Judge delays approving $602 million insider trading settlement, citing liability question


Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors. (Steve Marcus/Reuters)
April 16, 2013

A federal judge tentatively approved on Tuesday a record $602 million insider trading settlement between federal regulators and SAC Capital Advisors, but there was a hitch.

U.S. District Judge Victor Marrero in Manhattan approved just about every aspect of the deal that the Securities and Exchange Commission negotiated with the storied hedge fund. But he questioned whether SAC should have to admit wrongdoing and held off on final approval until a similar issue involving Citigroup is resolved in another court.

The decision reignited a debate that began nearly two years ago when Judge Jed S. Rakoff rejected a $285 million settlement with Citigroup, in part because the deal included neither-admit-nor-deny language. The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals.

The Citigroup case has created headaches for the SEC by emboldening a handful of judges to voice their deep discomfort with the boilerplate clause that routinely allows companies to pay fines without acknowledging liability.

“It seems like Judge Rakoff started a mini trend,” said Erik Gerding, a professor at the University of Colorado Law School. “I think he’s blazed a trail for other federal judges to question whether the emperor has clothes.”

In the Citigroup case, the company had agreed to settle allegations that it misled investors into buying deteriorating assets in a weakening housing market. Rakoff ruled that because Citigroup did not admit or deny wrongdoing, he had no way of knowing if the settlement size he was asked to approve was too little or too much.

“Since then, there have been a handful of judges that have asked the SEC for more explanation for its failure to wring an admission out of a defendant,” said Adam C. Pritchard, a professor at the University of Michigan Law School.

This year, a federal judge in Colorado initially refused to approve a settlement involving an alleged $16 million Ponzi scheme run by Bridge Premium Finance, citing the SEC’s failure to get an admission of wrongdoing from the company.

In December 2011, a federal judge in Wisconsin scrutinized a settlement between the SEC and Koss Corp., and cited Rakoff’s decision. Officials at the Milwaukee-based firm were accused of accounting fraud, but did not admit or deny misdeeds.

In both cases, the judges eventually approved the settlements. But judges continue to more closely scrutinize SEC settlements. Recently, another federal judge refused to accept a foreign bribery settlement announced in March 2011 by the SEC and IBM, which did not admit or deny wrongdoing. The judge wants IBM to comply with even more terms.

Add to the list the Marrero decision involving SAC Capital Advisors, which agreed to settle an alleged insider-trading case involving its affiliate, CR Intrinsic Investors. The SEC accused a CR Intrinsic portfolio manager of getting secret tips from a neurologist about the results of a clinical trial involving an Alzheimer’s drug.

Marrero said he approves of the $602 million settlement as long as it complies with the court’s findings in the Citigroup appeal, which should determine whether Rakoff exceeded his authority in rejecting the Citigroup deal.

“Under the circumstances, the most prudent course the Court sees open to it would be to approve the settlement subject to a condition that it would become final upon a definitive determination in the Citigroup appeal,” Marrero wrote in his 34-page decision.

The SEC said it is reviewing the decision.

The appeals court has sympathized with the SEC’s position. The SEC has said that most companies would refuse to settle if they had to admit wrongdoing. The admissions would expose them to lawsuits, so they would fight in court, a process that could delay compensation to harmed investors — if the SEC even wins the case.

Eddy Palanzo contributed to this report.

Dina ElBoghdady covers housing policy for The Washington Post.
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