SAC Capital's alleged insider trading that led to a $602 million settlement with the SEC is discussed in detail in the excellent piece in The New Yorker that I recommended earlier this week. Now the SEC is faced with another question: what should it do with that $602 million?
The size of the trading involved has brought those who were on the other (money-losing) side of the transactions out of the woodwork to be paid back. Reuters reports that these investors have already filed a $2 billion class action lawsuit against SAC seeking to recover their losses, and that this same group has now approached the SEC seeking a share of the $602 settlement.
It is uncommon, but certainly not unheard of, for the SEC to create a Fair Fund to distribute funds to harmed investors in insider trading cases. According to a study by Prof. Urska Velikonja that will soon be published in the Stanford Law Review, the SEC created 236 Fair Funds between 2002 and 2013, just 15 of which (6%) were in insider trading cases. Those 15 Fair Funds in insider trading cases have returned just over $100 million to investors, or about 0.7% of the total funds distributed via SEC Fair Funds during that period.
One typical hurdle to distributing funds to insider trading "victims" is the difficulty involved in identifying who the specific victim on the wrong side of a trade may be. In this case, with a huge pot of settlement money available and with the victims waving their arms to be identified and included in any disbursement, that is not the case. Indeed, Bloomberg reports that the SEC has already received over 40 written submissions from shareholders in the two stocks at issue (Elan and Wyeth) who are seeking recovery. “The commission is currently determining whether it should recommend to the court that a fair fund be established in this case,” the SEC told the court in a letter this week.
Yesterday, the court overseeing the settlement instructed the SEC to notify potential victims about the fund by October 30, 2014, and to advise the court on how the money will be disbursed by November 14.