S.A.C. Capital Advisors

The lawsuit arose from the largest insider trading scandal in financial history. S.A.C. Capital prided itself on getting the “edge” on information about investments before any of its competitors. Plaintiffs alleged that S.A.C. Capital illegally both profited and avoided losses—for a gain of at least $276 million—by trading in Elan common stock and options based on nonpublic information. The information concerned the clinical drug trial of bapineuzumab (“bapi”), an Alzheimer’s disease drug under joint development by Elan and Wyeth Pharmaceuticals.

The complaint alleged that Matthew Martoma, an S.A.C. Capital portfolio manager, obtained the inside information from Sidney Gilman, the chair of the FDA’s Safety Monitoring Committee that reviewed non-public results of Elan’s bapi clinical trial. Gilman shared those results, and his analysis of the efficacy and safety of the drug, with Martoma on numerous occasions between August 2006 and July 2008.

Initially, Gilman was highly encouraged by the trial results as they were collected. Relying upon such information, Martoma recommended that S.A.C. Capital buy a substantial amount of Elan common stock and call options totaling $350 million. The final results were collected and shared with Gilman and the Monitoring Committee on July 3, 2008 (before any public disclosure thereof). Gilman shared this inside data with Martoma ten days before Elan was scheduled to announce the results. Martoma immediately recognized that there were problems with the efficacy data. Martoma called Cohen on Sunday, July 20; they spoke for nearly twenty minutes. Over the next seven trading days, S.A.C. Capital sold all its Elan common stock and call options while shorting the stock and buying a significant amount of put options.

The data, publicly disclosed after trading hours on July 29, 2008, signaled that the results were subpar. The next day, Elan’s shares plummeted 41.8%. However, S.A.C. Capital profited enormously.

Federal investigators had spent years doggedly unravelling this scheme. In July 2013, the U.S. Attorney’s Office charged Cohen for failing to supervise Martoma, Michael Steinberg (another S.A.C. Capital portfolio manager), and others who conducted insider trading under his watch. In November of that year, S.A.C. Capital agreed to the terms of an agreement with the U.S. Attorney’s office and the FBI, including that it pay a $1.8 billion financial penalty, to be distributed as a $900 million criminal fine to the government and a $900 civil forfeiture to the SEC.

In 2014, the SEC created a Fair Fund of $602 million from its portion of the fines, to be distributed to all investors who were harmed by S.A.C. Capital’s insider trading of Elan securities right before the major clinical trial announcement. The Fair Fund was also to be distributed to investors in Wyeth Pharmaceuticals who were harmed by S.A.C. Capital’s insider trading. Only investors who bought or acquired eligible shares of these companies during this tight 9-day window were eligible to participate in the distribution.

While the SEC settlement was significant, Pomerantz recognized that it provided no benefit for Elan investors that were harmed by insider trading at S.A.C. Capital that began almost two years before the 9-day period. The Firm sought to prove claims for the longer class period and recover losses incurred by those investors. On July 15, 2013, as Class Counsel for Elan investors, the Firm filed a joint consolidated class action complaint together with several other plaintiffs’ firms. With this complaint, Pomerantz expanded the class period for Elan investors to August 23, 2006 through July 29, 2008. The class period for Wyeth investors (for whom Pomerantz was not counsel) was not extended beyond the SEC’s parameters.

Per the terms of the SEC settlement, S.A.C. Capital and Cohen did not admit to any wrongdoing. As a result, for the next four years, Pomerantz and co-counsel had to vigorously battle defendants.

Pomerantz and co-counsel deposed all the principals, including Gilman and Cohen. The exception was Martoma, who had refused to testify against Cohen. (He was convicted of insider trading after a jury trial, sentenced to nine years in prison, and ordered to forfeit $9.3 million.)

Gilman admitted to sharing the confidential data with Martoma, with whom Gilman said he had developed a paternal-like relationship. Cohen admitted to having a lengthy conversation with Martoma before reversing all S.A.C. Capital’s positions but insisted that his decision was driven more by reservations expressed by a senior level manager, Michael Steinberg. In fact, Steinberg had no contact with Gilman, nor did he have any access to the confidential data.

On April 28, 2015, the court sustained the plaintiffs’ claims for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5, Section 20A of the Exchange Act, and Section 20(a) of the Exchange Act. On December 2, 2015, the court certified two classes of Elan investors. One class included all investors who sold Elan shares while S.A.C. Capital was buying shares, between August 2006 and July 2008. The other included investors who bought Elan shares and call options or sold put options in July 2008, while S.A.C. Capital sold Elan shares.

By identifying and proving claims during a far longer period than that address by the SEC and bringing this action to its highly successful conclusion, the Firm vindicated Elan investors who would have otherwise been disenfranchised.

Coda
Although Cohen was never criminally charged, his 2016 agreement with the SEC barred him from managing outside investor money until 2018. The fund then rebranded itself as a family office named Point72 Asset Management to manage Cohen’s personal fortune. Once the ban expired, Cohen reopened Point72 to external investors. In 2020, Cohen purchased the New York Mets.

Martoma was incarcerated in a federal prison in Miami from November 20, 2014 through July 19, 2021.

Steinberg (whom Cohen had tried to throw under the bus regarding S.A.C. Capital’s Elan trades) was neither implicated in the Elan insider trading nor a defendant in Pomerantz’s Elan-related litigation against S.A.C. Capital. He was, however, convicted by a federal jury in December 2013 for trading, while at S.A.C. Capital, on illegal tips regarding Dell and Nvidia stock. He was sentenced to three and a half years in prison but did not serve a single day. While Steinberg was appealing his verdict, the Second Circuit Court of Appeals issued a landmark ruling in United States v. Newman. The Newman Court, opining that prosecutors had been relying on an overly broad definition of insider trading laws, radically narrowed those laws. It held that federal prosecutors must prove that a “tippee” explicitly knew that the original corporate insider leaked the information in exchange for a direct, tangible personal benefit. To Steinberg’s advantage, he was far enough downstream from the original source of the leak, and, under the new standard imposed by Newman, his conduct no longer legally qualified as a crime.

Marc I. Gross, former Managing Partner and now Senior Counsel, led the litigation on behalf of Pomerantz.