SAC Capital Affiliate Settles Record Insider Trading Case

Mathew Martoma
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Mathew Martoma

Hedge fund titan Steven A. Cohen's firm, long the focus of a federal investigation into insider trading, is paying more than $600 million to U.S. securities regulators to settle allegations arising from improper trading in two stocks.

The settlement is the largest ever by a hedge fund and involves allegations of improper trading by two subsidiaries of Cohen's $15 billion SAC Capital Advisors. The U.S. Securities and Exchange Commission announced the agreement on Friday.

SAC Capital affiliate CR Intrinsic agreed to pay more than $600 million to settle allegations that one of its former employees participated in an insider trading scheme involving shares of Elan Corp. and Wyeth, now a part of Pfizer.

In another settlement, SAC Capital subsidiary Sigma Capital agreed to pay $14 million to settle charges the firm engaged in insider trading in shares of Dell and Nvidia Corp.

The settlements come after outside investors in Cohen's fund submitted notices last month to pull $1.68 billion from SAC Capital, largely over concerns about the insider trading investigation. Cohen is one of the $2 trillion hedge fund industry's best-known and most successful traders.

Neither SAC Capital nor any of it subsidiaries admitted or denied wrongdoing in agreeing to the settlements.

The fines will be paid by SAC Capital's management company and not outside investors, said a person familiar with SAC Capital.

In a statement the firm said: "This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence." The firm also added that Cohen himself "has not been charged with any wrongdoing and has done nothing wrong."

SEC officials, during a telephone press conference, said the settlements resolve a so-called Wells notice issued to SAC Capital in November, stemming from the Elan investigation.

(Read More: SAC Works to Contain Fallout From Inquiry)

The officials said the settlement does not impact any other improper trading that authorities may be investigating. Authorities also said the settlements do not preclude future charges against other current or former SAC Capital employees, including Cohen.

"These settlements call for the imposition of historic penalties," SEC Acting Enforcement Director George Canellos said during the conference call on Friday.

In November, regulators charged CR Intrinsic with insider trading and the SEC said one of its portfolio managers, Mathew Martoma, illegally obtained confidential details about a clinical trial for an Alzheimer's drug.

Martoma is facing criminal charges over the 2008 incident and has pleaded not guilty. At the time, U.S. prosecutors in New York called the insider trading in shares of Elan and Wyeth one of the largest illegal trading schemes on record.

The settlement over the improper trading in shares of Dell and Nvidia arises from a guilty plea last year by former SAC Capital portfolio manager, Jon Horvath, who reported to Michael Steinberg, one of Cohen's longest-tenured traders. Last fall, federal prosecutors named Steinberg as an unindicted co-conspirator in a criminal prosecution involving two other recently convicted hedge fund traders, who had also traded Dell shares.

In February, Reuters reported that prosecutors are nearing a decision on whether to pursue criminal charges against Steinberg, who was suspended in October from his post at SAC Capital.

Barry Berke, a lawyer for Steinberg, said his client "did absolutely nothing wrong."

For some perspective on the magnitude of the SAC Capital settlement, the biggest previous SEC insider trading sanction in the hedge fund sector was the $156 million that Galleon Group founder Raj Rajaratnam was ordered to pay, in a case related to a sprawling insider trading investigation that culminated with his criminal conviction in May 2011.

(Watch: Judge Sentences Raj Rajaratnam to 11 Years)