SEC Strikes Again With New SAC Insider Trading Charge

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Last week the Securities and Exchange Commission filed civil charges against yet another former SAC Capital analyst for insider trading, suggesting that the government is not done with its investigation of Steven Cohen’s hedge fund.

Background of the Case

In its recent complaint, the SEC alleged that Ronald N. Dennis, a former analyst at SAC affiliate CR Intrinsic Investors, traded on material nonpublic information he received from two other hedge fund analysts in the shares of Dell (DELL) and Foundry Networks (BRCD) during 2008 and 2009.

Dennis purportedly received illegal inside information about Dell’s financial performance from former Diamondback Capital analyst Jesse Tortora.  Separately, Dennis received an illegal tip about the impending acquisition of Foundry Networks by Brocade Communication Systems from Matthew Teeple, an analyst at a San Francisco-based hedge fund.  Both Tortora and Teeple have been previously charged by the SEC for insider trading.

The SEC also alleged that Dennis traded in Dell before earnings announcements in 2008 and 2009, enabling CR Intrinsic and SAC Capital to either generate profits or avoid losses of $3.2 million on its positions in Dell stock.

In addition, the SEC alleged that Dennis received information from Teeple about Brocade’s upcoming acquisition of Foundry Networks in July 2008, prompting him to purchase Foundry stock for CR Intrinsic before the news of the acquisition was made public.  This trade enabled CR Intrinsic to generate approximately $550,000 in profits.

Steve Cohen Identified

In the SEC’s complaint, a number of SAC employees were mentioned who Dennis reportedly shared the inside information he had received.  This includes “Portfolio Manager A” who the SEC alleges, purchased 120,000 shares of Foundry stock for CR Intrinsic after Dennis gave him the tip; “Portfolio Manager B,” who the SEC alleges traded Dell shares based on inside information Dennis provided; and “Portfolio Manager C,” who the SEC alleges, bought 500,000 shares of Dell in August, 2009 after speaking with Portfolio Manager B, who had received inside information from Dennis.

While the SEC complaint did not identify the three SAC employees Dennis allegedly shared his illegal tips with, people familiar with the matter say that Portfolio Manager A is likely to be Alec Shutze, Dennis’s former boss at CR Intrinsic; Portfolio Manager B is Eric Gerster, who became Dennis’s boss after Shutze left the firm; and Portfolio Manager C is SAC founder Steven Cohen.

Settlement Agreed

In response to the SEC’s allegations, Dennis agreed, without admitting or denying the charges, to pay $95,351 in disgorgement of profits, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Dennis also agreed to be permanently barred from working in the securities industry.  The settlement is subject to court approval.

Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office explained this settlement, “Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself.  His actions have cost him the privilege of working in the hedge fund industry ever again.”

The case is SEC v. Dennis, U.S. District Court, Southern District of New York, No. 14-01746.

Summary

Almost exactly one year after the SEC announced a record $600 million insider trading settlement with SAC Capital affiliate, CR Intrinsic Investors, the SEC brought yet another civil case against a former CR Intrinsic analyst for insider trading.  While the settlement of this case was not surprising, what the case clearly proves is the SEC is far from done with its insider trading investigation of the firm, or the hedge fund community in general.

As we have mentioned numerous times in the past, the federal criminal and civil authorities collected hundreds of hours of wiretaps, have thousands of e-mail communications, and have dozens of cooperating witnesses on hand as part of its “Perfect Hedge” investigation.  Most experts we have spoken with believe this alone is sufficient evidence for the DOJ and SEC to continue bringing insider trading cases for the next few years.

In our minds, this should be sufficient legal pressure for the asset management industry to continue to clean up its act.  It probably also means that hedge funds will continue to hire legal and compliance professionals to help protect the firms from bad actors and potential insider trading risk.

 

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