Dear Friends, Colleagues and Shareholders:
While 2016 was a generally difficult operating environment for financial services organizations
broadly as active managers experienced a more difficult year for redemptions, capital raising was
down across the board and equity commissions remained under pressure, we successfully
advanced each of our businesses at Cowen.1 Despite the fact that our financial results reflected
broader industry challenges as well as a difficult year for investment income, 2016 was also a
constructive year in which we made important strides towards positioning the organization for
greater resilience in the years ahead. Specifically, we utilized the industry downturn to expand
our platform in key areas as talented individuals, teams and businesses became available. The
investment management business continued to attract interest in its differentiated alpha
generating capabilities, the investment banking and brokerage businesses both gained market
share in their respective markets, and we reached a broader audience with our new credit
research and macro commentary products. Earlier this year, we announced two significant
corporate transactions: (i) the proposed acquisition of Convergex, a leading agency-focused
global brokerage and trading related services provider, and (ii) a strategic partnership with CEFC
China, a highly-respected global organization with a broad portfolio of successful businesses in
energy and finance. Both of these are discussed later in this letter.
The changing landscape highlights how a nimble firm like Cowen can make a difference by
investing in its platform intelligently. During 2016 we invested approximately $24 million to
attract and retain high quality investment professionals, underscoring our effort to invest in our
core competencies. In addition to the May acquisition of the credit products, credit trading,
special situations and emerging market businesses from CRT, we welcomed the policy team
from the Washington Research Group in August. The addition of these groups added
meaningfully to our content differentiation and their impact has enabled us to continue taking
market share. In the fall, we also welcomed the merchant and investment banking teams from
Morgan Joseph TriArtisan, which provided increased scale in investment banking and introduced
a seasoned fundless private equity sponsor capability which we plan to scale in the coming years.
We are positioning Cowen to take advantage of the fact that the global capital markets are
embroiled in a titanic battle between the value of active management and the allure of passive
management. Our new Outperform™ brand crystalizes our mission at Cowen: we are intensely
focused on clients who seek to outperform the markets, their peers and passive alternatives.
Since the financial crisis, the growth in passively managed funds has been meteoric, with many
pundits predicting the inevitable demise of active management. We could not disagree more. In
fact, assets under management in active funds have grown 54% since 2007.2 Active
management is not going away - it is just going to be different. The primary market participants
in both the equity and credit markets are undergoing significant change. And where there is
change, there is opportunity.
What is causing this change? In our opinion, it is simply that investors in actively managed
funds are increasingly choosing not to overpay for beta-oriented return fee structures. If
managers do not perform well, they are more likely to be replaced by passive product. If
managers perform in line with market averages, they are also more likely to be replaced by
passive product. To be sure, fees paid to long only and hedge fund firms are compressing just as
1 Paul Vigna, “Year in Review: IPOs Struggled Again in 2016,” The Wall Street Journal, December 29, 2016,
https://blogs.wsj.com/moneybeat/2016/12/29/year-in-review-ipos-struggled-again-in-2016/
2 Paul Smith, “A New Perspective on the Active Passive Investing Debate,” Institutional Investor, July 12, 2016,
http://www.institutionalinvestor.com/blogarticle/3569487/blog/a-new-perspective-on-the-activepassive-investing-
debate.html#.WPj1AWnyv0M
the pressure on active managers to outperform their benchmarks has increased. In other words,
the performance bar for us and for our clients has been significantly raised.
At Cowen, our belief is that only strong active managers will survive and prosper. In order to do
so, they and their investors are increasingly reliant on the high quality products and services that
we provide:
Our Premium Quality, Collaborative and Insightful Equity, Credit and Policy
Research continues to win critical acclaim from our clients
Our Cutting Edge, Non-Conflicted, Independent Execution and Trading Services,
which will be further enhanced by our pending acquisition of Convergex, provide clients
with much needed liquidity as well as market structure insights
Our Corporate Finance Advisory and Capital Raising capabilities enable our
corporate clients to outperform their peer groups by engaging Cowen’s corporate network
as well as gaining valuable access to growth capital
Our Differentiated Investment Strategies offered by our alternative investment
platform continue to garner meaningful allocations from important investors who are
willing to pay for high quality outperformance and risk-adjusted returns
Our corporate strategy should be judged not only by our market position but by how well we are
accomplishing our lofty goals in each of these disciplines.
Investment Management Business
The broader alternative investment space continued to mature with the pace of AUM growth
slowing to a 5.9% CAGR between 2014 through 2016 compared to an 8.1% CAGR between
2008 and 2014. Industry data indicates that there were $106 billion in outflows in 2016.3 In
addition, several major hedge funds closed in the year.
In contrast to the industry trend, our investment management platform had a productive year.
We recruited new partners to the platform, launched new strategies and continued to attract blue
chip investors across investment products. We raised approximately $600 million for emerging
strategies such as event, equity long/short, global macro and distressed credit. We ended the
year with $10.5 billion in assets under management (AUM), which included a $2.5 billion
reduction in assets associated with the sale of our interest in the alternative solutions business.
Excluding the sale, the investment management business grew AUM by $774 million over the
prior year. We successfully launched a consumer long-short strategy in May 2016. During the
year, we announced a partnership with our newest affiliate, a woman-owned long/short equity
strategy, which launched in October. We also launched our first UCIT (an investment fund
regulated by the EU) for the merger arbitrage strategy which opened new avenues of asset
growth and greatly expanded our geographic footprint.
Investment Banking Business (Cowen and Company)
The fact that our primary markets at Cowen and Company have not been growing meaningfully
over the past few years is exactly why we are investing in areas where we can expand market
share, create scale and eliminate costs. Acquisitions like the ones we made in 2015 (prime
services) and 2016 (credit research and trading) along with a pending acquisition in 2017 (global
3 Barclays Hedge as of December 31, 3016.
equity trading) are recent examples. Weaker, smaller competitors, who offer clients little value
or differentiation, continue to lose share in many of the businesses where we excel, and our
market share gains are evident of our position.
While we performed well in the areas in which we compete, we were not immune to the broader
market slowdown for financings. Fees from our equity and debt capital markets business
declined 46% from the record level achieved in the prior year. Our advisory business
experienced solid growth, especially in areas such as technology which performed quite well.
The addition of several bankers with M&A experience during the year created significant
momentum with the team entering 2017 with our strongest M&A backlog in recent memory.
In 2016, we broadened our research coverage to include credit and cross capital and macro
commentaries. At year-end, we had 745 stocks under coverage and 150 names covered in credit.
The Washington Research Group, who joined in August, is well regarded by buy side portfolio
managers and added macro commentary to our already vaunted fundamental research. In our
brokerage business, core equities revenue - which includes cash equities, electronic trading,
special situations, options and convertible trading - increased 7% in 2016. Our new credit
business, which was on our platform for nearly eight months in 2016, generated 19% of its
revenue from Cowen’s distribution network. Cross selling opportunities are increasingly
commonplace.
Looking Forward
We believe that well-capitalized financial services companies not only have staying power in
challenging markets, but are poised to take advantage of dislocation as it is occurring. In the
current regulatory environment, critical mass matters more than ever. As such, in April of this
year we announced our plan to acquire Convergex. Convergex has a diverse service offering in
equity sales and electronic trading, commission management, prime services and global clearing.
