SEC attempts to set an example with largest-ever insider trading fine

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Robert Khuzami, who left the SEC in January, wanted to make an example of hedge funds. He got his wish.
Robert Khuzami, who left the SEC in January, wanted to make an example of hedge funds. He got his wish.
Image: AP Photo/Louis Lanzano

The US Securities Exchange Commission (SEC) has just announced that hedge-fund advisory firm CR Intrinsic—an affiliate of SAC Capital—has agreed to cough up $614 million in order to settle an allegation that it organized an insider trading scheme.  That’s the largest insider trading settlement that’s ever been handed down from the SEC.

The SEC accused a portfolio manager at CR Intrinsic, Mathew Martoma, of passing on illegal information about clinical trials on a new pharmaceutical drug designed by Elan and Wyeth. The study was going badly, Martoma found, causing hedge funds—including SAC Capital—to pull some $960 million out of the company in little more than a week.

The SEC has been ramping up the pressure on SAC Capital and its founder, Steve Cohen, which it’s been scrutinizing since 2010. Martoma himself still faces criminal charges. Cohen himself has not been accused of any wrongdoing, but analysts have speculated that the legal mess could be enough to shutter the $14 billion fund. Today, the SEC also added SAC and four others as “relief defendants” in the case because they made money on CR Intrinsic’s insider information.

Regulators are hoping the penalty and criminal charges will dissuade hedge funds from making similar bets in the future. When it filed the case initially, the agency said in a statement:

“Today’s record-setting insider trading case reinforces the cold, hard lesson of so many other recent cases that when you trade on inside information, you’re not just betting your money but also your career, your reputation, your financial security, and your liberty,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Now, yet another corrupt hedge fund manager has learned the high cost of ignoring that lesson.”