Two Affiliates of a hugely successful hedge fund, SAC Capital Advisor, were char
ID: 2480249 • Letter: T
Question
Two Affiliates of a hugely successful hedge fund, SAC Capital Advisor, were charged with insider trading by the SEC. CR Intrinsic investors and CIGNA capital management apparently relied on "expert networks" through which, allegedly, people with information funnel it to traders. The biggest charge involved a doctor who had passed information to a trader regarding problems with a new drug that targeted Alzheimers disease. After the information was passed, around $1 billion worth of shares of two pharmaceutical companies related to the drugs were sold before the drug information was released to the public. The drug was still going through scientific trials, and the results had not been finalized. The doctor was a part of that project. How do you think this case turned out? [Securities and Exchange Commission v. Sigma Capital Management, LLC, et al., C.A. No. 13-civ-1740 (2013).]
Explanation / Answer
In a complaint filed on March 15, 2013 along with the proposed settlements, the SEC charged Sigma Capital in the insider trading scheme and named two affiliated hedge funds - Sigma Capital Associates and S.A.C. Select Fund - as relief defendants that unjustly benefited from Sigma Capital’s violations. S.A.C. Select Fund is affiliated with S.A.C. Capital Advisors.
The SEC’s complaint alleged that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for $6.425 million in gains for its hedge fund affiliates.
Without admitting or denying the charges, Sigma Capital agreed to pay disgorgement of $6.425 million plus prejudgment interest of $1,094,161.92 and a penalty of $6.425 million. Sigma Capital is also permanently enjoined from future violations of the antifraud provisions of the federal securities laws.
According to the SEC’s complaint, the key inside information that Horvath obtained about upcoming earnings announcements by Dell and Nvidia often differed significantly from the predictions of market analysts, who only had access to publicly available information. Based on this inside information, Sigma Capital traded Dell and Nvidia securities in advance of four quarterly earnings announcements and reaped more than $5.2 million for its hedge fund Sigma Capital Associates. Horvath’s inside information also enabled S.A.C. Select Fund to execute trades and avoid losses of more than $1 million. The SEC’s complaint charged Sigma Capital with violating Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
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