Tuesday, 27 September 2016
Last updated 4 hours ago
Jul 22 2013 | 12:43pm ET
The SEC's administrative charges against SAC Capital's Steve Cohen may be intended to assist the Department of Justice in its efforts to build a criminal case against SAC, said one legal expert.
The SEC is seeking to have Cohen banned for life from the financial services industry for failing to supervise two senior employees and prevent them from engaging in insider trading on his watch.
The charges, according to Thompson Hine Partner Richard Heller, have likely been laid in cooperation with the SEC's enforcement division “which is probably working hand in hand with the DOJ because that's how they do things these days."
“I think that they [brought the administrative charges] for strategic purposes; to perhaps, in discovery, learn as much as they can to help them potentially bring an enforcement proceeding which I think would be linked with the DOJ investigation and proceeding," Heller told FINalternatives in a phone interview.
The Department of Justice and the FBI continue to build a criminal case against SAC. A spokesman for SAC says the charges have "no merit."
For Sadis & Goldberg Partner Ron Geffner, the most “novel” aspect of the SEC's charges is that “the penalty sought does not fit the crime alleged,” as Cohen himself is not charged with insider trading.
“[T]his is less damaging than an insider-trading allegation,” Geffner, who is vice president of the Hedge Fund Association, told FINalternatives in a phone interview. “[T]he SEC has enhanced their odds of success by bringing their action through the administrative action versus a civil action. There's less discovery and fewer safeguards for the respondent...”
Asked to evaluate the strength of the SEC's case against Cohen, Geffner said he had unanswered questions which would be key to such an evaluation, like what communications did Cohen have with SAC's chief compliance officer? “Did he have a reasonable basis to believe that several of the portfolio managers were in possession of material non-public information and is it reasonable to believe that he knew or that a person reasonably should have known?
“And then...let's say he did know, what communications or steps, if any, were taken in connection with resolving it? Did he have conversations with the chief compliance officer to examine this? I don't know the answers to those questions, they weren't mentioned.”
Geffner did not think the SEC's move against SAC would lead to a rash of 'failure to supervise' cases in the financial services industry.
“Failure to supervise actions, while they're not unheard of, they're not routinely brought by the staff of the SEC in the advisory industry.”
Heller said the charges represent “the ultimate message that the SEC can bring to the industry to engender a top-down culture of compliance—if you, the manager of a fund, do not deal not only with marketing and trading but in keeping your house in order and compliant then you can be the subject of an SEC inquiry, enforcement proceeding or action.”
Geffner said the charges will be heard by an administrative law judge who must provide an initial ruling within 300 days of the filing of the action. If appealed, the decision is subject to review by a panel of SEC commissioners, the "very people...who authorized the SEC to file the action."
Heller said the SEC would not have brought the charges lightly.
“They believe that they can win,” he said.