Steve Cohen Will Be Back in 2018. That's Good.

Also, like, what I said at the beginning. What is the SEC's job? One part of its mandate is to stop and deter insider trading, sure. But it is also supposed to "protect investors" and "facilitate capital formation," and denying investors access to a wildly successful fund manager fits a bit awkwardly with that mission. He's spent the last three years being washed clean of the taint of insider trading, and will spend the next two years being rinsed under SEC supervision. After that, though, if investors want to give him their money, and if he wants to take it, then let no one stand in their way.

The most promising part of this settlement for the SEC seems to me to be the monitor that it is installing. The independent consultant will:

(a) conduct a review of the Cohen Entity's compliance with the federal securities laws and issue a report at least every six months to the Cohen Entity and the staff of the Commission describing the scope and results of the IC's review; and

(b) In connection with each report described in paragraph 71(a) above, recommend any additional policies and procedures which, on the basis of the review, the IC believes are reasonably designed to ensure the Cohen Entity complies with the federal securities laws (the "Recommendations").

And then Cohen will just have to go implement whatever recommendations the consultant comes up with.⁷ I think it is fair to say that prosecutors, and the SEC enforcement staff, take rather a stricter view of insider trading law than, you know, the law does.⁸ As a strict matter of federal criminal law, it's not illegal to trade on insider tips unless the insider received a personal benefit, and as a practical matter that makes it very difficult to punish hedge funds for aggressively seeking "edge" from corporate insiders. But as a matter of best practices recommended by a monitor? There are no rules. Remember, Cohen's monitor will be a former prosecutor chosen with the SEC staff's agreement;⁹ it seems unlikely that he will be an advocate for pushing the envelope and staying just the right side of the criminal law.

For the next two years, Cohen's family office will be regulated less like a hedge fund, which can fight back if it feels like the SEC is wrong on the law, and more like a bank, dependent on unreviewed regulatory goodwill to survive. The SEC can try to shape how Cohen's firm interacts with companies, how it rewards analysts for getting "edge," and generally how it monitors behavior that the courts might not think is illegal but that the SEC dislikes. It's an opportunity for Cohen/Point72/New SAC to become "a leader in compliance," and for the SEC to have a hand in shaping what exactly that means — and to push it beyond what the Newman decision requires of hedge funds. And then, when Cohen goes back on the market in 2018, perhaps other hedge funds will follow his lead on insider-trading compliance, and the SEC will achieve through Cohen what it can't quite get through the courts.

1. SAC did underperform the S&P 500 index that year, which I feel like is relevant for an equities-focused hedge fund, but it is long/short and has other strategies so it's not a totally fair comparison. In any case, I am hiding the S&P reference down here so that I don't enrage purists like my Bloomberg colleague Tracy Alloway, who criticized Showtime's "Billions" because it portrays "a hedge fund manager opting to benchmark his performance against the Standard & Poor's 500 Index." I gather that the hedge fund manager in "Billions" is not exactly based on Cohen but, you know.
   
   
2. But I think SAC isn't. SAC's 2013 plea agreement provided that the "each of the SAC Entity Defendants agrees to cease operating as an investment adviser and to not accept any additional funds from third-party investors." The SEC settlement doesn't on its face seem to reverse that, so I guess those defendants (S.A.C. Capital Advisors, L.P.; S.A.C. Capital Advisors, LLC; CR Intrinsic Investors, LLC; and Sigma Capital Management, LLC) are out of luck. Fortunately it is cheap to get a new entity, and the plea agreement didn't cover Cohen himself.
   
   
3. And two named S.A.C. Capital Advisors. (L.P. and LLC that is.) The list of entities is S.A.C. Capital Advisors, L.P.; S.A.C. Capital Advisors, LLC; CR Intrinsic Investors, LLC; and Sigma Capital Management, LLC; who pleaded guilty in 2013. The list of humans is, according to Bloomberg, "Noah Freeman, Donald Longueuil, Wesley Wang, Richard Choo-Beng Lee, Jon Horvath and Richard Lee," all of whom pleaded guilty, and Mathew Martoma, who was convicted at trial and sentenced to nine years in prison. (An eighth former employee, Michael Steinberg, was convicted at trial, but his conviction was reversed and the charges dropped.)
   
   
4. For instance:
   43. In March and April 2008, two analysts at CR Intrinsic (the "Analysts") repeatedly sent emails to Cohen advocating against the Elan and Wyeth positions and suggesting trading strategies to hedge them.
   
   44. The Analysts exchanged a number of emails and instant messages with Cohen about whether Martoma's advice on Elan and Wyeth was sound. On March 28, 2008, one of the Analysts told Cohen in an instant message that he did not think anyone could yet know the Phase II Trial data, because the trial was not over yet. Cohen responded by saying he would follow Martoma's and another hedge fund manager's advice, because "they are closer to it than you." Later in the same message, the Analyst asked Cohen: "[I] don't know if [the other hedge fund manager] or mat [Martoma] will answer, but do you think they know something or do they have a very strong feeling." Cohen replied: "[T]ough one . . . i think mat [Martoma] is the closest to it." The Analyst responded: "[T]he question that I would ask is if it[']s possible to know the data yet – i could be wrong, but i don't think it is yet."
   
   45. A few days later, on April 6, 2008, Cohen exchanged instant messages with the other Analyst about the Drug. Cohen remarked that it "seems like mat [Martoma] has a lot of good relationships in this arena." Those relationships turned out to be with doctors involved in Elan's drug trials who were illegally leaking information to Martoma. The e-mails and IMs are not proof that Cohen knew that. But they are … Cohen probably wouldn't want to read them to a jury.
   
   
5. In rereading what I wrote about SAC's November 2013 guilty plea, I came across this paragraph:
   In March, I suppose it was possible to believe that SAC's settlement with the SEC might put an end to its insider trading troubles. Now, though, even though this plea deal puts an end to SAC, no one quite believes that its troubles are over. The government is having too much fun to stop this case just because it has recovered X dollars, for any X.But in fact that came very near to being the high-water mark for SAC trouble, though it took the Newman decision a year later to really turn the tide.
   
   
6. In fact, the SEC's original lawsuit involved failure to supervise, not just Martoma, but also Steinberg; the SEC dropped his trading from the case against Cohen when his criminal case was dismissed. 
   
   
7. I mean, he can object, but the system is stacked against him:
   Cohen agrees that within 60 days following the receipt by a Cohen Entity of the Recommendations, the Cohen Entity shall adopt all Recommendations of the IC; provided, however, that within 30 days of the receipt of the Recommendations, Cohen shall in writing (i) notify the IC and the staff of the Commission of any Recommendations that he considers to be unnecessary, inappropriate, or unduly burdensome, and (ii) propose an alternative policy, procedure, or system designed to achieve the same objective or purpose. As to any Recommendation on which Cohen and the IC do not agree, such parties shall attempt in good faith to reach an agreement within 30 days after Cohen serves the written notice and proposal described above. In the event that Cohen and the IC are unable to agree to an alternative proposal, Cohen will ensure that the Cohen Entity abides by the determinations of the IC by no later than the 75th day following the receipt of the Recommendations.
   
   
8. I base this on things like the Justice Department's unsuccessful appeal of the Newman decision, or the SEC's unsuccessful argument to one of its own administrative judges that he shouldn't apply that decision in an SEC administrative action.
   
   
9. It doesn't have to be a former prosecutor, but it has to be Bart Schwartz (a former prosecutor) or "another IC not unacceptable to the Commission staff."