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Securities and Exchange Commn. v. CR Intrinsic Investors, LLC

United States District Court, S.D. New York

April 16, 2013

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
CR INTRINSIC INVESTORS, LLC, MATHEW MARTOMA, and DR. SIDNEY GILMAN, Defendants, and CR INTRINSIC INVESTMENTS, LLC, S.A.C. CAPITAL ADVISORS, LLC, S.A.C. CAPITAL ASSOCIATES, LLC, S.A.C. INTERNATIONAL EQUITIES, and S.A.C. SELECT FUND, LLC, Relief Defendants

Decided April 15, 2013

Page 432

For Securities and Exchange Commission, Plaintiff: Amelia Anne Cottrell, Charles D. Riely, Securities and Exchange Commission(NYC), New York, NY; Matthew James Watkins, Securities and Exchange Commission(3 WFC), New York, NY; Sanjay Wadhwa, U.S. Securities and Exchange Commission (3 World Financial), New York, NY.

For CR Intrinsic Investors, L.L.C., Defendant: Daniel Jonathan Kramer, Michael E. Gertzman, LEAD ATTORNEYS, Paul, Weiss, Rifkind, Wharton & Garrison LLP (NY), New York, NY; Martin B Klotz, Michael Steven Schachter, LEAD ATTORNEYS, Willkie Farr & Gallagher LLP (NY), New York, NY.

For Mathew Martoma, Defendant: Charles A. Stillman, LEAD ATTORNEY, Nathaniel Z Marmur, Scott M. Himes, Stillman, Friedman & Shechtman, P.C., New York, NY.

OPINION

Victor Marrero, United States District Judge.

Page 433

DECISION AND ORDER

On November 20, 2012, the United States Securities and Exchange Commission (the " SEC" ) brought this action against defendants CR Intrinsic Investors, LLC (" CR Intrinsic" ), Mathew Martoma (" Martoma" ), and Sidney Gilman (collectively, " Defendants" ) alleging violations of § 10(b) of the Securities Exchange Act of 1934 (the " Exchange Act" ), 15 U.S.C. § 78j (b) (" § 10(b)" ), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (" Rule 10b-5" ), and § 17(a) of the Securities Act of 1933 (the " Securities Act" ), 15 U.S.C. § 77q (" § 17(a)" ).

On March 15, 2013, the SEC filed an amended complaint in this action (the " Amended Complaint" ). The Amended Complaint alleged that CR Intrinsic participated in an insider trading scheme that caused hedge fund portfolios managed by CR Intrinsic and S.A.C. Capital Advisors, LLC (" SAC Capital" ) to generate approximately $275 million in illegal profits or avoided losses. The Amended Complaint also contained a new claim of unjust enrichment against five relief defendants: (a) CR Intrinsic Investments, LLC; (b) S.A.C. Capital; (c) S.A.C. Capital Associates, LLC; (d) S.A.C. International Equities, LLC; and (e) S.A.C. Select Fund, LLC (collectively, the " Relief Defendants" ).

That same day, the SEC also submitted to the Court for its approval a " Final Judgment As To Defendant CR Intrinsic Investors, LLC" (the " CR Intrinsic Consent Judgment" ), together with a " Consent of Defendant CR Intrinsic Investors, LLC" (the " CR Intrinsic Consent" ) that provided that CR Intrinsic consented to the entry of the CR Intrinsic Consent Judgment " [w]ithout admitting or denying the allegations of the Complaint . . . CR Intrinsic Consent ¶ 2. The CR Intrinsic Consent Judgment: (a) " permanently restrained and enjoined" CR Intrinsic from future violations of § 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and § 17 (a) of the Securities Act; (b) required CR Intrinsic, on a joint and several basis with the Relief Defendants, to disgorge to the SEC $274,972,541, representing the profits gained and losses avoided of CR Intrinsic and the Relief Defendants, together with pre-judgment interest of $51,802,381.22; and (c) required CR Intrinsic to pay to the SEC a civil penalty in the amount of $274,972,541.