The combination of Convergex’s best-in-class global execution capabilities with Cowen’s high
quality research sales platform, will create a leading independent, non-conflicted trading
platform and positions Cowen as a key equity market liquidity provider for clients.
We also recently announced a strategic partnership with CEFC China. Our agreement to sell
19.9% of our common equity to CEFC China is an example of a unique business development
opportunity that will advance Cowen’s goal to broaden our capabilities to serve clients through
our areas of expertise: investment banking, equities, research and investment management. Our
companies have complementary functional expertise, industry focus, geographic coverage and
business networks. This strategic partnership will provide capital to scale businesses that are
more capital intensive like securities lending and leveraged finance, and will provide for long-
term growth initiatives such as further developing Cowen’s advisory practice related to outbound
investments (capital raising and M&A advice) and asset management distribution in China.
With $1 billion in total capital,4 we have the flexibility to optimize capital deployment that will
fuel shareholder value in the years ahead. We will continue to look for ways to optimize our
balance sheet by taking into account the capital needs of our businesses and the desire of
shareholders to have capital returned to them.
If 2016 was about hiring the best talent, driving our core businesses, and creating platform
synergies through accretive acquisitions, then 2017 is about nurturing these investments and
directing our energy toward those areas where we believe we can have the greatest impact. That
is what we intend to do.
4 Prior to the CEFC investment
Finally, in the coming weeks and months we will be moving the organization to a single identity
under the banner “Cowen” which will better maximize the resources across the entire platform.
I would like to express my deepest gratitude to my colleagues at Cowen. Their unwavering
commitment to our organization gives me great confidence about what we can achieve together.
To our clients, shareholders, bondholders and others: Thank you for your ongoing support.
Sincerely,
Peter A. Cohen
Chairman and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2016
Commission file number: 001-34516
Cowen Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-0423711
(I.R.S. Employer
Identification No.)
599 Lexington Avenue
New York, New York 10022
(212) 845-7900
(Address, including zip code, and telephone number, including area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which Registered
Class A Common Stock, par value $0.01 per share
8.25% Senior Notes due 2021
The Nasdaq Global Market
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual
Report on Form 10-K or any amendment to the Annual Report on Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of Class A common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the
registrant's most recently completed second fiscal quarter, based upon the closing sale price of the Class A common stock on the NASDAQ Global
Market on that date was $298,141,545.
As of February 24, 2017, after taking into account the Company’s December 5, 2016 one-for-four reverse stock split, there were 26,750,754
shares of the registrant's common stock outstanding.
Documents incorporated by reference:
Part III of this Annual Report on Form 10-K incorporates by reference information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2017 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Item No.
PART I
PART II
1. Business
1A. Risk Factors
1B. Unresolved Staff Comments
2. Properties
3. Legal Proceedings
4. Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
5.
6. Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
7.
7A. Quantitative and Qualitative Disclosures about Market Risk
8. Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
9.
9A. Controls and Procedures
9B. Other Information
PART III
10. Directors, Executive Officers and Corporate Governance
11. Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
12.
13. Certain Relationships and Related Transactions
14. Principal Accountant Fees and Services
PART IV
15. Exhibits and Financial Statement Schedules
16. Form 10-K Summary
Consolidated Financial Statements and Notes
Supplemental Financial Information
SIGNATURES
EXHIBIT INDEX
Page No.
1
6
23
23
23
24
24
27
29
63
65
65
65
66
66
66
66
66
66
66
67
F- 1
F- 66
ii
Special Note Regarding Forward-Looking Statements
We have included or incorporated by reference into our Annual Report on Form 10-K (the "Annual Report"), and from
time to time may make in our public filings, press releases or other public documents, certain statements, including (without
limitation) those under Item 1—"Business," Item 1A—"Risk Factors," Item 3—"Legal Proceedings," Item 7—"Management's
Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A—"Quantitative and Qualitative
Disclosures about Market Risk" that may constitute "forward-looking statements" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-
looking terms such as "may," "might," "will," "would," "could," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "project," "possible," "potential," "intend," "seek" or "continue," the negative of these terms and other comparable
terminology or similar expressions. In addition, our management may make forward-looking statements to analysts,
representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding
future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based
on our current expectations and projections about future events. There are important factors that could cause our actual results,
level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking
statements. In particular, you should consider the risks outlined under Item 1A—"Risk Factors" in this Annual Report.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility
for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking
statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after
the date of this filing to conform our prior statements to actual results or revised expectations.
iii
(This page has been left blank intentionally.)
When we use the terms "we," "us," "Cowen Group" and the "Company," we mean Cowen Group, Inc., a Delaware
corporation, its consolidated subsidiaries and entities in which it has a controlling financial interest, taken as a whole, as well
as any predecessor entities, unless the context otherwise indicates.
PART I
Item 1. Business
Overview
Cowen Group, Inc. (the "Company"), a Delaware corporation formed in 2009, is a diversified financial services firm and,
together with its consolidated subsidiaries (collectively, "Cowen", "Cowen Group" or the "Company"), provides alternative
investment management, investment banking, research, sales and trading and prime brokerage services through its two business
segments: alternative investment and broker-dealer. The alternative investment segment includes private investment funds,
managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed
vehicles and also manages a significant portion of the Company’s proprietary capital. The broker-dealer segment offers
industry focused investment banking for growth-oriented companies including advisory and global capital markets origination
and domain knowledge-driven research and a sales and trading platform for institutional investors.
The Company's alternative investment platform, which operates primarily under the Ramius name, offers innovative
investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this
business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisors Act") since 1997. Ramius offers investors access to strategies to
meet their specific needs including long/short equity, merger arbitrage, activist equity, event driven credit, fundamental global
macro, managed futures, health care royalties and real estate direct lending and equity. Ramius focuses on attracting and
retaining talented in-house and affiliated investment teams and providing seed capital and working capital, an institutional
infrastructure, robust sales and marketing and industry knowledge. A significant portion of the Company’s capital is invested
alongside Ramius’s alternative investment clients. The Company has also invested some of its capital in its recently formed
aviation and reinsurance businesses. Our alternative investment business had approximately $10.5 billion of assets under
management as of January 1, 2017. See the section titled "Assets Under Management and Fund Performance" for further
analysis.
Our broker-dealer businesses include research, sales and trading, prime brokerage and investment banking services to
companies and primarily institutional investor clients. Our primary target sectors ("Target Sectors") are healthcare, technology,
media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and
transportation. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade
securities and other financial instruments, principally in our target sectors. The broker-dealer segment also offers a full-service
suite of introduced prime brokerage services targeting emerging hedge fund managers. Historically, we have focused our
investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time,
the Company invests in private capital raising transactions of its investment banking clients.
On December 5, 2016, the Company effected a one-for-four reverse stock split of our common stock. Except where the
context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.
