Approximately four months ago, the hedge fund company owned and run by Steve Cohen agreed to pay the SEC approximately $616 million to settle allegations relating to insider trading.
At the time of the settlement, attorneys for SAC told the court that SAC was willing to pay the large sum because it wanted to put the matter behind them. A few days ago, the SEC announced new civil charges against Steve Cohen, individually.
There are at least four potential unintended consequences of the SEC’s action:
1. Steve Cohen might decide to fight the new administrative action. If he doesn’t fight it and agrees to the sanction the SEC is seeking, he will be out of business because he will be banned from managing money for others. (Or he may not. Mr. Cohen has amassed a large enough fortune that he might just put this matter behind him and manage his own money.) If he fights, there is a chance that he could avoid this severe penalty. In any case, the SEC has substantially harmed his business by spooking his investors with this second action.
2. Future subjects of SEC enforcement actions may be less likely to settle. From the defendant’s point of view, the main benefit of settling is finality and being able to move forward. Now defendants need to consider whether the settlement will actually bring the hoped for finality. Here the earlier action was brought against SAC the entity and this administrative action was brought against Steve Cohen the individual but given Mr. Cohen’s role at SAC, the company surely would not have agreed to pay so much in the first action if it thought that the SEC would be coming after Mr. Cohen the individual next.
3. The costs related to SEC enforcement may increase significantly. If more defendants refuse to settle, the SEC will need to take more cases to court, which will exponentially increase the costs of those enforcement actions that would have settled under the old model.
4. The number of SEC investigations and enforcement actions may decline as more money is diverted towards litigating.
Rosanne Felicello is the founder of Felicello Law P.C. She does not represent Mr. Cohen, SAC, or the SEC. She is available to consult on issues relating to SEC enforcement, the JOBS Act, and commercial litigation.