S.E.C. Files Civil Case Against Hedge Fund Manager Steven Cohen - U.S. Second Circuit
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S.E.C. Files Civil Case Against Hedge Fund Manager Steven Cohen

On Friday, the SEC filed civil charges against billionaire hedge fund manager Steven Cohen for failing to supervise two employees, criminally charged with insider trading, that occurred on his watch.

Cohen, known as one of the most successful hedge fund managers, has an estimated net worth of $9 billion, and his company SAC Capital Advisors LP, oversees $15 billion, Bloomberg reports. Since founding SAC in 1992, he has seen a 25% return in his investments each year.

Bloomberg reports that Professor John Coffee, of Columbia Law School, noted: "The SEC is aiming at his kneecaps, not his jugular ...This is a little like catching John Dillinger entering a bank with a submachine gun and charging him with double parking."

Just a few days away from a five-year statute of limitations deadline, stemming from the underlying alleged insider trading deals, the SEC brought the action against Cohen. There are two underlying deals conducted by SAC employees Mathew Martoma and Michael Steinberg.

Matthew Martoma is charged with insider trading related to pharmaceutical companies Elan and Wyeth. He was betting on good results from early clinical trials of an Alzheimer's drug. He allegedly received non-public information about less than stellar results from the trial, and sold off shares, avoiding losses and making illegal profits of $276 million.

Michael Steinberg is also charged with insider trading related to computer giant, Dell. Steinberg allegedly received information regarding Dell's financial performance before that information was made public. Both men are facing separate trials in November.

According to the SEC, Steven Cohen "ignored the red flags ... that would have caused any reasonable hedge fund manager to investigate the basis of the trades." With regard to Martoma, Cohen did not show any concern that Martoma may have non-public information and had a twenty-minute phone call just before Martoma unloaded the stocks.

With regard to Steinberg, Cohen did not act after receiving suspicious emails and after SAC avoided major losses on the Dell stock, Cohen sent an email to Steinberg stating "Nice job on Dell."

Though SAC has already paid more than $600 million in a settlement (the largest settlement to date) this case is hitting Cohen where it hurts. If successful, the SEC could ban Cohen from the financial industry for life.

According to Bloomberg, many are speculating that if the SEC had enough evidence to file criminal charges, they would. Instead, they chose to file an administrative proceeding, one where the evidentiary standard is much lower and the Federal Rules of Evidence don't apply.

Should the U.S. attorney decide to charge Cohen with criminal activity, a conspiracy charge would extend the five-year statute of limitations to ten years. Depending on what evidence is uncovered in the Martoma and Steinberg trials, Cohen may also face criminal charges.

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