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The Morning Brief: SEC Files Charges Against SAC's Steven Cohen

The Securities and Exchange Commission has finally brought civil charges against SAC Capital’s founder, Steven Cohen. The regulator has charged the legendary hedge fund manager with failing to supervise two senior employees and prevent them from insider trading under his watch. The SEC’s Enforcement Division is seeking to bar Cohen from overseeing investor funds.

The Justice Department, however, did not bring any criminal charges, which is significant. Also, the SEC did not bring insider trading charges against Cohen. Failure to supervise is a weaker charge that is akin to someone in the Mob being hauled in for tax evasion. In any case, according to the SEC, “Cohen received highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades made by two portfolio managers who reported to him.”

It is referring to Mathew Martoma and Michael Steinberg. Martoma and Steinberg have been charged with insider trading but have refused to cooperate with the government.

“Cohen ignored the red flags and allowed Martoma and Steinberg to execute the trades,” the SEC adds. It lamented that instead of investigating their conduct, Cohen rewarded Martoma with a $9 million bonus, and the hedge funds earned profits and avoided losses of more than $275 million as a result of the illegal trades. Although some pundits believe the SEC charges mean there probably won’t be criminal charges coming in the future, keep in mind that at the Delivering Alpha conference held in New York last week, U.S. Attorney Preet Bharara stressed that under certain circumstances the government could bring securities fraud charges as much as 10 years after the committed crime.

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Meanwhile, Philip Falcone’s Harbinger Group, a publicly-traded company run by the founder of the Harbinger Capital Partners hedge fund,  told shareholders that the Securities and Exchange Commission rejected a previously agreed-upon settlement between the SEC’s enforcement staff and a number of Harbinger entities stemming from two civil actions. They did not include the public company. The SEC, however, has not made any announcement regarding Harbinger. Back in May Falcone agreed to pay $18 million to settle two SEC cases alleging market manipulation, giving preferential treatment to certain investors and taking a loan from his own fund to pay his taxes.

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Investors punished Microsoft Friday for reporting results that came in below expectations. The stock plunged 11.4 percent to close at $31.40. This was especially bad news for ValueAct Capital’s Jeff Ubben, who in the first quarter made an initial $2 billion investment in the company. At least one sell-side firm, UBS, kept its Buy rating and $40 target price.

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Investors were kinder to hedge fund favorite Google, whose stock dropped just 1.55 percent on Friday — much less than it fell during after-hours trading Thursday evening — after the internet giant missed expectations by a wide margin. Interestingly, on Friday UBS raised its price target on the stock to $1020 from $945. “We expect any sell-off in Google’s shares to be short-lived given the forward growth initiatives & 2014 valuation,” UBS stated in its report. The stock closed Friday at $896.60. Keep in mind that at the end of the first quarter, Google was the second most frequently appearing stock among the largest 10 holdings of hedge funds, according to Goldman Sachs.

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