More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
The Securities and Exchange Commission levied civil charges Friday against hedge fund advisor Steven Cohen, founder of SAC Capital Advisors, for failing to supervise two senior employees and prevent them from insider trading under his watch.
The SEC’s Division of Enforcement says 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 — Mathew Martoma and Michael Steinberg.
Cohen “ignored the red flags and allowed Martoma and Steinberg to execute the trades” in 2008 in two pharmaceutical companies as well as Dell, the SEC says. “Instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work.”
Cohen’s hedge funds earned profits and avoided losses of more than $275 million as a result of the illegal trades, the SEC says.
The SEC’s Enforcement Division is seeking to bar Cohen from overseeing investor funds. His firm has already agreed to pay more than $615 million his firm has already agreed to pay for the alleged insider trading.
After learning about red flags indicating potential insider trading by his employees, Cohen allegedly failed to follow up to prevent violations of the law.
According to the SEC’s order instituting administrative proceedings against Cohen, portfolio managers Martoma and Steinberg obtained material nonpublic information about publicly traded companies in 2008, and they traded on the basis of that information.
The SEC charged Martoma, of the SAC affiliate CR Intrinsic, and the doctor who tipped him with insider trading last year, slapping the affiliate with a record fine of more than $600 million.
Steinberg, a portfolio manager at Sigma Capital Management, was charged earlier this year. Sigma Capital agreed to pay nearly $14 million to settle the charges.
The SEC says that its investigation found that in his supervisory role, Cohen oversaw trading by Martoma and Steinberg and required them to update him on their stock trading and convey the reasons for their trades. “On at least two separate occasions in 2008, they provided information to Cohen indicating their potential access to inside information to support their trading. However, Cohen stood by on both occasions instead of ascertaining whether insider trading was taking place.”
According to the SEC’s order, “Cohen watched Martoma build a massive long position in the stock of two pharmaceutical companies — Elan and Wyeth — based on their joint clinical trial of a drug with the potential to treat Alzheimer’s disease. Cohen allowed this despite repeated e-mails and instant messages to Cohen from other analysts at CR Intrinsic advocating against it.”
The analysts, the SEC says, “questioned whether Martoma possessed undisclosed data on the results of the trial. Cohen responded by saying it was ‘tough’ to know whether Martoma knew something, but that he would follow Martoma’s advice because he was ‘closer to it than you.’”
“Despite Martoma’s abrupt change in view and red flags that he likely received confidential information about the clinical trials from a tipper, Cohen failed to take prompt action to determine whether an employee under his supervision was violating insider trading laws,” the SEC says.
The next morning, the SEC says that Cohen oversaw the liquidation of his and Martoma’s positions in Elan and Wyeth and the accumulation of a short position instead.
According to the SEC’s order, Cohen also supervised Steinberg while he was involved in insider trading of Dell securities in August 2008. “After being looped into a highly suspicious email between Steinberg and other firm employees reflecting the clear possibility that they possessed material non-public information about an upcoming earnings announcement at Dell, Cohen again failed to take prompt action to determine whether Steinberg was engaged in unlawful insider trading,” the SEC says.
Instead, “Cohen liquidated his Dell shares based on the recommendation of Steinberg, who continued short selling Dell shares in his Sigma Capital portfolio based on the confidential information.”
Dell’s stock price dropped sharply after its Aug. 28 earnings announcement, and funds managed by Cohen’s firms profited or avoided losses totaling at least $1.7 million.
Says the SEC: “Three hours after the earnings announcement, Cohen e-mailed Steinberg: ‘Nice job on Dell.’”
Check out these related stories on ThinkAdvisor: