What Comes Next for SAC

The two settlements reached between SAC Capital Advisors, the hedge fund controlled by Steven A. Cohen, and the Securities and Exchange Commission raise the question of what comes next for the firm.

The S.E.C. noted that its investigations were “continuing,” and the Justice Department’s criminal case against a former SAC portfolio manager, Mathew Martoma, is not affected.

The bulk of the settlements, $602 million, involved trades in July 2008 right before the announcement of problems in a drug trial being conducted by Wyeth and Elan. SAC sold its holdings in the two companies and then shorted shares hat allowed it to avoid losses and reap gains totaling about $275 million, according to the government. The firm disgorged that amount, plus it paid interest and a one-time penalty.

Mr. Martoma has been accused of insider trading based on a tip from Dr. Sidney Gilman, who was a consultant on the drug trial. Shortly before SAC began selling its stock positions through one of its funds, CR Intrinsic Investors, Mr. Martoma had a 20-minute conversation with Mr. Cohen. That discussion has been the focus of federal investigators, who were unable to gain Mr. Martoma’s cooperation before he was charged last November.

Mr. Martoma’s lawyer, Charles A. Stillman, commented on the settlement by stating: “SAC’s business decision to settle with the S.E.C. in no way changes the fact that Mathew Martoma is an innocent man. We will never give up our fight for his vindication.”

The second case involves trading by another SAC fund in Dell and Nvidia based on inside information received by Jon Horvath, a former analyst at the firm who pleaded guilty to insider trading. SAC’s settlement required it to pay $14 million for trading that resulted in gains of about $6.4 million.

SAC disclosed last year that it had received a so-called Wells notice from the S.E.C. stating that the agency was considering filing civil charges based on the firm’s failure to properly oversee its employees, known as “controlling person” liability. Under this approach, a company can be held liable for insider trading if it did not have in place adequate measures to prevent violations, even though it did not direct the improper transactions.

The settlements with SAC were not based on controlling person liability, however, and instead the S.E.C. complaint claims that the funds involved directly violated the law. That indicates the S.E.C. concludedthat there was enough evidence to go after SAC itself for its involvement in the trading rather than just claiming that the firm did not effectively supervise its employees.

Because the CR Intrinsic settlement deals only with trading in Wyeth and Elan shares in late July 2008, the S.E.C. is free to pursue additional transactions by SAC in those companies if there is evidence that it received other inside information.

One problem the agency could face in pursuing a case involving earlier trading, however, is that a recent Supreme Court decision limits its ability to obtain penalties for violations that are more than five years old, unless the firm waived the statute of limitations.

The criminal prosecution of Mr. Martoma continues, and it raises the intriguing question about whether prosecutors will call anyone from SAC as a witness against him.

One issue in proving insider trading is demonstrating that the defendant breached a fiduciary duty of trust and confidence by misusing! the mate! rial, nonpublic information. In addition, a fraud charge requires proof of criminal intent, and showing that a defendant was aware of an internal policy prohibiting insider trading could be important evidence to show knowledge of wrongdoing along with a breach of fiduciary duty.

When Mr. Martoma was charged, a spokesman for SAC stated, “Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry.”

That cooperation may entail having someone from the firm come into court to testify about its policies on insider trading and how that was communicated to Mr. Martoma.

It is also likely the government will need someone from SAC to testify about the trading in Wyeth and Elan to establish the gains made and losses avoided in order to prove there was fraud in connection with the purchase and sale of securities, an element of the crime. Thus, one or more witnesses from SAC will in all likelihood be an important part of the proecution of Mr. Martoma.

Could prosecutors even call Mr. Cohen as a witness It’s is unlikely, because of questions that could be raised about his conversation with Mr. Martoma before the trading at issue, but it is certainly not impossible. Whether he would be willing to testify for the government, given the continuing investigation of the firm, is another interesting question.

Recall that at the trials of Raj Rajaratnam and Rajat Gupta for insider trading, Goldman Sachs‘s chief executive, Lloyd C. Blankfein, testified for the government. He spoke about the importance of corporate information and the obligations of a director like Mr. Gupta to maintain its confidentiality. And this testimony came only months after a Senate subcommittee made a referral to the Justice Department concerning testimony by Goldman witnesses at a hearing about the financial crises, although no charges were ever brought.

After the S.E.C. settlement, a spokesman for SAC stated, “These settlements are a substantial step toward resolving all outstanding regulatory matters and allow the firm to move forward.”

While certainly helpful for the firm, the impending prosecution of Mr. Martoma will make it, along with Mr. Cohen, a featured player in a criminal trial.