SEC to Proceed with Case Against SAC Capital Advisors Founder

In 2014, SAC Capital Advisors portfolio manager Mathew Martoma was convicted of insider trading and sentenced to nine years in prison. Martoma was found guilty of seeking out confidential information about a clinical drug trial that enabled SAC Capital to realize profits of $275 million.

Another SAC Capital manager, Michael Steinberg, was sentenced to 3 ½ years for insider trading on technology stocks. He appealed his conviction and the SEC abandoned its case against him last October in light of a 2014 federal appeals court ruling in U.S. v. Newman that established four essential elements for determining liability for illegal tipping under the classic or misappropriation theory of insider trading:

  1. The person entrusted with confidential information had a fiduciary or similar duty;
  2. That duty was breached by providing confidential information to a tippee as a quid pro quo for a personal benefit;
  3. The tippee was aware that the tipper was breaching his or her duty; and
  4. The tippee traded on the confidential information received.

However, the SEC said that it will use information gathered in the prosecution of both Martoma and Steinberg in its administrative proceeding against SAC Capital founder Steven Cohen. The SEC is seeking to prove that Cohen did not properly supervise Martoma.

SAC Capital pleaded guilty in 2013 to insider trading and paid a record $1.8 billion fine. Cohen was not charged at that time with any wrongdoing. The SEC later sued Cohen, seeking a lifetime ban. Since that time, Cohen turned SAC Capital into a family office called Point72 Asset Management and returned funds to clients.

Since the 2014 appeals court ruling in Newman, Point72 has reportedly considered seeking a three-year limit on any SEC ban on managing outside capital, according to Bloomberg.

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