SEC v. CR Intrinsic Investors

The Court assumes familiarity with its prior

Conditional Approval Order. Briefly restated, the SEC

filed an Amended Complaint dated March 15, 2013 (the

"Amended Complaint"), which 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 to generate approximately $275 million in

illegal profits or avoided losses. (Dkt. No. 25.) The

Amended Complaint also alleged a claim of unjust enrichment

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against the Relief Defendants, which, according to the SEC,

directly benefitted from the insider trading scheme. (Id. )

On the same day that the Amended Complaint was filed,

the SEC provided the Court with the Proposed Consent

Judgments. (Dkt. No. 30.) Each of the Proposed Consent

Judgments provided for injunctive relief and damages: they

enjoined each defendant from committing future violations

of federal securities laws, and required them to disgorge

their alleged wrongful profits (plus interest) and pay a

civil penalty. In total, CR Intrinsic was held jointly and

severally liable for over $600 million in wrongful profits,

penalties, and interest, and the Relief Defendants were

each held jointly and severally liable for a portion of

that amount. The Proposed Consent Judgments indicated that

CR Intrinsic and the Relief Defendants consented to entry

of judgment against them "without admitting or denying the

allegations of the [Amended] Complaint. II The SEC

also filed a statement from each defendant consenting to

entry of the Proposed Consent Judgments. Those statements

each provided that the respective defendant consented to

the entry of judgment against it "[w] ithout admitting or

denying the allegations of the [Amended] Complaint . . .

(Id. )

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The Court held a hearing on March 28, 2013, to

consider the Proposed Consent Judgments. Both at the

hearing and in its subsequent Conditional Approval Order,

the Court indicated that the injunctive and monetary relief

embodied in the Proposed Consent Judgments was "fair,

adequate, reasonable, and in the public interest." CR

Intrinsic, 939 F. Supp. 2d at 435.

At the same time, the Court expressed its concern over

the use of the "neither admit nor deny" provisions in the

Proposed Consent Judgments. Id. at 436. The Court noted

that those provisions were sensible in ordinary, run-of

the-mill cases. Id. at 437. But, in the Court I s view,

this litigation was extraordinary for at least two reasons:

first, this action involved parallel criminal charges

against Martomai second, even though CR Intrinsic had not

admitted liability, it had agreed, promptly upon the SEC's

filing of the Amended Complaint, to forfeit virtually all

damages that the SEC had sought. Id. at 440. The Court

was struck by a seeming contradiction: a declaration by

sophisticated defendants claiming they committed no

wrongdoing that flies in the face of their unusual and

swift capitulation, and that appears at odds with their

acceptance of responsibility to pay disgorgement and

penalties of such staggering amounts. rd. While

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recognizing that courts are, in general, "'bound. to

give deference to [the SEC's] assessment of the public

interest,'" see id. at 443 (alteration in original)

(quoting S.E.C. v. Citigroup Global Markets, Inc., 673 F.3d

158, 168 (2d Cir. 2012)), the Court also suggested that

"courts must bring to bear enhanced scrutiny in reviewing

proposed consent judgments in certain extraordinary cases

alleging extraordinary public and private harms, in

recognition of their particular importance to the public

interest," id. at 444.

However, the Court recognized that a district court's

role in approving settlements containing "neither admit nor

deny" provisions was unclear in light of the then-pending

appeal in Citigroup IV. Id. The Court determined that the

ultimate outcome of the Citigroup IV appeal "must have some

bearing" on the Court's decision of whether to approve the

Proposed Consent Judgments. Id. The Court thus

conditioned its approval on the Second Circuit's decision

in that case. Id.

Now, following the Second Circuit's recent opinion,

the parties have renewed their request for the Court to

approve the Proposed Consent Judgments. They suggest that

Citigroup IV prohibits the Court from refusing to approve a

consent judgment merely because the defendant neither

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admits nor denies the allegations in the complaint. In

light of that ruling, the parties argue, the Court's

previous finding that the Proposed Consent Judgments were

fair and reasonable necessarily requires the Court to

approve the judgments.

