US billionaire Steven Cohen to answer case over insider trading
Hedge fund owner's alleged failure to supervise ex-workers lands him in trouble with regulators
After a long investigation into insider trading at the hedge fund SAC Capital Advisors, an inquiry that has produced several guilty pleas and a record US$616 million civil penalty, the US government has brought a case for the first time against the fund's billionaire owner, Steven Cohen.
In a civil action, the Securities and Exchange Commission accused Cohen, 57, of failing to supervise former employees who face criminal charges.
The commission contends that he ignored "red flags" that should have led him to investigate suspicious trading activity at SAC and take steps to prevent illegal conduct.
The case is filed as an administrative proceeding at the SEC rather than a lawsuit in federal court.
If the SEC prevails, a range of penalties are possible, including assessing additional fines, barring Cohen from managing money for clients, or banning him from the financial services industry for life.
Although the case stops short of accusing Cohen of fraud or insider trading, it represents the first government action brought directly against him after an inquiry that has persisted for nearly a decade.
And while the government has taken its first direct shot at him, it is unlikely to be the last.
Federal prosecutors and the FBI were continuing to build a criminal case against SAC, people briefed on the matter said.
The authorities expected to announce charges as soon as this summer, the people said, noting that prosecutors might indict other traders at SAC or the fund itself, a move that would effectively destroy the company.
Even if a criminal case does not materialise, the SEC's action is a blow to Cohen, who has built Connecticut-based SAC into one of the largest and most powerful hedge funds, with about 1,000 employees and US$15 billion in assets at the start of the year.
It has a nearly unparalleled investment record, delivering nearly 30 per cent annual returns, on average, over two decades.
But SAC's investors had withdrawn billions of dollars from the fund this year as the government's investigation intensified.
Cohen thought his legal troubles were behind him in March when SAC agreed to pay a US$616 million civil penalty to the SEC.
The case resolved insider trading actions connected to the suspected misconduct of two former employees, Mathew Martoma and Michael Steinberg, although they did not implicate Cohen directly.
The commission filed its case, accusing Cohen of failing to supervise the pair, a day before a five-year legal deadline to bring a case related to trades that Martoma made in July 2008.
"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 enforcement at the SEC, said.
SAC spokesman Jonathan Gasthalter said the commission's action had no merit.
"Steve Cohen acted appropriately at all times and will fight this charge vigorously," he said.
"The SEC ignores SAC's exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen's strong support for SAC's compliance programme."