July 24, 2013
SEC v. Cohen: The Outsource
Posted by David Zaring

The SEC "failure to supervise" claim against Steven A. Cohen is an administrative one; it goes before an admnistrative law judge, insulated agency employees that preside over trial-type hearings (but can dispense with the rules of evidence, etc), appeal from which is made to the commission, and after that to the federal courts.  Court review is likely to be most searching where the commission reverses the ALJ; and SEC ALJs in my view, have the most fun (or are tied for that  honor with ITC ALJs who hear seriously big money disputes).  Most ALJs work for the Social Security Administration, but a small number occupy specialized niches in other agencies (in the 90s, the SEC relied on all of three ALJs to do their administrative adjudications).  These judges, because of a very strong veterans' preference, are very likely to have military backgrounds, which makes them in turn very likely to be men.  

Will they rule in favor of the agency they work for?  Here's John Carney on the early defense being put together by Cohen's lawyers:

First, they say Cohen didn't read the email. Like most of us, Cohen gets far too many emails to read them all. According to the paper, he gets roughly 1,000 emails each day. This is highly plausible for someone in Cohen's position. Let's call this the "Email is Broken" defense.

The second response is the "Hamptons Pool" defense. When the email was sent to Cohen, at 1:29 in the afternoon, Cohen was in the middle of a 19 minute telephone call with SAC's head of business development. A minute and a half after the conclusion of that phone call, at 1:37:46, Cohen got a call from a research trader, discussing something or other (no one is certain what). At 1:39:11, an order to sell shares of Dell in Cohen's personal account at SAC was placed.

And here's Matt Levine on the claim that Cohen should have realized he was being told to sell Dell stock based on inside information:

here’s the obvious paradox of “I was too busy not reading emails to not supervise.” ... [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 thatThere 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.


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