Antitrust Law Daily Wrap Up, RICO—S.D.N.Y.: Insider trading could not constitute RICO violation, (May 1, 2015)

By Matthew Garza, J.D.

Investors failed to convince the federal district court in New York City that Steven Cohen’s SAC Capital Advisors violated the Racketeer Influenced and Corrupt Organizations (RICO) Act when it engaged in insider trading in shares of Elan Corporation and Wyeth Corporation. The criminal conviction exception to the Private Securities Litigation Reform Act bar on using securities fraud as a predicate act under RICO did not apply because SAC pleaded guilty only on the basis of corporate responsibility for the actions of three specific employees, and did not plead guilty to any conduct involving Elan or Wyeth (Kaplan v. S.A.C. Capital Advisors, L.P., Birmingham Retirement and Relief System v. S.A.C. Capital Advisors, L.P., April 27, 2015, Marerro, V.).

Background. In July 2008, SAC Capital and CR Intrinsic, a SAC-affiliated hedge fund, traded ahead of a negative public announcement regarding clinical trial results for an Alzheimer’s drug by obtaining inside information about the trials. The fund made profits and avoided losses of approximately $275 million by repositioning its holdings in two pharmaceutical companies, the Irish biotech company Elan and New Jersey pharmaceutical Wyeth. Elan and Wyeth have since merged with Perrigo and Pfizer, respectively. The RICO suit named SAC Capital, Cohen, Mathew Martoma, portfolio manager at the hedge fund, and Sidney Gilman, a University of Michigan neurologist who oversaw the drug’s clinical trials and passed inside information to Martoma. An SEC infographic issued at the time of a $600 million settlement with the agency illustrated the scheme.

Criminal charges. The SAC Capital guilty plea was accepted in April 2014 by Judge Swain of the Southern District of New York. The court imposed a $900 million criminal fine, a maximum five-year term of probation for four SAC hedge funds, and required SAC to stop providing investment advisory services for outside investors. Martoma was convicted by a jury in Manhattan in February 2014. Cohen has since opened Point72 Asset Management to manage his personal fortune.

The investors urged the court not to accept the plea agreement because “SAC is not required to plead guilty to insider trading in Elan or Wyeth,” wrote the court. A narrow construction of the criminal conviction led the court to conclude that the plea agreement did not fall within the PSLRA exception because it made no mention of the conduct the investors claimed defrauded them.

The investors argued that the insider trading in Wyeth and Elan stock heavily influenced the fine imposed on SAC under the sentencing guidelines and made clear that it was convicted of insider trading in Wyeth and Elan. But the penalties imposed had no bearing on whether the defendants, on the basis of the applicable criminal case standard of proof, were convicted with regard to those trades, said the court.

“RICO's criminal conviction exception is to be narrowly construed such that a defendant must have been criminally convicted of securities fraud encompassing the specific plaintiffs filing suit and the specific fraudulent conduct to which the defendant's conviction relates. It is clear from the record that the RICO Defendants did not plead guilty to insider trading in Wyeth and Elan stocks and therefore did not plead guilty to defrauding the Plaintiffs,” concluded the court.

The cases are No. 12-cv-9350 and No. 13-cv-2549.

Companies: S.A.C. Capital Advisors, L.P.; Birmingham Retirement and Relief System

Cases: RICO NewYorkNews