SEC accuses Cohen of missing insider trading red flags

Steven A. Cohen, the billionaire founder of hedge-fund firm SAC Capital Advisors LP, was accused by U.S. regulators of failing to supervise two employees facing criminal charges that they illegally traded stocks based on confidential information.

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, the SEC said in an administrative proceeding filed today. Cohen ignored red flags and allowed illegal trades that earned profits and avoided losses of more than $275 million, the SEC said.

“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.”

The SEC is seeking to bar Cohen from overseeing investor funds, in addition to the more than $615 million his firm has already agreed to pay for the alleged insider trading, the SEC said. The $15 billion hedge-fund firm, based in Stamford, Connecticut, and its founder have moved to the center of the U.S. multiyear investigation of insider trading on Wall Street since former portfolio manager Martoma was charged in November in what prosecutors called the biggest insider-trading scheme in history.

Cohen Defiant

SAC, which initially cooperated, told clients in May, after Cohen was subpoenaed, 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.

“The SEC’s administrative proceeding has no merit,” Jonathan Gasthalter, a spokesman for SAC, said in a statement today. “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.”

Martoma, Steinberg

The Martoma case, which centered on trades in drugmakers Elan Corp. and Wyeth Inc., was the first to link Cohen directly to alleged inside information. The investigation has hurt SAC’s business, with clients asking to pull billions of dollars from the fund company.

Martoma is scheduled to go on trial Nov. 4. He has pleaded not guilty.

Steinberg was indicted in March on one count of conspiracy and four counts of securities fraud. The U.S. alleges he engaged in insider trading in Dell Inc. and Nvidia Corp. (NVDA) based on illicit tips provided to him by his analyst, Jon Horvath. Steinberg has pleaded not guilty. Horvath pleaded guilty and is cooperating with the U.S.

“They face a very high burden of proof if they’re going to get some sort of conviction” of Cohen, said Steven Nadel, a lawyer at Seward & Kissel LLP in New York, whose clients include hedge funds.
(Bloomberg News)