Steve Marcus / Reuters Hedge-fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, responds to a question at the SkyBridge Alternatives Conference in Las Vegas on May 11, 2011.

The U.S. Securities and Exchange Commission has announced charges against billionaire hedge fund mogul Steven A. Cohen, alleging that he failed to supervise two of his employees who have been accused of insider trading. The SEC’s civil action comes two weeks after reports emerged that Cohen was poised to avoid criminal charges in what the feds have called the largest insider trading scheme in U.S. history. As part of its order initiating administrative proceedings against Cohen, the SEC is seeking to bar the reclusive hedge fund titan from overseeing investor funds.

If the government’s case is successful, it could amount to a Wall Street death sentence for SAC Capital, one of the most legendary hedge funds on Wall Street over the last two decades.

“The SEC will probably structure a settlement where Cohen will be prevented from managing customer funds,” said Bill Singer, a partner at New York–based securities-law firm Herskovits and a veteran Wall Street defense attorney. “They may let him trade his own money through the fund, but if they don’t, Cohen could fight the case and tie it up for one to three years on appeal.” Cohen retains an estimated $8 billion of his own money in the fund, which at one time managed more than $15 billion.

The U.S. government has been investigating SAC Capital for several years, but has thus far not charged Cohen with criminal conduct. Last November, the U.S. charged one of SAC’s former portfolio managers, Mathew Martoma, with orchestrating a $275 million insider trading fraud. When the FBI showed up at Martoma’s Florida mansion last fall, he fainted on his front lawn. Martoma is charged with trading illegally on inside information he obtained from a doctor involved in a 2008 pharmaceutical trial. The feds had hoped to convince Martoma to testify against Cohen, but have thus far not been successful.

(MORE: Wall Street Billionaire Steve Cohen Dodges Insider Trading Charges)

On Friday, the SEC alleged that Cohen received “highly suspicious” information that should have caused any “reasonable” hedge fund manager to investigate the basis for trades made by Martona and another former SAC portfolio manager, Michael Steinberg, who has also been charged with insider trading. In March, Steinberg was arrested at his Park Avenue home. The feds allege that Cohen ignored “red flags” and allowed Martoma and Steinberg to execute the suspicious trades.

“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement, 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’s administrative proceeding will determine what measures to take against Cohen, including financial penalties and, potentially, a supervisory and financial services industry bar.

The SEC said that on at least two occasions in 2008, the portfolio managers provided information to Cohen indicating that they potentially had access to insider information. But instead of scrutinizing the conduct of his employees, Cohen “stood by” and did not investigate to see whether insider trading was taking place. Cohen even praised his managers and rewarded Martoma with a $9 million bonus for his work, the feds said.

(MORE: SAC Capital: Feds Are Probing Insider Trading Scandal)

Singer said that it appears that Manhattan U.S. Attorney Preet Bharara, who has made insider trading his signature law enforcement mission, has concluded that he lacks the evidence to charge Cohen himself with insider trading. Since taking office in 2009, Bharara has charged more than 70 people with insider trading and obtained nearly as many convictions or guilty pleas. Singer said that it seems as if Bharara has “lateraled” the case off to the SEC, where Mary Jo White, a former United States Attorney for the Southern District of New York, was recently sworn in as chairman.

Throughout the probe, Cohen has maintained his innocence. Reached by TIME, Jonathan Gasthalter, a spokesperson for Cohen, denied the charges. “The SEC’s administrative proceeding has no merit,” Gasthalter said in a statement. “Steve Cohen acted appropriately at all times and will fight this charge vigorously.” Gasthalter added that 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.”

In the Martoma case, the U.S. faces a five-year July statute-of-limitations deadline to bring charges against Cohen. Martoma has pleaded not guilty to insider trading charges and is set to go on trial in November. He faces decades in prison for what the feds have called the largest insider trading scheme in U.S. history. Martoma’s alleged fraud resulted in $275 million in ill-gotten gains for SAC. In March, SAC Capital agreed to pay a whopping $616 million penalty to the SEC to settle the insider-trading civil case, without admitting or denying guilt.