SEC Bars Hedge Fund Manager From Supervisory Role

The U.S. Securities and Exchange Commission (SEC) 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.

Additionally, 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. Also his firms, registered or unregistered, must submit to on-site SEC examinations.

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, an entity founded and controlled by Cohen.

The order also finds that Cohen ignored red flags that should have precipitated action on his part to determine whether Martoma was engaged in insider trading. Instead, Cohen permitted Martoma to make trades based on that information, along with placing similar trades in accounts that Cohen controlled.

Among other things, Cohen 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.

Andrew J. Ceresney, Director of the SEC’s Enforcement Division, commented:

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. 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.

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.