Steve Cohen Was Serious About Stopping Insider Trading Unless It Occurred In The 89% Of Emails He Didn't Read

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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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