Deal Ends SEC’s Pursuit of Steven Cohen
Settlement with billionaire investor clears him to return to managing outside money in two years
The SEC originally had sought to bar Steven A. Cohen for life from managing other people’s money. PHOTO: STEVE MARCUS/REUTERS
Billionaire investor Steven A. Cohen reached a settlement with regulators that clears him to return to managing out side money in two years, a remarkable turnaround for the Wall Street veteran after years of legal fights.
Long a target of law-enforcement authorities, Mr. Cohen’s SAC Capital Advisors LP pleaded guilty to insider trading in 2013, paid $1.8 billion in penalties, and shrank to manage only his own fortune. One of his confidants at SAC was convicted, and the Securities and Exchange Commission sought to have Mr. Cohen barred for life from the industry. Mr. Cohen was never criminally charged.
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But a 2014 appeals court ruling overturning insider-trading convictions in a related case weakened the case against Mr. Cohen, paving the way for Friday’s settlement.
The pact with the SEC restricts Mr. Cohen for two more years from serving as a supervisor at a registered fund before allowing him to get back into the business that made him one of the country’s most-profitable hedge-fund managers. During that time, his firm will be subject to SEC exams. It will also require the firm to hire an independent consultant to review the firm’s compliance procedures and implement any recommended fixes.
The settlement also extends oversight if the SEC takes any new actions against Mr. Cohen. The provisions essentially allow the SEC to keep close watch on a firm that it wouldn’t otherwise have a window into.
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While that is short of the lifetime ban that some SEC officials had once sought, “the strong combination of a two-year supervisory bar and additional oversight requirements achieves significant and immediate investor protection and deterrence,” said Andrew Ceresney, the SEC’s enforcement director, in a statement.
Mr. Cohen declined to comment through a spokesman.
The question now is whether Mr. Cohen, 59 years old, can recover from his extended battle with regulators and by 2018 regain the confidence of investors.
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One former investor, Brad Alford of Atlanta-based investment firm Alpha Capital Management, said he would be glad to invest again with Mr. Cohen. “People are going to be lining up out the doors. It’s a layup,” Mr. Alford said, describing Mr. Cohen as “one of the best traders in history.”
At a time when many star hedge-fund managers are struggling, Mr. Cohen will be welcomed back by investors, said Don Steinbrugge of Agecroft Partners LLC, a hedge-fund consultant and marketer who works with pension funds and other large investors.
“I wouldn’t be surprised if he got $2.5 billion the day he opens up,” Mr. Steinbrugge said. “There were people who stayed with him to the very end, and those people will be the first to reallocate to him.”
Others aren’t so sure.
“Some people will be happy to invest with him, and some will not,” said Stephen Morton,a former hedge-fund executive at Blackstone Group LP. Mr. Morton is investing chief at money manager GDP Capital Management.
Mr. Cohen said in a note to employees of his current firm, Point72 Asset Management LP, that he hadn’t decided whether to resume managing outside funds, but if he did he would focus “on delivering superior risk-adjusted returns, not accumulating assets and fees.” Point72 manages the wealth of Mr. Cohen, his family and employees, a set-up known as a family office.
The SEC had sued Mr. Cohen in July 2013, accusing him of failing to supervise two traders who were later convicted of insider trading, including by ignoring warning signs of their illicit activity and instead trading personally on their advice. The agency had alleged the trading resulted in hundreds of millions of dollars in profits and avoided losses for Mr. Cohen and the firm.
The SEC action was based largely on the alleged actions of SAC employees Michael Steinberg and Mathew Martoma, who were separately convicted of insider trading. Mr. Steinberg was a senior employee and confidant of Mr. Cohen, and his case brought prosecutors after a nearly decadelong investigation as close as they ever got to Mr. Cohen.
In 2013, SAC pleaded guilty to securities and wire fraud, and agreed to pay $1.8 billion in penalties, a rare instance of a hedge fund being criminally charged for insider trading. In its plea, SAC took responsibility for the actions of Mr. Steinberg and a handful of other employees.
But in December 2014, the Second U.S. Circuit Court of Appeals in New York overturned the insider-trading convictions of two hedge-fund portfolio managers who didn’t work for Mr. Cohen, saying it wasn’t enough for prosecutors to show that someone who received an inside tip traded on material, nonpublic information about a corporation. The court said a trader had to know that it came from someone who stood to be substantially rewarded in exchange.
In October 2015, prosecutors cited that ruling and dropped the case against Mr. Steinberg, as well as charges against six others who had cooperated in the investigation and previously pleaded guilty. The move undermined half the SEC case and set the stage for settlement negotiations.
The case against Mr. Martoma stood untouched, because the evidence had showed he had paid for confidential information, while the others had only obtained it through a chain of analysts.
As recently as three weeks ago, both sides had suggested they were far apart on any deal and had been preparing to go to trial later this year.
In total, Mr. Cohen will have been restricted from managing money for four years—the two years that have passed since the plea of guilty and the two more to come—a period in line with what the SEC has settled for in similar cases.
In the Friday settlement, the SEC said Mr. Cohen “received information that should have caused him to take prompt action” to determine if Mr. Martoma was engaged in unlawful conduct. The settlement didn’t include any reference to Mr. Steinberg.
SAC, based in Stamford, Conn., was long one of the most profitable hedge funds on Wall Street, recording annual returns of more than 25% over two decades. Mr. Cohen’s own money made up the bulk of assets under management by SAC, some $8 billion out of the $14 billion the hedge-fund firm managed in January 2013. Point72, which manages $11.1 billion, returned almost 16% last year, outstripping many other hedge funds that bet on and against stocks.
Some former clients of Mr. Cohen’s, including Blackstone, Citigroup Inc.’s private bank and Ironwood Capital Management, a San Francisco-based investment firm, declined to comment on whether or not they would consider investing with Mr. Cohen again. They were part of a steady stream of outside investors who pulled their money from SAC as it remained the focus of probes.
Other industry veterans said they believed Point72 would have an easy time raising funds, particularly from investors with lower profiles, such as family offices, that are better able to shield their investments from public scrutiny than other types of investors, such as public pensions.
One person said Mr. Cohen’s travails might make it easier for certain investors to give Point72 money in the future, viewing the organization as having been scrubbed and effectively been given a near-clean bill of health and unlikely to run afoul of regulators down the road.
—Timothy W. Martin contributed to this article.
