Hedge fund titan Steven A. Cohen’s firm is paying $615.7 million to settle charges that it improperly traded in two stocks, in what is the largest-ever, insider trading settlement, U.S. securities regulators said on Friday.
SAC Capital Advisors has long been the focus of a federal insider trading probe, and the settlement removes a major distraction that had prompted some investors to pull their money out of the $15 billion hedge fund. But it does not end the scrutiny as the U.S. Department of Justice and the Federal Bureau of Investigation are still investigating SAC’s trading of other stocks.
The accord “does not preclude the future filing of additional charges against any person, including Steve Cohen, who is not named as a defendant in these cases,” George Canellos, acting director of the SEC enforcement division, said on a conference call.
Cohen is one of the most successful and best known managers in the $2.25 trillion hedge fund industry, generating an average annual return of 25 percent over the life of his 20-year-old firm.
(CM Editor’s Note: In the property/casualty insurance industry, Cohen is a founding investor of Bermuda-based S.A.C. Re Holdings)
The settlements involves two subsidiaries of SAC: CR Intrinsic agreed to pay about $601.7 million to settle allegations that one of its former employees participated in an insider trading scheme involving shares of Elan Corp. and Wyeth Inc., now a part of Pfizer Inc. And Sigma Capital agreed to pay about $13.9 million to settle charges the firm engaged in insider trading in shares of Dell Inc. and Nvidia Corp.
The combined payout is nearly four times the biggest previous sanction in an SEC insider trading case, which was the $156 million that Galleon Group founder Raj Rajaratnam was ordered to pay. That case culminated with Rajaratnam’s criminal conviction in May 2011.
In agreeing to settle, neither SAC Capital nor its subsidiaries admitted or denied wrongdoing. SAC Capital’s management company and not outside investors will pay the fines, said a person familiar with the hedge fund.
“This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence,” SAC said in a statement.
The Stamford, Connecticut-based firm added that Cohen himself “has not been charged with any wrongdoing and has done nothing wrong.”
The settlements come after investors submitted notices last month to pull $1.68 billion from SAC Capital, largely over concern about the insider trading investigation.
Big investors including Morgan Stanley and Blackstone Group LP, which last month negotiated more favorable redemption conditions with SAC, declined to comment on the settlements.
In November, regulators charged CR Intrinsic with insider trading and the SEC said one of its portfolio managers, Mathew Martoma, illegally obtained confidential details about a clinical trial for an Alzheimer’s drug.
Martoma is facing criminal charges over the 2008 incident and has pleaded not guilty. At the time, U.S. prosecutors in New York called the insider trading in shares of Elan and Wyeth one of the largest illegal trading schemes on record.
Outside lawyers expect the government is not done with the criminal case.
“The amended complaint specifically cites Mr. Martoma’s discussions with an unidentified portfolio manager who is probably Mr. Cohen,” said Thomas Gorman, a partner at law firm Dorsey & Whitney. He was referring to court documents that referred to the “hedge fund owner,” which is Cohen.
“Whether they can develop sufficient evidence to bring charges is another matter. Clearly, they do not have that evidence now but enforcement officials are continuing to look,” Gorman said.
Federal investigators are also examining other allegations of improper trading by SAC Capital in shares of Weight Watchers International Inc. and InterMune Inc., according to people familiar with the situation. Reuters first reported on that case in December.
SEC officials said the settlements resolve a Wells notice issued to SAC Capital in November, stemming from the Elan investigation.
“These settlements call for the imposition of historic penalties,” the SEC’s Canellos said. “We can’t tolerate a market rigged for the benefit of insiders and their cronies.”
The settlement over Dell and Nvidia arises from a guilty plea last year by former SAC Capital portfolio manager, Jon Horvath, who reported to Michael Steinberg, one of Cohen’s longest tenured traders.
Last fall, federal prosecutors named Steinberg as an unindicted co-conspirator in a criminal prosecution involving two other recently convicted hedge fund traders, who had also traded Dell shares.
In February, Reuters reported that prosecutors are nearing a decision on whether to pursue criminal charges against Steinberg, who was suspended in October from his post at SAC Capital.
Barry Berke, a lawyer for Steinberg, said his client “did absolutely nothing wrong.”
The cases are SEC v. CR Intrinsic Investors LLC et al, U.S. District Court, Southern District of New York, No. 12-08466; and SEC v. Sigma Capital Management LLC in the same court, No. 13-01740.