The U.S. attorney’s office in Manhattan and the SEC had been methodically climbing the hierarchy at SAC, going after lower-level traders and then Steinberg, one of Cohen’s trusted deputies. Expectations were high that Cohen would be next, several legal experts said.
On Friday, some critics balked at the outcome thus far.
“It’s hard to think of cases, or other examples of cases, in which the SEC has tried so hard and come up with so little in the ultimate enforcement action,” said Jacob S. Frenkel, a former SEC enforcement lawyer and former federal prosecutor. “It sounds very much like the agency putting the proverbial lipstick on the four-legged creature it was trying to slaughter.”
Other experts say the very merits of the charges are squishy.
“I’ve read the complaint carefully, and I think it’s hard to think of a weaker complaint against Steven Cohen as an individual,” said Joseph Grundfest, a former SEC commissioner and a securities law expert. “There’s no allegation that he himself violated any law. Instead, the allegation is that he didn’t properly supervise other people where he reasonably should have known that they were violating the law.”
The SEC alleges that Martoma and Steinberg were required to report to Cohen and convey the reasons for their trades. On at least two occasions, they indicated that they potentially had access to non-public information, but Cohen did nothing to stop them, the government’s complaint said.
When Martoma was an SAC portfolio manager, he allegedly got secret tips about the results of a clinical trial jointly sponsored by Elan and Wyeth involving an Alzheimer’s drug. Getting advance word on the results enabled SAC and others to make profits exceeding $275 million, the SEC said.
Martoma, who was indicted by a grand jury in December, allegedly had been a big promoter of Elan and Wyeth within SAC, until a well-connected tipster told him that the drug test results were not favorable, according to the complaint.
Martoma had a 20-minute conversation with Cohen on July 20, 2008, after speaking to his tipster, the SEC said. The next morning, SAC began selling its shares in Elan and Wyeth and betting against the stock. For his efforts, Martoma scored a $9 million bonus.
Cohen also worked closely with Steinberg, who also was indicted in part for insider trading in Dell stock. The SEC alleges that Cohen was “looped in” on e-mails between Steinberg and others that suggested that Steinberg had non-public information about Dell’s upcoming financial results.
Again, the SEC said, Cohen ignored the warning signs and sold his Dell shares minutes after receiving the e-mails, a move that earned his hedge fund $1.7 million in profits.
Three hours after Dell’s earnings were made public, Cohen e-mailed Steinberg: “Nice job on Dell.”
In a separate action in March, SAC settled with the SEC for the trades in Dell, Elan and Wyeth for $616 million. The firm did not admit wrongdoing. And back then, SAC suggested to its investors that the worst was over.
But the government kept probing, and SAC abruptly announced it was no longer cooperating with federal authorities. Investors, spooked by the news, withdrew billions from the hedge fund.
If the administrative court determines Cohen is liable for failing to properly oversee his employees’ conduct, he faces a range of penalties, from a fine to a permanent ban from the financial industry.
If the SEC strips Cohen of his ability to manage other people’s money, he could still manage his own. Most of the $15 billion SAC currently manages belongs to Cohen.