SEC Seeks to Ban Cohen from Money Management


New York, NY – On October 18, 1931, mobster Al Capone was convicted on federal tax evasion charges and sentenced to eleven years in prison because the government did not have enough evidence to convict him of any other criminal charges.  Similarly, last week U.S. securities regulators slapped hedge fund manager Steven A. Cohen with civil “failure to supervise” charges and are seeking to ban him from the money management business as they too feel that convicting him on criminal insider trading charges might be difficult to prove.

Background of the Case

Last week the Securities and Exchange Commission charged Steve Cohen with failing to supervise former SAC Capital Advisors portfolio manager Mathew Martoma and SAC executive Michael Steinberg, both of whom face criminal and civil insider trading charges.

Regulators have characterized Martoma’s purported illegal trades in pharmaceutical firms Elan and Wyeth, as “the most lucrative insider trading scheme ever”.  Steinberg faces accusations that he traded on advance knowledge of results at technology stocks such as Dell.

As part of the government’s 17-page complaint, the SEC argues that in the matters involving Steinberg and Martoma, Cohen “received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position” to determine whether the employees had acted appropriately.

The SEC’s latest charges stem from a six-year probe of Steve Cohen and SAC, his $15 billion hedge fund. So far in this investigation nine current or former SAC employees have been charged or implicated with insider trading.

Cohen’s team 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.”

Rationale for the Charges

Many argue that the SEC brought the “failure to supervise” charges against Cohen because they were running into the 5-year statute of limitations to bring civil insider trading charges against Cohen for the Elan, Wyeth and Dell trades.  These people suggest that the SEC wanted to be seen doing something in this case rather than nothing.

“There clearly isn’t a smoking gun here otherwise they would have charged him with insider trading,” said Thomas Gorman, partner at the law firm Dorsey Whitney and a former SEC official. “The entire case raises a concern as to whether or not investigators have passed the line of investigating and are simply bringing their case based on their beliefs as opposed to the facts.”

Others argue that the latest charges against Cohen are the latest attempts by the SEC to shut SAC down despite the agency’s inability to obtain the evidence necessary to convict him of insider trading, much like the government did by bringing tax evasion charges against Al Capone in the 1930’s.

Failure to Supervise Charges

Failure to supervise charges, like those brought against Cohen last week, are most commonly seen in cases targeting abusive sales practices at broker firms. The Commodity Futures Trading Commission used a similar provision in its June lawsuit against Jon Corzine when it accused him of failing of supervise employees who misused customer funds at now-defunct MF Global Holdings Ltd.

The “failure to supervise” charges can only be brought in an administrative proceeding rather than in a federal court, and will therefore be heard by an administrative judge.  This, however, might not be good news for Cohen as in an administrative proceeding there is no right to a jury trial, a defendant has fewer protections against the admission of unfavorable evidence, and the judge in the proceeding is entitled to draw a “negative inference” from a defendant choosing to “take the fifth” and refuse to answer specific questions.

However, it not all bad news for Cohen.  In the “failure to supervise” case, the government will have to show that Cohen was not only in charge but that he didn’t act in good faith.  Some legal experts contend that if Cohen acted in good faith and did not induce these acts directly or indirectly, then he’s not liable.

If its proceedings are successful, the SEC said it would seek to bar Cohen from managing money for investors. The move could effectively end his hedge-fund career even though the SEC isn’t pursuing insider-trading claims against him personally.


The SEC’s “failure to supervise” charge could be seen as a victory of sorts for Cohen and his team, as it shows that the agency could not bring more serious charges.  However, we see this as a rather shallow victory.  Not only can the SEC effectively shut SAC down and bar Cohen from managing client assets, but this also does not keep the FBI and DOJ from pursuing criminal insider trading or conspiracy charges on their own as the statute of limitations has not run out on any of these potential criminal charges.

Clearly the Fed’s don’t feel in any rush with SAC.  Just last week, Manhattan U.S. Attorney Preet Bharara said at the Delivering Alpha conference co-sponsored by CNBC and Institutional Investor “People should be afraid that bad actions they have committed in the past” will catch up with them.

While Mr. Bharara would not confirm whether this statement was in reference to his ongoing investigation of SAC, he left his audience wondering.  Perhaps Mr. Bharara feels that Cohen, like Capone before him, will eventually get his just desserts. Or maybe he knows something we don’t know…



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