With two new insider trading settlements the SEC made it clear its on-going investigations continue to focus on S.A.C. Capital Advisors and what role the firm may have had in the scandals plaguing the hedge fund industry. One settlement involves S.A.C. Capital as a relief defendant and the payment of a record $600 million insider trading settlement. The other centers on a former affiliate of the Advisor. SEC v. CR Intrinsic Investors, LLC, Civil Action No. 12 (Civ 8466 (S.D.N.Y. Amended complaint filed March 15, 2013). SEC v. Sigma Capital Management, LLC, (S.D.N.Y. Filed March 15, 2013).
The amended CR Intrinsic Investors case includes the initial defendants, CR Intrinsic, Matthew Martoma and Dr. Sidney Gilman. It adds as relief defendants four hedge funds affiliated with S.A.C. Capital who are alleged to have benefited from the illegal trades: S.A.C. Capital, S.A. C. Capital Associates, LLC, S.A.C. International Equities, LLC and S.A.C. Select Fund, LLC, all of whom are alleged to have benefited from the illegal trades.
The claims in the CR Investors amended complaint are essentially the same as in the initial action. Mr. Martoma, who served as portfolio manager until 2010, met Dr. Gilman through a New York expert network firm. At the time the doctor, a professor of neurology at the University of Michigan Medical School, had a consulting contract with Elan Corporation, plc. He consulted on certain clinical trials being conducted by Elan and Wyeth on clinical trials for the Alzheimer’s drug, bapineuzumab.
Dr. Gilman is alleged to have furnished Mr. Martoma with inside information on the Phase II trial for the drug as early as 2007. On June 17, 2008 the top line results for the Phase II trial were released. The share price rose. Subsequently, Dr. Gilman was selected to present the Phase II Trial results at the International Conference on Alzheimer’s Disease, scheduled for July 29, 2008. The Doctor then sent Mr. Montoma an e-mail requesting an expert network conversation.
The Doctor also traveled to Elan’s offices on July 15 and 16, 2008 to review the full results of the Phase II Trial. In the period prior to the July 29 announcement the trader and the doctor spoke several times on the phone. During the conversations, according to the court papers, Mr. Martoma was given the then confidential results of the trials. He was also furnished a copy of a power point presentation with detailed information. At the time funds managed by Mr. Martoma and related funds at an affiliated entity held a combined long position of over $700 million in Elan and Wyth securities. As a result of the inside information the long positions were liquidated. The funds immediately built a substantial short position in each security.
Following the announcement of disappointing results, the funds had profits of about $82 million on the short positions. By liquidating their massive long positions the funds avoided losses of about $194 million. Overall the trading profits and losses avoided totaled over $276 million.
Mr. Martoma received a $9.3 million bonus at the end of 2008, a significant portion of which was attributable to the illegal trading profits. Dr. Gilman was paid over $100,000 by the expert network and $79,000 under his consulting contract with Elan for work in 2007 and 2008.
To settle the case CR Intrinsic consented to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The firm also agreed to pay disgorgement of $274,972,541, prejudgment interest and a penalty equal to the trading profits. S.A.C. Capital will fund the entire settlement which totals about $600 million, according to Bloomberg (March 15, 2013).
The Sigma Capital action names the unregistered investment adviser as a defendant and two hedge funds alleged to have benefitted from the trades as relief defendants: Sigma Capital Fund and S.A.C. Select Fund which was at the time of the transactions affiliated with S.A. C. Capital Advisors, LLC. This action centers on trading in advance of earnings announcements in the shares of Dell, Inc. and Nvidia Corporation. In each instance Sigma Capital obtained the inside information from Jon Horvath. Mr. Horvath is alleged to have belonged to a group which periodically exchanged inside information. He previously pleaded guilty to one count of conspiracy and two counts of securities fraud in the parallel criminal case.
In one part of the scheme Sandeep Goyal, an analyst at an investment adviser, periodically obtained inside information from an insider at Dell in 2008 and 2009. In each instance the inside information related to earnings announcements. Mr. Goyal in turn passed the information to Jesse Tortora, an analyst at Diamondback Capital Management, LLC, a firm which at one time was affiliated with S.A.C. Capital. Diamondback was also one of the firms against whom search warrants were executed in November 2010. Messrs. Goyal and Tortora have been charged in the parallel criminal case.
Mr. Tortora shared the Dell inside information he obtained with a group which included Mr. Horvath on at least two instances. One related to a May 2008 earnings announcement while the other concerned the August 2008 announcement. He in turn transmitted the information to Portfolio Manager A at Sigma Capital which traded, netting the fund about $2.6 million in profits and losses avoided. In August 2008 the information from Mr. Tortora about Dell was also transmitted to Portfolio Manager B at the same fund who caused it to trade, avoiding losses of about $2 million. S.A.C. Select fund also benefited from the Dell inside information since both Portfolio Managers caused it to trade and avoid losses of about $1 million.
A second facet of the scheme involved Danny Kuo, a fund manger at another adviser who was also a member of the group which exchanged inside information. He previously pleaded guilty to one count of conspiracy and two counts of securities fraud related to this action. Mr. Kuo obtained inside information about Nvidia’s pending earnings releases from Hyung Lim who secured it from a friend. In May 2009 Mr. Horvath obtained inside information from Mr. Kuo that was used by Sigma Capital to trade and avoid a loss of over $500,000.
Sigma Capital agreed to settle with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Ac Section 10(b). The firm also agreed to pay disgorgement of $6.425 million plus prejudgment interest and a penalty equal to the trading profits.
Neither action charges S.A.C. Capital or its principal, Steve Cohen, with wrong doing. At the same time entities affiliated with S.A. C. Capital are paying millions of dollars to resolve insider trading charges. And, the SEC has made it clear that the investigations are continuing.