SEC Charges Cohen With Failing to Supervise Portfolio Managers and Prevent Insider Trading (with Lofchie Comment)
The SEC announced charges, pursuant toSection 203(f) of The Advisers Act, against hedge fund adviser Steven A. Cohen, of S.A.C. Capital Advisors ("SAC"), for failing to supervise two senior employees who allegedly entered into inside trades during the time that they were under his supervision. The Division of Enforcement alleges that Cohen received highly suspicious information that should have caused him to investigate the basis of trades made by the two portfolio managers. According to the SEC's order announcing administrative proceedings, Cohen oversaw trading by the portfolio managers, requiring them to update him on their stock trading and convey to him the reasons for their trades. On at least two separate occasions, the SEC alleges that the portfolio managers provided information to Cohen that might have raised red flags that they were potentially trading on inside information. According to the SEC, Cohen failed to take prompt action to determine whether an employee under his supervision was violating Section 10(b) of the Exchange Act ("Manipulative and Deceptive Devices") and Rule 10b-5 thereunder ("Employment of Manipulative and Deceptive Devices") thereunder.
Lofchie Comment: The SEC's administrative order references Section 203(f), which is the provision that allows the SEC to sanction an individual who has committed a violation specified in certain paragraphs of Section 203(e). Although the SEC does not specifically reference the relevant paragraphs, the SEC's charges against Steven Cohen are apparently based on paragraph (6) of 203(e), which provides that the SEC may sanction a person who has "willfully . . . commanded, induced or procured the violation by any other person of the . . . [rules under the Exchange Act] . . . or has failed reasonably to supervise, with a view to preventing violations . . . another person who commits such a violation." The person accused of such a supervisory violation may defeat it by showing that (i) there were reasonably established procedures that might reasonably have been expected to prevent the violation and (ii) the person reasonably discharged the duties incumbent upon him by reason of such procedures.At the time of the alleged violation, SAC was not registered with the SEC as an investment adviser, but that is not a defense to the SEC's implicit charge of a violation of 203(e)(6).