The Securities and Exchange Commission yesterday presented new details that it said showed Cohen received “highly suspicious” information that should have caused any reasonable hedge-fund manager to investigate the basis for trades made by Mathew Martoma and Michael Steinberg. Cohen, 57, ignored red flags and allowed illegal trades that earned profits and avoided losses of more than $275 million, the SEC said in an administrative proceeding.
“Hedge-fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” Andrew Ceresney, co-director of the SEC’s enforcement division, said in a statement. “After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law.”
If its proceedings are successful, the SEC said it would seek to bar Cohen, who boasts one of the best long-term track records in history, from managing money for investors. The move could effectively end his hedge-fund career even though the SEC isn’t pursuing insider-trading claims against him personally.
SAC, based in Stamford, Connecticut, oversees $15 billion, about 60 percent of which is money from Cohen and employees. Cohen hasn’t been charged criminally despite a multiyear probe by the U.S. attorney’s office in Manhattan and the Federal Bureau of Investigation.
Cohen, whose net worth is estimated at about $9 billion by the Bloomberg Billionaires Index, has returned 25 percent a year in his funds since founding his firm in 1992 -- after taking half of the profits in fees -- a record unsurpassed by any other equity hedge-fund manager.
“The SEC’s administrative proceeding has no merit,” Jonathan Gasthalter, a spokesman for SAC, said in a statement. “Steve Cohen acted appropriately at all times and will fight this charge vigorously. The SEC ignores SAC’s exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen’s strong support for SAC’s compliance program.”
The SEC moved against Cohen four months after his firm agreed to pay $616 million to settle a complaint of insider trading by Martoma and Steinberg, without admitting or denying wrongdoing. At least nine current and former employees of SAC have been linked to insider trading while working at the firm.
The SEC’s five-year statute of limitations deadline to sue Cohen for a series of trades sparked by Martoma’s tip expires this month. Manhattan U.S. Attorney Preet Bharara said this week that prosecutors have an arsenal of statutes to bring securities fraud and insider trading charges and aren’t limited to a five-year deadline.
The Martoma case, which centered on trades in drugmakers Elan Corp. (ELN) and Wyeth Inc., was the first to link Cohen directly to alleged inside information. Martoma, who has pleaded not guilty and is scheduled to go on trial Nov. 4, allegedly received inside information on the drug trial from Dr. Sid Gilman, who was involved in the trial of an Alzheimer’s drug.
The SEC’s administrative action showed that the U.S. has amassed more evidence against Cohen than was previously known. Cohen knew that his employees were talking to at least one doctor about the trial, the SEC alleged in its order.
On April 11 and April 12, 2008, two unnamed analysts told Cohen they had a conversation with a doctor who they said implied he had seen some confidential phase II trial data on the Alzheimer’s drug being developed by Wyeth and Elan and that it did not have a statistically significant effect on patients.
“During his e-mail exchanges with the analysts, Cohen displayed no concern about the apparent disclosure of nonpublic information by the doctor to the analysts or about the analysts’ use of such information to inform their investment decisions on the firm’s behalf,” the SEC said.
Cohen then asked Martoma to speak with the unnamed doctor, the SEC said in its order. Martoma came back and said the information was a “non issue.” Cohen replied: “How come?” The SEC didn’t say in its order how Martoma responded. During that time, Martoma was getting nonpublic information from another doctor, Gilman, the SEC said.
The SEC also said in its order that Cohen got and traded on a tip about Dell Inc. (DELL) that was forwarded to him by Steinberg. Cohen sold off more than $11 million in Dell stock within minutes of getting a copy of a “highly suspicious” e-mail from Jon Horvath, Steinberg’s analyst.
Steinberg was indicted in March on charges of conspiracy and securities fraud. The U.S. alleges he engaged in insider trading in Dell based on illicit tips provided to him by Horvath. Steinberg has pleaded not guilty and is scheduled to go to trial in November. Horvath pleaded guilty and is cooperating with the U.S.
The SEC’s order -- the first time ever that government has brought an action against Cohen personally -- coincided with news that the regulator had rejected a proposed $18 million settlement with hedge-fund manager Philip Falcone as too lenient, suggesting its new Chairman Mary Jo White is following through on a pledge to run a “bold and unrelenting” enforcement program.
Falcone in April agreed to a two-year suspension from investing client money in order to settle claims that he improperly borrowed money from his fund to pay his taxes. White and Democrats Luis A. Aguilar and Elisse B. Walter, in a 3-to-1 vote, were concerned that Falcone wasn’t barred from serving as officer or director of a public company, said two people briefed on the matter, asking not to be named because the deliberations aren’t public.
Failure to supervise claims, such as brought against Cohen yesterday, are most commonly seen in cases targeting abusive sales practices at brokerages. The Commodity Futures Trading Commission used a similar provision in its June lawsuit against Jon Corzine when it accused him of failing of supervise employees who misused customer funds at now-defunct MF Global Holdings Ltd.
Failure to supervise claims can only be brought administratively and will be heard by an administrative judge within the SEC, not in a federal court like civil insider-trading allegations would.
Cohen had previously considered offering the government a deferred prosecution agreement under which SAC would admit wrongdoing and become a family office, but wouldn’t be prosecuted unless it broke the law again, a person familiar with his thinking told Bloomberg News in May.
SAC, which initially cooperated with the investigation, told clients in May that it will no longer do so unconditionally. Cohen last month declined to testify before a grand jury about allegations of insider trading at SAC. His firm has said it doesn’t plan to stop managing outside money even after clients pulled billions of dollars amid the investigation.