On March 15, 2013, in the largest ever settlement for an insider trading case, the SEC announced that CR Intrinsic Investors, LLC (“CR Intrinsic”), an unregistered investment adviser, agreed to pay more than $600 million to settle charges that it engaged in an insider trading scheme in which it used material nonpublic information (“MNPI”) obtained by CR Intrinsic’s former portfolio manager, Mathew Martoma (“Martoma”), to trade shares of two pharmaceutical companies. The announced settlement also included as “relief defendants” S.A.C. Capital Advisors, LLC (“S.A.C. Capital”), an affiliated investment adviser of CR Intrinsic, and four hedge funds managed by CR Intrinsic and S.A.C. Capital.
According to the SEC, Elan Corporation (“Elan”) and Wyeth LLC (“Wyeth”) had jointly developed a drug intended to treat Alzheimer’s disease and, from 2006 to 2008, were in the process of conducting clinical trials on the drug. The SEC alleged that Dr. Sidney Gilman (“Gilman”), a medical doctor and a consultant to Elan and Wyeth who served as chairman of a committee (the “Committee”) overseeing the clinical trials on the drug, was tasked with presenting the final clinical results of the drug at the International Conference on Alzheimer’s Disease (the “ICAD”). As a result, according to the SEC, Gilman possessed MNPI in respect of Elan and Wyeth. The SEC alleged that after being introduced through an expert network firm, as of at least 2007, Gilman provided Martoma with MNPI obtained as a result of Gilman’s role as chairman of the Committee overseeing the clinical trials, including the final trial results. According to the SEC, as of June 30, 2008, CR Intrinsic and S.A.C. Capital portfolios owned more than $233 million and $95 million of Elan securities, respectively, and more than $80 million and $293 million of Wyeth securities, respectively.
According to the SEC, after learning from Gilman that the results of clinical trial would fail to meet market expectations (but before such information was to be made public at the ICAD), Martoma, the portfolio manager of S.A.C. Capital and S.A.C. Capital’s head trader collaborated to sell (including to sell short) the Elan and Wyeth stock held by the CR Intrinsic and S.A.C. Capital portfolios, which resulted in approximately $275 million in combined profits and avoided losses for the portfolios managed by the advisers.
Based on this conduct, the SEC charged CR Intrinsic, Martoma and Gilman with violating Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder and Section 17(a) of the Securities Act. Without admitting or denying the SEC’s findings, CR Intrinsic agreed to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest and a civil penalty of $274,972,541. According to the SEC’s press release, the settlement is subject to approval by Judge Victor Marrero of the U.S. District Court for the Southern District of New York. In addition, according to the SEC’s press release, while the settlement does not resolve the charges against Martoma, Gilman has entered into an agreement with the SEC to pay disgorgement and prejudgment interest and to be enjoined from further violations of the anti-fraud provisions of the federal securities laws.