SEC Charges Steve Cohen For Failing To Stop Insider Trading At SAC Capital
The SEC has slapped hedge fund manager Steve Cohen with civil charges, accusing the billionaire of “failure to supervise” a pair of senior employees now facing criminal prosecution for insider trading.
According to the complaint filed by regulators, Cohen “received highly suspicious information” that should have caused him to investigate the rationale for trades conducted by Matthew Martoma and Michael Steinberg for affiliates of his hedge fund SAC Capital.
The firm scored more than $275 million in profits and skirted losses as a result of the trades, the SEC alleges in its complaint, which seeks to bar Cohen from overseeing investor assets.
Cohen’s camp immediately responded to the charges. “The S.E.C.’s administrative proceeding has no merit,” reads the statement from a Cohen spokesman. “Steve Cohen acted appropriately at all times and will fight this charge vigorously. The S.E.C. ignores SAC’s exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen’s strong support for SAC’s compliance program.”
Martoma and Steinberg, each facing criminal charges, are among a number of traders with SAC ties to be caught up in the government’s massive insider trading crackdown. Martoma’s allegedly illicit trades in pharmaceutical firms Elan ELN +1.75% and Wyeth have been termed “the most lucrative insider trading scheme ever” by prosecutors, while Steinberg faces accusations he traded on advance knowledge of results at technology stocks such as Dell DELL +5.44%.
On March 15, SAC affiliates CR Intrinsic and Sigma Capital agreed to pay more than $600 million to settle charges traders engaged in insider trading in the shares of Elan, Wyeth, Dell and Nvidia NVDA +0.75%.
In Martoma’s case, the SEC says Cohen was aware that his employee was receiving tips from a doctor with insider knowledge of clinical trials on an Alzheimer’s drug in 2008:
The SEC’s Enforcement Division alleges that after months of building up the massive position and being bullish on both Elan and Wyeth, Martoma had a 20-minute phone conversation with Cohen on July 20, 2008. According to Cohen, Martoma said that he was no longer comfortable with the Elan investments that CR Intrinsic and SAC held. Despite Martoma’s abrupt change in view and red flags that he likely received confidential information about the clinical trials from a tipper, Cohen failed to take prompt action to determine whether an employee under his supervision was violating insider trading laws. Starting the next morning, Cohen oversaw the liquidation of his and Martoma’s positions in Elan and Wyeth and the accumulation of a short position instead.
With respect to Steinberg, regulators say Cohen was “looped into a highly suspicious e-mail,” that should have prompted him to investigate whether the trader was engaging in illegal 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.”
Cohen, who has maintained that he acted appropriately throughout, has not faced any criminal accusations from federal authorities. That means even if the SEC were able to prove its charges, the billionaire would not face any jail time though he could face financial penalties and a ban from the securities industry.
SAC itself has seen investors pull significant assets from its funds given the cloud hanging over the firm and Cohen, but the billionaire’s $9 billion fortune already represented a sizable portion of the firm’s assets under management, which would lessen the sting if he were barred from managing outside money.
Read the SEC’s entire civil complaint against Cohen, including the instant messages in which he discusses Martoma and Steinberg, below.