The Lee Insider Trading Case: A Critical Element of the SAC Charges

 The case against S.A.C. Capital received what appears to have been a critical, last minute boost when Richard Lee agreed to plead guilty to one count of conspiracy to commit securities fraud and one count of securities fraud on July 23, 2013. U.S. v. Lee, 13 Crim 539 (S.D.N.Y. Filed July 23, 2013, unsealed July 25, 2013). That was just two days before the grand jury handed up an indictment of four corporate entities that are commonly called SAC Capital. Those entities are SAC Capital Advisors, LP (“SAC Capital LP), SAC Capital Advisors LLC, CR Intrinsic Investors LC and Sigma Capital management. U.S. v. SAC Capital Advisors, L. P., 13 Crim 541 (S.D.N.Y. July 25, 2013) (here). The Lee plea deal appears to have furnished the critical evidence to name SAC Capital LP as a defendant.

The Lee case

Richard Lee was a portfolio manager at SAC Capital Advisors, LP from April 2009 through June 2011. He rejoined the firm again in September 2012 and remained through March 2013. Mr. Lee co-managed a portfolio that focused on “special situations” such as mergers and acquisitions, private equity buy-out, and corporate restructurings. The portfolio had about $1.25 billion in purchasing power.

The Information claims that Mr. Lee “obtained Inside Information directly and indirectly from individuals who worked at public companies and investment firms.” In 2009 the Information alleges that he obtained inside information from multiple sources about Yahoo! Inc. In one instance cited in the Information he met with an unnamed co-conspirator on April 20, 2009. That person had inside information about the earnings of Yahoo. The net day Mr. Lee sold about 1.2 million shares of Yahoo in his portfolio at the SAC Capital LP.

On November 11, 2009 Mr. Lee again received inside information. This time it concerned 3Com Corporation. As a result of the information Mr. Lee purchased 700,000 shares of 3Com in his portfolio at SAC Capital LP. Further details regarding that transaction are furnished in the SEC’s parallel case against Mr. Lee. There it states that his source was a Beijing based consultant who had close personal ties with executives at the company. From the Beijing source he learned that 3Com was about to be acquired by Hewlett-Packard.

The SEC’s action cites another instance of insider trading in the securities of Yahoo not specifically identified in the Information. The Commission’s complaint claims that in July 2009 Mr. Lee was told by a sell-side analyst familiar with the nonpublic negotiations between Microsoft and Yahoo that the two firms would enter into an internet search engine partnership. Mr. Lee promptly purchased a large block of Yahoo shares for his SAC Capital LP portfolio as well as in his personal trading account. The SEC’s complaint alleges violations of Exchange Act Section 10(b). SEC v. Lee, Civil Action No. 13-cv-5185 (S.D.N.Y. Filed July 25, 2013).

The SAC Capital indictment

Mr. Lee’s guilty plea is clearly a key element in the indictment against the SAC Capital companies. First, the indictment names four of the SAC Capital entities, one of which is SAC Capital L.P, the firm which employed Mr. Lee. In the section of the indictment concerning that entity, Mr. Lee and his trades in the shares of Yahoo and 3Com are the only examples cited of trading on inside information by SAC Capital LP.

Second, a critical element of the indictment is the claim that SAC “sought to hire PMs [portfolio managers] and RAs [research analysts] believed by the SAC Owner and others in SAC management to have an “edge” based in part on networks of contacts . . .” One example of this practice was the hiring of Mr. Lee “who previously had worked at Hedge Fund A, and was known for being part of Hedge Fund A’s ‘insider trading group,’” according to the indictment. Mr. Lee was hired over the objection of the legal department.

Finally, Mr. Lee is one of eight SAC employees who have been charged with insider trading. Two of those individuals, Matthew Martoma and Michael Steinberg are awaiting trial. The others have pleaded guilty.

Absent Mr. Lee’s guilty plea last week it does not appear that the government would have had the evidence to charge SAC Capital LP. Likewise, the government would not have had other evidence which appears critical to the charges.

For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.

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