Surely the most hilarious possible defense to charges that Steve Cohen “failed to supervise” his traders is that he couldn’t have failed to supervise his traders because he was too busy ignoring everything they said and did. So what a delight to learn that SAC has chosen exactly that defense:

SAC Capital Advisors LP fired back at the U.S. government, telling employees Monday that the evidence shows Steven A. Cohen “did not even read” the email at the heart of allegations he failed to take proper steps to prevent insider trading at his hedge-fund firm. …

The lawyers also took direct aim at the SEC’s assertion that Mr. Cohen got an email in August 2008 that reflected “the clear possibility” that information about upcoming Dell Inc. earnings was improperly obtained. … Mr. Cohen’s lawyers responded that the evidence shows he “did not even read” the email because he got so many emails and instant messages.

On the average day, Mr. Cohen got about 1,000 emails, “innumerable” instant messages and “could not” read the “vast majority,” the report said.

So many emails landed in his inboxes that Mr. Cohen opened just 11% of them, according to the report.

And he was on the phone when the Dell email arrived, the report added.

Mr. Cohen would have had just “a matter of seconds” to review the email before making trades cited by the SEC in the administrative action filed against him Friday.

The magic here is many-layered. There’s the obvious paradox of “I was too busy not reading emails to not supervise.” There’s the fact that SAC sent this memo, about how Steve Cohen never reads his employees’ emails, to those employees. Your hard work is appreciated, whatsyername!

And then there’s the fact that, as Ryan McCarthy pointed out, a billionaire businessman who gets 1,000 emails a day can probably afford an employee to screen those emails and flag the most important ones for him. And Cohen did that. There was “a SAC employee whose duties included forwarding to Cohen trading-related information worthy of Cohen’s attention (the ‘Research Trader’).” And that employee forwarded the relevant Dell email to Cohen’s office and home email addresses. And then called to follow up. And talked to Cohen for 48 seconds. And then Cohen sold Dell. But: he never opened the email. Imagine the priority that he gave to emails that the Research Trader didn’t flag.

I don’t have SAC’s 46-page white paper, only the Journal‘s report, so I can’t tell you if Cohen also didn’t read the IMs he wrote about how close Mat Martoma was to nonpublic information about Elan’s drug trials.

Intuitively the SEC’s “failure to supervise” case against Cohen should be straightforward; it’s like:

  • Did a ton of your employees insider trade?
  • Well okay then.

But in fact the law is more complicated, and hinges on questions like, did SAC have a reasonable set of procedures to prevent insider trading?1 So whether Cohen himself did or did not read all of his analysts’ naughty emails is not entirely to the point; the real question is whether his massive hedge fund had some sort of system to stop their naughtiness. And SAC thinks it did:

The report said SAC maintained a forceful compliance program to ensure there were no violations of insider-trading laws. The hedge-fund firm has spent “tens of millions of dollars developing and implementing a robust and constantly improving compliance program.” SAC’s “trading-surveillance procedures are some of the most aggressive” in the industry, the report added.

The thing is that the SEC’s complaint doesn’t really dispute that: in the language of the statute, it doesn’t deny that SAC has “procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect” insider trading. Instead, it argues in effect that Cohen didn’t fulfill “the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with.” Because: he had reasonable cause to worry, what with all the emails and IMs he was receiving (and sending!) that were on the suspicious side.

So the fact that Cohen never saw those red flags – and relied on a robust and expensive set of surveillance procedures, rather than reading his email, to prevent insider trading – is a real defense. It’s not a very inspiring one though. The SEC’s case is that Cohen allowed trading on inside information because he ignored red flags about where it came from. The defense is basically: well, sure I ignored those red flags, but you can’t blame me for that. I ignored pretty much everything.

SAC to Employees: Cohen Didn’t Read Dell Email at Heart of SEC’s Case [WSJ]
[Update: Oh, go read the white paper. It's not bad actually; I am somewhat persuaded.]

1. It’s section 203(e)(6) of the ’40 Act:

The Commission, by order, shall censure, place limitations on the activities, functions, or operations of, suspend for a period not exceeding twelve months, or revoke the registration of any [person who] … has failed reasonably to supervise, with a view to preventing violations of the provisions of such statutes, rules and regulations, another person who commits such a violation, if such other person is subject to his supervision. For the purposes of this paragraph no person shall be deemed to have failed reasonably to supervise any person, if—
(A) there have been established procedures, and a system for applying such procedures, which would reasonably be expected to prevent and detect, insofar as practicable, any such violation by such other person, and
(B) such person has reasonably discharged the duties and obligations incumbent upon him by reason of such procedures and system without reasonable cause to believe that such procedures and system were not being complied with.