Principal Business Lines
Alternative Investment Products and Services
Alternative Investment Strategies
The Company's alternative investment strategies are focused on addressing the needs of institutional investors and high
net worth individuals to preserve and grow allocated capital. The Company and its affiliated investment advisors manage a
number of single strategy vehicles, including merger arbitrage, long/short equity, consumer based long/short equity, activism
and fundamental global macro. The Company and one of its affiliated investment advisors also manage certain multi-strategy
hedge funds that are currently in wind-down. The majority of assets remaining in these funds include private investments in
public companies, investments in private companies, real estate investments and special situations.
Ramius Trading Strategies
Our managed futures fund business serves as investment adviser and commodity pool operator to the State Street/Ramius
Managed Futures Strategy Fund, a mutual fund advised by Ramius Trading Strategies LLC and sub-advised by SSgA Funds
Management Inc. (an affiliate of State Street Global Advisors), that offers U.S. investors access to a multi-manager strategy that
seeks to capture returns tied to a combination of global macroeconomic trends in the commodity futures and financial futures
markets and interest income and capital appreciation. The State Street/Ramius Managed Futures Strategy Fund seeks to offer
1
investors access to returns with low correlation to the public equity and debt markets by allocating capital to various third party
commodity trading advisors that pursue a managed futures strategy in a managed account format.
Real Estate
Our real estate business focuses on generating attractive, risk adjusted returns by using an owner/manager approach to
underwriting, structuring, financing and redevelopment of all real estate property types since 1999. This approach emphasizes a
focus on real estate fundamentals and potential market inefficiencies. The RCG Longview platform provides senior bridge
loans, subordinated mortgages, mezzanine loans, and preferred equity through its debt fund series, and makes equity
investments through its equity funds. As of December 31, 2016, the members of the general partners of the RCG Longview
platform and its affiliates, independent of the RCG Longview funds, collectively owned interests in and/or manage over 21,000
apartments and approximately 21 million square feet of commercial space for their own accounts. The Company's ownership
interests in the various general partners of the RCG Longview funds range from 20% to 55%.
HealthCare Royalty Partners ("HRP")
The Company’s healthcare royalties business primarily purchases royalties and uses debt-like structures to invest in
commercial or near-commercial stage life science assets (through the funds managed by HRP (the "HRP Funds")). We share
the net management fees from the HRP Funds equally with the founders of the HRP Funds. In addition, we have interests in the
general partners of the HRP Funds ranging from 20% to 40.2%.
Broker-Dealer Business
Investment Banking
Our investment banking professionals are focused on providing strategic advisory and capital raising services to U.S. and
international public and private companies in our Target Sectors. By focusing on our Target Sectors over a long period of time,
we have developed a significant understanding of the unique challenges and demands with respect to public and private capital
raising and strategic advice in these sectors. Our advisory and capital raising capabilities begin at the early stages of a private
company's accelerated growth phase and continue through its evolution as a public company. Our advisory business focuses on
mergers and acquisitions, including providing fairness opinions and providing advice on other strategic transactions. Our
capital markets capabilities include equity, including private investments in public equity and registered direct offerings, credit
and fixed income, including public and private debt placements, exchange offers, consent solicitations and tender offers, as well
as origination and distribution capabilities for convertible securities. We have a unified capital markets group which we believe
allows us to be effective in providing cohesive solutions for our clients. Historically, a significant majority of our investment
banking revenue has been earned from high-growth small and mid-capitalization companies. The Company, from time to time,
may invest in private capital raising transactions of its clients.
Brokerage
Our team of brokerage professionals serves institutional investor clients in the United States and internationally. We trade
common stocks, listed options, equity-linked securities and other financial instruments on behalf of our clients and offer a full-
service suite of introduced prime brokerage services targeting emerging hedge fund managers. We provide our clients with an
electronic execution suite. We provide global, multi-asset class algorithmic execution trading models to both buy side and sell
side clients and also offer execution capabilities relating to these trading models through ATM Execution LLC ("ATM
Execution"). We also provide our clients with commentary on political, economic and market conditions. We have
relationships with over 1,000 institutional investor clients. Our brokerage team is comprised of experienced professionals
dedicated to our Target Sectors, which allows us to develop a level of knowledge and focus that we believe differentiates our
brokerage capabilities from those of many of our competitors. We tailor our account coverage to the unique needs of our clients.
We believe that our sector traders are able to provide superior execution because of their knowledge of the interests of our
institutional investor clients in specific companies in our Target Sectors.
Our sales professionals also provide our institutional investor clients with access to the management of our investment
banking clients outside the context of financing transactions. These meetings are commonly referred to as non-deal road shows.
Non-deal road shows allow our investment banking clients to increase their visibility within the institutional investor
community while providing our institutional investor clients with the opportunity to further educate themselves on companies
and industries through meetings with management. We believe our deep relationships with company management teams and
our sector-focused approach provide us with broad access to management for the benefit of our institutional investor and
investment banking clients.
Research
As of December 31, 2016, we had a research team of 54 senior analysts covering approximately 895 companies.
Within our coverage universe, approximately 28% are healthcare companies, 24% are TMT (technology, media and telecom)
2
companies, 16% are energy companies, 13% are capital goods and industrial companies, 5% are basic materials companies and
14% are consumer companies. Our differentiated approach to research focuses our analysts' efforts toward delivering specific
investment ideas and de-emphasizes maintenance research. We place significant emphasis on analyst collaboration, both within
and between sectors. We sponsor a number of conferences every year that are focused on our Target Sectors and sub-sectors.
During these conferences we highlight our investment research and provide significant investor access to corporate
management teams.
Information About Geographic Areas
We are principally engaged in providing alternative investment services to global institutional investors and investment
banking sales and trading and research services to corporations and institutional investor clients primarily in the United States.
We provide investment banking services to companies and institutional investor clients in Europe through our U.K. broker-
dealer, Cowen International Limited ("CIL").
Employees
As of February 24, 2017, the Company had 843 employees.
Competition
We compete with many other firms in all aspects of our business, including raising funds, seeking investment
opportunities and hiring and retaining professionals, and we expect our business will continue to be highly competitive. The
alternative investment and broker-dealer industries are currently undergoing contraction and consolidation, reducing the number
of industry participants and generally resulting in the larger firms being better positioned to retain and gain market share. We
compete in the United States and globally for investment opportunities, investor capital, client relationships, reputation and
talent. We face competitors that are larger than we are and have greater financial, technical and marketing resources. Certain of
these competitors continue to raise additional amounts of capital to pursue investment strategies that may be similar to ours.
Some of these competitors may also have access to liquidity sources that are not available to us, which may pose challenges for
us with respect to investment opportunities. In addition, some of these competitors may have higher risk tolerances or make
different risk assessments than we do, allowing them to consider a wider variety of investments and establish broader networks
of business relationships. Our competitive position depends on our reputation, our investment performance and processes, the
breadth of our business platform and our ability to continue to attract and retain qualified employees while managing
compensation and other costs. For additional information regarding the competitive risks that we face, see "Item 1A Risk
Factors-Risks Related to the Company's Alternative Investment Business" and "Risk Factors-Risks Related to the Company's
Broker-Dealer Business."
Regulation
Our businesses, as well as the financial services industry generally, are subject to extensive regulation, including periodic
examinations by governmental and self-regulatory organizations, in the United States and the jurisdictions in which we operate
around the world. As a publicly traded company in the United States, we are subject to the U.S. federal securities laws and
regulation by the Securities and Exchange Commission ("SEC").
