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From Securities Regulation Daily, May 30, 2014

SEC’s case on Steven Cohen stayed for Martoma sentencing, Steinberg appeal

By Mark S. Nelson, J.D.

The SEC’s administrative case against Steven A. Cohen, founder of S.A.C. Capital Advisors, L.P. (S.A.C.), has been stayed yet again at the request of the Manhattan U.S. Attorney. Yesterday’s order by SEC Chief Administrative Law Judge, Brenda P. Murray, delays the case until August 26, 2014, so that related criminal cases can be resolved (In Re Steven A. Cohen, May 29, 2014; Stay #2Stay #1Corrected OIP).

Parallel civil and criminal cases. The SEC alleged that Cohen, whose hedge fund advisory business once managed more than $15 billion, violated Investment Advisers Act Sec. 203(f) by failing to supervise two employees, Mathew Martoma and Michael Steinberg, who allegedly violated Exchange Act Sec. 10(b) and Rule 10b-5 by providing Cohen with material, nonpublic information about three public companies. Federal prosecutors brought parallel criminal insider trading charges against S.A.C., Martoma and Steinberg.

Chief ALJ Murray granted the U.S. Attorney’s latest stay request because of ongoing proceedings in the Martoma and Steinberg criminal cases. Previously, Chief ALJ Murray let the U.S. Attorney intervene in the Cohen case to ask for a stay because of the similarity between the SEC’s allegations and the charges brought by federal prosecutors. But in her initial order staying the SEC’s case, Chief ALJ Murray ruled that Cohen was not then entitled to production of SEC investigative files.

Martoma and Steinberg sentencings. Lawyers for Martoma recently filed papers with the federal court in Manhattan urging a lesser sentence than what is possible under the federal sentencing guidelines. Specifically, Martoma argued that a 15 to nearly 20 year sentence based on a more than $200 million gain is inapt because his personal gain was $6.3 million after his $9.4 million bonus related to the charged insider trading is offset by the amount of taxes he paid to the U.S. (U.S. v. Martoma, May 27, 2014).

Martoma’s lawyers said the guidelines’ emphasis on the size of a person’s gain from the offense tends to produce “irrational” sentences. Martoma’s filing said many district judges have noted the disparate influence of the gain factor. Martoma also noted that the guideline sentence for him would be almost twice the near upward-bound 11-year sentence imposed on Raj Rajaratnam, who has appealed his conviction to the Supreme Court (Rajaratnam v. U.S., No. 13-1001, February 18, 2014).

Last year, the Third Circuit upheld a 12-year insider trading sentence, which the court said it believed to be the longest sentence of its kind (U.S. v. Kluger, July 9, 2013, Greenberg, M.). The court clarified its decision to affirm Matthew Kluger’s sentence in a footnote. “We are not implying that if we had imposed the sentence in the first instance that we might have imposed a shorter sentence. We simply are making it clear that even if we would have done so that circumstance would not require that we reverse here.” Martoma’s filing did not appear to mention the Kluger opinion.

Martoma also claimed that he engaged in a single act of getting inside information from a single tipper, traded on that information in a brief time frame, was convicted of conspiring with two others, was a less culpable tippee who did not also become a tipper, and that his actions did not involve bribery, perjury or obstruction of justice. Martoma’s filing also said his unrelated expulsion from Harvard Law School and the more recent loss of his Stanford degree should not impact his sentence. As a result, Martoma suggested a prison sentence of between 5 to 6.5 years.

He also urged the court not to impose a fine because he is subject to forfeiture, faces liability in a parallel SEC case and from private securities class action suits, and that his ability to pay is limited by depleted or frozen assets and his likely inability to find gainful employment. Martoma’s sentencing hearing is set for June 10, 2014.

Steinberg was sentenced earlier this month to 3.5 years in prison, after having been convicted of four counts of securities fraud and one count of conspiracy to commit securities fraud. Steinberg also must serve three years of supervised release and pay a $2 million fine and $365,000 forfeiture. The court rejected arguments made by Steinberg’s lawyers in a prior motion for acquittal. According to ALJ Murray’s order, Steinberg has said he will appeal (U.S. v. Steinberg, May 15, 2014, Sullivan R.).

The Release is No. AP-1472.

Attorneys: Antonia Marie Apps, U.S. Attorney's Office, for the U.S. in U.S. v. Steinberg. Barry Berke (Kramer Levin Naftalis & Frankel, LLP) for Michael Steinberg. Eugene Edward Ingoglia, U.S. Attorney's Office, for the U.S. in U.S. v. Martoma. Richard M. Strassberg (Goodwin Proctor LLP) for Mathew Martoma.

Companies: S.A.C. Capital Advisors, L.P.; S.A.C. Capital Advisors, LLC.

MainStory: TopStory Enforcement FraudManipulation InvestmentAdvisers

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