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Jul 21, 2013

SEC charges SAC’s Cohen with lax supervision

As time runs out for criminal charges, SEC seeks to put Cohen out of business

Years of investigation and hundreds of millions of dollars in alleged illegal profits that shone a spotlight on the hedge fund industry have culminated in an SEC charge against hedge fund billionaire Steven Cohen for lax supervision.

Days before the statute of limitations was due to run out and clear Cohen of any charge, the SEC has announced an administrative charge of failing ‘to reasonably supervise’ employees including Mathew Martoma and Michael Steinberg, both of whom have been charged with insider trading and could face prison terms after their trials start in November.

Cohen will not face criminal charges that could result in prison time as the statute of limitations runs out this month, but he could be barred from working as a supervisor in the financial services industry and could face fines.

‘Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure their firms comply with the securities laws,’ says Andrew Ceresney, co-director of the SEC’s division of enforcement, in a press 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. In addition to the more than $615 mn his firm has already agreed to pay for the alleged insider trading, the enforcement division is seeking to bar Cohen from overseeing investor funds.’

The SEC says CR Intrinsic, a unit of Cohen’s SAC Capital, earned profit and avoided losses of more than $275 mn as a result of the illegal trades. Besides Martoma and Steinberg, investigators have charged or implicated seven other current and former SAC Capital employees. Earlier this year, the SEC won its biggest ever settlement for an insider trading case when SAC Capital agreed to pay more than $600 mn in relation to the probe.

‘Cohen received highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades made by two portfolio managers who reported to him,’ the SEC says in a press release announcing the charge. ‘Instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 mn bonus for his work.’