Published on Jan 8th, 2016 | Posted in Articles

The Securities and Exchange Commission today announced that hedge fund manager Steven A. Cohen will be prohibited from supervising funds that manage outside money until 2018 in order to settle charges for failing to supervise a former portfolio manager who engaged in insider trading while employed at his firm.  In addition, Cohen’s family office firms will be subject to SEC examinations and the firms must retain an independent consultant to conduct periodic reviews of their activities to ensure compliance with securities laws.

“Before Cohen can handle outside money again, an independent consultant will ensure there are legally sufficient policies, procedures, and supervision mechanisms in place to detect and deter any insider trading,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “The strong combination of a two-year supervisory bar and additional oversight requirements achieves significant and immediate investor protection and deterrence, while ensuring that the activities of his funds are closely monitored going forward.”

The SEC’s order finds that Cohen failed to supervise former portfolio manager Mathew Martoma, who engaged in insider trading in 2008 while employed at CR Intrinsic Investors, an investment advisory firm that was a wholly-owned subsidiary of S.A.C. Capital Advisors LLC, an entity founded and controlled by Cohen.  The order also finds that Cohen ignored red flags that should have caused him to take prompt action to determine whether Martoma was engaged in insider trading.  Instead, Cohen permitted Martoma to make trades based on that information, and Cohen placed similar trades in accounts that Cohen controlled.  Cohen also encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions.  Based on these trades, Cohen’s hedge funds earned profits and avoided losses of approximately $275 million.

Under the terms of the settlement, Cohen is prohibited from serving in a supervisory role at any broker, dealer, or investment adviser until 2018, must retain an independent consultant and adopt consultant recommendations, and must submit to on-site SEC examinations of his registered or unregistered firms.

The SEC order also includes provisions to extend the length of the settlement terms in the event the Commission brings a new action against Cohen, a related entity, or an employee supervised by him.  The settlement terms also provide that if Cohen becomes associated in a supervisory capacity with an entity that is a registered broker, dealer, or investment adviser in 2018 or 2019, that entity will retain an independent consultant through Dec. 31, 2019.

Previously in November 2012, the SEC charged CR Intrinsic and Martoma with insider trading.  In March 2013, CR Intrinsic agreed to pay more than $600 million in order to settle the SEC charges.  In July 2013, Cohen’s entities, including S.A.C. Capital Advisors and CR Intrinsic, paid an additional $1.2 billion to resolve criminal charges brought by the U.S. Attorney’s Office for the Southern District of New York.

Cohen neither admits nor denies the SEC’s finding that he failed reasonably to supervise Martoma and prevent his violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC investigation was conducted by Charles D. Riely and Neil Hendelman of the New York Regional Office, and the litigation was led by Matthew Solomon, Preethi Krishnamurthy, and Mr. Riely.  The case has been supervised by Sanjay Wadhwa and Joseph G. Sansone.