II. LEGAL STANDARD

citigroup IV clarified the standard that district

courts should apply in their review of consent judgments

between the SEC and a defendant:

Today we clarify that the proper standard for reviewing a proposed consent j udgment involving an enforcement agency requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the public interest would not be disserved in the event that the consent decree includes injunctive relief. Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.

Citigroup IV, 2014 WL 2486793, at *7 (citation and internal

quotation marks omitted). Contrary to the standard

previously applied by this Court and others, the Second

Circuit declared that the adequacy of a settlement was no

longer a consideration that a district court should weigh

in analyzing a proposed consent judgment. Id.

The Circuit Court laid out four factors that a

district court "should, at a minimum, assess" to determine

whether a proposed consent judgment is fair and reasonable:

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(1) the basic legality of the decree: (2) whether the terms of the decree, including its enforcement mechanism, are clear: (3) whether the consent decree reflects a resolution of the actual claims in the complaint; and (4) whether the consent decree is tainted by improper collusion or corruption of some kind.

Id. (citations omitted). While noting that some cases may

require "additional inquiry,,,l the Second Circuit held that

"the primary focus of the inquiry should be on

ensuring the consent decree is procedurally proper" based

on "objective measures" that do not "infringe on the

S.E.C.'s discretionary authority to settle on a particular

set of terms. It Id. Similarly, when considering whether

any injunctive relief would disserve the public interest,

the district court "may not find the public interest

disserved based on its disagreement with the S.E.C.'s

decisions on discretionary matters of policy, such as

deciding to settle without requiring an admission of

liability. Id. at *9. It

The Second Circuit outlined two factors that a

district court should not consider in its evaluation.

First, the court may not require the SEC to prove facts to

establish the truth of its allegations. Id. at *8. While

the court should "establish that a factual basis exists for

1 In a concurring opinion, Judge Lohier offered his view that a court should conduct "a straightforward analysis of only the four factors" listed in the majority opinion. Citigroup IV, 2014 WL 2486793, at *11 (Lohier, J., concurring) (emphasis in original).

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the proposed decree," in general the parties can meet this

requirement by "setting out the colorable claims, supported

by factual averments by the S. E . C., neither admitted nor

denied by the wrongdoer [ . ] " Id. The district court may,

however, require a more concrete factual basis for the

proposed consent agreement when it suspects improper

collusion between the parties. Id.

Second, the district court should not base its

decision on a determination of whether the SEC brought the

proper charges against the defendant. Id. at *10. Rather,

" [t] he exclusive right to choose which charges to levy

against a defendant rests with the S . E. C. " Id. Along

similar lines, a district court cannot decline to approve a

consent judgment "on the ground that it fails to provide

collateral estoppel assistance to private litigants." Id.

III. DISCUSSION

The Court is persuaded that, at this time, each of the

Proposed Consent Judgments is fair and reasonable under the

factors outlined in Citigroup IV. The Proposed Consent

Judgments are legal and clear, and they resolve the claims

in the Amended Complaint. See Citigroup IV, 2014 WL

2486793, at *7. There is no evidence in the record to

suggest that the agreements are "tainted by improper

collusion or corruption of some kind." Id. The Court thus

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reaffirms its earlier statement that the terms of the

Proposed Consent Judgments are "fair" and "reasonable."

See CR Intrinsic, 939 F. Supp. 2d at 435. In light of that

conclusion, the Court "is required to enter" the Proposed

Consent Judgments. Citigroup IV, 2014 WL 2486793, at *7.

In making this determination, the Court is mindful of

and deems it appropriate to call attention to how

circumstances have changed since it issued the Conditional

Approval Order. First, the criminal trial of defendant and

CR Intrinsic employee Martoma, which was pending at the

time of the Conditional Approval Order, see CR Intrinsic,

939 F. Supp. 2d at 440, is now complete. On February 6,

2014, a jury convicted Martoma on three counts of

securities fraud grounded on charges of unlawful conduct

arising out of the same transactions and events involved in

the instant case. See Verdict Form, United States v.

