Connecticut-based hedge fund advisory firm CR Intrinsic Investors has agreed to pay more than USD600m to settle Securities and Exchange Commission (SEC) charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies.
The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial from Dr Sidney Gilman, who was selected by the pharmaceutical companies — Elan Corporation and Wyeth — to present the final drug trial results to the public.
The settlement filed in federal court in Manhattan is the largest ever in an insider trading case, requiring CR Intrinsic — an affiliate of SAC Capital Advisors — to pay USD274,972,541 in disgorgement, USD51,802,381.22 in prejudgment interest, and a USD274,972,541 penalty.
“The historic monetary sanctions against CR Intrinsic and its affiliates are 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 S Canellos, acting director of the SEC’s division of enforcement.
The SEC’s complaint against CR Intrinsic, Martoma, and Dr Gilman alleged that during phone calls arranged by a New York-based expert network firm for which Dr Gilman moonlighted as a medical consultant, he tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than USD960m in Elan and Wyeth securities in a little more than a week.
In an amended complaint, the SEC added SAC Capital Advisors and four hedge funds managed by CR Intrinsic and SAC Capital as relief defendants because they each received ill-gotten gains from the insider trading scheme. These ill-gotten gains are comprised of profits and avoided losses resulting from trades placed in the hedge fund portfolios that CR Intrinsic and SAC Capital managed, and include fees that SAC Capital received as a result of these ill-gotten gains.
The settlement is subject to the approval of Judge Victor Marrero of the US District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30 2008. The settling parties neither admit nor deny the charges. The settlement does not resolve the charges against Martoma, whose case continues in litigation. The court previously entered a consent judgment against Dr Gilman requiring him to pay disgorgement and prejudgment interest, and permanently enjoining him from further violations of the anti-fraud provisions of the federal securities laws.