[ by Melanie Gretchen ]

SAC Capital suspected there was something wrong with Mathew Martoma, its hedge fund portfolio manager.  Although he saved the fund $276 million by getting out of Elan before negative drug trial results his the public airwaves - which earned him a $9.3 million bonus - Martoma's performance continued to be rather uninspiring.  In 2010, a SAC officer referred to him in an email as being a "one trick pony with Elan."  Indeed, he was fired for performance and, upon learning of about the accusations of insider trading, we now can sense that Martoma's brief success may have been engineered by use of illegal information.

Was Martoma the exception or the rule?  Is this recent bout of trading a onetime violation or representative of SAC Capital's ranks?

The $614 million that SAC's management company will pay is just the latest (and biggest – and record) wedge in SAC's wave of success.  To date, 4 of the 9 current or former SAC employees who have been tied to allegations of illegal trading have pled guilty.  However, perhaps the biggest problem that has emerged from the prosecution of SAC's trading activity is the inability of SEC authority to effect change.

Dealbreaker pointed out, "SAC is paying back 2-2.5x what it made on these trades."  In return, the SEC will not sue SAC institutionally and will cut the hedge fund a 50% break on the amount it might have pay by settling now.  To be fair, the SEC's settlement only covers 10 days, between 7/21 and 7/30, thus the regulator has the ability to pursue other trades and other individuals.  (On the other side of justice, the DOJ has launched its own, criminal case against the trades.)  SEC enthusiasts are sure that $614 million will not deter its ranks.

But what prosecution of any trade will be worthwhile if the regulator's own officers are perpetuating insider trading?  What about regulation of the regulator?

For further details, go to [Dealbreaker, 3/15/13] and [Bloomberg, 3/17/13].

To contact Melanie Gretchen: melanie@compliance-insights.com.