Last updated: March 15, 2013 9:48 pm

SAC in record $614m insider settlements

Steven Cohen, founder and chief executive officer of SAC Capital Advisors LP©Bloomberg

Steven Cohen: embraced the hedge fund industry

SAC Capital, the $15bn hedge fund run by Steven Cohen, paid $614m to settle civil insider trading charges, in what regulators say is the largest payment over an insider trading inquiry.

SAC’s CR Intrinsic division agreed to pay $600m to settle allegations it profited from trading in the shares of two pharmaceutical companies ahead of the release of negative clinical drug trial results. Sigma Capital, a separate SAC unit, is to pay $14m to settle allegations that portfolio managers traded in advance of Dell earnings results.

The settlement does not preclude further action against Mr Cohen, the founder of one of Wall Street’s most powerful hedge funds with a remarkable investment record spanning three decades.

Regulators and lawyers have speculated that Mr Cohen may be the ultimate target of ongoing probes.

Known across Wall St both for his combative approach to trading and his collection of modern art – he has work by Picasso and Jackson Pollock hanging on the walls of his Greenwich mansion – he appears to have made a bet that it was better to settle with the Securities and Exchange Commission than risk a protracted battle with the regulator.

The settlement is one of the largest ever imposed by the SEC for any securities violation and is the first against SAC. It comes as the SEC and the Justice Department are investigating trading in several other stocks by SAC. In both settlements, SAC did not admit or deny wrongdoing.

“The historic monetary sanctions against CR Intrinsic and its affiliates are [a] sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” said George Canellos, acting director of the SEC’s enforcement division.

“It’s in the top two to three [settlements] historically any way you compute it in terms of sanctions in SEC actions,” he said.

SAC said in a statement: “We are happy to put the Elan and Dell matters with the SEC behind us. This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence. We are committed to continuing to maintain a first-rate compliance effort woven into the fabric of the firm.”

The settlement follows the arrest in November of Mathew Martoma, a former portfolio manager charged with trading in advance of the drug trial results of the two pharmaceutical companies Wyethand Elan. The criminal charges against Mr Martoma are the first time authorities have linked any alleged misconduct to Mr Cohen.

Mr Martoma has denied any wrongdoing. Mr Cohen has not been accused of any wrongdoing.

Seven former SAC employees have been indicted on criminal insider trading charges, although not all of them were alleged to have traded while they were at the firm. Six of those SAC employees have pleaded guilty.

One of those charged, Jon Horvath, has pleaded guilty to trading Dell shares based on inside information. At his guilty plea, Mr Horvath said he provided the information to his portfolio manager, who people familiar with the matter confirm is Michael Steinberg, a long-time SAC employee.

Mr Steinberg has not been charged with any wrongdoing. The Justice Department is close to deciding whether to file criminal charges against Mr Steinberg in connection to the trades, people familiar with the matter have said. Barry Berke, a lawyer for Mr Steinberg, said his client has done nothing wrong.

A person close to SAC said the fund had chosen settlement over two to three years of civil litigation that would follow the trial of Mr Martoma, threatening prolonged uncertainty for investors and staff of the hedge fund.

It comes after SAC last month extended the period during which its investors may request the return of their capital this year, to give clients more time to await new information and consider the effect of the investigations on the fund.

Ed Butowsky, of Chapwood Investments, said he retained full confidence in SAC and Mr Cohen to manage money for him and his clients following the settlement: “Its like saying you would drop Michael Jordan from your team because of a technical foul”.

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