A Manhattan federal judge signaled on Tuesday that he will not rubber-stamp a central component of billionaire Steven A. Cohen's SAC Capital Advisors LP's record $1.2 billion insider trading settlement with the government, saying he needs more information about the accord's fairness.
Citing the recent judicial "debate" about how closely to scrutinize regulatory settlements, U.S. District Judge Richard Sullivan directed SAC and the U.S. Department of Justice to address at a hearing on Wednesday morning what standard he should use to evaluate the civil forfeiture portion of the accord.
Separately, Sullivan's colleague, U.S. District Judge Laura Taylor Swain, scheduled a Friday hearing to review the criminal portion of the settlement in which SAC agreed to plead guilty to five fraud counts.
That plea ended years of investigations and made SAC the first big Wall Street firm since Drexel Burnham Lambert more than 20 years ago to admit to criminal conduct.
Monday's settlement calls for SAC to pay a $900 million criminal penalty and forfeit $900 million in the civil case. The latter sum would be reduced by $616 million, reflecting prior accords with the U.S. Securities and Exchange Commission.
SAC's $1.8 billion overall penalty represents less than half of the roughly $4 billion of gross profit it has made this year, said a person familiar with the hedge fund's performance and operating structure, who was not authorized to discuss the results.
Both portions of the settlement require judicial approval to become effective, but Sullivan noted disputes among judges about how much discretion to give federal agencies in resolving enforcement actions.
The 2nd U.S. Circuit Court of Appeals is expected to rule at any time whether to uphold or overturn the 2011 rejection by another colleague of Sullivan, U.S. District Judge Jed Rakoff, of a $285 million civil fraud settlement between Citigroup Inc and the U.S. Securities and Exchange Commission.
In rejecting that settlement, Rakoff said he was not given enough facts to decide whether approval was fair or in the public interest, and the 2nd Circuit is reviewing whether he used the right standard.
Approval of one of the SAC accords with the SEC has also been held up pending the 2nd Circuit decision.
SEEKING THE CORRECT STANDARD
Noting this uncertainty, Sullivan directed the Justice Department and SAC to address what standard he should use to review the civil forfeiture settlement, whether the standard was satisfied, and what steps have been taken to protect the rights of potential claimants to the forfeited property.
SAC spokesman Jonathan Gasthalter declined to comment. Jennifer Queliz, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment.
C. Evan Stewart, a partner at Zuckerman Spaeder in New York, who is not involved in the case, expects the government and SAC to argue that the forfeiture accord meets whatever standard Sullivan chooses to apply.
"Judge Sullivan is a very thoughtful and careful judge," Stewart said. "In light of the very high public interest in this particular settlement, (he) wants to hear from all sides about what standards they think he should apply."
As part of the overall settlement, SAC agreed to stop managing money from outside investors.
Cohen, who has not charged with criminal offenses, is expected to continue managing about $9 billion of his own money via a so-called family office.
The hearing before Sullivan on Wednesday is scheduled for 10:30 a.m. EST (1530 GMT). The hearing before Swain on Friday is scheduled for 3 p.m. EST (2000 GMT).
The cases are U.S. v. SAC Capital Advisors LP et al, U.S. District Court, Southern District of New York, No. 13-cr-00541; and U.S. v. SAC Capital Advisors LP et al in the same court, No. 13-05182.