The US SEC won the biggest-ever settlement for an insider case as hedge fund advisory firm CR Intrinsic Investors, a unit of hedge fund magnate Steven Cohen’s SAC Capital Advisors, agreed to pay more than $600 mn for alleged illegal trades involving shares of pharmaceuticals companies working to develop a drug for Alzheimer’s disease.
The settlement came less than four months after the SEC charged CR Intrinsic with insider trading over allegations that Mathew Martoma, a company portfolio adviser, illegally obtained confidential information about clinical trials of the drug under development by pharmaceutical companies Wyeth and Elan. The SEC says Martoma received the information from Sidney Gilman, the neurology professor selected by the companies to present the drug in trials.
‘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,’ says George Canellos, acting director of the SEC’s division of enforcement, in a press statement.
In its case, the SEC says investment advisers and hedge funds linked to the case made $275 mn in illegal profit and avoided losses by using the confidential information to trade before a negative announcement regarding the drug in July 2008. According to the SEC, Gilman gave Martoma repeated updates on the trials and, finally, the actual detailed results of the clinical trials ahead of a public announcement on July 29, 2008.
The SEC says CR Intrinsic and SAC Capital together sold stock in the pharmaceutical companies worth about $700 mn and took about $260 mn in short positions in a single week before the negative announcement in order to profit by around $275 mn. That year, Martoma earned a bonus of $9.3 mn and Gilman was paid $100,000 for consultations, the SEC says.
The defendants agree to pay some $275 mn in disgorgement, a penalty of a further $275 mn and about $52 mn in prejudgment interest, the commission says. Martoma faces further litigation while the settlement will wrap up the SEC case against four hedge funds managed by CR Intrinsic and SAC Capital Advisors, the SEC says, adding that ‘the settling parties neither admit nor deny the charges.’ Cohen was not charged or named in the case.
‘A robust culture of compliance and zero tolerance toward employee misconduct can help other firms avoid the severe financial consequences that CR Intrinsic is facing for its misconduct,’ Sanjay Wadhwa, senior associate director of the SEC’s New York regional office, says in the commission statement.
