Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, April 16, 2013

Judge Marrero Approves $600 Million SAC Insider Trading Settlement, Conditioned on Disposition of Citigroup Appeal

On March 15, 2013 the SEC filed an amended complaint against CR Intrinsic Investors, Mathew Martoma and Sidney Gilman and five relief defendants, alleging that CR Intrinsic participated in an insider trading scheme that caused hedge fund portfolios managed by CR Intrinsic and S.A.C. Capital Advisors to generate approximately $275 million in illegal profits.  The same day the SEC also submitted to the federal district court for its approval a final judgment as to CR Intrinsic that contained a permanent injunction against future violations, required CR Intrinsic, on a joint and several basis with the relief defendants, to disgorge approximately $275 million, together with $51.8 million pre-judgment interest, and a civil penalty of approximately $275 million.  The SEC also submitted to the court for its approval final judgments with respect to the five relief defendants.  On March 28, Judge Victor Marrero held a conference to consider the proposed settlements and to discuss issues raised by some courts in reviewing regulatory agency settlements containing "neither admit nor deny" provisions such as those contained in the proposed final judgments.  Today the court released Judge Marrero's decision and order, in which he granted approval of the Final Judgments "conditioned upon the disposition of the pending appeal in the U.S. Court of Appeals for the Second Circuit in S.E.C. v. Citigroup Global Markets, Inc., 11 Civ. 7387 (S.D.N.Y.)."

In his decision Judge Marrero make clear that he is troubled by the use of "neither admit nor deny" language "as they permit CR Intrinsic and the Relief Defendants to resolve the serious allegations against them involving a massive insider trading scheme 'without admitting or denying the allegations of the Complaint.'"  Because of the pendency of the Second Circuit's decision in Citigroup, addressing the issue of whether the district courts have the authority to reject settlements on account of this language, the Judge determined it was appropriate to approve the settlement "subject to a condition that it would become final upon a definitive determination in the Citigroup appeal that the district courts lack authority to reject such settlements on the basis of reservations about the 'neither admit nor deny' provision." 

In the event the Second Circuit does leave ground for district courts to accord higher scrutiny to such terms, Judge Marrero goes on to express his concerns about the use of such provisions.  He recognizes that courts must perform "a very delicate balancing act" and must avoid second-guessing or undue meddling in agency settlement decisions.  But he also finds it inconceivable that "Congress intended the judiciary's function in passing upon these settlements as illusory...." 

Judge Marrero suggests that there is a middle ground, a role for judicial scrutiny in high-profile cases:

Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail -the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.

Judge Marrero notes, in particular, that less than four months after the SEC initially filed its complaint, CR Intrinsic and the relief defendants reached agreement with the SEC and agreed to pay essentially everything that the SEC demanded and arguably as much as the SEC would be able to recover if it prevailed at trial.  Yet the defendants are not "admitting nor denying" the allegations:

In this Court's view, it is both counterintuitive and incongruous for defendants in this SEC enforcement action to agree to settle a case for over $600 million that would cost a fraction of that amount, say $1 million, to litigate, while simultaneously declining to admit the allegations asserted against it by the SEC. An outside observer viewing these facts could readily conclude that CR Intrinsic and the Relief Defendants essentially folded, in exchange for the SEC's concession enabling them to admit no wrongdoing.

The court also expressed concern about the pendency of the related criminal proceeding against Mortoma.  The dismissal of charges against Martoma or an acquittal at trial could make the SEC's decision to include "neither admit nor deny" provisions in the settlements of the other defendants appear reasonable.  Conversely, a guilty plea or conviction at trial could establish facts potentially decisive to the SEC's allegations of wrongdoing in this enforcement action.  The pendency of the criminal proceeding, which might be resolved in a matter of months, provided the judge with an additional reason not to rubber stamp the proposed final judgments.

Judge Marrero also identified "two important, potentially counterproductive effects" that would flow from approval of these settlements: 

First, final approval at this time would deny the private plaintiffs of the benefit of a resolution that potentially could ease the burden of proving their case, prolong their litigation, and diminish the amount they could recover....Second, to the extent it takes the parties longer to resolve the private litigation, it imposes a heavier burden on the courts. The Court must accord these adverse effects serious consideration where, as here, they result from a policy or practice of the Government.

Finally, Judge Marrero identified another serious shortcoming of settlements that include "neither admit nor deny" language: "that of the public and its interest in knowing the truth in matters of major public concern."

In conclusion:

the Court once again emphasizes that, while [judicial] deference is particularly appropriate in unexceptional cases, courts must bring to bear enhanced scrutiny in reviewing proposed consent judgments in certain extraordinary cases alleging extraordinary public and private harms, in recognition of their particular importance to the public interest notwithstanding the deference normally accorded the policy decisions of federal administrative agencies."

Judge Marrero's opinion is well worth reading.  However the Second Circuit decides the Citigroup appeal, it is certain that the debate on this issue will not be over.  (Download SECvSAC)

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