Virtually all aspects of our business are subject to various laws and regulations both inside and outside the United States,
some of which are summarized below. Regulatory bodies in the United States and the rest of the world are charged with
safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers
participating in those markets. Governmental authorities in the United States and in the other countries in which we operate
have proposed or adopted additional disclosure requirements and regulation of alternative investment funds and alternative
asset managers. The rules governing the regulation of the various aspects of our business are very detailed and technical.
Accordingly, the discussion below is general in nature, does not purport to be complete and is current only as of the date of this
report.
Alternative Investment Business
The investment advisers responsible for the Company's alternative investment business are all registered as investment
advisers with the SEC or rely upon the registration of an affiliated adviser. In addition, several of our investment advisers are
also registered as commodity pool operators (“CPOs”) and therefore are also subject to regulation by the National Futures
Association (the "NFA") and the U.S. Commodity Futures Trading Commission (the "CFTC").
Registered investment advisers are subject to the requirements of the Advisers Act and the regulations promulgated
thereunder. Such requirements relate to, among other things, fiduciary duties to clients, maintaining an effective compliance
program, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The NFA
and CFTC each also administer a comparable regulatory system covering futures contracts and various other financial
instruments, including swaps in which certain alternative investment funds may invest.
3
The investment activities of our alternative investment business are also subject to regulation under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"), and
various other statutes as well as the rules of various United States and non-United States securities exchanges and self-
regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of
technical requirements (e.g., short sale limits, volume limitations, reporting obligations) and market regulation policies in the
United States and globally. Congress, regulators, tax authorities and others continue to explore and implement, on their own and
in response to demands from the investment community and the public, increased regulation including changes with respect to
investor eligibility, certain limitations on trading activities, record-keeping and reporting, the scope of anti-fraud protections,
safekeeping of client assets and a variety of other matters. Most of our registered investment advisers are required to report
certain information about a number of their alternative investment funds to the SEC and certain information about a number of
their commodity pools to the CFTC, pursuant to systemic risk reporting requirements adopted by both agencies.
In addition, certain of our investment advisers act as a “fiduciaries” under the Employee Retirement Income Security Act
of 1974 (“ERISA”) with respect to benefit plan clients. As such, the advisers, and certain of the alternative investment funds
they advise, may be subject to ERISA and to regulations promulgated thereunder. ERISA and applicable provisions of the
Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving
ERISA plan clients and provide monetary penalties for violations of these prohibitions.
In the aftermath of the financial crisis of the late 2000's, significant regulatory reforms have been enacted. On July 21,
2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law in the
United States. The Dodd-Frank Act is expansive in scope and has led to the adoption of extensive regulations by the SEC and
other governmental agencies and additional regulations are anticipated in the future. As of July 2016 approximately 70% of the
total rulemaking requirements under the Dodd-Frank Act have been met with finalized rules. As such, we are continuing to
review what impact the Dodd-Frank Act legislation and related rule making that remains will have on our business, financial
condition, and results of operations.
The Dodd-Frank Act establishes the Financial Services Oversight Council (the "FSOC") to identify threats to the financial
stability of the United States, promote market discipline, and respond to emerging risks to the stability of the United States
financial system. The FSOC is empowered to determine whether the material financial distress or failure of a non-bank
financial company would threaten the stability of the United States financial system, and such a determination can subject a
non-banking finance company to supervision by the Board of Governors of the Federal Reserve and the imposition of standards
and supervision including stress tests, liquidity requirements and enhanced public disclosures including the authority to require
the supervision and regulation of systemically significant non-bank financial companies. We do not believe we are at risk of
being considered a systematically significant non-bank financial company.
The regulation of swaps and derivatives under the Dodd-Frank Act may impact the manner by which our alternative
investment business utilize trade swaps and other derivatives, and may significantly increase the costs of derivatives trading
conducted on behalf of our clients. Moreover, applicability of CFTC rules and regulations to our investment advisory products
and requirements to centrally clear certain swap transactions and to execute certain swap transactions only on or through
CFTC-registered trading venues may impact our alternative investment business. The European Union ("EU") (and some other
countries) are implementing similar requirements that will affect derivatives transactions with a counterparty organized in that
country or otherwise subject to that country’s derivatives regulation. The mandatory minimum margin requirements for
bilateral derivatives adopted by the U.S. government and the EU affect our alternative investment management business as
these requirements can increase the amount of margin required to be provided in connection with a derivatives transactions and,
therefore, makes derivatives transactions more expensive. While certain of the rules are effective, other rules are not yet final
and/or effective, so their ultimate impact on our alternative investment management business remains unclear.
Given our investment activities are carried out around the globe, we are subject to a variety of regulatory regimes that
vary country by country. Certain of our investment advisers are subject to the Commission de Surveillance du Secteur Financier
in Luxembourg. Also, our captive insurance and reinsurance companies are regulated by the New York State Department of
Finance and the Luxembourg Commissariat aux Assurances, respectively. EU financial reforms included a number of initiatives
to be reflected in new or updated directives, regulations and recommendations of the pan-European regulatory regime
established by the Markets in Financial Instruments Directive (“MiFID”), which regulates the provision of investment services
and activities throughout the European Economic Area (the “EEA”). In addition, the Alternative Investment Fund Managers
Directive (“AIFMD”), which became effective on July 21, 2011 and was required to be implemented by EU member states by
July 22, 2013, regulates managers of, and service providers to, a broad range of alternative investment funds domiciled within
and (depending on the precise circumstances) outside the EU as well as regulate the marketing of all alternative investment
funds inside the EEA. The AIFMD is being implemented in stages through 2018. Compliance with the AIFMD impacts our
alternative investment fund marketing efforts in the EEA and requires additional compliance and disclosure obligations on any
alternative investment funds we actively market in the EEA and for funds domiciled in the EU, may also necessitate, among
other requirements, the use of EU domiciled depositories and custodians. Additionally, certain individual EU Member States,
4
such as France and Italy, have enacted national financial transaction taxes (“FTTs”), and a group of Member States also could
adopt a FTT under an EU Enhanced Cooperation procedure that would apply in those Member States. Although not a member
of the EU, Switzerland also imposes similar regulatory requirements for foreign investment advisors marketing alternative
investment funds in Switzerland including the use of a Swiss domiciled depository and marketing agent.
Our businesses have operated for many years within a legal framework that requires us to be able to monitor and comply
with a broad range of legal and regulatory developments that affect our activities both in the United States and abroad. As noted
above, certain of our businesses are subject to compliance with laws and regulations of United States federal and state
governments, foreign governments, their respective agencies and/or various self-regulatory organizations or exchanges relating
to the privacy of client information, and any failure to comply with these regulations could expose us to liability and/or
reputational damage. Additional legislation, changes in rules promulgated by the SEC, the CFTC, our other regulators and self-
regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect the mode of our operation and profitability. The United States and non-United States government
agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to
conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion or deregulation of a broker-dealer, an investment advisor or its directors, officers or employees.
