Judge Approves SAC Settlement in Insider Trading Case

A judge approved a settlement between the hedge fund SAC Capital Advisors and securities regulators that allows the firm to pay a record $602 million fine to resolve a civil insider trading case without admitting any guilt, but conditioned his ruling on a pending Federal Appeals Court ruling.

In an opinion released Tuesday, Judge Victor Marrero of Federal District Court in Manhattan said he had serious concerns with the “neither admit nor deny” language contained in the agreement, but said that he would await guidance from a case involving Citigroup.

The pending appellate case, heard by the United States Court of Appeals for the Second Circuit, involves the review of a ruling by Judge Jed S. Rakoff, who rejected a $285 million settlement in a fraud case brought against Citigroup by the Securities and Exchange Commission. The agreement let the bank avoid acknowledging that it did anything wrong. Judge Rakoff called the settlement “chump change” for Citigroup and suggested it was not in the public interest; the bank and the S.E.C. said that the judge overstepped his bounds in interfering with the decision of a government agency.

The S.E.C. has traditionally permitted defendants to settle regulatory actions by paying a fine while not admitting liability, arguing that the practice is efficient and less costly than taking deep-pocketed financial firms to court and risk losing the case.

Much of Judge Marrero’s 34-page opinion centered on the “neither admit nor deny wrongdoing” language contained in the SAC settlement and many other settlements struck by the S.E.C. In recent months, federal judges across the country have followed Judge Rakoff’s lead and suggested that the S.E.C. and other government agencies are letting defendants off lightly by not forcing them to acknowledge wrongdoing.

Judge Marrero indicated that the “neither admit nor deny wrongdoing” language had no place in a post-financial crisis world.

“Perhaps we live in a different era,” Judge Marrero wrote. “In this age when the notion labeled ‘too big to fail’ (or jail, as the case may be) has gained currency throughout commercial markets, some cynics read the concept as code words meant as encouragement by an accommodating public - a free pass to evade or ignore the rules, a wink and a nod as cover for grand fraud, a license to deceive unsuspecting customers.”

“Perhaps, too, in these modern times,” he added, “new financial, industrial, and legal patterns have merged that call for enhanced regulatory and, as appropriate, judicial oversight to counter these sinister attitudes.”

Despite his skepticism about the S.E.C.’s settlement practices, Judge Marrero tentatively signed off on the commission’s deal with SAC. The case related to the conduct of a former SAC portfolio manager, Mathew Martoma, who was charged in November with illegal trading in two pharmaceutical stocks and helping SAC make $276 in illicit profits and avoided losses. Mr. Martoma has denied the charges.

Last month, Judge Harold Baer Jr. approved a separate S.E.C. insider trading case against SAC, signing off on a $14 million settlement that resolved accusations that the firm’s Sigma Capital unit illegally traded in shares of technology. As part of that agreement, SAC neither admitted nor denied wrongdoing. Judge Baer, however, raised no issues with the deal.

SAC, which is based in Stamford, Conn., and owned by the billionaire investor Steven A. Cohen, has emerged as a focus of the government’s multiyear investigation into insider trading at hedge funds. The two civil matters - the $602 million case, and the $14 million one - are the only legal actions against SAC, but the government has brought criminal insider trading charges against several of its former employees, including four who have pleaded guilty.

Representatives of the S.E.C. and SAC declined to comment on the judge’s ruling. Mr. Cohen has not been accused of any wrongdoing.

Judge Marrero laid out a court’s balancing act in weighing the approval of settlements struck by government agencies that do not force a defendant to admit liability.

“The court must avoid undue meddling and second-guessing, and must accord government agency law enforcement and financial determinations such as those now before it the proper level of deference they are due,” the judge wrote. “At the same time, the court cannot conceive that Congress intended the judiciary’s function in passing upon these settlements as illusory, as a predetermined rubber stamp for any settlement put before it.”

The judge’s words seemed to suggest that he was grudgingly approving the SAC settlement. On page after page, Judge Marrero used strong language - and lengthy sentences - to convey his discomfort the S.E.C.’s policy. In one part of the opinion, he said he was “troubled” by the practice; a paragraph later, he expressed “misgivings” about it. At another point, he called the settlement terms “both counterintuitive and incongruous” and sharply criticized the government’s settlement practices.

“The damage the victims suffer cannot always be blamed on acts of God or the mischief of leprechauns,” said Judge Marrero. “There cannot be proper closure when incidents causing extensive loss occur, if the individuals or entities responsible for the large scale wrongful consequences are not properly held accountable.”