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.”