Broker-Dealer Business
Cowen and Company, LLC ("Cowen and Company") is a registered broker-dealer with the SEC and in all 50 states, the
District of Columbia and Puerto Rico. Self-regulatory organizations, including the Financial Industry Regulatory Authority
("FINRA"), adopt and enforce rules governing the conduct and activities of its member firms, including Cowen and Company,
ATM Execution, and Cowen Prime Services LLC ("Cowen Prime"). In addition, state securities regulators have regulatory or
oversight authority over our broker-dealer entities. Accordingly, Cowen and Company, ATM Execution, and Cowen Prime are
subject to regulation and oversight by the SEC and FINRA and Cowen Prime is also registered with and subject to oversight by
the NFA. Cowen and Company is also a member of, and subject to regulation by the New York Stock Exchange ("NYSE"), the
NASDAQ PHLX LLC, the NYSE MKT LLC, the International Stock Exchange and the Nasdaq Stock Market as well as other
exchanges. ATM Execution is a member of, and subject to regulation by, the NYSE and the Nasdaq Stock Market.
Additionally, CIL is primarily regulated by the FCA in the United Kingdom.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade
practices among broker-dealers, use and safekeeping of customers' funds, conflicts of interest, securities and information,
capital structure, research/banking interaction, record-keeping, the financing of customers' purchases and the conduct and
qualifications of directors, officers and employees. In particular, as registered broker-dealers and members of various self-
regulatory organizations, Cowen and Company, ATM Execution, and Cowen Prime are subject to the SEC's uniform net capital
rule. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant
part of a broker-dealer's assets be kept in relatively liquid form. The SEC and various self-regulatory organizations impose rules
that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in
the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under
certain circumstances. Additionally, the SEC's uniform net capital rule requires us to give prior notice to the SEC for certain
withdrawals of capital. As a result, our ability to withdraw capital from our broker-dealer subsidiaries may be limited.
The effort to combat money laundering and terrorist financing is a priority in governmental policy with respect to
financial institutions. The Bank Secrecy Act ("BSA"), as amended by Title III of the USA PATRIOT Act of 2001 and its
implementing regulations ("Patriot Act"), requires broker-dealers and other financial services companies to maintain an anti-
money laundering compliance program that includes written policies and procedures, designated compliance officer(s),
appropriate training, independent review of the program, standards for verifying client identity at account opening and
obligations to report suspicious activities and certain other financial transactions. Through these and other provisions, the BSA
and Patriot Act seek to promote the identification of parties that may be involved in financing terrorism or money laundering.
We must also comply with sanctions programs administered by the U.S. Department of Treasury's Office of Foreign Asset
Control, which may include prohibitions on transactions with designated individuals and entities and with individuals and
entities from certain countries.
Anti-money laundering laws outside the United States contain certain similar provisions. The obligation of financial
institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for
information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has
required the implementation and maintenance of internal practices, procedures and controls that have increased, and may
continue to increase, our costs. Any failure with respect to our programs in this area could subject us to serious regulatory
consequences, including substantial fines, and potentially other liabilities.
Rigorous legal and compliance analysis of our businesses and investments is important to our culture and risk
management. In addition, disclosure controls and procedures and internal controls over financial reporting are documented,
5
tested and assessed for design and operating effectiveness in compliance with the Sarbanes-Oxley Act of 2002. We strive to
maintain a culture of compliance through the use of policies and procedures such as oversight compliance, codes of conduct,
compliance systems, communication of compliance guidance and employee education and training. Our corporate risk
management function further analyzes our business, investment and other key risks, reinforcing their importance in our
environment. We have a compliance group that monitors our compliance with all of the regulatory requirements to which we
are subject and manages our compliance policies and procedures. Our General Counsel supervises our compliance group, which
is responsible for addressing all regulatory and compliance matters that affect our activities. Our compliance policies and
procedures address a variety of regulatory and compliance risks such as the handling of material non-public information,
position reporting, personal securities trading, valuation of investments on a fund-specific basis, document retention, potential
conflicts of interest and the allocation of investment opportunities. Our compliance group also monitors the information barriers
that we maintain between each of our different businesses. We believe that our various businesses' access to the intellectual
capital, contacts and relationships that reside throughout our firm benefits all of our businesses. However, in order to maximize
that access without compromising our legal and contractual obligations, our compliance group oversees and monitors the
communications between or among our firm's different businesses. Occasionally, we have been subject to investigations and
proceedings, and sanctions have been imposed for infractions of various regulations relating to our activities.
Available Information
We routinely file annual, quarterly and current reports, proxy statements and other information required by the Exchange
Act with the SEC. You may read and copy any document we file with the SEC at the SEC's public reference room located at
100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings also are available to the public from the SEC's internet site at http://www.sec.gov.
We maintain a public internet site at http://www.cowen.com and make available free of charge through this site our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and
Forms 3, 4 and 5 filed on behalf of directors and executive officers, as well as any amendments to those reports filed or
furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. We also post on our website the charters for our Board of Directors' Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines, our Code
of Business Conduct and Ethics governing our directors, officers and employees and other related materials. The information on
our website is not incorporated by reference into this Annual Report.
Item 1A. Risk Factors
Risks Related to the Company's Businesses and Industry
For purposes of the following risk factors, references made to the Company's funds include hedge funds and other
alternative investment products, services and solutions offered by the Company, investment vehicles through which the
Company invests its own capital, and real estate funds. References to the Company's broker-dealer business include Cowen and
Company, ATM Execution, and Cowen Prime.
The Company
The Company's alternative investment and broker-dealer businesses have incurred losses in recent periods and may incur
losses in the future.
While the Company's alternative investment business was profitable for the year ended December 31, 2016, the
Company's broker-dealer business and alternative investment business have incurred losses in recent periods. For example, the
Company's broker-dealer business incurred losses in each of the years ended December 31, 2016, 2013 and 2012. In addition,
the Company's alternative investment business incurred losses in each of the years ended December 31, 2009 and 2008. The
Company may incur losses in any of its future periods. Future losses may have a significant effect on the Company's liquidity
as well as our ability to operate.
In addition, we may incur significant expenses in connection with any expansion, strategic acquisition or investment with
respect to our businesses. Specifically, we have invested, and will continue to invest, in our broker-dealer business, including
hiring a number of senior professionals to expand our research, investment banking and sales and trading product offerings.
Accordingly, the Company will need to increase its revenues at a rate greater than its expenses to achieve and maintain
profitability. If the Company's revenues do not increase sufficiently, or even if its revenues increase but it is unable to manage
its expenses, the Company will not achieve and maintain profitability in future periods. As an alternative to increasing its
revenues, the Company may seek additional capital through the sale of additional common stock or other forms of debt or
equity financing. The Company cannot be certain that it would have access to such financing on acceptable terms.
6
The Company depends on its key senior personnel and the loss of their services would have a material adverse effect on the
Company's businesses and results of operations, financial condition and prospects.
