Column: SEC blasts Pfizer's bid for $75 million from insider trading victims' fund
The opinions expressed here are those of the author, a columnist for Reuters.
By Alison Frankel
July 9 (Reuters) -One of the most notorious insider trading schemes in U.S. history has led to a $75 million fight between drugmaker Pfizer and the U.S. Securities and Exchange Commission.
That sum is what remains of a fund to compensate victims of insider trading by the now-shuttered hedge fund SAC Capital, which reaped more than $275 million in profits in 2008 from trading on unlawfully obtained clinical data about a prospective Alzheimer's drug. SAC Capital and related entities paid more than $600 million in 2013 to resolve the SEC's case, in the largest insider trading settlement in U.S. history.
About $275 million was a civil penalty. The rest was deemed disgorgement and pre-judgment interest.
The government distributed most of the money – about $531 million – to about 5,000 investors who lost money as a result of SAC’s illegal trades based on misappropriated information about a drug being developed by Wyeth and Elan. All of the investors who provided evidence of their losses were repaid in full, according to the SEC’s report last March to U.S. District Judge Victor Marrero of Manhattan, who is overseeing the agency's case.
The SEC asked Marrero to order the remaining $75 million to be transferred to the U.S. Treasury, which, by statute, is the designated recipient of penalties obtained by the agency.
But Pfizer PFE.N has different ideas about who should get the money, as I told you in May.
Pfizer acquired Wyeth in 2009, before SAC Capital’s insider trading scheme was revealed. And ever since the SEC’s settlement with the hedge fund, Pfizer has maintained that its subsidiary was a victim of the scheme.
It was a Wyeth consultant, after all, who leaked confidential clinical data to SAC portfolio manager Mathew Martoma, in a breach of the consultant's duty to the company. (The consultant, a medical researcher, made a non-prosecution deal with the government. Martoma was convicted in 2014.)
Even the U.S. government, Pfizer has said, acknowledged during a 2013 hearing in the parallel criminal case against SAC and related funds that the “prime victims” of the funds’ illegal trades were the companies whose confidential information was stolen -- Wyeth and Elan.
Pfizer first pitched that argument to the SEC in 2014 but agreed to wait to press its case until all of the injured Wyeth and Elan investors were made whole. Last May, after the SEC informed Marrero that $75 million remained in the fund after investors had been repaid in full, the company told the judge why it believes it is entitled to the leftover funds.
The gist of its argument: Because Wyeth was actually victimized by the misappropriation of its confidential data, its parent, Pfizer, is a more deserving recipient than the U.S. Treasury. (Elan, which sought restitution via the criminal case against SAC and related funds, reached a settlement with the funds and has not pressed for a share of the SEC settlement money.)
Pfizer offered two theories to quantify its purported financial losses. The stolen data, it argued, was worth about $7 billion, based on the decline in Wyeth’s share price when the disappointing clinical trial results were publicly announced, so Pfizer is entitled to recoup 1% of the value of the information to compensate the company for the theft.
Alternatively, Pfizer said, it valued Wyeth’s goodwill at $4 billion when it acquired the company in 2009, before Wyeth’s reputation was dinged by the misconduct of its consultant. $75 million, or 2%, Pfizer said, is a conservative estimate of Wyeth’s reputational harm from the insider trading scheme.
The SEC fired back at Pfizer in a brief filed on Monday. The agency’s primary argument: Pfizer hasn’t demonstrated any measurable loss from the theft of Wyeth’s confidential information so it’s not entitled to recover money from the victims’ fund.
Pfizer’s arguments about the value of the stolen information and the harm to Wyeth’s reputation are “arbitrary and irrelevant,” the SEC said. Insider trading didn’t cause Wyeth’s share price to plunge when the disappointing trial results were announced, the SEC said. Nor has Pfizer ever before claimed that it overvalued Wyeth’s reputation in their 2009 merger.
Investors who were repaid from the $600 million fund had to prove they lost money as a result of the insider trading scheme, the SEC said. There is no reason to relax that requirement for Pfizer, the agency said.
Pfizer and the SEC are also fighting about whether the leftover money should be characterized as a disgorgement by SAC or as a penalty -- and that dispute is not just a matter of semantics.
The U.S. Supreme Court ruled in 2020 that money disgorged by defendants in SEC enforcement actions should generally be distributed to victims. The 2nd U.S. Circuit Court of Appeals subsequently held in a 2023 decision that disgorged funds “must be ‘awarded for victims.’”
Citing those decisions, Pfizer said in it brief last May that if the leftover money is a disgorgment, it can’t go to the U.S. Treasury.
But the SEC said in Monday’s brief that the entire remaining $75 million comes from the penalty portion of the hedge fund’s settlement because, as a rule, disgorged money is paid out to investors before penalty funds, and payments to SAC victims have already surpassed the hedge fund’s disgorgement.
Pfizer has said there is no case law backing the SEC’s purported order-of-payment rule. The agency retorted in Monday’s brief that its position tracks statutory language from the law establishing fair funds to recompense victims of financial fraud.
An SEC spokesperson declined to comment on the Pfizer dispute.
Pfizer, which is represented by Skadden, Arps, Slate, Meagher & Flom, said in an email statement, “We believe under governing legal and equitable principles that the remaining settlement proceeds should be paid to Wyeth, which was a victim of the conduct at issue.” A Pfizer spokesperson did not respond to a follow-up query about the SEC’s specific arguments in Monday’s brief.
The company will get one final chance to argue its case in a brief next month.
Read more:
Pfizer wants the $75 mln left from SAC Capital’s insider trading settlement with SEC
(Reporting By Alison Frankel)
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