SAC Capital Advisors LP will have to wait to learn if its $602 million insider trading settlement with the Securities and Exchange Commission can go forward, after a Manhattan judge raised questions over a provision that allows the hedge fund to avoid admitting it did anything wrong.
SAC and the agency asked U.S. District Judge Victor Marrero today to approve the agreement, which is the SEC’s biggest insider-trading settlement. It would resolve SEC claims that SAC and its CR Intrinsic Investors LLC unit profited from illegal tips about an Alzheimer’s drug received by a former portfolio manager, Mathew Martoma.
Marrero today expressed concern about the SEC’s use of the “neither admit nor deny” provision, which was questioned by a different judge who rejected an SEC settlement with Citigroup Inc. in 2011. Marrero said today he may condition approval of the SAC deal on a ruling in the Citigroup case by the U.S. Court of Appeals in New York. Marrero also asked what would happen if Martoma, who has pleaded not guilty to related criminal charges, is convicted.
“How would it look if in the settlement before it, the parties were allowed to say ‘We did nothing wrong?’” Marrero asked.
Charles Riely, a lawyer for the SEC, argued that the Citigroup appeal doesn’t concern the question whether a judge may approve a settlement with such a provision. He said the judge is free to approve the deal without regard to the Citigroup appeal.
“We do not see the no-admit, no-deny language as an unsettled question,” Riely said.
“The ground is shaking, let’s admit that,” said Marrero. “This court is in the same position that Judge Rakoff was some months ago.”
In the Citigroup case, U.S. District Judge Jed Rakoff in Manhattan criticized the SEC’s policy of allowing settlements that permit defendants to neither admit nor deny the agency’s allegations, ruling that Citigroup’s $285 million SEC settlement couldn’t go forward because the deal wasn’t in the public interest. The appeals court heard arguments in the case last month.
Marrero questioned why SAC, the Stamford, Connecticut-based hedge fund run by billionaire Steven A. Cohen, is willing to pay more than $600 million to settle, rather than $1 million in legal costs to defend itself, “if it truly did nothing wrong.” He said he isn’t questioning the amount of the settlement.
SAC settled “because we have a business to run and we don’t want to have this case hanging over our heads for years,” Martin Klotz, a lawyer representing the firm, told Marrero. “And we want to put this behind us.”
Jonathan Gasthalter, an SAC spokesman who works for Sard Verbinnen & Co., declined to comment on today’s hearing.
Marrero ended the hour-long hearing without saying when he will rule on the settlement.
At least six people who worked for SAC 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.
Prosecutors claim Martoma shared the inside tips on the 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 pleaded not guilty. His wife, Rosemary, was in the courtroom today.
Martoma’s lawyer, Charles Stillman, today told Marrero he expects his client will go to trial to defend himself against the insider trading charges. Responding to Marrero’s remark that “97 percent” of cases are resolved before trial, Stillman said: “We are the 3 percent and the criminal case will go to trial.”
“I wonder whether they’ll get their money back when Mr. Martoma is acquitted,” Stillman said, referring to SAC.
Rakoff and Marrero were both appointed to the bench by President Bill Clinton, a Democrat. Provisions allowing defendants to neither admit nor deny SEC allegations have been a sticking point for Rakoff in several cases.
In a 2011 case involving Vitesse Semiconductor Corp., 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.
“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. In a policy change last year, the SEC limited the “neither admit nor deny” language to settlements with defendants who have not already been convicted of the conduct in related criminal cases.
In rejecting a $33 million Bank of America Corp. accord with the SEC in 2009, Rakoff said that agreement suggested “a rather cynical relationship between the parties.”
In that case, the SEC claimed the Charlotte, North Carolina-based bank misled shareholders about bonuses and losses related to its acquisition 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.”
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.
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.”
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.
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.
The SEC case is Securities and Exchange Commission v. CR Intrinsic Investors LLC, 12-cv-08466, and the criminal case is U.S. v. Martoma, 12-cr-02985, U.S. District Court, Southern District of New York (Manhattan).