The Company depends on the efforts, skill, reputations and business contacts of its principals and other key senior
personnel, the information and investment activity these individuals generate during the normal course of their activities and the
synergies among the diverse fields of expertise and knowledge held by the Company's senior professionals. Accordingly, the
Company's continued success will depend on the continued service of these individuals. Key senior personnel may leave the
Company in the future, and we cannot predict the impact that the departure of any key senior personnel will have on our ability
to achieve our investment and business objectives. The loss of the services of any of them could have a material adverse effect
on the Company's revenues, net income and cash flows and could harm our ability to maintain or grow assets under
management in existing funds or raise additional funds in the future. Our senior and other key personnel possess substantial
experience and expertise and have strong business relationships with investors in its funds, clients and other members of the
business community. As a result, the loss of such personnel could have a material adverse effect on the Company's businesses
and results of operations, financial condition and prospects.
The Company's ability to retain its senior professionals is critical to the success of its businesses, and its failure to do so may
materially affect the Company's reputation, business and results of operations.
Our people are our most valuable resource. Our success depends upon the reputation, judgment, business generation
capabilities and project execution skills of our senior professionals. Our employees' reputations and relationships with our
clients are critical elements in obtaining and executing client engagements. The Company may encounter intense competition
for qualified employees from other companies inside and outside of their industries. From time to time, the Company has
experienced departures of professionals. Losses of key personnel have occurred and may occur in the future. In addition, if any
of our client-facing employees or executive officers were to join an existing competitor or form a competing company, some of
our clients could choose to use the services of that competitor instead of the services of the Company.
The success of our businesses is based largely on the quality of our employees and we must continually monitor the
market for their services and seek to offer competitive compensation. In challenging market conditions, such as have occurred
in recent years, it may be difficult to pay competitive compensation without the ratio of our compensation and benefits expense
to revenues becoming higher. In addition, a portion of the compensation of many of our employees takes the form of restricted
stock or deferred cash that vest over a period of years, which is not as attractive to existing and potential employees as
compensation consisting solely of cash or a lesser percentage of stock or other deferred compensation that may be offered by
our competitors.
Difficult market conditions, market disruptions and volatility have adversely affected, and may in the future adversely affect,
the Company's businesses, results of operations and financial condition.
The Company's businesses, by their nature, do not produce predictable earnings, and all of the Company's businesses may
be materially affected by conditions in the global financial markets and by global economic conditions, such as interest rates,
the availability of credit, inflation rates, economic uncertainty, changes in laws, commodity prices, asset prices (including real
estate), currency exchange rates and controls and national and international political circumstances (including wars, terrorist
acts, protests or security operations). Challenging market conditions could affect the level and volatility of securities prices and
the liquidity and the value of investments in the Company's funds or other investments in which the Company has investments
of its own capital, and the Company may not be able to effectively manage its alternative investment business's exposure to
challenging market conditions. Challenging market conditions can also adversely affect the Company's broker-dealer business
as increased volatility and lower stock prices can make companies less likely to conduct transactions.
Volatility in the value of the Company's investments and securities portfolios or other assets and liabilities or negative
returns from the investments made by the Company could adversely affect the Company's results of operations and
statement of financial condition.
The Company invests a significant portion of its capital base to help drive results and facilitate growth of its alternative
investment and broker-dealer businesses. As of December 31, 2016, the Company's invested capital amounted to a net value
$656.8 million (supporting a long market value of $1,030 million), representing approximately 85% of Cowen Group's
stockholders' equity presented in accordance with accounting principles generally accepted in the United States of America
("US GAAP"). In accordance with US GAAP, we define fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. US GAAP also establishes a
framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an
asset or liability. Changes in fair value are reflected in the statement of operations at each measurement period. Therefore,
continued volatility in the value of the Company's investments and securities portfolios or other assets and liabilities, including
funds, will result in volatility of the Company's results. In addition, the investments made by the Company may not generate
7
positive returns. As a result, changes in value or negative returns from investments made by the Company may have an adverse
effect on the Company's financial condition or operations in the future.
If the Company were deemed an investment company under the U.S. Investment Company Act, applicable restrictions could
make it impractical for the Company to continue its respective businesses as contemplated and could have a material
adverse effect on the Company's businesses and prospects.
We do not believe that we are an "investment company" as defined in the U.S. Investment Company Act of 1940, as
amended, because the nature of our assets and the sources of our income exclude us from the definition of an investment
company under the Investment Company Act and we are primarily engaged in a non-investment company business.
The Investment Company Act and the rules thereunder contain detailed requirements for the organization and operation
of investment companies. Among other things, the Investment Company Act and the rules thereunder limit transactions with
affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of options and impose
certain governance requirements. The Company intends to conduct its operations so that the Company will not be deemed to be
an investment company under the Investment Company Act. If anything were to happen which would cause the Company to be
deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company
Act, including limitations on its capital structure, ability to transact business with affiliates (including subsidiaries) and ability
to compensate key employees, could make it impractical for the Company to continue its business as currently conducted,
impair the agreements and arrangements between and among it, its subsidiaries and its senior personnel, or any combination
thereof, and materially adversely affect its business, financial condition and results of operations. Accordingly, the Company
may be required to limit the amount of investments that it makes as a principal or otherwise conduct its business in a manner
that does not subject the Company to the registration and other requirements of the Investment Company Act.
Limitations on access to capital by the Company and its subsidiaries could impair its liquidity and its ability to conduct its
businesses.
Liquidity, or ready access to funds, is essential to the operations of financial services firms. Failures of financial
institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to Cowen and
Company's trading business and perceived liquidity issues may affect the willingness of the Company's broker-dealer clients
and counterparties to engage in brokerage transactions with Cowen and Company. Cowen and Company's liquidity could be
impaired due to circumstances that the Company may be unable to control, such as a general market disruption or an
operational problem that affects Cowen and Company, its trading clients or third parties. Furthermore, the Company's ability to
sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
The Company primarily depends on its subsidiaries to fund its operations. Cowen and Company, ATM Execution, and
Cowen Prime are subject to the net capital requirements of the SEC and various self-regulatory organizations of which they are
members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also
mandate that a significant part of its assets be kept in relatively liquid form. CIL, the Company's U.K. registered broker-dealer
subsidiary, is subject to the capital requirements of the U.K. Financial Conduct Authority (the "FCA"). Any failure to comply
with these capital requirements could impair the Company's ability to conduct its broker-dealer business.
The Company's alternative investment business and/or Cowen and Company and the Company's other broker-dealer
subsidiaries may become subject to additional regulations which could increase the costs and burdens of compliance or
impose additional restrictions which could have a material adverse effect on the Company's businesses and the performance
of the Company's investment advisory products.
Firms in the financial services industry have been subject to an increasingly regulated environment. The industry has
experienced increased scrutiny from a variety of regulators, including the SEC, CFTC, FINRA, NFA, U.S. Treasury, the NYSE
and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last
several years. In light of current conditions in the global financial markets and the global economy, regulators have increased
their focus on the regulation of the financial services industry. The Company may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
The Company also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other
United States or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial
markets. The Company could be fined, prohibited from engaging in some of its business activities or subjected to limitations or
conditions on its business activities. In addition, the Company could incur significant expense associated with compliance with
any such legislation or regulations or the regulatory and enforcement environment generally. Substantial legal liability or
significant regulatory action against the Company could have a material adverse effect on the financial condition and results of
operations of the Company or cause significant reputational harm to the Company, which could seriously affect its business
prospects.
