Divided Views of an Insider Trading Fine

Not many Wall Street executives, let alone hedge funds, could write a $616 million check and remain solvent.

But Steven A. Cohen and his fund, SAC Capital Advisors, have done exactly that, agreeing to pay that amount to settle two insider-trading lawsuits brought against it by the government.

Inside SAC’s Stamford, Conn., headquarters, the resolution of the civil actions â€" announced Friday by the Securities and Exchange Commission â€" was seen as a big victory. In a statement, the fund, which neither admitted nor denied wrongdoing, called the settlements “a substantial step toward resolving all outstanding regulatory matters.”

SAC investors also viewed the news favorably, because it removed the fund’s exposure to litigation related to alleged insidr trading by two former employees.

The Blackstone Group, SAC’s largest outside client with about a $550 million investment, views the settlements as a positive development, according to a person familiar with Blackstone’s thinking. This person cautioned, however, that it was still too early to say what Blackstone will decide to do come mid-May, the next deadline for investors to ask for their money back.

Investors in SAC funds will be paying close attention to the criminal investigation into possible insider trading by Mr. Cohen and his employees. Mr. Cohen, 56, has not been charged with any wrongdoing, and has told his employees and investors that he has acted appropriately at all times.

Friday’s settlements â€" for $602 million and $14 million â€" were criticized by a number of rival hedge fund managers and securities law! yers as not tough enough. Despite the S.E.C.’s trumpeting the $602 million payment as the largest-ever settlement of an insider trading case, critics said that the commission could have sought a harsher punishment.

“While $616 million would normally be a massive penalty, for Cohen this is basically a drop in the bucket,” said Bradley D. Simon, a criminal defense lawyer and former federal prosecutor in New York. “There is also no debarment or admission of wrongdoing.”

Nor have SAC’s legal problems had a substantial effect on its operations so far. Last month, investors had asked to withdraw $1.7 billion from the $15 billion fund, an amount that SAC said will not affect its business. And because more than half of SAC’s assets belong to Mr. Cohen, the fund is largely protected from the damaging effects of withdrawals.

“Most investors will view these settlements as a major step in the right direction,” said Steven B. Nadel, a lawyer at Seward & Kissel who represents hedge funs. “However, some clients may not be fully satisfied until the S.E.C. says that it is no longer pursuing any further inquiries against SAC or Steve Cohen.”

S.E.C. officials made clear on Friday that Mr. Cohen and his employees are not out of the woods. George S. Canellos, the commission’s acting enforcement director, emphasized that the settlements â€" the first time SAC has settled government allegations â€" do not prevent future charges against individuals, including Mr. Cohen. Then, speaking broadly, Mr. Canellos said, “There’s a lot more to come in insider-trading cases.”

The United States attorney’s office in Manhattan, which has worked closely with the S.E.C. in the government’s broad insider-trading inquiry, continues to examine possible misconduct at SAC, according to people briefed on the investigation. Federal prosecutors have tied at least nine former or current SAC employees to insider trading while at the fund. Four have pleaded guilty.

Prosecutors, thes! e people ! said, are now weighing whether to file a criminal case against Michael Steinberg, a longtime SAC portfolio manger. If indicted, Mr. Steinberg, 40, would be the most senior employee charged in the government’s investigation of SAC.

Mr. Steinberg is implicated in the smaller of the two cases that SAC settled Friday. In that case, SAC agreed to pay $14 million to resolve related to charges that a former SAC analyst was part of an insider-trading ring that illegally traded shares in the technology companies Dell and Nvidia.

The analyst, Jon Horvath, pleaded guilty last September and said that he passed on secret information about the two technology stocks to his supervisor at SAC, who was Mr. Steinberg. And in court papers filed Friday, the S.E.C. said that Mr. Horvath passed the information to a second SAC portfolio manager.

The second prtfolio manager is Gabe Plotkin, another senior SAC trader, according to a person with direct knowledge of the investigation who requested anonymity because he was not authorized to discuss it publicly.

A lawyer for Mr. Steinberg, Barry Berke, said in a statement that his client “did absolutely nothing wrong.” He added: “At all times, his trading decisions were based on detailed analysis as well as information that he understood had been properly obtained through the types of channels that institutional investors rely upon on a daily basis.”

An SAC spokesman issued a statement on behalf of Mr. Plotkin, who remains employed by the fund. “Gabe Plotkin has not been accused of wrongdoing and has done nothing wrong,” said the spokesman, Jonathan Gasthalter. “He has built a successful career on a commitment to sound fundamental research.”

Both Mr. Steinberg and Mr. Plotkin showed up on e-mails that emerged during a recent trial of two traders at other hedge funds who were ! convicted! as part of the Dell and Nvidia insider trading conspiracy.

In an e-mail from August 2008, sent days before Dell’s quarterly earnings announcement, Mr. Horvath divulged details about Dell’s financial data to Mr. Steinberg and Mr. Plotkin.

“I have a secondhand read from someone at the company,” Mr. Horvath wrote. “Please keep to yourself as obviously not well known.”

Mr. Steinberg replied: “Yes normally we would never divulge data like this, so please be discreet. Thanks.”

In another e-mail that month, Mr. Steinberg told Mr. Horvath and Mr. Plotkin about a conversation he had had with Mr. Cohen about conflicting views of Dell inside SAC. Mr. Plotkin owned a large Dell position, while Mr. Steinberg was short, meaning that he thought Dell would decline in value.

“Guys, I was talking to Steve about Dell earlier today and he asked me to get the two of you to compare notes before the print” â€" meaning before the company’s earnings release â€" “as we are on oposite sides of this one,” wrote Mr. Steinberg.

The legal pressure on Mr. Cohen intensified last November, when prosecutors charged Mathew Martoma, a former SAC portfolio manager, with trading in the drug stocks Elan and Wyeth based on secret information from a doctor related to drug trials. Mr. Cohen was involved in the trades at the center of the Martoma case, but the government has not alleged that Mr. Cohen possessed any secret information.

SAC agreed to pay $602 million Friday to end its potential civil liability related to the Elan and Wyeth investments, which the government said allowed the fund to make profits â€" and avoid losses â€" totaling $275 million. Mr. Martoma has pleaded not guilty and refused the government’s overtures to become an informant and cooperate in a case against Mr. Cohen.

Critics of Friday’s s! ettlement! s say that Mr. Cohen, a multibillionaire who lives in a 35,000-square-foot home in Greenwich, Conn., has bought his way out of trouble. Because SAC has been implicated in numerous different insider-trading cases, the critics said, it should face stiffer penalties than a fine with no admission of liability. The settlements still require the approval of a federal judge.

The S.E.C. could have imposed an array of additional punishments, legal experts say. Among other things, it could have named Mr. Cohen as a defendant on a legal theory of control-person liability, alleging that he failed to properly supervise his employees. It also could have sought the revocation of SAC’s securities license and prohibited it from managing money for clients. Even the fine itself could have been substantially higher under securities laws.

The fine is being paid by SAC Capital Advisors, the management company that operates the SAC fund. That means that Mr. Cohen, who owns 100 percent of the management company, is efectively making the $616 million payment out of his own pocket.