The Securities and Exchange Commission on Friday charged hedge-fund tycoon Steven A. Cohen with ignoring “red flags” that two of his employees engaged in insider trading, a case that could all but end the career of the hedge-fund industry’s godfather.

Cohen represents one of the most prominent targets the SEC has ever pursued. A successful outcome would be a major prize in the government’s high-stakes campaign to snuff out illegal trading, sending ripples throughout the hedge-fund world, which has gained financial clout over the past two decades partially because of the eye-popping returns Cohen generated.

For years, the government has suspected that those returns were too good to be true, and it has accused at least half a dozen current and former traders at Cohen’s hedge fund — SAC Capital Advisors in Connecticut — of profiting from illegal tips. But until Friday, the government had never accused Cohen himself of any wrongdoing.

“SAC is Steve Cohen,” said Harvey Pitt, a former SEC chairman. “If he winds up being suspended or having his registration revoked, the game is over.”

Cohen, 57, has an estimated net worth of more than $9 billion. He built his fortune making risky bets on stock and emerged as a mythical figure in the hedge-fund world, with SAC racking up years of stellar profits. Cohen became a well-known art collector who has a minority stake in the New York Mets. Trading through SAC’s hedge funds is known to sometimes account for as much as 3 percent of the New York Stock Exchange’s daily trading.

The government’s efforts to connect Cohen to insider trading have played out like a soap opera over the last year. Even as the SEC closed in, Cohen made headlines in March when he bought Pablo Picasso’s “Le Reve” for $155 million from casino owner Steve Wynn.

While the SEC can only bring civil charges against Cohen, the Justice Department has been pursuing a criminal case. Fines and a lifetime ban from trading are the most severe of the punishments possible if the SEC wins.

On Friday, SAC’s spokesman denied the SEC’s allegations.

“Steve Cohen acted appropriately at all times and will fight this charge vigorously,” the spokesman said in a statement. “The S.E.C. ignores SAC’s exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen’s strong support for SAC’s compliance program.”

The SEC is betting that it can tie Cohen to his employees’ bad behavior. Success would embolden the agency, which has been pummeled for not holding Wall Street accountable for misconduct. It has been criticized for slap-on-the-wrist settlements and failing to wring out admissions from the defendants it charges. The new SEC chairman, Mary Jo White, a former federal prosecutor, has vowed to change that.

On Friday, the SEC’s commissioners took the unusual step of rejecting a recommended settlement its own enforcement division made with another hedge-fund tycoon, Peter Falcone. Last month, White told her staff that more firms would be forced to admit wrongdoing before the agency would agree to a settlement, upending a long-standing agency practice.

The lawsuit against Cohen, filed in an administrative court, alleges that he turned a blind eye to suspicious trades made by two of his portfolio managers in 2008 — Mathew Martoma and Michael Steinberg. Both men already face criminal and civil charges accusing them of insider trading while they worked for Cohen. They have denied the allegations and have, so far, refused to settle.The lawsuit against Cohen, filed in an administrative court, alleges that he turned a blind eye to suspicious trades made by two of his portfolio managers in 2008 — Mathew Martoma and Michael Steinberg. Both men already face criminal and civil charges accusing them of insider trading while they worked for Cohen. They have denied the allegations and have, so far, refused to settle.

But as they wait for their day in court, neither of them has turned on Cohen, making it difficult for the government to build an insider-trading case against their billionaire boss. Instead, the agency might run him out of the industry he helped build, legal experts said.

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.