8
The Company may need to modify the strategies or operations of its alternative investment business, face increased
constraints or incur additional costs in order to satisfy new regulatory requirements or to compete in a changed business
environment. The Company's alternative investment business is subject to regulation by various regulatory authorities both
within and outside the United States that are charged with protecting the interests of investors. The activities of certain of the
Company's subsidiaries and affiliates are regulated primarily within the United States by the SEC, FINRA, the NFA and the
CFTC, as well as various state agencies, and are also subject to regulation by other agencies in the various jurisdictions in
which they operate and are offered, including the FCA, the Commission de Surveillance du Secteur Financier in Luxembourg
and the European Securities and Markets Authority. The activities of our investment advisor entities are all regulated by the
SEC due to their registrations as U.S. investment advisers and certain of these entities are also registered as CPOs with the NFA
and subject to CFTC and NFA regulations. The Company’s alternative investment management business is also subject to
applicable anti-money laundering regulations in the jurisdictions in which it operates and certain alternative investment funds
that are being marketed to investors domiciled in Switzerland and the EU are subject to disclosure and reporting requirements
set forth under Swiss law and AIFMD, respectively.
In addition, the Company's alternative investment business is subject to regulation in the jurisdictions in which it
organizes and offers its various investment products. These and other regulators in these jurisdictions have broad regulatory
powers dealing with all aspects of financial services including, among other things, the authority to make inquiries of
companies regarding compliance with applicable regulations, to grant permits and to regulate marketing and sales practices and
the maintenance of adequate financial resources as well as significant reporting obligations to regulatory authorities.
Additionally, the regulatory environment in which the Company operates frequently changes and has seen significant increased
regulation in recent years and it is possible that this trend may continue.
The regulatory environment continues to be turbulent. There is an extraordinary volume of regulatory discussion papers,
draft directives and proposals being issued around the world and these initiatives are not always coordinated. The predecessor
to the FCA has issued a discussion paper entitled "A Regulatory Response to the Global Banking Crisis" as well as undertaken
an exercise to collect data to assess the systemic risk that hedge funds may or may not pose. The Bank of England is also
collecting data on the systemic risk of hedge funds. Recent rulemaking by the SEC and other regulatory authorities outside the
United States have imposed trading restrictions and reporting requirements on short selling, which have impacted certain of the
investment strategies implemented on behalf of the Company's investment advisory products, and continued restrictions on or
further regulations of short sales could also negatively impact their performance.
In addition, financial services firms are subject to numerous perceived or actual conflicts of interest, which have drawn
and which we expect will continue to draw scrutiny from the SEC and other federal and state regulators. For example, the
research areas of investment banks have been and remain the subject of heightened regulatory scrutiny, which has led to
increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms.
Regulations have also been focusing on potential conflicts of interest or issues relating to impermissible disclosure of material
nonpublic information. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be
damaged if it fails to do so. Such policies and procedures to address or limit actual or perceived conflicts may also result in
increased costs, additional operational personnel and increased regulatory risk. Failure to adhere to these policies and
procedures may result in regulatory sanctions or client litigation.
The Company is subject to third party litigation risk and regulatory risk which could result in significant liabilities and
reputational harm which, in turn, could materially adversely affect its business, results of operations and financial
condition.
The Company depends to a large extent on its reputation for integrity and high-caliber professional services to attract and
retain clients. As a result, if a client is not satisfied with the Company's services, it may be more damaging in its business than
in other businesses. Moreover, the Company's role as advisor to clients on underwriting or merger and acquisition transactions
involves complex analysis and the exercise of professional judgment, including rendering "fairness opinions" in connection
with mergers and other transactions. Such activities may subject the Company to the risk of significant legal liabilities, not
covered by insurance, to clients and aggrieved third parties, including stockholders of clients who could commence litigation
against the Company. Although the Company's investment banking engagements typically include broad indemnities from its
clients and provisions to limit exposure to legal claims relating to such services, these provisions may not protect the Company,
may not be enforceable, or may be with foreign companies requiring enforcement in foreign jurisdictions which may raise the
costs and decrease the likelihood of enforcement. As a result, the Company may incur significant legal and other expenses in
defending against litigation and may be required to pay substantial damages for settlements and/or adverse judgments. In
addition, in some instances Cowen Prime serves as a registered investment advisor providing advice to retail investors and
retaining discretion over some retail investment accounts. The Company could be exposed to potential litigation and liability if
any of these clients are not satisfied with the investment advisory services being provided. Substantial legal liability or
significant regulatory action against the Company could have a material adverse effect on our results of operations or cause
significant reputational harm, which could seriously harm our business and prospects.
9
In general, the Company is exposed to risk of litigation by investors in its alternative investment management business if
the management of any of its investment advisory products is alleged to have been grossly negligent or fraudulent. Investors or
beneficial owners of the Company’s investment advisory products could sue to recover amounts lost due to any alleged
misconduct, up to the entire amount of the loss. In addition, the Company faces the risk of litigation from investors and
beneficial owners of any of its investment advisory products if applicable restrictions are violated. In addition, the Company is
exposed to risks of litigation or investigation relating to transactions that presented conflicts of interest that were not properly
addressed. In the majority of such actions the Company would be obligated to bear legal, settlement and other costs, which may
be in excess of any available insurance coverage. In addition, although the Company is contractually entitled to indemnification
from its investment advisory products, our rights to indemnification may be challenged. If the Company is required to incur all
or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds, if any, or is not
wholly indemnified, our business, results of operations and financial condition could be materially adversely affected. In its
alternative investment management business, the Company is exposed to the risk of litigation if a fund suffers catastrophic
losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated
market rules or regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by
circumstances which are materially damaging to the Company's reputation and businesses.
The potential for conflicts of interest within the Company, and a failure to appropriately identify and deal with conflicts of
interest could adversely affect our businesses.
Due to the combination of our alternative investment and broker-dealer businesses, we face an increased potential for
conflicts of interest, including situations where our services to a particular client or investor or our own interests in our
investments conflict with the interests of another client. Such conflicts may also arise if our broker-dealer business has access to
material non-public information that may not be shared with our alternative investment business or vice versa. Additionally, our
regulators have the ability to scrutinize our activities for potential conflicts of interest, including through detailed examinations
of specific transactions.
Appropriately identifying and dealing with conflicts of interest is complex and difficult, and the willingness of clients to
enter into transactions or engagements in which such a conflict might arise may be affected if we fail to identify and
appropriately address potential conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or
enforcement actions.
Employee misconduct could harm the Company by, among other things, impairing the Company's ability to attract and
retain investors and subjecting the Company to significant legal liability, reputational harm and the loss of revenue from its
own invested capital.
It is not always possible to detect and deter employee misconduct. The precautions that the Company takes to detect and
prevent this activity may not be effective in all cases, and we may suffer significant reputational harm and financial loss for any
misconduct by our employees. The potential harm to the Company's reputation and to our business caused by such misconduct
is impossible to quantify.
