Hedge Fund Titan Steve Cohen SAC $600 Million SEC Settlement Questioned
How can a hedge fund pay the government a roughly $600 million penalty to settle insider trading accusations but not have to admit that it did anything illegal?
Judge Victor Marrero raised that question at Federal District Court in Manhattan on Thursday, as he considered whether to approve the landmark settlement between the Securities and Exchange Commission and the Steve Cohen’s hedge fund SAC Capital Advisors
“There is something counterintuitive and incongruous about settling for $600 million if it truly did nothing wrong,” Judge Marrero said.
“We’re willing to pay $600 million because we have a business to run and don’t want this hanging over our heads with litigation that could last for years,” said Martin Klotz, a lowyer for SAC.
At least nine current or former SAC employees have been tied to insider trading while at the hedge fund firm. Among them is Mathew Martoma, the former portfolio manager who was criminally charged with illegally trading in the drug stocks, Elan and Wyeth. Mr. Martoma, who has pleaded not guilty, did not attend Thursday’s hearing, but his lawyer, Charles A. Stillman, made an appearance, as did Mr. Martoma’s wife.
The Martoma case has increased scrutiny of Mr. Cohen, as he was directly involved in trading Elan and Wyeth alongside Mr. Martoma. Mr. Cohen has not been charged or sued by the government, and has denied any wrongdoing.
Thursday’s hearing, which focused heavily on the “neither admit nor deny wrongdoing” language in the S.E.C. settlement with SAC, comes as federal judges across the country have expressed concerns over whether government agencies are letting defendants off easy by not forcing them to admit liability. Most prominently, last year Judge Jed S. Rakoff rejected the settlement of a fraud case brought against Citigroup by the S.E.C. that let the bank avoid an acknowledgment that it did anything wrong.
Judge Rakoff’s decision – and the question of whether he exceeded his authority in rejecting the settlement – is now under review by a Federal Appeals Court, and on Thursday, Judge Marerro hinted that he might condition any approval of the SAC settlement on the outcome of the Citigroup appeal.
“That decision will be very much pertinent to what the court has been asked to do here,” Judge Marrero said.
Mr. Klotz, the SAC lawyer, argued that the decision from the United States Court of Appeals for the Second Circuit would be limited to Judge Rakoff’s ruling within the context of the specific facts of the Citigroup case, which relate to the bank’s sale of a complex $1 billion mortgage bond deal. Therefore, he said, Judge Marerro was well within his authority to approve the S.E.C.’s settlement with SAC. (Coincidentally, Mr. Klotz’s co-counsel in representing SAC in its case is Daniel Kramer of Paul Weiss Rifkind Wharton & Garrison, the same law firm defending Citigroup in its case against the S.E.C.)
Judge Marerro noted that other federal judges across the country had recently followed Judge Rakoff’s lead and cast skepticism on the “neither admit nor deny language,” in some cases demanding greater accountability before approving settlements.