Securities Regulation Daily Cohen barred from hedge fund adviser biz over supervisory failure
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Friday, January 8, 2016

Cohen barred from hedge fund adviser biz over supervisory failure

By Mark S. Nelson, J.D.

Hedge fund manager Steven Cohen is barred from having a supervisory role at any broker-dealer or investment adviser for two years now that the Commission has issued an order settling its administrative case against him. The ban, along with other undertakings, are being imposed to ensure that Cohen and his funds comply with federal securities antifraud laws in the wake of related criminal securities fraud cases against portfolio managers the SEC said Cohen failed to supervise. Cohen neither admitted nor denied the SEC’s findings (In the Matter of Steven A. CohenRelease No. IA-4307, January 8, 2016).

SEC Enforcement Division Director Andrew J. Ceresney emphasized how the Commission’s order is designed to deter similar future conduct by Cohen. “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.”

Go long, go short. In July 2013, the SEC alleged that Cohen ignored “red flags” that Mathew Martoma, a former portfolio manager for S.A.C. Capital Advisors’ wholly-owned registered investment adviser CR Intrinsic Investors, LLC, had abruptly abandoned a bullish (long) outlook on pharmaceutical firms Elan Corporation, plc and Wyeth (later acquired by Pfizer Inc.) for short positions based on information Martoma got from Dr. Sidney Gilman, an ex-University of Michigan Medical School professor and consultant to both drug companies and to an expert network, that a joint clinical drug trial of Elan’s and Wyeth’s new Alzheimer’s drug had gone poorly.

Martoma had a 20-minute phone call with Cohen two days after hearing the clinical trial results. The following day, Cohen initiated trades that would liquidate his and Martoma’s Elan and Wyeth positions, garnering them $275 million in profits and avoided losses. According to the SEC, email messages further demonstrated Cohen’s lack of supervision of Martoma.

The Commission’s order also explained that Dr. Gilman had ongoing access to material, nonpublic information about the clinical trial because he chaired the Phase II safety committee and was scheduled to present the results at a conference, which meant he had access to the full trial results two weeks before the presentation. Dr. Gilman met with Martoma 42 times, often in connection with safety committee meetings; S.A.C. records show the firm paid Dr. Gilman through the doctor’s expert network firm. The SEC said Dr. Gilman owed a duty of confidentiality to Elan, and the expert network firm had reminded him many times not to talk to clients about drug trials.

Supervisory bar, undertakings. In addition to Cohen’s supervisory bar, he and his funds will have to comply with numerous undertakings prescribed by the Commission. For one, Cohen must hire a consultant to review and make recommendations about his funds’ compliance with federal securities laws. Cohen’s funds also must conduct internal investigations of profitable trades (including those designed to avoid losses), allow onsite exams by SEC staff, and comply with SEC requests to interview employees.

The undertakings and Cohen’s supervisory bar last through December 2017, although both can be extended, in the case of the supervisory bar, for an extra two years. If Cohen later takes on a supervisory role at a registered broker-dealer or investment adviser, that firm must abide by the SEC-mandated undertakings until December 2019.

The SEC’s administrative case against Cohen had been delayed for over two years while prosecutors sorted out related criminal charges against Martoma and others. As recently as last month, an administrative law judge planned to start Cohen’s hearing this April, but earlier this week, the ALJ gave the SEC’s Enforcement Division until today to update its charges against Cohen. CR Intrinsic had already paid $600 million to settle related charges; Martoma is appealing the nine-year sentence imposed on him after a federal jury convicted him of securities fraud.

In 2014, a year after the SEC first alleged Cohen failed to supervise Martoma, Cohen changed S.A.C.’s name to Point72 Asset Management, L.P. and turned the firm into a family office exempt from Adviser Act registration under a rule that clarified revisions made to that law by the Dodd-Frank Act. Cohen’s family offices are subject to the Commission’s latest order.

The release is No. IA-4307.

Companies: S.A.C. Capital Advisors, LLC; S.A.C. Capital Advisors, L.P.; CR Intrinsic Investors, LLC; Elan Corporation, plc; Wyeth; Pfizer Inc.

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