SEC Charges Hedge-Fund Mogul Steve Cohen With Failing To Prevent Insider Trading

Image via Flickr/ Bête à Bon-Dieu

Billionaire hedge fund manager Steve Cohen has been charged by the SEC for “failing to supervise two senior employees and prevent them from insider trading under his watch,” according to its website.

The complaint alleges that Cohen refused to investigate suspicious activity from portfolio managers Mathew Martoma and Michael Steinberg. The SEC writes: “Cohen ignored the red flags and allowed Martoma and Steinberg to execute the trades. Instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work. Cohen’s hedge funds earned profits and avoided losses of more than $275 million as a result of the illegal trades.”

Jonathan Gasthalter, spokesman for SAC, told FINalternatives, “The SEC’s administrative proceeding has no merit. 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.”

According to the SEC complaint, at least two separate occasions occurred in 2008 where Martoma and Steinberg “provided information to Cohen indicating their potential access to inside information to support their trading” with pharmaceutical company Elan and Wyeth and tech company Dell. The SEC press release states:

…Cohen watched Martoma build a massive long position in the stock of two pharmaceutical companies—Elan and Wyeth—based on their joint clinical trial of a drug with the potential to treat Alzheimer’s disease. Cohen allowed this despite repeated e-mails and instant messages to Cohen from other analysts at CR Intrinsic advocating against it. The analysts questioned whether Martoma possessed undisclosed data on the results of the trial. Cohen responded by saying it was “tough” to know whether Martoma knew something, but that he would follow Martoma’s advice because he was “closer to it than you.” In later exchanges of instant messages, Cohen further remarked that it “seems like mat [Martoma] has a lot of good relationships in this arena.” Cohen also was told about a doctor who had provided his portfolio managers with potentially non-public information about the clinical trial, but failed to express any concern about the use of that information. During his e-mail exchanges, Cohen displayed no concern that Martoma might possess non-public information or about his use of such information to inform investment decisions at his firm.  Instead, Cohen encouraged Martoma to talk further with a doctor familiar with the clinical trial.”

…Cohen also supervised Steinberg while he was involved in insider trading of Dell securities in August 2008. After being looped into a highly suspicious e-mail between Steinberg and other firm employees reflecting the clear possibility that they possessed material non-public information about an upcoming earnings announcement at Dell, Cohen again failed to take prompt action to determine whether Steinberg was engaged in unlawful insider trading. Instead, Cohen liquidated his Dell shares based on the recommendation of Steinberg, who continued short selling Dell shares in his Sigma Capital portfolio based on the confidential information. Dell’s stock price dropped sharply after its August 28 earnings announcement, and funds managed by Cohen’s firms profited or avoided losses totaling at least $1.7 million. Three hours after the earnings announcement, Cohen e-mailed Steinberg: “Nice job on Dell.”

“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. “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 million his firm has already agreed to pay for the alleged insider trading, the Enforcement Division is seeking to bar Cohen from overseeing investor funds.”

If successful, the ruling could devastate Cohen’s career. But with more than half a billion already spent on settling insider trading, we’re willing to bet he’ll put up a good fight.