(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 ( PFE ) 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 ) has different ideas about who should get

the money, as I told you in May.

Pfizer ( PFE ) 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 ( PFE ) 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 ( PFE ) 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 ( PFE ) 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 ( PFE ), 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 ( PFE ) 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 ( PFE ) is entitled to recoup 1% of the value of the information

to compensate the company for the theft.

Alternatively, Pfizer ( PFE ) 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 ( PFE ) said, is a conservative estimate of

Wyeth's reputational harm from the insider trading scheme.

The SEC fired back at Pfizer ( PFE ) in a brief filed on Monday. The

agency's primary argument: Pfizer ( PFE ) 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 ( PFE ) 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 ( PFE ) 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 ( PFE ), the agency said.

Pfizer ( PFE ) 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 ( PFE ) 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 ( PFE ) 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 ( PFE )

dispute.

Pfizer ( PFE ), 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 ( PFE ) 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 ( PFE ) wants the $75 mln left from SAC Capital's insider

trading settlement with SEC