SEC: Cohen failed to prevent insider trading

1374260688000-XXX-PR-NEWSWIRE-APS-328-1307191506_4_3Steven Cohen, the billionaire manager of one of the largest and most successful hedge funds, was hit with a civil action by federal regulators Friday for allegedly failing to supervise two financial lieutenants accused of insider trading.

The action filed by the Securities and Exchange Commission stopped short of accusing the famed founder of SAC Capital and one of the nation’s wealthiest individuals of insider trading himself. But it seeks to bar Cohen from handling investor funds, a penalty that could force him to shutter portfolios that the agency said until recently totaled more than $15 billion.

In a relatively rare legal step, the SEC also filed administrative charges against Cohen, rather than a federal lawsuit. That means the case will be handled by an SEC administrative law judge, an employee of the regulatory agency.

That gives the agency potentially valuable “home court advantage” because the rules of evidence are somewhat less strict than those in federal court, said John Coffee, a Columbia University law school professor with expertise in securities law.

The action came roughly one week before the legal statute of limitations would have expired for some of the alleged insider trading offenses. It also follows the record $615 million in penalties that SAC Capital and CR Intrinsic, another Cohen affiliate, agreed to pay the SEC to resolve insider trading charges against the firms.

In the new case, the SEC charged that Cohen received “highly suspicious” non-public information in 2008 from portfolio managers, Mathew Martoma and Michael Steinberg, who have pleaded not guilty to insider trading charges and face separate trials later this year.

Instead of heeding his supervisory responsibility to investigate, the SEC charged that Cohen “ignored red flags” and allowed trading on the information to proceed, earning profits and avoiding losses totaling more than $275 million.

“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement. “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.”

“The SEC’s administrative proceeding has no merit,” said Cohen spokesman Jonathan Gasthalter, who said the agency had ignored SAC Capital’s extensive compliance policies and procedures. “Steve Cohen acted appropriately at all times and will fight this charge vigorously.”

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