Steven Cohen's New Concept Merits Another Look.

[ by Melanie Gretchen and Howard Haykin ]

SAC Capital founder Steven Cohen went to the mount and experienced an epiphany:  the best way to punish rogue traders and managers is to hit them where it hurts most - in their wallets.  It's not surprising that the turmoil of insider trading would weigh so heavily on Mr. Cohen - at east 9 current or former SAC employees have been tied to insider trading while residing at SAC Capital, with 4 pleading guilty.

And so, Stephen Cohen, 56, appealed to SAC investors and regulators saying that he and the firm are now prepared to aggressively tackle the problem.  And to prove how serious he was, Mr. Cohen, last week, chiseled onto a stone tablet the broad set of changes he devised to bolster his fund’s compliance practices.  The centerpiece would entail clawing back the pay of employees who violate the law, or who are sanctioned by regulators for alleged violations. 

The Consequences.  Basically stated, any employee accused of wrongdoing, who leaves the fund, will not be permitted to receive any deferred compensation balance - pending the completion of the applicable investigation and/or hearings in a court of law.  If that employee then is convicted or otherwise subject to other sanctions, that compensation will be forfeited by the individual in its entirety - and will not be paid. 

Bursting with pride and satisfaction, Mr. Cohen observed for all to hear: 

"These reforms send an unmistakable message: We have zero tolerance for wrongdoing and if you are caught breaking the rules, it will cost you.  This problem is our problem to solve. It’s my name on the door and we will solve it."

Should We Take Mr. Cohen's Words and Actions at Face Value?    Before trying to answer this question, we think it appropriate to lay out certain obstacles we face that challenge our ability to address the issue about Mr. Cohen and his proposed plan/

First, we admitted to the fact that we lack specifics on many aspects of this plan.  Take, for example, the following three elements:

• Would all employees and associates of SAC Capital Management be subject to this clawback plan, including Mr. Cohen? 
• Who would have the authority to sit in judgment and resolve disputes between the firm and an individual employee or associate?
• Who would have authority to define or interpret terms and conditions of the plan that are ambiguous or fail to address certain circumstances?

Second, we at Compliance-Insights recognize that we do not have the necessary legal training or expertise to draw conclusions about questions of law, such as the following: 

• Under what circumstances may the terms and conditions of the plan be applied to current employees and associates of SAC Capital?

Now, We May Proceed.   Notwithstanding the limitations noted above, we feel we can quite adequately identify inconsistencies and contradictions that exist between the words and the actions of Steven A. Cohen -  particularly as they pertain to the concept of this plan and to aspects of trading on insider information.  And so, we begin by throwing out a question about a scenario many of us are familiar with.

Have you ever tried arguing with someone who has billions of reasons for believing that he is right and you are wrong?   It can be disconcerting to walk away from such a confrontation while you ponder where or how your supposedly iron-clad argument fell apart.

Frustration then sets in as you recall all the neat talking points you were prepared to say about Mr Cohen's new found religion - that is before you lapsed into an inescapable brain freeze.  Yes, now you recall that you were going to compliment his intentions as being notable, HOWEVER, the sentiment comes across as being disingenuous - i.e., lacking pathos or sincerity. 

After all, let's consider the following:

• Steven Cohen admitted during a deposition taken in 2011 that he was indeed unfamiliar with his firm’s compliance and ethics policies on insider trading. 

• "I’ve read the compliance manual, but I don’t remember exactly what it says,” Mr. Cohen said, according to a transcript of the testimony.

• Let's further presume that his firm, like most others, requires its employees and associated persons to affirm at least annually that they have conducted their affairs in full compliance with the firm's policies and procedures.  [C-I Note:  How the heck could Mr. Cohen respond  to that question, when he didn't have a clue what was stated in the manual?  And further presuming that Mr. Cohen signed off on the annual compliance questionnaire but really didn''t know the correct answer - right or wrong.  In those instances, did Mr. Cohen perjure himself, and thus violated securities laws?]

• We've left the best for last.  Of course we're referring to the proposed $612 million settlement between SAC Capital and the SEC, which had charged the firm with trading on material confidential information.  Given the irrefutable fact that SAC Capital Advisers is Steven A. Cohen, and Steven A. Cohen is SAC Capital Advisers, it would be fair to say that, what goes for one, goes as well for the other - much akin to the 3 musketeers' philosophy, "One for all and all for one!  .

How, then do we reconcile the fact that Cohen and SAC Capital ran afoul of Mr. Cohen's newly-minted personnel clawback policy?  After all, the $612 million payment is a sanction - related to apparent or alleged violations.  Accordingly, Mr. Cohen should be required to return all the bonus payouts he received  for the relevant periods of the alleged insider trading.  That would be a larger and harder nut to crack - even for Mr. Cohen.

It would appear we have a choice of take away  lessons from this case:

• People who live in glass houses shouldn't thrown stones.
• "Do as I say and not as I do," usually is accompanied by too many uncertainties.
• "At least we still have our health!" .....  and our new impressionist painting and Hamptons house, and our ...........    .

Yet, in spite of it all, Steven Cohen is still able to smile and say, "I'm proud of what we’ve built and the work we do."   Hmmm.  We'll let you chew on that for awhile.

For further details, go to [Dealbook, 5/2/13].