New York, NY – Last week, two units of Steve Cohen’s SAC Capital hedge fund, agreed to settle civil insider trading charges with the SEC for a record $615.7 mln. The two units that reached settlements with the government include CR Intrinsic and Sigma Capital.
CR Intrinsic Settles with SEC
In one of the cases concluded last week, the SEC announced that hedge fund advisory firm, CR Intrinsic Investors, agreed to pay $601.8 mln to settle charges that it participated in an insider-trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies, Elan Corp. and Wyeth, now a division of Pfizer.
The settlement filed with the U.S. District Court for the Southern District of New York is the largest ever in an insider-trading case, requiring CR Intrinsic to pay $275 mln as disgorgement, $275 mlln as a penalty, and $51.8 mln as prejudgment interest.
The SEC settlement with CR Intrinsic does not resolve the charges against Mathew Martoma, whose case continues in litigation. The court previously entered a consent judgment against Sidney Gilman requiring him to pay disgorgement and prejudgment interest, while permanently enjoining him from further violations of the anti-fraud provisions of the federal securities laws.
Sigma Capital Also Settles
The second case, involving New York-based hedge fund advisory firm Sigma Capital Management, agreed to pay nearly $13.9 mln to settle charges that the firm engaged in insider trading based on nonpublic information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.
“These settlements call for the imposition of historic penalties,” said George S. Canellos, the Securities and Exchange Commission’s acting enforcement director. Sigma Capital agreed to pay disgorgement of $6.425 mln plus prejudgment interest of $1.094 mln and a penalty of $6.425 mln.
The SEC’s case against Sigma Capital was based on its ongoing investigation into expert networks and the trading activities of hedge funds. It began last year with charges against Jon Horvath, a former analyst at Sigma Capital who admitted liability in a separate settlement this month.
The settlements still need to be approved by Judge Victor Marrero of the Federal District Court in Manhattan, the presiding judge in the case. As is typically the case in these type of settlements, SAC neither admitted nor denied wrongdoing.
The two settlements against Sigma and CR Intrinsic do not prevent the filing of additional civil or criminal charges against any person, including Steve Cohen, who was not named as a defendant in either of the civil actions settled last week. Mr. Cohen has not been charged with any wrongdoing and has told his clients that he believes he has behaved properly.
“These settlements are a substantial step toward resolving all outstanding regulatory matters and allow the firm to move forward,” said a spokesman for SAC.
Importance of these Settlements
While the sheer size of these settlements – particularly the $601.8 mln fine against CR Intrinsic is noteworthy – we think these cases are important for another reason altogether.
Typically, insider trading cases are prosecuted against individuals like Jon Horvath or Mathew Martoma, and not the firms that employ them. However, the two settlements against Sigma Capital and CR Intrinsic are IN ADDITION TO the cases brought against the individuals who committed the insider trading. In other words, the SEC is trying to make sure that hedge funds cannot benefit from the illegal activities of their employees and get away with it.
“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,” George S. Canellos, acting director of the SEC’s Division of Enforcement, said in a statement.
This means that the government may start bringing more regular civil cases against the fund managers who employ analysts or portfolio managers who engage in insider trading if it can be shown that the fund and its investors also benefited from the insider trading activity. This raises the consequences of insider trading for a fund manager as they will also face a financial penalty if their people engage in this type of illicit activity.