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Comments (23)

  1. Posted by Guest | July 23, 2013 at 11:18 AM

    I've been accused of ignoring important e-mails that indicate violations of securities regulations, but you need to understand that between all the e-mails discussing lurid affairs, bitter personal disputes, and efforts to leave the firm for a competitor, I just don't have the time to review everything.

    - Hardworking Compliance Officer Who's Got Priorities

  2. Posted by Gumby Moonstone | July 23, 2013 at 11:18 AM

    I'm glad you are finally touching on the topic of immigration, but may I be the voice of reason and just say your plan is ape-shit crazy. So let me get this straight, you want to have blacks give up their driver ids, then hand them over to mexicans, who we will know refer to as italians. I got news for you Mr. Levine, we already tried that with puerto ricans, and well, have you been to philadelphia intl airport recently?

  3. Posted by Guest | July 23, 2013 at 11:21 AM

    I like to imagine Cohen sitting in his office with his fingers in his ears screaming "na na na I can't hear you" whenever anyone tried to talk to him.

  4. Posted by Guest | July 23, 2013 at 11:34 AM

    SAC seems to be doing a great job of tracking everything that S.A.C. was doing on a second by second basis. If I'm the SEC I'd be asking for some more information about that… Seems like a short sighted approach to this whole thing.

  5. Posted by Guest | July 23, 2013 at 12:21 PM

    Spending "tens of millions" of dollars on compliance sounds less impressive if you have made tens of billions of dollars (allegedly!) insider-trading.

  6. Posted by Guest | July 23, 2013 at 12:25 PM

    On the phone? Was it with his wife? Isn't that when most people read their emails.

  7. Posted by Guest | July 23, 2013 at 12:35 PM

    Fucking yinzers

  8. Posted by Guest | July 23, 2013 at 12:35 PM

    SAC: "There we go. One check for ten million dollars to a Compliance. Good thing there is no one that works here by that name, or it would actually get cashed"
    Lawyer: "Looks good. The SEC will never catch on"

  9. Posted by Man Fin | July 23, 2013 at 12:36 PM

    "stop writing to me" was the best one i ever got on that from a guy across from me

    stood up and shouted over the desk

    some margin call violation bs

  10. Posted by Guest | July 23, 2013 at 1:40 PM

    <Furiously changing my name to Compliance>

  11. Posted by quant me maybe ... | July 23, 2013 at 1:50 PM

    I frequently make derivatives and equities trades amounting to hundreds of millions of dollars based on 45 second conversations and e-mails I haven't read — what they fail to mention is that I get my best information from Yahoo! finance.

    Will those filthy SEC bastards come after me next?

    –Guy concerned that also using MSN money would set too many red flags. And don't even get me started on that brilliant Jim Cramer guy.

  12. Posted by Public Client | July 23, 2013 at 1:52 PM

    Ah – so this is how the 1%ers "work hard" for their wealth.

  13. Posted by 33%'er | July 23, 2013 at 2:29 PM

    What the fuck is a "Public Client"

  14. Posted by quant me maybe ... | July 23, 2013 at 3:07 PM

    Sarcasm. Learn to recognize it.

  15. Posted by quant me maybe ... | July 23, 2013 at 3:29 PM

    Here's a trivial test to determine if you are eligable to join the 1%

    Which of these does not belong with the others?
    1) PhD in Statistics
    2) PhD in Econometrics
    3) PhD in Theoretical Mathematics
    4) Pizza delivery guy

  16. Posted by 33%'er | July 23, 2013 at 4:28 PM

    What type of pizza? Because if it's 9/9/9 I could get down with that.

  17. Posted by Guest | July 23, 2013 at 4:48 PM

    You wil respect my authoritah!

    -SEC Enforcement Officer Eric Cartman

  18. Posted by Guest | July 23, 2013 at 5:01 PM

    Will just bolster the case that it wasn't his job, it was the job of his compliance infrastructure.

  19. Posted by Analyst Ackbar | July 23, 2013 at 5:50 PM

    Here's a trivial test to determine if you are eligible to join the 1%:

    Can you spell "eligible?"

  20. Posted by quant me maybe ... | July 23, 2013 at 6:27 PM

    No — it's 3. With every other thing you can make enough feed your family.

  21. Posted by Guest | July 24, 2013 at 7:11 AM

    A government subsidized hooker.

    -Former 99%er that left UBS to sell Hondas and is now a proud 98%er

  22. Posted by M. Yass | July 24, 2013 at 11:03 AM

    Of the 22,200 e-mails sent to my work e-mail, 19650 have neither been opened or read. The march to 20K rolls on.

  23. Posted by Public Client | July 25, 2013 at 8:47 AM

    You have Private Client,… and then you have,….