This SEC enforcement matter serves to further demonstrate both the SEC’s resolve to more closely track the activities of hedge fund advisers and their employees and the adviser’s administrative liability when its employees trade on material non-public insider information.
CR Intrinsic Investors LLC, a Connecticut-based hedge fund adviser, was recently charged by the SEC, along with its former portfolio manager and a medical consultant for an expert networking firm, for their activities in connection with a $276 million insider trading scheme. The amount of alleged illegal gains in this matter makes it the largest insider trading case brought to date by the SEC.
The adviser’s portfolio manager was charged with using material non-public insider information obtained from the medical consultant involved in a clinical trial for an Alzheimer’s drug being developed by certain pharmaceutical companies. The consultant tipped the adviser’s portfolio manager with details about negative clinical results about the drug weeks before the news was made public in July 2008. Based on the non-public material information, the portfolio manager caused several hedge funds he managed to sell more than $960 million in securities of the affected pharmaceutical companies during a one-week period. After the news of the disappointing clinical trials was made public, shares of the companies declined by double digits. The hedge funds had liquidated their positions in the stocks before the news was made public of more than $700 million and went on to short the stocks resulting in $82 million in profits and the avoidance of more than $194 million in losses, resulting in $276 million in alleged illegal gains. Based primarily on the gains from the alleged illegal trades, the portfolio manager received a year-end bonus from the adviser at the end of 2008 of $9.3 million and the medical consultant was paid more than $100,000 by the advisers of the affected hedge funds.
The SEC’s complaint charges each of the defendants with violations of the “anti-fraud” provisions under the federal securities laws, and seeks a final judgment from the court ordering the defendants to disgorge the ill-gotten gains plus interest, pay financial penalties, and personally enjoining them from future violations of the anti-fraud provisions.