The SEC also submitted to the Court for its approval: (1) a " Final Judgment as to Relief Defendant CR Intrinsic Investments, LLC," together with a " Consent of Relief Defendant CR Intrinsic Investments, LLC" ; (2) a " Final Judgment as to Relief Defendant S.A.C. Capital Advisors, LLC," together with a " Consent of Relief Defendant S.A.C. Capital Advisors, LLC" ; (3) a " Final Judgment as to Relief Defendant S.A.C. Capital Associates, LLC," together with a " Consent of Relief Defendant S.A.C. Capital Associates, LLC" ; (4) a " Final Judgment as to Relief Defendant S.A.C. International Equities, LLC," together with a " Consent of Relief Defendant S.A.C. International Equities, LLC" ; and (5) a " Final Judgment as to Relief Defendant S.A.C. Select Fund, LLC," together with a " Consent of Relief Defendant S.A.C. Select Fund, LLC" (collectively, the " Relief Defendant Consent Judgments" and the " Relief Defendant Consents" respectively). The Relief Defendant

Page 434

Consents provide that the Relief Defendants consent to the entry of the Relief Defendants Consent Judgments " [w]ithout admitting or denying the allegations of the Complaint . . . See, e.g., Consent of Relief Defendant CR Intrinsic Investments, LLC, ¶ 2. The Relief Defendant Consent Judgments provide that the Relief Defendants are jointly and severally liable for certain portions of CR Intrinsic's disgorgement figure, as well as the pre-judgment interest thereon.

Upon receipt of these submissions, the Court, by Order dated March 22, 2013, scheduled a conference with the parties, which was held on March 28, 2013, to consider the proposed settlements and to discuss the issues raised recently by some courts in reviewing regulatory agency settlements containing " neither admit nor deny" provisions such as those before the Court, for example S.E.C. v. Citigroup Global Markets, Inc., 827 F.Supp.2d 328 (S.D.N.Y. 2011) (" Citigroup I" ), which is now on appeal before the U.S. Court of Appeals for the Second Circuit. See S.E.C. v. Citigroup Global Mkts. Inc., 673 F.3d 158 (2d Cir. 2012) (" Citigroup II" ).

I. LEGAL STANDARD

The role of the Court in reviewing and approving proposed consent judgments in SEC enforcement actions is " restricted to assessing whether the settlement is fair, reasonable and adequate within the limitations Congress has imposed on the SEC to recover investor losses." S.E.C. v. Cioffi, 868 F.Supp.2d 65, 74 (E.D.N.Y. 2012); United States v. Peterson, 859 F.Supp.2d 477, 478 (E.D.N.Y. 2012) (" A district court has the duty to determine whether a consent decree based on a proposed settlement is 'fair and reasonable.'" ) (quoting S.E.C. v. Wang, 944 F.2d 80, 84-85 (2d Cir. 1991)).

Courts should also weigh the effect of the proposed settlement in an SEC enforcement action on the public interest.[1] Courts " are bound in such matters to give deference to an executive agency's assessment of the public interest. This does not mean that a court must necessarily rubber stamp all arguments made by such an

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agency. It does mean at least that a court should not reject the agency's assessment without substantial reason for doing so," such as a finding that the proposed settlement was " arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." Citigroup II, 673 F.3d at 168 (internal citations omitted); Cioffi, 868 F.Supp.2d at 74 (" A district court is surely not required to rubber stamp every settlement between the SEC and a defendant." ).

In assessing a proposed settlement in an SEC enforcement action, a court should also consider, among other factors:

the connection between the settlement and any related pending or prospective criminal or civil cases. The same defendant may be subject to multiple obligations, including the need to pay restitution to victims of his criminal conduct; private civil damages as a result of breach of contract or tortious activities; fines; and forfeiture to the government in both criminal and civil actions.

Peterson, 859 F.Supp.2d at ...


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