SEC Says Hedge Fund Adviser Cohen Failed to Supervise Insider-Trading Execs
Ending months of speculation, the Securities and Exchange Commission July 19 commenced administrative proceedings against hedge fund adviser Steven A. Cohen, saying he failed to supervise two senior employees who engaged in insider trading under his watch (In re Cohen, SEC, Admin. Proc. File No. 3-15382, 7/19/13).
The executives–Mathew Martoma and Michael Steinberg–currently are facing civil and criminal charges over their alleged roles in what prosecutors termed an insider trading scheme on a scale with “no historical precedent” (224 SLD, 11/21/12; 62 SLD, 4/1/13).
According to the SEC, Cohen’s hedge funds earned profits and avoided losses of more than $275 million as a result of the unlawful transactions.
Cohen’s attorney, Martin Klotz, Willkie Farr & Gallagher LLP, New York, could not be reached immediately for comment.
Red Flags Ignored
According to the commission, the Enforcement Division contended that 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”–Martoma and Steinberg.
Instead, the SEC said in a release, Cohen “ignored the red flags, allowing the officials to continue to trade.” In fact, it said, “Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work.”
Earlier this year, in connection with the cases against Steinberg and Martoma, CR Intrinsic, an affiliate of Cohen’s firm S.A.C. Capital Advisors, agreed to pay more than $600 million in the largest-ever insider trading settlement. Another Cohen affiliate, Sigma Capital, agreed to pay nearly $14 million to settle insider trading charges.
In the release, co-Enforcement Director Andrew Ceresney said, “Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws.”
“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,” Ceresney said.
“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.”
To see the SEC’s administrative order, go to http://www.sec.gov/litigation/admin/2013/ia-3634.pdf.