Judge Questions S.E.C. Settlement with Steven Cohen’s Hedge Fund

How can a hedge fund pay the government a roughly $600 million penalty to settle insider trading accusations but not have to admit that it did anything illegal

Judge Victor Marrero raised that question at Federal District Court in Manhattan on Thursday, as he considered whether to approve the landmark settlement between the Securities and Exchange Commission and the hedge fund SAC Capital Advisors, which is owned by the billionaire stock picker Steven A. Cohen.

“There is something counterintuitive and incongruous about settling for $600 million if it truly did nothing wrong,” Judge Marrero said.

Martin Klotz, a lawyer for SAC, said that his client made a business decision in agreeing to pay such a large fine.

“We’re willing to pay $600 million because we have a business to run and don’t want this hanging over our heads with litigation that could last for years,” Mr. Klotz said.

Judge Marerro reserved judgment on approving the settlement, which related to accusations that SAC made $276 million in profits and avoided losses by illegally trading two pharmaceutical stocks after a former portfolio manager obtained secret information from a doctor about clinical drug trials. But the judge made it clear that he was troubled that, as part of the agreement, SAC did not have to acknowledge wrongdoing.

The Greenwich, Conn. hedge fund has emerged as a major focus of the federal government’s long-running inquiry into criminal activity at hedge funds. Earlier this month, it agreed to settle two insider-trading cases - one for $602 million, which was at issue on Thursday, and the other for $14 million.

At least nine SAC employees or former employees have been tied to insider trading while at the fund. Among them is Mathew Martoma, the former portfolio manager who was criminally charged with illegally trading in the drug stocks, Elan and Wyeth. Mr. Martoma, who has pleaded not guilty, did not attend Thursday’s hearing, but his lawyer, Charles A. Stillman, made an appearance, as did Mr. Martoma’s wife.

The Martoma case has increased scrutiny of Mr. Cohen, as he was directly involved in trading Elan and Wyeth alongside Mr. Martoma. Mr. Cohen has not been charged or sued by the government, and has denied any wrongdoing. In recent days, he made headlines for embarking on a shopping spree amid his legal woes, agreeing to pay $60 million for an oceanfront estate in East Hampton and purchasing a Picasso painting for $155 million.

Thursday’s hearing, which focused heavily on the “neither admit nor deny wrongdoing” language in the S.E.C. settlement with SAC, comes as federal judges across the country have expressed concerns over whether government agencies are letting defendants off easy by not forcing them to admit liability. Most prominently, last year Judge Jed S. Rakoff rejected the settlement of a fraud case brought against Citigroup by the S.E.C. that let the bank avoid an acknowledgment that it did anything wrong.

Judge Rakoff’s decision - and the question of whether he exceeded his authority in rejecting the settlement - is now under review by a federal appeals court, and on Thursday, Judge Marerro hinted that he might condition any approval of the SAC settlement on the outcome of the Citigroup appeal.

“That decision will be very much pertinent to what the court has been asked to do here,” Judge Marrero said.

Mr. Klotz, the SAC lawyer, argued that the decision from the United States Court of Appeals from the Second Circuit would be limited to Judge Rakoff’s ruling within the context of the specific facts of the Citigroup case, which relate to the bank’s sale of a complex $1 billion mortgage bond deal. Therefore, he said, Judge Marerro was well within his authority to approve the S.E.C.’s settlement with Citigroup. (Coincidentally, Mr. Klotz’s co-counsel in representing SAC in this matter is Daniel Kramer of Paul Weiss Rifkind Wharton & Garrison, the same law firm defending Citigroup in its case against the S.E.C.)

Judge Marerro noted that other federal judges across the country had recently followed Judge Rakoff’s lead and cast skepticism on the “neither admit nor deny language,” in some cases demanding greater accountability before approving settlements.

Charles D. Riely, a lawyer for the S.E.C., also urged Judge Marerro to approve its settlement with SAC, despite the pending appeals court decision.

“There is always a risk to the legal landscape shifting,”
Mr. Riely said.

“But the ground is shaking,” Judge Marerro said. “There are tremors.”