Martoma, 12-cr-973 (PGG) (S.D.N.Y.), Dkt. No. 230.

Second, after the Conditional Approval Order was

issued, the Government brought and resolved related

criminal and civil forfeiture proceedings against CR

Intrinsic and affiliated entities, including SAC Capital.

Both cases concern, in part, the same alleged unlawful

conduct that is the subject of the Amended Complaint:

trading stock in Elan Corporation, plc, and Wyeth based on

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material nonpublic information. Compare Am. Compl., Dkt.

No. 25, ~ 1-7, with Indictment, United States v. S.A.C.

Capital Advisors, L.P., et al., 13-cr-541 (LTS) (S.D.N.Y.),

Dkt. No. 1, ~ 31(a}, and Complaint, United States v. S.A.C.

Capital Advisors, L.P., et al., 13-cv-5182 (RJS)

(S.D.N.Y.), Dkt. No. 1, ~ 31(a}. In a global disposition of

those two cases, CR Intrinsic and its codefendants pled

guilty to securities fraud and wire fraud, admitted to the

forfeiture allegations, and agreed, among other conditions,

to surrender $1.8 billion to the Government in fines and

forfeiture. See S.E.C. v. Cioffi, 868 F. Supp. 2d 65, 74

(E.D.N.Y. 2012) (approving consent judgment in light of

acquittals in related criminal case) i S.E.C. v. Vitesse

Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011)

(approving consent judgment in light of convictions in

related criminal case) .

In its Conditional Approval Order, the Court noted

that a conviction in Martoma' s case "would presumptively

establish facts of wrongdoing that a settlement in this

action does not expressly acknowledge an incongruity

obvious to even the most casual observer. II CR Intrinsic,

939 F. Supp. 2d at 440. The Court's concern about this

incongruity contributed to its reluctance to approve the

Proposed Consent Judgments at that time. See id. i id. at

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443. But the guilty verdict in Martoma's case and the

guilty plea in CR Intrinsic's own criminal case have cast

the SEC's "neither admit nor deny" settlement in this

action in a different light: while presumably denying

wrongdoing in a civil case, these defendants have been

convicted of criminal offenses based on a prosecution for

the same conduct and resting on a full factual record and

application of the most rigorous evidentiary standard.

As a matter of policy, then, the delay between the

SEC's filing of its Proposed Consent Judgments and the

Court's decision to approve those judgments today has

served a purpose. It has called attention to the

importance of more rigorous inquiry by the SEC in its

application of "neither admit nor deny" provisions in

settlements embodying the exceptional circumstances

presented by this action, specifically those where parallel

criminal cases track an SEC complaint arising from the same

facts. In such instances, there may be value in a wait

and-see approach before rushing into a settlement and

hurrying to a district court to seek approval of a proposed

consent decree. Situations could arise, as might have been

the case here, in which the outcome of a strong criminal

case could strengthen the administrative agency's hand in

achieving a settlement more favorable to the public good

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and the interests of justice. Similarly, in some

circumstances, a judge considering whether to enter such a

proposed civil consent decree should weigh the value of

holding an approval decision in abeyance pending the

outcome of the parallel criminal litigation. See Kashi v.

Gratsos, 790 F.2d 1050, 1057 (2d Cir. 1986) (noting that a

district court may stay civil proceedings pending the

outcome of criminal proceedings when the interests of

justice so require) .

For the reasons discussed above, it is hereby

ORDERED that the Court grants approval of the Final

Judgment as to Defendant CR Intrinsic Investors, LLCi the

Final Judgment as to Relief Defendant CR Intrinsic

Investments, LLCi the Final Judgment as to Relief Defendant

S .A. C. Capital Advisors, LLC i the Final Judgment as to

Relief Defendant S.A.C. Capital Associates, LLCi the Final

Judgment as to Relief Defendant S.A.C. International

Equities, LLCi and the Final Judgment as to Relief

Defendant S.A.C. Select Fund, LLC.