Regulators have filed charges against billionaire investor and famed art collector Steven Cohen for failing to act on "red flags" suggesting insider trading at his hedge fund.

The move is a major blow for the founder of SAC Capital, whose company has been under investigation by the FBI, Securities and Exchange Commission (SEC) and other regulators for years. While the civil charges stop short of accusing Cohen of fraud, the SEC said he failed to spot signs that indicated insider trading by two portfolio managers at his Stamford, Connecticut, hedge fund.

"Both portfolio managers provided information to Cohen indicating that they may have had access to inside information to support their trading," the SEC said in a statement. "In each case, Cohen received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen's position to take prompt action to determine whether employees under his supervision were engaged in unlawful conduct and to prevent violations of the federal securities laws. "

"Hedge fund managers are responsible for exercising appropriate supervision over their employees," Andrew Ceresney, co-head of the SEC's enforcement division, said in a statement. "After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law."

The SEC alleges that the suspicious trades made by Cohen's hedge funds allowed his investment firm to reap profits and avoid losses of more than $275m. It is seeking unspecified damages.

In a statement, a spokesman for SAC said the SEC's case "has no merit", and Cohen had "acted appropriately at all times and will fight this charge vigorously".

The move comes as federal investigators and prosecutors continue to press SAC and its founder. In March SAC agreed to pay $616m settle charges related to improper trading at the fund, including $14m to resolve charges the firm had participated in insider trading in the computer firm Dell. But the SEC said at the time that the record settlement would not prevent the filing of future charges.

Investigations by federal agents have continued as more SAC employees have come under fire. Last year Matthew Martoma, a former SAC portfolio manager, was indicted on charges related to questionable drug-stock trades tied to a new Alzheimer's drug. He denies wrongdoing and a trial is expected to start in November. Jon Horvath, a former SAC analyst, has plead guilty to participating in the Dell insider trading ring.

In March one of Cohen's closest associates, portfolio manager Michael Steinberg, was arrested at his Park Avenue home. New York attorney general Preet Bharara said he had benefitted from a "corrupt grapevine of proprietary and confidential information cultivated by other professionals who made their own rules to make money."

Cohen is one of the world's most high profile, and richest, financiers. Earlier this year it emerged that he was the latest owner of Picasso's Le Reve, bought for $150m. Forbes magazine estimates his wealth at $9.3bn. But the seemingly never ending investigations have spooked investors have who have pulled billions from his funds as the government probes have continued.