The SEC’s Cohen Settlement

Steven Cohen settled his long running case with the SEC. In the Matter of Steven A. Cohen, Adm. Proc. File No. 3-15382 (January 8, 2016). In the settlement Mr. Cohen consented to the entry of an order which precludes him from being associated in a supervisory capacity with any broker, dealer, or investment adviser until December 31, 2016. He also agreed to comply with certain undertakings. Those include the retention of a consultant, the adoption of the consultant’s recommendations and the retention of a monitor until the termination of the bar order. This is not the result the SEC sought when the proceedings were initiated.

Mr. Cohen, the founder of SAC Capital, a hugely successful hedge fund he created which at one time managed $15 billion in assets, had long battled the Manhattan U.S. Attorney’s Office and the SEC about insider trading allegations. Former and current employees of the fund had been charged and convicted. Affiliates of the hedge fund settled with the SEC, paying over $600 million. The fund and an affiliate paid an additional $1.2 billion to settle criminal charges brought by the Manhattan U.S. Attorney’s Office.

The SEC’s administrative action against Mr. Cohen was largely viewed as an effort to end the adviser’s career. In the Matter of Steven A. Cohen, Adm. Proc. File No. 3-15382 (July 19, 2013) was brought shortly after the SEC initiated it admissions-to settle policy. It charged failure to supervise, alleging violations of Exchange Act Section 10(b).

The SEC, however, brought its charges on an unstable foundation — two then pending and unresolved criminal trading cases. Most to the initial Order detailed the allegations against Messrs. Martoma and Steinberg. Little was actually said about Mr. Cohen. One criminal case was against former SAC employee Mathew Martoma. The other centered charged then current SAC Capital employee Michael Steinberg. The Order claimed that Mr. Cohen failed to take prompt steps to investigate a series of red flags. By not doing so he “failed reasonably to supervise Martoma and Steinberg with a view to preventing their violations of Section 10(b) of the Exchange Act . . .”

By the time of the settlement last week the landscape had changed. Mr. Martoma had in fact been convicted of insider trading. His case is currently on appeal. Mr. Steinberg was also convicted and sentenced to serve three and ½ years in prison. For a time the Manhattan U.S. attorney was invincible.

Then came the decision in U.S. v. Newman. There the Second Circuit held that the prosecution must to prove a breach of duty known to the defendant in a tipping case and, in addition, a personal benefit. The case was built on a straight forward reading of the Supreme Court’s decision in Dirks v. SEC. The district court did not give the personal benefit instruction at the insistence of the government. Following Newman the conviction of Mr. Steinberg, who was severed from the trial in Newman, was dismissed.

With half of its case gone the SEC took what it could get. The Exchange Act Section 10(b) allegation was absent. No cease and desist order was entered. No admissions were made. No penalty will be paid. The limited remedies obtained are clearly not what was sought.

While Newman had a significant impact on Mr. Cohen’s case, other factors were at work. Charging someone in either a criminal or civil law enforcement action is a very serious matter, inflicting significant harm on those named in the action. Newman ultimately traces to the overreaching of the U.S. Attorney’s Office despite an incredible winning record at the time. While the SEC’s settlement is the byproduct of that decision, it is, in the first instance, a direct result of the Commission’s decision to bring charges based not on facts it had gathered but two unproven and unresolved criminal cases. In this regard it is little different that the decision which ultimately resulted in Newman. Once can only hope that the real result of the settlement is a more careful charging process in the future.

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