The U.S. Securities and Exchange Commission will decide next week whether investors in two drug stocks at the center of the largest-ever insider trading case are entitled to compensation.
If the SEC rules in their favor, the investors could seek a portion of the $602 million the SEC collected in a settlement from a division of SAC Capital Advisers after former portfolio manager Mathew Martoma was caught trading on secret tips. It would be the SEC's largest payout ever to insider trading victims. The settlement money would otherwise go to the U.S. Treasury.
The SEC will also be weighing in on a long-running debate over whether insider trading is a victimless crime. Defense attorneys in several recent cases have made that argument to push for lighter sentences for their clients.
Calling the investors victims would put the SEC at odds with criminal courts, where judges and prosecutors have avoided designating victims.
Federal sentencing guidelines rely on the size of the insider trader's profits based on the belief that victims and the losses they suffer in such cases are nearly impossible to identify. In SAC's case, prosecutors have already argued that Elan and Wyeth investors are not victims.
SEC enforcement director Andrew Ceresney said in an interview on Friday that previous court cases had established grounds for identifying insider trading victims, but doing so was challenging.
"If you look at the case law, courts have talked about contemporaneous traders being victims," he said. "I think it's a question of fairness in markets."
He declined to comment specifically on the SAC case.
In 2012, the SEC sued SAC, which is now called Point 72 Asset Management, for violating securities laws after Martoma traded on tips that a once-promising Alzheimer's drug had failed a late-stage trial.
SAC agreed to settle the case in March 2013. A jury in a separate criminal case convicted Martoma of securities fraud and conspiracy in Manhattan federal court. He was sentenced on Sept. 8 to nine years in prison. SAC admitted guilt in a second criminal case for which it paid additional penalties.
A group of investors who, at the time of Martoma's trades, owned shares of Elan, which is now owned by Perrigo Company Plc and Wyeth, now owned by Pfizer Inc, filed a class action suit against SAC in which they are separately seeking around $2 billion.
"SAC was selling shares to get out before the rest of us knew the drug was a bust," wrote Lance Bredvold, one of several investors who identified themselves as victims in letters to the SEC.
Federal prosecutors leading the criminal case against SAC argued that class action plaintiffs were not victims of the crime and should not be allowed to have a say in court about the plea deal, which needs to be approved by a judge.
The SEC's five-person governing commission is expected to decide the matter at a closed-door meeting on Oct. 9.
