A judge on Thursday put off a decision on the U.S. Securities and Exchange Commission’s proposed $602 million insider trading settlement with a unit of SAC Capital Advisors hedge fund, potentially delaying resolution of the litigation for months.
U.S. District Judge Victor Marrero in Manhattan said he was considering whether a condition for approval of the deal should be the outcome of a pending appeal by Citigroup Inc. of another judge’s rejection of a $285 million SEC settlement.
What is at issue in the Citigroup appeal is whether a federal judge had the authority reject the settlement because he took issue with SEC’s longstanding policy of allowing defendants “to neither admit nor deny” allegations as part of a deal to resolve outstanding litigation.
“What the court is suggesting here is not extraordinarily novel,” Marrero said at a hearing on the proposed SAC unit’s deal.
The settlement was announced March 15, but Thursday’s development means resolution of the case, which concerns SAC unit CR Intrinsic’s liability in an insider trading case, could be put off for months, adding another layer of woe to the legal troubles Steven A. Cohen’s $15 billion hedge fund is facing.
The CR Intrinsic case relates to a former employee Mathew Martoma, who has pleaded not guilty to criminal charges.
Nine one-time employees of SAC Capital have been charged or implicated with insider trading, but Cohen, the firm’s founder, has not been named in court papers related to them.
The criminal complaint against Martoma, however, was the first to refer to Cohen, who appears in it as “Hedge Fund Owner” a source previously told Reuters.
The SEC argued that CR Intrinsic did not properly supervise its operations to prevent what the regulator believes was Martoma’s illegal activity.
A spokesman for SAC Capital declined to comment on Thursday.
Martin Klotz, a lawyer representing CR Intrinsic, emphasized the firm’s eagerness to bring a quick end to the firm’s involvement in the Martoma matter.
“We’re willing to pay $600 million because we have a business to run and we don’t want to have this litigation hanging over our heads,” he said.
Klotz said CR Intrinsic was not denying the allegations in the government’s case against Martoma.
Judge Marrero said the criminal case against Martoma “provides a compelling reason for the court not just to rubber stamp” the proposed civil settlement by the SEC. If Martoma were convicted, he said, it would undermine the terms in the SEC settlement in which CR Intrinsic neither admitted nor denied wrongdoing.
The 2nd U.S. Circuit Court of Appeals heard arguments in February on whether to reverse a decision by U.S. District Judge Jed Rakoff rejecting the SEC’s settlement with Citigroup.
“A proper way to address this issue might be to condition whatever approval this court gives on the outcome of the 2nd Circuit decision,” Marrero said.
A lawyer for the SEC, Charles Riely, said in court that the settlement proposal was “squarely at the middle of our precedent” and that the “neither admit nor deny” language was “not an unsettled question.”
“It’s not unsettled, but it’s not settled,” Marrero said. “The ground is shaking.”
Separately, a spokesman for the SEC said the regulator was “happy to explain how our proposed $600 million settlement protects investors and holds wrongdoers accountable.”
Stephen Crimmins, a partner at K&L Gates in Washington who is not involved in the case, said Marrero’s stance seemed prudent considering how controversial the “neither admit nor deny” policy has become.
“With guidance from the appeals court this close, it makes sense for Judge Marrero to briefly table consideration of the settlement before him,” Crimmins said.
The case is Securities and Exchange Commission v. CR Intrinsic Investors, LLC, et al, U.S. District Court, Southern District of New York, No. 12-08466.