Key Takeaways
- • SAC Capital pleaded guilty to insider-trading charges and paid a combined penalty of $1.8 billion, with eight employees charged by the government; six have pleaded guilty and one, Michael Steinberg, was convicted on five counts of securities fraud and conspiracy in December 2013.
- • The SEC filed a civil suit against Steven Cohen in July 2013 alleging he failed to properly supervise employees involved in illegal trading, specifically citing two instances involving pharmaceutical companies Elan and Wyeth, and computer giant Dell, where Cohen allegedly traded on illicit information despite "red flags."
- • Cohen has not been criminally charged but faces civil liability for failing to investigate suspicious trading activity; his defense argues the SEC's allegations lack factual basis and that all trades were based on publicly available data.
- • Criminal trials continue against two senior traders: Michael Steinberg was convicted in December 2013, and Mathew Martoma's trial began in early January 2014, with potential outcomes likely to influence the SEC's civil case against Cohen.
- • A federal judge issued a stay on the SEC civil case in August 2013 pending resolution of criminal proceedings against employees and the firm, effectively pausing litigation while criminal cases proceed.
Summary
Steven Cohen, billionaire founder of SAC Capital Advisors, faces a pivotal moment in a high-stakes regulatory confrontation that centers on his personal culpability for systematic insider trading within his hedge fund. While Cohen himself has not been criminally prosecuted, the Securities and Exchange Commission filed a civil enforcement action in July 2013 alleging that he failed to properly supervise employees engaged in illegal trading and that he knowingly profited from their illicit activities.
The underlying insider-trading scandal has already exacted substantial financial and reputational costs. SAC Capital pleaded guilty to insider-trading charges and agreed to pay $1.8 billion in penalties. The government has brought charges against eight employees of the firm; six have already pleaded guilty. Most significantly, Michael Steinberg, a senior trader, was convicted by jury in December 2013 on five counts of securities fraud and conspiracy. Mathew Martoma, another key trader, was undergoing trial as of early January 2014, with his case potentially providing additional evidence relevant to the SEC's allegations against Cohen.
The SEC's civil complaint centers on two specific instances of alleged insider trading. The first involves pharmaceutical companies Elan and Wyeth; the second concerns Dell, the computer manufacturer. The SEC's theory is that Cohen observed "red flags" indicating his traders possessed material nonpublic information but deliberately ignored these warnings, instead trading on the basis of their tips and generating millions in profits. Cohen's legal defense, articulated in a July 2013 white paper, flatly rejects this characterization, arguing that the SEC's allegations are "contrary to the indisputable facts" and lack evidentiary foundation. His attorneys contend that Cohen had no reason to suspect employee misconduct and that all trades were executed based on publicly available information.
A federal judge ordered a stay of the SEC civil case in August 2013, effectively placing Cohen's suit on hold pending the resolution of criminal proceedings against the firm and its employees. This procedural pause means the central question—whether Cohen's failure to supervise constitutes civil liability—remains unresolved, with outcomes from the Steinberg and Martoma criminal trials potentially influencing how regulators and courts assess Cohen's knowledge and intent.
The underlying insider-trading scandal has already exacted substantial financial and reputational costs. SAC Capital pleaded guilty to insider-trading charges and agreed to pay $1.8 billion in penalties. The government has brought charges against eight employees of the firm; six have already pleaded guilty. Most significantly, Michael Steinberg, a senior trader, was convicted by jury in December 2013 on five counts of securities fraud and conspiracy. Mathew Martoma, another key trader, was undergoing trial as of early January 2014, with his case potentially providing additional evidence relevant to the SEC's allegations against Cohen.
The SEC's civil complaint centers on two specific instances of alleged insider trading. The first involves pharmaceutical companies Elan and Wyeth; the second concerns Dell, the computer manufacturer. The SEC's theory is that Cohen observed "red flags" indicating his traders possessed material nonpublic information but deliberately ignored these warnings, instead trading on the basis of their tips and generating millions in profits. Cohen's legal defense, articulated in a July 2013 white paper, flatly rejects this characterization, arguing that the SEC's allegations are "contrary to the indisputable facts" and lack evidentiary foundation. His attorneys contend that Cohen had no reason to suspect employee misconduct and that all trades were executed based on publicly available information.
A federal judge ordered a stay of the SEC civil case in August 2013, effectively placing Cohen's suit on hold pending the resolution of criminal proceedings against the firm and its employees. This procedural pause means the central question—whether Cohen's failure to supervise constitutes civil liability—remains unresolved, with outcomes from the Steinberg and Martoma criminal trials potentially influencing how regulators and courts assess Cohen's knowledge and intent.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.