Two affiliates of hedge fund giant SAC Capital have agreed to pay a total of more than $615 million to the U.S. Securities and Exchange Commission to settle insider-trading charges, in what the SEC called the largest-ever insider-trading settlement.
One of the affiliates, CR Intrinsic Investors, was accused of engaging in an insider-trading scheme involving a new Alzheimer’s drug being developed by pharmaceutical companies Elan Corporation and Wyeth.
According to the SEC’s complaint, one of CR Intrinsic’s portfolio managers, Mathew Martoma, obtained confidential information about the drug from a doctor through a New York-based "expert network" company, which connects investors with industry experts. The doctor, Sidney Gilman, told Martoma that the drug had done poorly in clinical tests two weeks before those tests became public, according to the SEC. Martoma and CR Intrinsic then had funds they controlled sell more than $960 million in Elan and Wyeth securities in about a week.
CR Intrinsic has agreed to pay $275 million in disgorgement, $52 million in prejudgment interest and a $275 million penalty. It neither admits nor denies the allegations. The settlement is subject to court approval.
"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 Canellos, acting director of the SEC’s Division of Enforcement, said in a press release.
The settlement does not resolve civil and criminal charges still pending against Martoma.
The other SAC affiliate, Sigma Capital Management, was accused of trading on insider information about the quarterly earnings of Dell and Nvidia Corporation.
The SEC alleges that Jon Horvath, a former analyst at Sigma, obtained the non-public information about Dell and Nvidia from a group of other hedge fund analysts. Sigma traded on this information for a gain of $6.425 million, according to the SEC.
Canellos said Sigma had "secured a crystal ball revealing where the stock would likely be trading in the near future."
Sigma has agreed to pay $6.425 million in disgorgement, prejudgment interest of $1 million and a penalty of $6.425 million. It does not admit or deny the allegations, and the settlement is subject to court approval.
Horvath agreed to a settlement earlier this month in which he admitted liability, according to the SEC.
"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. "We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm."
The settlements arise out of the SEC’s investigation of insider trading in connection with hedge funds and expert networks, which is still continuing, according to the agency.
SAC founder Steven Cohen has not been charged with any wrongdoing.
Daniel Kramer, a partner at Paul, Weiss, Rifkind, Wharton & Garrison who represents CR Intrinsic and Sigma, declined to comment.
Martin Klotz, a partner at Willkie Farr & Gallagher who also represents CR Intrinsic and Sigma, could not be reached for comment.
The SEC’s case against CR Intrinsic, is being handled by Charles Riely and Amelia Cottrell, attorneys in its New York market abuse unit, and by Matthew Watkins, an attorney in the New York regional office.
The case has been assigned to Southern District Judge Victor Marrero.
The SEC’s case against Sigma is being handled by Joseph Sansone and Daniel Marcus, attorneys in the New York market abuse unit, and by Watkins and Justin Smith in the New York regional office.
Both cases are supervised by Sanjay Wadhwa, senior associate director of the SEC’s New York regional office.