INSIDER-TRADING prosecutions usually revolve around whether information is illegally obtained and then, knowingly and profitability, traded on. On July 19thAmerica’s Securities and Exchange Commission (SEC) used a novel approach to charge Steven Cohen, boss of SAC Capital, one of world’s most successful hedge funds. The agency asserts he should have known that two of his employees had illegally obtained information (which turned out to be worth $275m, through trading profits and avoided losses) and then failed to supervise them sufficiently to discourage violations of the law. Whether this argument flies in court is an open question. The SEC’s move suggests that, after an extensive investigation, it had not collected strong enough evidence to directly accuse Mr Cohen of insider trading and chose to opt for an alternative charge rather than drop the case.

The decision comes after a deal between the SEC and SAC in March. The hedge fund did not admit or deny any wrongdoing, but affiliates agreed to pay $614m to settle charges in cases against two portfolio managers, Mathew Martoma and Michael Steinberg, who are both awaiting criminal trial. Both have said that they have done nothing wrong and are fighting the charges.

The SEC argues that rather than challenge the two when they provided “highly suspicious information”, Mr Cohen did the opposite, giving Mr Martoma a $9m bonus and praising Mr Steinberg. “Hedge fund managers are responsible for exercising supervision over their employees to ensure that their firms comply with the law”, said Andrew Ceresney, a co-director of enforcement at the SEC, in a statement.

It is not clear, however, whether that is indeed the case. The rules for proper supervision in cases of insider trading are not precise and have largely been the product of court decisions. In a carefully written statement SAC vowed to contest the charges. "The SEC's administrative proceeding has no merit,” it states. “Steve Cohen acted appropriately at all times and will fight this charge vigorously. The SEC ignores SAC's exceptional supervisory structure, its extensive compliance policies and procedures, and Steve Cohen's strong support for SAC's compliance program."

For years questions have been raised as to how Mr Cohen managed to produce extraordinary investment returns and whether his approach crossed legal boundaries. But he has never been charged before. SAC has a complex structure with much of the investing done by people working within affiliates which do not have clear legal ties to Mr Cohen himself.

The most important aspect of the charges relates to Mr Cohen’s treatment of Mr Martoma. Mr Cohen permitted the portfolio manager to build and then liquidate a large position in two drug companies, Elan and Wyeth—despite contrary opinions within his firm. The SEC alleges Mr Martoma received insider information from a doctor involved in the evaluation of a potential blockbuster treatment for Alzheimer’s disease and traded on the information. Mr Cohen “encouraged Martoma to speak with the doctor who Cohen had been told may have Phase II Trial results—information that any reasonable hedge fund manager should have known might be material and non-public,” the complaint says.

Since the charges against Mr Cohen are civil, rather than criminal, he is likely to only face fines and restrictions on his ability to invest for others. Given his vast fortune, prospects are good for yet another settlement which makes both sides happy: the defendant pays up without confirming nor denying guilt—while the SEC takes the money and declares victory.

This practice, however, has come under increasing criticism. The SEC has vowed to take more cases to their conclusion, be it a determination of guilt or innocence. As a result, even if the outcome of the case against Mr Cohen is by no means obvious, it is a good bet that his legal entanglements will not end soon.