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Administrative Bout of the Century? SEC Takes on Steven Cohen

December 03, 2015

In a claim brought in its administrative law court, the U.S. Securities and Exchange Commission said that billionaire Steven Cohen, as head of the closed hedge fund SAC Capital Advisors LP, failed to reasonably supervise former top traders Michael Steinberg and Mathew Martoma, both of whom faced insider trading accusations.

The parties will start briefing the administrative law judge overseeing the case on next steps, and a hearing is expected to begin in the first half of 2016.

If a trial begins, this case will intersect insider trading, the controversy over the SEC’s in-house courts, and one of Wall Street’s most watched figures.

Michael Dicke, co-chair of Fenwick’s securities enforcement group, offered his perspective to Law360 about this administrative bout, calling this claim “the most-high profile administrative proceeding the SEC has done in years.”

Prior to joining Fenwick, Dicke served as the Associate Regional Director for Enforcement in the SEC’s San Francisco regional office.

In its complaint, the SEC said Cohen received “highly suspicious information” from Steinberg, Martoma and others about their trading activities. This information should have prompted him to investigate whether they possessed illegal inside information and prevent them from trading on it.

The SEC said that Cohen instead allowed the two men to execute their recommended trades on major technology companies.

The SEC faces an unusual challenge, as the Department of Justice dropped its prosecution of Steinberg following the Second Circuit’s narrowing of insider trading law in its Newman decision in late 2014, and Martoma is asking the Second Circuit to overturn his conviction.  Thus, the SEC may be faced with rulings that take away the finding that the traders did engage in illegal insider trading under Cohen’s supervision.

The SEC complaint could be challenging as both Steinberg and Martoma’s convictions may be overturned on appeal – meaning the two did not engage in any illegal activity under Cohen’s supervision.

Dicke told Law360 that the SEC will likely need to amend its administrative complaint - the order instituting proceedings - to take into account the changes to the law and the status of the convictions. He also mentioned that the SEC may seek approval to alter the document’s language so it will not need to conclusively prove that insider trading occurred to prove its failure to supervise charges.

However, Dicke noted that such actions open the door for Cohen’s defense team to oppose such steps. As the litigation progresses, Cohen’s team will likely fight the enforcement division on every motion, Dicke said.

“If they go forward at all, everything is going to be opposed,” Dicke told Law360.

The full article is available through the Law360 website​.​​