NEW YORK Steven A. Cohen's legal team claims the hedge fund titan was simply too busy to notice some of his employees may have been using inside information to make trades in shares of computer company Dell Inc in the summer of 2008.
For starters, the lawyers argue Cohen was not even at his desk at his SAC Capital Advisors hedge fund when the allegedly improper trading took place on the afternoon of August 26, 2008. Rather, the billionaire trader was working from his vacation home in East Hampton, New York, and likely ignoring many of his emails, including the one U.S. securities regulators say should have tipped off Cohen that some of his top portfolio managers may have had access to nonpublic information about Dell's earnings.
The 57-year-old Cohen, one of the world's top hedge fund managers, is fighting a noncriminal proceeding brought by the U.S. Securities and Exchange Commission last week accusing him of ignoring "red flags of potentially unlawful conduct." The SEC contends that two SAC portfolio managers elicited inside information in 2008 and parlayed it into roughly $275 million.
Cohen's defense lawyers, however, also say that his decision to sell shares of Dell in his own personal account was dictated not because of any single email but because his top consumer portfolio manager was selling shares and Cohen was more or less simply following that trader's lead.
"The consumer PM was one of the portfolio managers whose trading ... Cohen followed most closely," according to a lengthy presentation prepared by Cohen's lawyers. "Cohen would follow the Consumer PM's sale of a stock by selling stock in the COHE Account even if technical analyses counseled against selling."
This is among several lines of defense outlined by Cohen's lawyers in a 46-page "white paper" distributed on Monday to some of the more than 900 employees at Cohen's $15 billion hedge fund. A copy of the white paper reviewed by Reuters and other news organizations may preview some of the arguments Cohen's lawyers will use to defend the tycoon against a civil administrative failure to supervise charge filed by the SEC.
The paper offers not only a defense for Cohen but provides a rare window into the secretive billionaire's professional habits through descriptions of his trading practices, his communication methods and the way he is perceived by top deputies.
The civil administrative proceeding, which follows a multi-year investigation into insider trading at SAC, is the most serious challenge yet to Cohen and his standing in the industry he helped build.
The SEC on Friday, in a move to bar Cohen from managing other people's money, charged he failed to spot potential "red flags" that SAC executive Michael Steinberg was making improper trades in Dell and another former employee, Mathew Martoma, was using improper information to make trades in two health care stocks.
The agency said on Tuesday that long-serving Chief Administrative Law Judge Brenda Murray would preside at a hearing on the charges scheduled to begin on August 26.
Overall, Cohen is depicted in the paper as a boss who in many cases has little time to focus on any single issue, instead using established trading systems to maximize the number of stocks he trades each day while minimizing the time spent analyzing the motivations behind them. The lawyers said that on any given day he receives 1,000 emails and reads only 11 percent of them.
Yet in the few cases in which he devotes deeper attention to an investing strategy, the paper shows Cohen soliciting opinions on a single stock from a number of different employees, at times almost refereeing their disagreements. The paper also claims Cohen puts a lot of weight on the stock picks of his top consumer portfolio manager, Gabriel Plotkin, who is not named in the presentation but who is the person referred to in the document, sources confirmed.
'A TRADER, NOT AN ANALYST'
In a May 30 deposition, Plotkin said of his boss:
"He trades a lot. He's in and out of stuff a lot," according to the defense team's paper.
"Steve has no emotion in this stuff. Stocks mean nothing to him. They're just ideas, they're not even his ideas, and he buys stuff, sells stuff. I don't know how frequently he trades but that's what he does," Plotkin said in the deposition, according to the paper.
"He's a trader, he's not an analyst," Plotkin said. "And he trades constantly. That's what he loves to do."
On August 26, 2008, according to the paper, Cohen's head trader, Phillipp Villhauer, telephoned Cohen to inform him that Plotkin was selling shares of Dell. Just over a minute later, Cohen issued an order to sell his own Dell shares.
The close timing makes it highly unlikely that Cohen would have had time to read an email forwarded to him around the same time in which Steinberg and former portfolio manager Jon Horvath discussed nonpublic information about Dell's upcoming earnings announcement, the paper argues.
Steinberg was arrested on March 29 for insider trading and has pleaded not guilty. His trial is set to begin in November.
Horvath pleaded guilty last year to insider trading in Dell and is now cooperating with the government.
But the paper also said Cohen did not completely ignore his deputies' views on Dell. That November, Steinberg said in an email that Cohen was "pissed" at him for having a bullish view on Dell even as the 2008 financial crisis worsened. According to the paper, Steinberg responded by laying out his views to Cohen and "citing many sources of information - all legal - that he and Horvath had."
(Additional reporting by Jonathan Stempel in New York; editing by Matthew Goldstein and Matthew Lewis)