The Securities and Exchange Commission (“SEC”) announced on July 19, 2013 that it has filed an administrative proceeding against hedge fund manager Steven A. Cohen for failing to supervise two senior employees and prevent them from engaging in insider trading. Cohen founded famed hedge fund SAC Capital Advisors. Although prosecutors have not filed criminal charges against Cohen, claiming a lack of sufficient evidence to obtain a conviction, the SEC’s Division of Enforcement will have a lower standard of proof to find Cohen at fault for failing to supervise traders. Supervisors are the first line of defense against securities fraud. As such, while the allegations against Cohen do not rise to the level of intentional fraud, securities regulators can hold Cohen responsible for failing to supervise those who engaged in securities fraud.
“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. The SEC alleges that Cohen received highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades made by two portfolio managers who reported to him. According to the SEC, Cohen ignored the red flags and allowed the traders to make certain trades. Instead of scrutinizing their conduct, Cohen praised a trader for his role in the trading and rewarded another trader with a $9 million bonus. Cohen’s hedge funds allegedly earned profits and avoided losses of more than $275 million as a result of the illegal trades.
SAC already has paid a record fine of more than $600 million relating to insider trading charges. Another Cohen affiliate, Sigma Capital, agreed to pay nearly $14 million to settle insider trading charges. Now, the SEC seeks to ban Cohen from managing client money for the rest of his life. Of course, even if the SEC is successful and bans Cohen, other than suffering from a bruised ego, Cohen likely would be able to sail off into the sunset to enjoy his multi-billion dollar net worth.