Steve Cohen doesn’t recall reading an e-mail on Dell Inc. (DELL) that was cited by the Securities and Exchange Commission as evidence that that the founder of SAC Capital Advisors LP failed to supervise his employees, according to a report given to the firm’s employees yesterday.
While Cohen sold his stake in Dell after being forwarded the e-mail, evidence suggests he did so because one of his portfolio managers started selling the stock, SAC said in a 45-page paper that rebuts many of the facts outlined in the SEC’s administrative order filed last week against the 57-year-old billionaire. There’s no evidence Cohen ever read the communication, according to the paper.
The response, posted on SAC’s internal website, illustrates Cohen’s efforts to keep his employees calm while fighting the SEC’s allegations -- the government’s first against him personally -- and its efforts to close down his $15 billion hedge fund. Cohen was accused of ignoring red flags in trades conducted by two portfolio managers, Mathew Martoma and Michael Steinberg, who have both been charged with securities fraud.
“Any claim that Cohen overlooked red flags showing unlawful conduct by SAC employees is contrary to his and SAC’s longstanding demonstrated commitment to the firm’s compliance efforts,” Cohen’s lawyers wrote in the paper, which was reported yesterday by the Wall Street Journal.
In the SEC’s July 19 order, the agency 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 the alleged wrongdoing.
The SEC today scheduled an administrative hearing in the case for Aug. 26 at 9:30 a.m. in Washington. Chief administrative law judge Brenda P. Murray will preside over the hearing.
Martoma, 39, was arrested in November for alleged insider trading in Elan Corp. and Wyeth after receiving confidential information from Dr. Sidney Gilman in July 2008 that caused him and Cohen to abruptly abandon their bullish bets and sell their holdings. The trades earned SAC profits and avoided losses of more than $275 million, the government said. Steinberg was arrested in March for trading in Dell and Nvidia Corp. (NVDA) based on illicit tips given to him by his analyst. Martoma and Steinberg, 41, have pleaded not guilty.
The SEC said in last week’s order that Cohen received a tip about Dell Inc. that was also sent to Steinberg, and that he traded afterward. 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, on Aug. 26, 2008, two days before Dell was scheduled to release earnings.
SAC countered in its report that Cohen sold his shares because one of his portfolio managers, who had who initially recommended that Cohen buy Dell, and whose trading Cohen relied on frequently in establishing his own positions, was selling some of his shares. That portfolio manager is Gabriel Plotkin, according to people familiar with the matter.
The report stated that at that time, Cohen only opened about 11 percent of his messages. SAC argues that even if Cohen had read the e-mail, which mentions a “second-hand read” from someone inside the company and warned that Dell’s gross margins would be less than the market expected, there is no evidence that it contained material nonpublic information.
After Dell reported earnings that month, Cohen e-mailed Steinberg “nice job on Dell,” according to the SEC.
The SAC report also says there were no “red flags” suggesting that Martoma had improper information and that his recommendation to reduce the firm’s exposure on Elan -- delivered in a 20 minute phone call -- made sense given that the shares had appreciated approximately 40% over the previous six weeks.
SAC defended its compliance team, saying it deploys some of the most aggressive communications and trading surveillance in the hedge-fund industry. The firm said it has daily reviews of e-mails, instant messages and internal write-ups, SAC trading using keyword- and concept-based search protocols; weekly reviews of randomly selected portfolio manager teams; reviews of electronic communications between investment professionals and their former employers for a period after commencing work at SAC; reviews of trading made around market moving events and corporate access events; and regular reviews of the firm’s most-profitable trades.
In a 2011 deposition taken in connection with a lawsuit against SAC filed by Fairfax Financial Holdings Ltd. (FFH), Cohen said, “I’ve read the compliance manual, but I don’t remember exactly what it says.” Cohen also said during the deposition that no employee had ever been punished for violating the firm’s compliance policy.
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