Steve Marcus/ReutersSteven Cohen, the chief of the hedge fund SAC Capital Advisors.

5:12 p.m. | Updated

Federal regulators filed a civil action against Steven A. Cohen on Friday, accusing the billionaire hedge fund manager of “failing to supervise” employees and prevent them from insider trading.

The action, filed by the Securities and Exchange Commission, delivers a serious blow to Mr. Cohen, the founder of SAC Capital Advisors. The agency is seeking to bar Mr. Cohen from overseeing investor funds, a death knell to a hedge fund manager.

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Yet the order, filed as an S.E.C. administrative proceeding rather than lawsuit, stops short of accusing him of fraud. Instead, the S.E.C.’s action focused on a breakdown in controls at the fund, once one of Wall Street’s best performers.

“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” Andrew J. Ceresney, co-head of the S.E.C.’s enforcement division, said in a statement. “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.”

SAC agreed several months ago to settle charges with the S.E.C., paying a record $615 million. Federal prosecutors and the F.B.I. continue to investigate the fund.

In a statement, a spokesman for SAC argued that the S.E.C.’s case had “no merit,” adding that Mr. Cohen “acted appropriately at all times and will fight this charge vigorously.”

The S.E.C case against Mr. Cohen focuses on his relationship with two portfolio managers, Mathew Martoma and Michael Steinberg. Both managers have been ensnared by the sweeping federal investigation into insider trading.

Last year, federal prosecutors accused Mr. Martoma of trading on non-public information about two pharmaceutical companies, Elan and Wyeth. According to the lawsuit, Mr. Martoma, a portfolio manager at CR Intrinsic, which was set up as a research engine of SAC, obtained secret information from a doctor about the bad results of clinical trials for an Alzheimer’s drug the companies were developing. The information, prosecutors said, allowed him to make more than $276 million in illegal profits and avoid losses.

The evidence in that criminal case links Mr. Cohen to Mr. Martoma. The case highlights a 20-minute telephone call between Mr. Martoma and Mr. Cohen before SAC began selling off its large positions in Elan and Wyeth.

The government did not claim that Mr. Martoma told Mr. Cohen about the confidential information. Mr. Cohen, 57, has not been accused of any criminal wrongdoing and has told his investors that he has behaved appropriately at all times.

Mr. Martoma, who has denied the charges, is set to go to trial Nov. 4.

According to the S.E.C., Mr. Cohen “oversaw trading” by Mr. Martoma and Mr. Steinberg and “required them to update him on their stock trading and convey the reasons for their trades.”

Mr. Cohen “watched” Mr. Martoma “build a massive long position in the stock of two pharmaceutical companies – Elan and Wyeth – based on their joint clinical trial of a drug with the potential to treat Alzheimer’s disease,” the S.E.C. said. The S.E.C. added that Mr. Cohen “allowed this despite repeated e-mails and instant messages” from other Mr. Martoma’s co-workers “advocating against it.”

Mr. Steinberg was arrested in late March and accused of trading on confidential financial data from Dell.

According to the S.E.C.’s case on Friday, an analyst, then at an SAC affiliate, passed along to Mr. Steinberg non-public information about the computer maker that was gleaned second-hand from an investor relations employee at the company.

The analyst, Jon Horvath, did so again in August of 2008, e-mailing specific information about Dell’s financial performance to Mr. Steinberg two days before the company reported its latest quarterly earnings.

In late August 2008, an SAC employee forwarded Mr. Cohen the information from Mr. Horvath. Within two minutes, working from his vacation home on Long Island, Mr. Cohen began selling shares in Dell that he had begun buying earlier that week. About two hours later, Mr. Cohen had sold off his entire position, according to the S.E.C.
The S.E.C. said that Mr. Cohen e-mailed Mr. Steinberg three hours after the earnings announcement, saying “Nice job on Dell.”

Mr. Horvath has pleaded guilty. A trial for Mr. Steinberg, who has denied the criminal charges against him, is scheduled to begin on Nov. 18.

“On at least two separate occasions in 2008,” Mr. Martoma and Mr. Steinberg “provided information to Cohen indicating their potential access to inside information to support their trading,” the S.E.C. said. But Mr. Cohen “stood by on both occasions instead of ascertaining whether insider trading was taking place.”

Article source: http://dealbook.nytimes.com/2013/07/19/s-e-c-files-civil-case-against-steven-cohen-of-sac/?partner=rss&emc=rss