settlement after criticizing the SEC’s practice of letting defendants settle allegations without saying whether they’re true. Vitesse, based in Camarillo, California, was accused by the SEC of fraudulently inflating revenue and backdating stock options.

‘Terrible Things’

“Here an agency of the U.S. is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,’” Rakoff wrote in his decision approving the settlement.

The SEC has defended the practice, saying it encourages settlements and allows defendants to avoid public admissions that would then be used against them in private litigation.

Marrero doesn’t have a record comparable to Rakoff’s of holding up SEC settlements. He expressed a harsh view of insider trading in May 2010 while sentencing Mark Kurland, a co-founder of New Castle Funds LLC, in a case tied to the investigation of Raj Rajaratnam’s Galleon Group LLC.

“Mr. Kurland here had a chance as a leader of the financial industry, he could have led by example, instead he chose to follow,” Marrero said before giving Kurland a 27-month prison term. “He became a joiner, surrendering to a spree of a mob mentality that nearly brought down this country’s financial industry in a search for ever bigger and faster gains.”

Employee Supervision

Marrero will likely question the parties about the agreement before deciding whether to approve it, said John C. Coffee Jr., a professor at Columbia Law School in New York. He said Marrero may want to know why the SEC didn’t sue SAC for so-called control-person liability, for failing to supervise its employees.

Jonathan Gasthalter, an SAC spokesman who works for Sard Verbinnen & Co., declined to comment before today’s hearing.

The SEC’s investigation of SAC is continuing, according to George Canellos, the agency’s acting director of enforcement. The CR Intrinsic settlement and a second agreement with SAC’s Sigma Capital unit don’t prohibit the SEC from suing Cohen.

The SEC and the Federal Bureau of Investigation are also probing trades that SAC Capital made in shares of InterMune Inc. (ITMN:US), a Brisbane, California-based biopharmaceutical company, a person familiar with the matter said. That inquiry wasn’t resolved in last week’s settlement.

Sigma Settlement

Sigma Capital agreed to pay $14 million to resolve SEC claims. The Sigma settlement stems from a case involving Jon Horvath, a former SAC technology analyst who pleaded guilty to passing nonpublic information to his portfolio manager. The SEC alleged that Horvath’s tips earned the fund more than $6.4 million in profit and avoided losses.

The Sigma case is assigned to U.S. District Judge Harold Baer Jr., another Clinton appointee.

Marrero has several cases from his courthouse to look back on when considering the SAC settlement today. In rejecting the $33 million Bank of America (BAC:US) accord in 2009, Rakoff said that agreement suggested “a rather cynical relationship between the parties.”

In that case, the SEC claimed the Chalotte, North Carolina-based bank misled shareholders about bonuses and losses related to its acquisition (BAC:US) of Merrill Lynch & Co.

“The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” Rakoff wrote at the time. “The bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense not only of the shareholders, but also of the truth.”

Risky Mortgages

Rakoff later approved a $150 million settlement in which the parties provided an agreed “statement of facts.”

In the Citigroup case, Rakoff rejected the proposed $285 million settlement of claims the New York-based bank misled investors in a $1 billion financial product linked to risky mortgages. Rakoff said the parties didn’t give him sufficient facts to determine whether it was fair, adequate, reasonable and in the public interest, as required by law. That decision is on appeal.

Coffee said he expects Marrero, at the end of the process, to approve the settlement with SAC.

“You don’t sneeze at the largest settlement ever,” Coffee said.

The SEC case is Securities and Exchange Commission v. CR Intrinsic Investors LLC, 12-08466, and the criminal case is U.S. v. Martoma, 12-02985, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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Companies Mentioned

  • C
    (Citigroup Inc)
    • $53.6 USD
    • -0.06
    • -0.11%
  • BAC
    (Bank of America Corp)
    • $17.03 USD
    • -0.01
    • -0.06%
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