The Securities and Exchange Commission is charging Stephen A. Cohen with failure to supervise two portfolio managers and stop them from insider trading. Cohen is the SAC Capital. The SEC wants to ban the hedge fund mogul from supervising investor funds. A spokesperson for SAC says the securities case is meritless and Cohen always behaved appropriately.
According to SEC Division of Enforcement Co-Director Andrew Ceresny, even though it is the job of a hedge fund manager to properly supervise his/her employees and make sure that everyone is in compliance with securities laws, Cohen failed to act after finding out about red flags indicating that portfolio managers Michael Steinberg and Mathew Martoma may have been engaged in insider trading. The agency says that Cohen received “highly suspicious information” that should have compelled any reasonable hedge fund manager to look into the basis for trades made by Steinberg and Martoma. Instead, he purportedly let them execute the trades and even gave Martoma a $9 million bonus. Because of the illegal trades, the SEC contends, Cohen’s hedge funds made profits while avoiding $275 million in losses.
Already, SAC Capital affiliates have agreed to pay the SEC more than $615 million over the insider trading charges. The Commission says that, Martoma, affiliate CR Intrinsic Investors’ portfolio manager, received confidential data about an Alzheimer’s drug from a doctor who told him about clinical test results before they became public. Martoma and the affiliate then sold over $960 million in securities of Wyeth and Elan Corp., the two pharmaceutical companies that developed the drug, in the span of the week.
To settle the SEC’s case, CR Intrisinc said it would pay $275 million penalty, $275 million in disgorgement, and $52 million in prejudgment interest. Another SAC Affiliate, Sigma Capital, said it would pay $14 million over insider trading allegations to the SEC.
As for Steinberg, he is accused of insider trading in Dell securities. The SEC says that rather than find out whether Steinberg had material non-public information and was insider trading, Cohen followed Steinberg’s recommendation and sold his own shares in Dell. Meantime, Steinberg allegedly used that insider information as the basis for short-selling of Dell shares in his portfolio with Sigma Capital. Shortly after. Dell made its earnings announcement on August 28, 2008, its stock prices dropped. Funds overseen by Cohen’s firms, however, either made money or avoided losing at least $1.7 million.
The SEC is accusing Cohen of violating the Exchange Act’s Section 10(b) and Rule 10b-5 thereunder. He could be ordered to pay financial penalties and be barred from the industry.
More Blog Posts:
New Stream Capital LLC Hedge Fund Executives Face Criminal Securities Fraud Charges, Stockbroker Fraud Blog, February 28, 2013
Hedge Fund Manager Philip Falcone Consents to $18M Securities Fraud Settlement, Institutional Investor Securities Blog, May 16, 2013
Investment Advisors Report: SEC Division Reviews Application of Investment Advisers Act, New Commission Unit Will Watch For Adviser Risk, & Just 1 in 10 SEC Exams Leads to Enforcement Action, Stockbroker Fraud Blog, March 26, 2013