U.S. judge takes on SEC again, questions Heinz insider trading pact

NEW YORK Thu Jan 30, 2014 6:53pm EST

NEW YORK Jan 30 (Reuters) - A federal judge who has questioned the U.S. Securities and Exchange Commission's practice of settling cases without admissions of wrongdoing is raising concerns about a proposed agreement over insider trading in H.J. Heinz Co.

Concerns voiced by U.S. District Judge Jed Rakoff were detailed by the SEC in a court filing in New York federal court Thursday as it seeks approval of a $5 million settlement with two brothers from Brazil.

The SEC said that in November, Rakoff questioned the agency's decision to allow the brothers to settle while neither admitting nor denying the charges. Despite a revision to the settlement, the judge has continued to raise issues, the SEC said.

The dispute, which has not been previously reported, came despite a new settlement policy ushered in by SEC Chair Mary Jo White in June that would require defendants in some cases to make admissions, in contrast to letting them resolve lawsuits without admitting or denying the charges.

The shift followed a public debate over the practice prompted in large part by Rakoff, who in 2011 refused to approve the SEC's $285 million financial crisis-related settlement with Citigroup Inc.

Rakoff at the time said he had no way to know if the accord was in the public interest. The SEC is awaiting a decision by 2nd U.S. Circuit Court of Appeals in New York on whether it will reverse the judge.

The commission's latest run-in with Rakoff came in lawsuit filed in February 2013 initially against unknown traders in H.K. Heinz over suspicious trades ahead of the announcement that the ketchup maker would be acquired for $23 billion by Warren Buffett's Berkshire Hathaway Inc and Brazil's 3G Capital.

In October, the SEC filed an amended complaint while simultaneously settling with the two brothers in Brazil now named in the case, Michel Terpins and Rodrigo Terpins.

The SEC said the brothers had used a family-owned Cayman Islands entity called Alpine Swift to buy $90,000 in options positions a day before the takeover was announced.

After the deal became public, the positions' jumped in value by 2000 percent, the SEC said.

As part of the settlement, the Terpins agreed to forfeit all $1.81 million in profits made from trading Heinz options and also pay $3 million in penalties.

Neither brother admitted nor denied the charges as part of the settlement as initially drafted.

No transcripts exist of the calls between Rakoff and the parties where the SEC said he raised his concerns. But from the start, Rakoff's only concern was the inclusion of the no-admit, no-deny language, the SEC said.

The SEC said that after further negotiations, it submitted on Dec. 26 revised proposed consent judgments for Rakoff's approval that dropped the language. But the proposed judgments contained clauses that made clear that the lack of the language didn't constitute an admission, the SEC said.

Rakoff on a Dec. 31 call expressed continued concerns and gave the parties three options, the SEC said: remove the new clauses, require the brothers to admit to the allegations for the limited purpose of the proceedings, or have an evidentiary hearing.

On a call that followed on Jan. 9, Rakoff ordered the SEC to submit a court filing providing the evidence supporting its claims. Rakoff had required a similar filing in the Citigroup case as well.

In Thursday's filing, which provided that evidence, the SEC said the settlements with the brothers "reflect a fair, adequate, and reasonable resolution of this matter."

Dwight Bostwick, a lawyer for Michel Terpins, declined comment. A lawyer for Rodrigo Terpins did not respond to a request for comment. A spokesman for the SEC also declined comment.

The case is Securities and Exchange Commission v. Certain Unknown Traders in the Securities of H.J. Heinz Co, U.S. District Court, Southern District of New York, No. 13-01080.