SAC Capital Settles For $614M Claim but the net continues to close around “Stevie”

3 mins. to read

News that SAC Capital, the US hedge fund belonging to Steve Cohen had one of its subsidiary company’s agree to pay a record $614 million (£410 million) fine to the SEC as part of a settlement regarding two insider trading cases struck me as the first shot across the bows from the regulator, warning Cohen that they are getting close to potentially nailing him for insider trading.

The 2 cases occurred at “affiliate” companies – CR Intrinsic Investors and Sigma Capital and involve illegal trading activity in two pharmaceutical companies, in the first case, and in the second in 2 tech stocks – Dell and Nvidia.

CR Intrinsic was accused of profiting to the tune of $275 million in a mix of “avoided losses” and also profits generated from trading shares in two top pharmaceutical companies – the Irish-based Elan Corp and the US-based Wyeth. This case has been highly covered in the press and the portfolio manager behind it, Matthew Martoma is facing charges and seriously staring down the risk of not only being fined but also going to prison as he hasn’t cooperated with prosecutors, in fact believing that he hasn’t engaged in any wrongdoing.

According to the prosecutors, Martoma networked with several industrial professionals as a way of getting some professional advice regarding his investments and, in the middle of this social set he obtained inside information regarding an Alzheimer drug being developed by Elan and Wyeth. A doctor in his network advised him of the better than expected results from the drug clinical trials which led him to buy a stake worth $700 million on those two companies. Later, in July 2008, the same doctor advised Mr. Martoma about the potential side effects deriving from the drug, leading SAC to reverse its long position to a short one. With Wyeth and Elan plunging 12% and 42% in a single day after those side effects became public information, SAC made a total of $276 million and Martoma received a bonus of $9 million in the same year.

Martoma’s case isn’t yet concluded as prosecutors have been trying very hard to place Steven Cohen squarely in the middle but so far without any luck. Even though SAC hasn’t admitted any wrongdoing, the company agreed to settle the case by returning the $275 million plus another $275 as a penalty and $51.8 million as interest.

In a separate case, SAC aksi agreed to pay $14 million to settle another insider trading case this time relating to trading in Dell and Nvidia shares conducted by Sigma Capital. Jon Horvath, a former trader at Sigma and his former supervisor Michael Steinberg, discussed an upcoming Dell earnings announcement by email. Horvath has been convicted and pleaded guilty last year and it became clear that Steinberg traded on non-public information too which resulted in relatively modest profits for SAC of $1 million in Dell and $0.4 million in Nvidia’s case. In the same case, it became apparent that Steven Cohen was also involved in the discussions about Dell but prosecutors weren’t able to build a case against him.

So the crackdown on illegal trading continues and Steven Cohen’s SAC Capital remains squarely in the spotlight as prosecutors are trying to convince former SAC’s portfolio managers to testify against Cohen. The criminal cases against Martoma and Steinberg have both been extended without a final solution thus far ith both refusing to admit any wrong doing but the settlements will undoubtedly damage them. With hourly fees above $750, Martoma it seems is happy to have his lawyers paid by SAC, even though he is no longer working at the company.

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