SEC: Steven Cohen Barred from Supervisory Hedge Fund Role Until 2018

SEC: Steven A. Cohen barred from supervisory hedge fund role until 2018.

The Securities and Exchange Commission today announced that hedge fund manager Steven A. Cohen will be prohibited from supervising funds that manage outside money until 2018 in order to settle charges for failing to supervise a former portfolio manager who engaged in insider trading while employed at his firm. In addition, Cohen’s family office firms will be subject to SEC examinations and the firms must retain an independent consultant to conduct periodic reviews of their activities to ensure compliance with securities laws.

“Before Cohen can handle outside money again, an independent consultant will ensure there are legally sufficient policies, procedures, and supervision mechanisms in place to detect and deter any insider trading,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “The strong combination of a two-year supervisory bar and additional oversight requirements achieves significant and immediate investor protection and deterrence, while ensuring that the activities of his funds are closely monitored going forward.”

The SEC’s order finds that Cohen failed to supervise former portfolio manager Mathew Martoma, who engaged in insider trading in 2008 while employed at CR Intrinsic Investors, an investment advisory firm that was a wholly-owned subsidiary of S.A.C. Capital Advisors LLC, an entity founded and controlled by Cohen. The order also finds that Cohen ignored red flags that should have caused him to take prompt action to determine whether Martoma was engaged in insider trading. Instead, Cohen permitted Martoma to make trades based on that information, and Cohen placed similar trades in accounts that Cohen controlled. Cohen also encouraged Martoma to talk to a doctor about nonpublic drug trial results to inform trading decisions. Based on these trades, Cohen’s hedge funds earned profits and avoided losses of approximately $275 million.

Under the terms of the settlement, Cohen is prohibited from serving in a supervisory role at any broker, dealer, or investment adviser until 2018, must retain an independent consultant and adopt consultant recommendations, and must submit to on-site SEC examinations of his registered or unregistered firms.

The SEC order also includes provisions to extend the length of the settlement terms in the event the Commission brings a new action against Cohen, a related entity, or an employee supervised by him. The settlement terms also provide that if Cohen becomes associated in a supervisory capacity with an entity that is a registered broker, dealer, or investment adviser in 2018 or 2019, that entity will retain an independent consultant through Dec. 31, 2019.

Cohen has undertaken to:

71. Within 30 days of this Order, Cohen shall arrange for any broker, dealer, investment adviser, or entity excluded from the definition of investment adviser pursuant to Rule 202(a)(11)(G)-1 as promulgated under the Advisers Act that he directly or indirectly wholly owns or controls (each, a “Cohen Entity”) to retain an independent consultant (“IC”), which shall be either: (a) Bart M. Schwartz of Guidepost Solutions LLC who was previously retained by a Cohen Entity as a consultant in connection with the matter United States of America v. S.A.C. Capital, Advisors, L.P. et al.; or (b) another IC not unacceptable to the Commission staff. This IC shall be retained through December 31, 2017, and during such other period as provided for in paragraph 76, and shall:

(a) conduct a review of the Cohen Entity’s compliance with the federal securities laws and issue a report at least every six months to the Cohen Entity and the staff of the Commission describing the scope and results of the IC’s review; and

(b) In connection with each report described in paragraph 71(a) above, recommend any additional policies and procedures which, on the basis of the review, the IC believes are reasonably designed to ensure the Cohen Entity complies with the federal securities laws (the “Recommendations”).

72. Cohen agrees that within 60 days following the receipt by a Cohen Entity of the Recommendations, the Cohen Entity shall adopt all Recommendations of the IC; provided, however, that within 30 days of the receipt of the Recommendations, Cohen shall in writing (i) notify the IC and the staff of the Commission of any Recommendations that he considers to be unnecessary, inappropriate, or unduly burdensome, and (ii) propose an alternative policy, procedure, or system designed to achieve the same objective or purpose. As to any Recommendation on which Cohen and the IC do not agree, such parties shall attempt in good faith to reach an agreement within 30 days after Cohen serves the written notice and proposal described above. In the event that Cohen and the IC are unable to agree to an alternative proposal, Cohen will ensure that the Cohen Entity abides by the determinations of the IC by no later than the 75th day following the receipt of the Recommendations.

73. Cohen shall not have the authority to terminate the IC without prior written approval of the staff of the Commission. Cohen shall compensate the IC, and persons engaged to assist the IC, for services rendered, at their reasonable and customary rates. Cohen shall not be in, and shall not have, an attorney-client relationship with the IC and shall not seek to invoke the attorney-client privilege or any other doctrine or privilege to prevent the IC from transmitting any information, reports, or documents to the staff of the Commission. Cohen shall require the IC to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the IC shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Cohen, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the IC will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the IC in performance of his/her duties under this Order shall not, without prior written consent of the staff of the Commission, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Cohen, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.

74. Cohen agrees that, through December 31, 2017, he shall, or shall cause the relevant Cohen Entity to: (a) perform an internal investigation of any profitable (including loss avoidance) trade identified by the Commission’s staff; (b) consent to any onsite examination of any Cohen Entity that the Commission staff elects to conduct; and (c) arrange for any Cohen Entity to undertake reasonable efforts to make any employee available for a deposition or interview by the Commission within 21 days of any request.

75. The undertakings outlined in paragraphs 71-74 shall continue at least through December 31, 2017, but shall be extended in the event of a new enforcement action by the Commission, filed on or prior to December 31, 2017, for an alleged violation of the federal securities laws for any conduct that occurred after August 1, 2013 and that was not brought to the attention of the SEC by a Cohen Entity or a person associated with such entity acting in a capacity other than a whistleblower (“New SEC Action”). The parties agree that in the event of a New SEC Action naming Cohen, the provisions of paragraphs 71-74 will be extended until the final adjudication of that action. In the event of a New SEC Action naming a Cohen Entity or an employee employed with a Cohen Entity, paragraphs 71-74 shall remain in effect until December 31, 2019.

76. In the event that Cohen becomes associated in a supervisory capacity with a Cohen Entity that is a registered broker, dealer, or investment adviser, Cohen agrees that any such registered entity shall retain an IC and abide by the provisions in paragraphs 71-73 above until December 31, 2019.

77. In the event of a New SEC Action that results in a final judgment or order, after appeal, finding liability for a federal securities law violation by Cohen or a Cohen Entity, or a scienter-based federal securities violation of a Cohen Entity employee acting in the course of his or her employment for such entity and supervised by Cohen, Cohen agrees not to be associated in a supervisory capacity with any broker, dealer, or investment adviser for a period of two years in addition to the period from the date of the Order to December 31, 2017 provided for in Part IV, paragraph A. If such final judgment or order is entered prior to December 31, 2017, such additional two year period shall begin January 1, 2018 and expire on December 31, 2019. If such final judgment or order is entered subsequent to January 1, 2018 (i.e., after the two year period provided for in Part IV, paragraph A) such additional two year period shall commence at the time such final judgment or order, after appeal, is entered. Nothing herein shall be deemed to limit the Commission’s ability to enter an order ordering other sanctions available to the Commission based on the entry of such final judgment or order.

78. Nothing in this Order shall be read to preclude or inhibit any Cohen Entity from applying to register as an investment adviser under the Advisers Act, provided that Cohen shall not be associated with such adviser in a supervisory capacity until December 31, 2017 and during such other period as provided for in paragraph 77. This Order is not intended to serve as a basis for bar or disqualification of any person or entity by any other U.S. or foreign regulatory entity

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