COLUMN-Objections to SAC Capital guilty plea: Alison Frankel

(Alison Frankel is a Reuters columnist. The opinions expressed are her own.)

By Alison Frankel

NEW YORK, Nov 7 (Reuters) - On Friday, the notorious hedge fund SAC Capital will appear before U.S. District Judge Laura Swain in New York to plead guilty to all five counts of an indictment against it. But shareholders in two companies that were allegedly prime targets of SAC (KOSDAQ: 122690.KQ - news) 's insider trading scheme filed a motion Thursday calling on Judge Swain to reject the plea because it does not require the hedge fund to admit to illegal trading in Wyeth and Elan (Frankfurt: DRX.F - news) shares.

The Wyeth and Elan shareholders who wrote to Swain are lead plaintiffs in two securities class actions against SAC, claiming that they were on the losing side of SAC's allegedly illegal trades and are owed hundreds of millions of dollars in damages. Their private litigation against the fund will be streamlined if SAC admits that it engaged in insider trading in Wyeth and Elan shares because that admission would bar SAC from contesting its illegal acts. They contend in Thursday's motion, as they did in a letter to Swain last week, that they are victims of SAC's crimes and have a right to a say on SAC's sentencing under the Crime Victims Rights Act of 2004.

The securities plaintiffs believe that SAC will not admit illegal trading in their shares when the hedge fund makes its formal allocution Friday before Swain, even though the hedge fund has agreed to plead guilty to all of the U.S. Attorney's charges. Plaintiffs' lawyers - Wohl & Fruchter and Pomerantz Grossman Hufford Dahlstrom & Gross for Elan and Scott + Scott and Motley Rice for Wyeth - said in their motion that SAC and prosecutors have structured the plea agreement to permit SAC to avoid admitting to the most serious insider trading allegations against it, even though the Elan and Wyeth trades appear to the be basis of the penalties SAC has agree to.

That's because, according to Thursday's motion, the indictment against SAC and related defendants lumps hundreds of allegedly illegal acts into each of its five counts. The plea agreement, meanwhile, obligates SAC and the other defendants only to admit that "at least one employee of each of the SAC entity defendants engaged in insider trading within the scope of their employment and for the benefit of the respective SAC entity defendant." That language, according to the Elan and Wyeth shareholders, means that when SAC makes its allocution Friday, it could admit to illegal trades in other companies' stock and still satisfy the terms of the plea deal, without conceding that it traded on inside information about Elan and Wyeth.

Swain should not approve a plea that permits SAC to evade responsibility for the most egregious conduct in the indictment, the securities plaintiffs argued. They also argued that the judge should not give the usual deference to the U.S. Attorney. Prosecutors should be held accountable for an indictment that "lumped hundreds of trades directed by multiple individual wrongdoers ... into a single count against each defendant - treading the outer boundaries of proper pleading under the rules of criminal procedure." The government then permitted SAC to enter a plea agreement that "misleadingly obscures the fact that SAC is not required to admit the conduct charged."

(Part of the Elan and Wyeth shareholders' evidence that the plea deal is misleading is my own post on their class actions from Monday, in which I assumed that the plea deal did not contain a carve-out for Wyeth and Elan trades because SAC was admitting to all charges; I'm in good company, though, with Bloomberg columnists Matt Levine and Jonathan Weil, who also wrote that the deal required SAC to admit to inside trading in Elan and Wyeth shares.)

"SAC should not be allowed to just pay a fine and avoid admitting that it did what the indictment charges, the sentence requires, and the evidence proves," the motion said.

An SAC representative declined to comment in an email. The hedge fund is represented by Paul, Weiss, Rifkind, Wharton & Garrison and Willkie Farr & Gallagher. (Reporting by Alison Frankel; Editing by Eddie Evans)