Elan Pharmaceuticals believes it was victimized twice over by SAC Capital, the notorious hedge fund now called Point72. The first time was when SAC obtained insider information about unsuccessful trials of the Alzheimer’s drug bapineuzumab and dumped $700 million in shares of the Irish drug company and its drug development partner Wyeth. But to add insult to that injury, Elan had to spend a small fortune, about $1.6 million, in legal fees and costs stemming from the government’s investigation of SAC’s insider trading. That is money SAC should have to pay, according to Elan. With the hedge fund due to be sentenced Thursday by U.S. District Judge Laura Taylor Swain of Manhattan, the pharma company’s lawyers at Reed Smith have submitted a letter asking Swain to recognize Elan as a victim of SAC’s crimes and order the hedge fund to pay it $1.6 million in restitution.
It’s a fascinating request. You probably recall that in a couple of high-profile cases in the recent spate of insider-trading prosecutions, Morgan Stanley and Goldman Sachs won rulings that former employees (in a broad sense of that word) were on the hook for legal fees the banks incurred as a result of the employees’ crimes. In February 2013, U.S. District Judge Jed Rakoff held that under the federal victims’ restitution law, former Goldman director Rajat Gupta owes the bank $6.2 million — the money Goldman laid out to Sullivan & Cromwell to investigate Gupta’s conduct internally and to cooperate with government investigators. Last July, the 2nd U.S. Circuit Court of Appeals affirmed a similar ruling by U.S. District Judge Denise Cote. She had concluded in 2012 that Morgan Stanley was the victim of insider trading by FrontPoint hedge fund manager Chip Skowron, so Skowron was responsible not just for repaying the bank the cost of his own defense but also for restitution of the legal fees Morgan Stanley advanced to other FrontPoint employees.
The 2nd Circuit’s ruling in the Skowron case didn’t leave much doubt that employers can receive restitution as victims for the money they spend to cooperate with government investigations of employees who go on to plead guilty or be convicted. Elan, however, didn’t employ SAC or Mathew Martoma, the former SAC trader who was convicted of trading on inside information about the company. On Monday, in a response to Elan’s letter requesting restitution, SAC’s lawyers at Paul, Weiss, Rifkind, Wharton & Garrison said Elan’s theory of restitution is “without precedent.”
“Elan is not seeking restitution against its own agents (Drs. Oilman and Ross) who admitted breaching their duties to it by disclosing confidential information, but from entities that had no fiduciary or other relationship to Elan,” wrote SAC counsel Daniel Kramer of Paul Weiss. “We are aware of no court that has ever held a defendant responsible for legal fees incurred by a public company whose information was misused, where the defendant was not an employee or agent of the company, but rather a tippee of the company’s employees — much less an employer of the tippee.” The victims’ restitution law requires a showing that the supposed victim was directly harmed by the underlying crime in the case. Here, SAC said, Elan couldn’t show that its legal fees were attributable to SAC’s criminal actions.
The hedge fund made its broad argument about Elan’s theory in a footnote, choosing to emphasize in its main arguments that the pharmaceutical company had waited too long to request restitution and hadn’t adequately shown in its 188-page compendium of bills from Shearman & Sterling that the law firm’s fees were specifically tied to the government’s investigation of SAC, rather than other supposed insider trading cases or the Elan shareholder class action against SAC.