| July 19
July 19 "Failure to supervise" is not the sort
of charge that typically grabs Wall Street's attention. Unless
the target is one of the world's best-known hedge fund managers.
In an order on Friday, the U.S. Securities and Exchange
Commission detailed how it believes Steven Cohen, the
billionaire founder of SAC Capital Advisors LLC, turned a blind
eye to what it called illegal trades by two of his portfolio
"Faced with red flags of potentially unlawful conduct by
employees under his supervision, Cohen allowed his traders to
execute the recommended trades and stood by," the SEC said.
The case centers on Cohen's dealings with two managers at
affiliated hedge funds, Mathew Martoma of CR Intrinsic Advisors
LLC and Michael Steinberg of Sigma Capital Management LLC. Both
have pleaded not guilty to criminal insider trading charges.
In March, Cohen agreed to pay about $616 million to settle
SEC probes into alleged insider trading at CR Intrinsic and
Sigma. By beginning administrative proceedings, the SEC said it
now wants him to stop managing other people's money.
SAC said on Friday the charges against Cohen have no merit.
ELAN AND WYETH
Part of the SEC case focuses on trades in Ireland's Elan
Corp and Wyeth, which were working on a joint clinical
trial of a drug to treat Alzheimer's disease.
According to the SEC, Martoma, now 39, had a close
relationship with University of Michigan doctor Sidney Gilman, a
consultant to both companies. Gilman, then in his mid-70s, saw
in Martoma a friend and pupil, the SEC said.
Starting in 2007, Gilman allegedly began giving Martoma
regular tips about how the Alzheimer's trial was going. In time,
Martoma was allegedly touting Elan and Wyeth to Cohen as top
By July 2008, Martoma and Cohen had built up combined
positions of more than $700 million in Elan and Wyeth stock.
The SEC said this occurred even though two CR Intrinsic
analysts had warned Cohen in April 2008 that the trial might be
in trouble. They allegedly cited their talk with another doctor,
and suggested that perhaps he should hedge his bets.
Rather than be concerned about whether this doctor was
disclosing nonpublic information, the SEC said Cohen wanted to
know more and urged Martoma to follow up.
By July 2008, the SEC said it had become obvious to the
companies that the trial results would disappoint, and Gilman
conveyed details to Martoma.
On the morning of July 20, a Sunday, Martoma supposedly
reached out to Cohen. "It's important," he said, according to
the SEC, and the two supposedly spoke for nearly 20 minutes. It
seemed Martoma had had an abrupt change of heart about Elan.
The next day, according to the SEC, Cohen's head trader
began dumping Elan and Wyeth shares, and by July 29 SAC and CR
Intrinsic had taken sizable short positions in both companies.
On July 30, just after the drug trial results were
announced, Elan shares fell 42 percent and Wyeth shares fell 12
percent. Wyeth is now part of Pfizer Inc.
Total alleged gains and avoided losses for Cohen on the
trades: $275 million. Total alleged gain for Martoma: $9.3
million, in the form of his bonus for 2008.
By 2010, unable to repeat his success, Martoma was fired.
The other part of the case against Cohen focuses on trades
in Dell Inc, based on alleged advance tips about the
computer maker's results for the second quarter of 2008.
According to the SEC, Jon Horvath, a research analyst at
Sigma who reported to Steinberg, received tips from a friend at
another hedge fund, but knew the original source was a Dell
Horvath has since pleaded guilty to criminal charges.
On Aug. 25 and 26, 2008, Cohen was working at his vacation
home on Long Island, New York, and according to the SEC bought a
half million Dell shares for more than $12 million.
At 1:09 p.m. on Aug. 26, Steinberg was copied on an email in
which Horvath said "someone at the company" had signaled that
Dell's gross margins would disappoint investors. "Please keep to
yourself as obviously not well known," it said.
At 1:29 p.m., this email was allegedly sent to Cohen's email
box, but Cohen was on his cellphone, where he would remain until
1:36 p.m. A minute later, he supposedly chatted for 48 seconds
with a trader, according to the SEC's timeline.
By 1:39 p.m., the selling of the Dell stake supposedly
began, and by the close of trading it was done. Steinberg,
meanwhile, was selling Dell shares short, the SEC said.
The SEC said the "highly suspicious" email reflected "the
clear possibility that Steinberg and Horvath were unlawfully in
possession of material nonpublic information and that Steinberg
had traded or might trade on that information." But it said
Cohen did not investigate.
On Aug. 28, when Dell reported its second-quarter results,
its gross margin came in well short of what investors had been
"Nice job on Dell," Cohen emailed Steinberg, according to
The next day, Dell shares fell more than 13 percent, and
Steinberg allegedly soon closed out his short positions.
Cohen avoided losses of $1.7 million by selling his Dell
shares, the SEC said. Net gain for Steinberg: $1 million.