The U.S. Securities and Exchange Commission gets a lot of well-deserved brickbats for settling cases with crooks and cheats without making them admit to breaking the law. The deals often show the agency to be gutless and weak. Other times they look plain stupid.
Here is one of those times when it’s all of the above. This week, a federal judge in New York approved a $14 million settlement between the SEC and a unit of Steven A. Cohen’s hedge fund, SAC Capital Advisors LP, over insider-trading allegations. Cohen’s firm neither admitted nor denied the SEC’s claims, which was a ludicrous formality. The former SAC Capital analyst at the heart of the case, Jon Horvath, already had been convicted criminally. The violations he committed were central to the SEC’s allegations against the $15 billion hedge fund.
Horvath, who worked at SAC’s Sigma Capital Management unit, pleaded guilty to three felony counts last year, including securities fraud. He is cooperating with the government while awaiting sentencing. Had the SEC taken Cohen’s firm to trial, the case should have been straightforward, at least on paper: Simply call Horvath as a witness to describe his own crimes. “I knew that what I was doing was wrong and illegal,” Horvath said at his September plea hearing.
Horvath’s actions were imputed to the firm, as the SEC’s settled complaint made clear. The inside information he fed his SAC Capital colleagues about Dell Inc. and Nvidia Corp. let the fund reap millions of dollars illegally.
SAC Capital’s chances of winning in court should have been slim, although we never ought to underestimate the government’s ability to mess up an airtight case. Instead of requiring Cohen’s firm to acknowledge any violations, the SEC let it write a check and move on. The U.S. district judge in the case, Harold Baer, approved the deal without a hearing.
The settlement was one of two last month between the SEC and an arm of SAC Capital. The judge in the other case, Victor Marrero, is proving to be more than a rubber stamp. SAC Capital’s CR Intrinsic Investors unit agreed to pay $602 million to resolve allegations that it used inside information to trade in two drug stocks: Elan Corp. and Wyeth. A co-defendant in that case, former SAC Capital portfolio manager Mathew Martoma, was indicted last year. He pleaded not guilty and hasn’t settled with the SEC.
Marrero, in a hearing last week, questioned whether the hedge fund should be allowed to avoid admitting that it did anything wrong. “What if Mr. Martoma were convicted next week or next month of the criminal charges against him?” Marrero asked. “How would it look if, in this settlement, the parties were allowed in essence to say ‘We did nothing wrong?’”
The two judges’ approaches make for a stark contrast. That Horvath had pleaded guilty to crimes seems not to have mattered at all to Judge Baer. Yet the possibility that Martoma might be convicted greatly bothered Judge Marrero, who hasn’t ruled on whether to approve the settlement. It’s a shame that Marrero wasn’t assigned both cases.
The SEC tweaked its “no-admit” policy early last year. Before 2012, a defendant could be found guilty of criminal conduct and still include the usual “neither admit nor deny” language when settling parallel SEC claims. The SEC no longer allows this. Horvath, for example, acknowledged his prior guilty pleas as part of a separate accord with the SEC last month.
Strictly speaking, letting SAC Capital keep the weasel-word language is consistent with the new approach because prosecutors didn’t charge the firm criminally. But surely when a hedge fund makes a ton of money from an employee’s crimes, it’s wrong to let it settle SEC fraud claims without confessing something.
Why let Cohen’s firm off the hook without admitting anything? I asked an SEC spokesman, John Nester, for an explanation. He responded by reiterating the SEC’s updated policy.
An SAC Capital spokesman, Jonathan Gasthalter, said: “This settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence.” He added that Cohen “has not been charged with any wrongdoing and has done nothing wrong.”
No wonder Cohen has been on a shopping spree lately, including a $60 million property in the Hamptons and a Pablo Picasso painting for $155 million. He has good reason to be pleased.
When the SEC unveiled its change in approach last year, the enforcement director at the time, Robert Khuzami, said the new policy “eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases.” That’s not what happened here. By sticking to its “neither admit nor deny” boilerplate, the SEC embraced language that’s at odds with Horvath’s guilty pleas.
There’s no denying this: The SEC let Cohen and his hedge fund off easy.
(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)
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