SAC’s Record Settlement Is No All Clear for Founder CohenJoshua Gallu, Saijel Kishan and Katherine Burton
SAC Capital Advisors LP’s record settlement of insider-trading claims doesn’t mean regulators or federal prosecutors have abandoned their pursuit of founder Steven A. Cohen.
The firm said yesterday it agreed to pay $616 million to settle insider-trading claims against two of its units by the U.S. Securities and Exchange Commission. The payment is the largest ever in an insider-trading case, according to the SEC.
Settlement of the civil allegations doesn’t preclude the SEC from pursuing Cohen in the future, George Canellos, the agency’s acting enforcement director, said on a conference call with reporters. The agency’s investigation of the Stamford, Connecticut-based firm continues, as does a criminal case against former SAC portfolio manager Mathew Martoma.
“These settlements against the named corporate defendant don’t affect the liability of other persons for the trading at issue in the complaint, nor the liability of the defendants for other actions,” Canellos said on the call.
Cohen was linked in November to alleged illegal trades done by Martoma in a case that U.S. prosecutors described as the most-lucrative insider-trading scheme they’ve ever uncovered, with profits and averted losses of $276 million. SAC manages $15 billion, 60 percent of which is Cohen’s and his employees’ money. Cohen hasn’t been sued personally by the SEC or charged with a crime.
“Steve Cohen has not been charged with any wrongdoing and has done nothing,” said Jonathan Gasthalter, a spokesman for the company.
SAC is paying almost four times the $156 million Galleon Group LLC founder Raj Rajaratnam, who is serving 11 years in prison for insider trading, paid in civil and criminal fines in 2011. Stock-market arbitrager Ivan Boesky, who pleaded guilty to conspiracy in 1987, paid $100 million and was sentenced to three years in prison.
Michael Milken, the former junk bond financier who pleaded guilty to securities fraud, paid more than $1.1 billion in criminal and civil fines as part of his March 1991 settlement with the Justice Department and SEC. In 1990, Milken was sentenced to 10 years in prison. His term was later reduced to two years.
SAC and its affiliates settled the SEC’s claims without admitting or denying wrongdoing. SAC unit CR Intrinsic Investors LLC agreed to pay almost $602 million and Sigma Capital will forfeit about $14 million, the SEC said. They settled for a penalty about equal to the disgorgement amount.
“The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” Canellos said in a statement.
The settlement “is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence,” SAC spokesman Gasthalter said. “We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”
The SEC’s allegations against CR Intrinsic relate to a November lawsuit against Martoma, who allegedly placed trades ahead of an announcement involving a clinical trial of an Alzheimer’s drug being jointly developed by two pharmaceutical companies. Martoma has pleaded not guilty.
“There is no way of predicting what they intend to do,” said Jacob Frenkel, a former SEC enforcement lawyer who is now a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “When the agency is so obviously pursuing someone, and when we do not know what cooperators are saying, there are just too many unknowns.”
The SEC told SAC in November that it was considering pursuing civil claims, citing fraud and control-person liability over its management of CR Intrinsic.
“SAC’s business decision to settle with the SEC in no way changes the fact that Mathew Martoma is an innocent man,” Charles Stillman, a lawyer for Martoma at Stillman & Friedman, said in an e-mailed statement. “We will never give up our fight for his vindication.”
SAC will pay the entire settlement expenses, according to a person familiar with the firm who asked not to be named because the information is private. SAC has said it would indemnify clients against disgorgement of illegal profits and legal fees.
The government’s multiyear investigation has linked at least eight current or former SAC employees to allegations of insider trading while working at the hedge fund.
The SEC, in an amended complaint yesterday relating to SAC unit Sigma Capital Management, said former analyst Jon Horvath passed inside information to two unidentified fund managers at SAC earning it more than $6.4 million in profits and avoided losses. Previously, the agency had said only one SAC employee received tips from Horvath, who fought insider trading charges filed by the Justice Department until September, when he pleaded guilty a month before trial and agreed to cooperate.
SAC clients last month asked to pull $1.68 billion from the firm, or 27 percent of outside capital, a person with knowledge of the matter said at the time. About $660 million is set to leave at the end of this month, the person said.
SAC in February reached a deal with Blackstone Group LP that gives all clients three more months to decide whether to stay in the fund. Blackstone, one of the biggest investors in SAC, with about $550 million in the fund, will leave most of the money in place for at least another quarter under the new liquidity agreement, it said in a Feb. 14 statement.