Steven C Cohen doesn't recall reading an email on Dell Inc that was cited by the Securities and Exchange Commission (SEC) as evidence that that the founder of SAC Capital Advisors LP failed to supervise his employees, according to a report given to the firm's employees on Monday.
While Cohen sold his stake in Dell after being forwarded the email, evidence suggests he did so because a portfolio manager started selling the stock, SAC said in a 45-page paper that refutes many of the facts outlined in the SEC's administrative order filed last week against the 57-year-old billionaire. There's no evidence Cohen ever read the communication, according to the paper.
The refutation, posted on SAC's internal website, illustrates Cohen's efforts to keep his employees calm while fighting the SEC's allegations - the government's first against him personally - and its efforts to close down his $15-billion hedge fund. Cohen was accused of ignoring red flags in trades conducted by two portfolio managers, Mathew Martoma and Michael Steinberg, who have both been charged with securities fraud. (TRAIL OF INSIDER TRADING AT TOP HEDGE FUND)
"Any claim that Cohen overlooked red flags showing unlawful conduct by SAC employees is contrary to his and SAC's longstanding demonstrated commitment to the firm's compliance efforts," Cohen's lawyers wrote in the paper, which was reported earlier by the Wall Street Journal.
In the SEC's July 19 order, the agency presented new details that it said showed Cohen received "highly suspicious" information that should have caused any reasonable hedge-fund manager to investigate the basis for the alleged wrongdoing.
Dell trade
Martoma, 39, was arrested in November for alleged insider trading in Elan Corp and Wyeth after receiving confidential information from Sidney Gilman in July 2008 that caused him and Cohen to abruptly abandon their bullish bets and sell their holdings.
The trades earned SAC profits and avoided losses of more than $275 million, the government said. Steinberg was arrested in March for trading in Dell and Nvidia Corp based on illicit tips given to him by his analyst. Martoma and Steinberg, 41, have pleaded not guilty.
The SEC said in last week's order that Cohen received a tip about Dell Inc that was forwarded to him by Steinberg, and that he traded immediately afterward.
Cohen sold off more than $11 million in Dell stock within minutes of getting a copy of a "highly suspicious" email from Jon Horvath, Steinberg's analyst. SAC countered in its report that Cohen sold his shares because one of his portfolio managers, who had who initially recommended that Cohen buy Dell, and whose trading Cohen relied on frequently in establishing his own positions, was selling some of his shares. That portfolio manager is Gabriel Plotkin, according to people familiar with the matter.
Second hand
The report stated that at that time, Cohen only opened about 11 per cent of his messages. SAC argues that even if Cohen had read the e-mail, which mentions a "second-hand read" from someone inside the company and warned that Dell's gross margins would be less than the market expected, there is no evidence that it contained material nonpublic information.
The SAC report also says there were no "red flags" suggesting that Martoma had improper information and that his recommendation to reduce the firm's exposure on Elan - made in a 20-minute phone call - made sense given that the shares had appreciated approximately 40% over the previous six weeks.
SAC defended its compliance team, saying it deploys some of the most aggressive communications and trading surveillance in the hedge-fund industry. The firm said it has daily reviews of emails, instant messages and internal write-ups, SAC trading using keyword- and concept-based search protocols; weekly reviews of randomly-selected portfolio manager teams; reviews of electronic communications between investment professionals and their former employers for a period after commencing work at SAC; reviews of trading made around market moving events and corporate access events; and regular reviews of the firm's most-profitable trades.
