The charges involve allegations that he failed to supervise his employees and to prevent them from engaging in insider trading. Specifically, the Commission alleges that on two separate occasions in 2008, two portfolio managers who reported to Cohen obtained material nonpublic information about three different publicly traded companies. The Commission alleges that both portfolio managers provided information to Cohen indicating that they may have had access to inside information to support their trading. Based on that information, both portfolio managers engaged in unlawful insider trading.
That is a typical SEC-style allegation. The allegations are full of innuendo and speculation, and perfectly innocent statements and text messages presented as "evidence" of wrongful conduct. The Commission does NOT allege that the managers told Cohen that it was inside information, it alleges that the information indicated that they may have had access to inside information. Those two statements are very different, but undoubtedly intended by the Staff to imply that Cohen knew it was inside information.
Clearly that is not the case, or this would not be an administrative proceeding. I think we can confidently conclude that the Commission does not have any information that Cohen knew of the use of any inside information.
This becomes clear when the Commission alleges that "Cohen received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen’s position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws."
Parsing the Commissions factual allegations there are far too many conclusions, such as "Cohen was aware" and implications to convince me that the Commission has a case. Clearly, if they had evidence that Mr. Cohen was in fact "aware" and allowed the trades to be placed he would be the subject of an insider trading case, not a failure to supervise case.
While this all makes for interesting reading and exploration to securities attorneys who are interested in insider trading cases, really is not fun and games. The Commission spent a significant amount of time investigating Mr. Cohen for insider trading, undoubtedly hoping to catch a career making big fish. Obviously there was no such case.
However, rather than closing the investigation, they file this administrative proceeding, which could have a significant impact on Mr. Cohen's ability to conduct business. Although the Commission did not ask for any specific relief in its complaint, in the press release they claim that they will be seeking financial penalties as well as a "supervisory and financial services industry bar."
We will continue to review the allegations, but at this point in time it appears that not only is the proceeding excessive, discussions of "financial services" bars are a flight of fantasy.
We will update as the case progresses.
Press Release:SEC Charges Steven A. Cohen with Failing to Supervise Portfolio Managers and Prevent Insider Trading
The Administrative Order Filing the Charges