U.S. authorities reached a settlement of historic proportions with a unit of the hedge fund firm founded by billionaire Steven Cohen, to resolve charges that it reaped hundreds of millions of dollars in illegal profits from insider trading.
The affiliate of Mr. Cohen's firm, SAC Capital Advisors LLC, agreed to pay more than $600-million (U.S.) without admitting or denying the charges, the U.S. Securities and Exchange Commission announced Friday.
The settlement is the largest ever related to insider-trading charges and marks a watershed in the investigation into Mr. Cohen and his firm. A legendary figure in the hedge fund world, he is the most prominent financier to come under scrutiny in a long-running government probe that has turned up alleged misconduct by at least eight of his current and former employees.
Unnerved investors have sought to withdraw $1.7-billion from the funds managed by SAC amid intensifying attention from U.S. authorities.
While the settlement eliminates one question mark hanging over the firm, it does not rule out future charges against Mr. Cohen. He has not been charged with any wrongdoing and has denied doing anything improper.
On Friday, an SAC statement described the settlement as a "substantial step toward resolving all outstanding regulatory matters" which "allows the firm to move forward with confidence." It added that Mr. Cohen "has done nothing wrong."
The SEC trumpeted the settlement as a victory for deterrence. "The historic monetary sanctions … are a sharp warning," said George Canellos, a senior SEC official. "The SEC will hold hedge fund advisory firms and their funds accountable when employees break the law."
The size of the settlement is noteworthy, according to legal experts, and outstrips some of the recent penalties related to the financial crisis. (For example, Goldman Sachs Group Inc. agreed to pay $550-million to settle fraud charges related to a complex mortgage-backed investment it sold in 2007).
"This is not one of these wishy-washy settlements we sometimes see," said John Coffee, a securities law professor at Columbia University. However, he noted that the SEC did not take any actions against individuals, such as revoking their trading licences.
Only one person is in legal jeopardy for the charges central to the $600-million settlement: Mathew Martoma, a former trader at CR Intrinsic, an affiliate of SAC. He faces a possible prison sentence related to criminal charges that he parlayed insider tips about a drug trial into $275-million in illicit profits and avoided losses.
Court documents allege that Mr. Cohen played a role in those transactions, discussing the positions with Mr. Martoma and consulting with the firm's head trader on selling the relevant shares in a speedy and secretive manner.
Through his lawyer, Mr. Martoma has denied the charges.
"SAC's business decision to settle with the SEC in no way changes the fact that Mathew Martoma is an innocent man," Charles Stillman said in an e-mailed statement, according to Bloomberg News.
Some observers have hypothesized that Mr. Martoma might agree to provide evidence against Mr. Cohen in exchange for a plea bargain in his case. One of the interesting consequences of the settlement is "whether Mr. Martoma feels he has been left somewhat abandoned" by SAC to face the brunt of the charges, Prof. Coffee said.
Other lawyers suggested that the SAC settlement might indicate authorities do not have the evidence needed to pursue a case against Mr. Cohen.
"While on one level it appears the SEC is getting closer and closer to SAC and Mr. Cohen, in fact the way they are bringing the cases suggests that the gap … still is substantial," said Jacob Frenkel of Shulman Rogers, a former federal prosecutor.