University News

Trustee’s hedge fund indicted for fraud

The U. has not said whether charges against Cohen could affect his status as a trustee

University News Editor
Tuesday, September 3, 2013

After years of mounting investigations into alleged insider trading at his hedge fund, Corporation Trustee Steven Cohen P’08 P’16 took two big hits this summer when federal authorities filed a civil case against him and criminal charges against the fund, SAC Capital Advisors L.P.

Administrators still have not said whether or how the charges might affect Cohen’s status as a trustee. As of Monday evening, Marisa Quinn, vice president for public affairs and University relations, had not responded to requests for comment.

The Securities and Exchange Commission brought the civil case against Cohen July 19, charging him with “failing to supervise” two former SAC portfolio managers who allegedly engaged in insider trading. Six days later, prosecutors indicted the hedge fund on four counts of securities fraud and one count of wire fraud, pointing to “institutional practices” that made insider trading a permissible part of the company’s culture.

Federal authorities have in recent years implicated eight current or former SAC employees in insider trading schemes, leading to four guilty pleas.

In April, Chancellor Thomas Tisch ’76 said in a statement released to The Herald that “there has been no pressure” on Cohen to step down. Tisch did not respond to further requests for comment this summer.

The civil action filed in July is an administrative proceeding, which is less harsh than a lawsuit and does not accuse Cohen himself of taking part in fraud or improper trading. But if the case succeeds, a sentence could place a blanket prohibition on Cohen from overseeing investor funds, effectively ending his tenure atop SAC.

National news outlets have depicted regulators as attempting to ensnare Cohen on counts of insider trading for years, and he could face other charges in the continuing investigation. But due in part to a lack of cooperation from some of the arrested SAC employees, federal authorities have been unable to tie him directly to the schemes that allegedly occurred at the hedge fund.

Instead, the civil case targeted Cohen for mismanagement.

“After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law,” said Andrew Ceresney, co-director of the SEC’s Division of Enforcement, in a statement at the time.

The criminal case cited improper trading practices at SAC that stretched from 1999 to 2010, during which time the hedge fund emerged as one of Wall Street’s biggest power players. The hedge fund managed roughly $15 billion at the start of 2013.

The indictment, written by U.S. Attorney for the Southern District of New York Preet Bharara, described the alleged misdeeds as “on a scale without known precedent in the hedge fund industry.”

This summer’s investigation also extended to another SAC employee with ties to the University — Richard S. Lee ’01, who pled guilty to insider trading in July. Lee joined SAC after reportedly being fired from Citadel Investment Group on his first day in 2008 for attempting to falsify trading numbers to boost his pay.

Though the criminal suit highlighted an extended period during which insider trading allegedly occurred at SAC, the civil charges against Cohen focused on two cases involving former portfolio managers Mathew Martoma and Michael Steinberg. In separate incidents in 2008, the two are accused of manipulating so-called expert networks to receive advance information about new drug trials or quarterly earnings, which they used to change SAC’s stock holdings in advance of public announcement.

The two instances are alleged to have earned the hedge fund roughly $275 million in profits and averted losses. Martoma and Steinberg will face trial separately this fall. No evidence so far has indicated Cohen knew he was relying on illegally obtained information when he acted on the portfolio managers’ advice.

In March, SAC settled with the SEC over the two cases, paying roughly $616 million to the federal government. Media reports have indicated that Cohen believed the settlements could end his legal troubles and was surprised by the new charges.

A rewritten indictment of Martoma released Aug. 22 said he obtained illegal information from two doctors involved with clinical trials of a new Alzheimer’s disease drug — previously, only one doctor had been cited — and attempted to corrupt a total of more than 20 doctors between 2006 and 2008.

Concerns linger for SAC that investors frightened by the charges will pull their money from the hedge fund. Though roughly $9 billion of SAC’s funds at the beginning of the year was Cohen’s personal money, most outside money has evaporated over the past several months, leading to some recent speculation that Cohen could downsize the fund to manage only his money and run as a “family office” in the future.

Cohen is the second Corporation member to come under federal scrutiny for Wall Street dealings in the past few years. Former Corporation Fellow Steven Rattner ’74 P’10 P’13 P’15, a former Herald editor-in-chief, was penalized in 2010 for an alleged pay-to-play pension fund structure at his private investment firm Quadrangle Group.



Major SAC events of the summer

July 19: The Securities and Exchange Commission files a civil suit against Steven A. Cohen on charges of “failing to supervise” two SAC Capital Advisors L.P. portfolio managers accused of insider trading.

July 25: Federal officials indict SAC on five counts of fraud. They also announce that Richard S. Lee ’01 has pled guilty to insider trading.

Aug. 12: News outlets report that SAC has shuttered Parameter Capital Management, a stock trading unit.

Aug. 14: An SEC filing shows that SAC reduced its U.S.-listed stock holdings by 20 percent during the second quarter of 2013.

Aug. 22: Prosecutors release a rewritten indictment of former portfolio manager Mathew Martoma that accuses him of having obtained improper information from two doctors about an Alzheimer’s disease drug trial — up from the one previously announced — and tried to do so with roughly 20 others.


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