There is a risk that the Company's employees or partners could engage in misconduct that materially adversely affects the
Company's business, including a decrease in returns on its own invested capital. The Company is subject to a number of
obligations and standards arising from its businesses. The violation of these obligations and standards by any of the Company's
employees could materially adversely affect the Company and its investors. For instance, the Company's businesses require that
the Company properly deal with confidential information. If the Company's employees were improperly to use or disclose
confidential information, we could suffer serious harm to our reputation, financial position and current and future business
relationships. If one of the Company's employees were to engage in misconduct or were to be accused of such misconduct, the
business and reputation of the Company could be materially adversely affected.
The Company may be unable to successfully identify, manage and execute future acquisitions, investments and strategic
alliances, which could adversely affect our results of operations.
We intend to continually evaluate potential acquisitions, investments and strategic alliances to expand our alternative
investment and broker-dealer businesses. In the future, we may seek additional acquisitions, investments, strategic alliances or
similar arrangements, which may expose us to risks such as:
•
•
•
•
•
the difficulty of identifying appropriate acquisitions, investments, strategic allies or opportunities on terms acceptable
to us;
the possibility that senior management may be required to spend considerable time negotiating agreements and
monitoring these arrangements;
potential regulatory issues applicable to the financial services business;
the loss or reduction in value of the capital investment;
our inability to capitalize on the opportunities presented by these arrangements; and
10
•
the possibility of insolvency of a strategic ally.
Furthermore, any future acquisitions of businesses could entail a number of risks, including:
•
•
•
•
•
problems with the effective integration of operations;
inability to maintain key pre-acquisition business relationships;
increased operating costs;
exposure to unanticipated liabilities; and
difficulties in realizing projected efficiencies, synergies and cost savings.
There can be no assurance that we would successfully overcome these risks or any other problems encountered with these
acquisitions, investments, strategic alliances or similar arrangements.
The Company's future results will suffer if the Company does not effectively manage its expanded operations.
The Company may continue to expand its operations through new product and service offerings and through additional
strategic investments, acquisitions or joint ventures, some of which may involve complex technical and operational challenges.
The Company's future success depends, in part, upon its ability to manage its expansion opportunities, which pose numerous
risks and uncertainties, including the need to integrate new operations into its existing business in an efficient and timely
manner, to combine accounting and data processing systems and management controls and to integrate relationships with
customers and business partners. In addition, future acquisitions or joint ventures may involve the issuance of additional shares
of common stock of the Company, which may dilute the ownership of the Company's stockholders.
The Company's failure to maintain effective internal control over financial reporting in accordance with Section 404 of the
Act could have a material adverse effect on the Company's financial condition, results of operations and
business and the price of our Class A common stock.
The
Act and the related rules require our management to conduct an annual assessment of the
effectiveness of our internal control over financial reporting and require a report by our independent registered public
accounting firm addressing our internal control over financial reporting. To comply with Section 404 of the
Act, we are required to document formal policies, processes and practices related to financial reporting that are necessary to
comply with Section 404. Such policies, processes and practices are important to ensure the identification of key financial
reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our
organization.
If we fail for any reason to comply with the requirements of Section 404 in a timely manner, our independent registered
public accounting firm may, at that time, issue an adverse report regarding the effectiveness of our internal control over
financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a
timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of
applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition,
results of operations and business, and result in a decline in the price of our Class A common stock.
Certain provisions of the Company's amended and restated certificate of incorporation and bylaws and Delaware law may
have the effect of delaying or preventing an acquisition by a third party.
The Company's amended and restated certificate of incorporation and bylaws contain several provisions that may make it
more difficult for a third party to acquire control of the Company, even if such acquisition would be financially beneficial to the
Company's stockholders. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or
other transaction that might otherwise result in the Company's stockholders receiving a premium over the then-current trading
price of our common stock. For example, the Company's amended and restated certificate of incorporation authorizes its board
of directors to issue up to 10,000,000 shares of "blank check" preferred stock. Without stockholder approval, the board of
directors has the authority to attach special rights, including voting and dividend rights, to this preferred stock. With these
rights, preferred stockholders could make it more difficult for a third party to acquire the Company. In addition, the Company's
amended and restated bylaws provide for an advance notice procedure with regard to the nomination of candidates for election
as directors and with regard to business to be brought before a meeting of stockholders. The Company is also subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law. Under these provisions, if anyone becomes
an "interested stockholder," the Company may not enter into a "business combination" with that person for three years without
special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of
control. For the purposes of Section 203, "interested stockholder" means, generally, someone owning 15% or more of the
Company's outstanding voting stock or an affiliate of the Company that owned 15% or more of our outstanding voting stock
during the past three years, subject to certain exceptions as described in Section 203.
11
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may adversely impact the Company's business.
The Dodd-Frank Act, signed into law on July 21, 2010, represents a comprehensive overhaul of the financial services
industry within the United States and is being implemented through extensive rulemaking by the SEC and other governmental
agencies. In addition, the Dodd-Frank Act established the federal Bureau of Consumer Financial Protection (the "BCFP") and
the FSOC and will require the BCFP and FSOC, among other federal agencies, to implement new rules and regulations. Many
of these new rules have already been adopted, including new rules which require certain investment advisers to file information
under Form PF and rules that require certain registered investment advisers which are also registered CPOs to file Form CPO-
PQR with the CFTC. These filings require extensive information and we incur significant costs to satisfy these new filing
requirements. As of July 2016, rule-making under Dodd-Frank was 70% complete and therefore a full assessment of the impact
that the Dodd-Frank Act or the resulting rules and regulations will have on the Company's business or the financial services
industry within the United States is still not practical at this time.
Heightened cyber-security risks may disrupt our businesses, result in losses or limit our growth.
We may be subject to cyber-attacks on our critical data and we may not be able to anticipate or prevent all such attacks.
We may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.
While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security
breach of our information and communication systems, there can be no assurance that any such failure, interruption or security
breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or
security breach of our information or communication systems could damage our reputation, result in a loss of business, subject
us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.
Risks relating to the Company's financing transactions.
Our indebtedness has increased significantly as a result of the Cash Convertible Note financing ("Cash Convertible
Notes") issued in March 2014 and Senior Notes financing ("2021 Notes") issued in October 2014 (together referred to as
"Notes") and servicing this indebtedness requires a significant amount of cash. We may not have sufficient cash flow from our
business to service our indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including
the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond
our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and
make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more
alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or
highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such
time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result
in a default on our debt obligations.
We operate with a significant amount of indebtedness, which is subject to variable interest rates and contains restrictive
covenants. In addition, our Series A Convertible Preferred Stock contains certain restrictions on our operations.
The 2021 Notes were issued pursuant to an Indenture, dated as of October 10, 2014 (the “Senior Indenture”), by and
among the Company and The Bank of New York Mellon, as trustee. The Senior Indenture contains covenants that, among other
things, limit (subject to certain exceptions) the Company’s ability and the ability of the Company’s Restricted Subsidiaries (as
defined in the Senior Indenture) to: (1) incur debt (including certain preferred stock), if the incurrence of such indebtedness
would cause the Company’s consolidated fixed charge coverage ratio, as defined in the Senior Indenture, to fall below 2.0 to
1.0, (2) pay dividends or make distributions on its capital stock, or purchase, redeem or otherwise acquire its capital stock, and
(3) grant liens securing indebtedness of the Company without securing the 2021 Notes equally and ratably. If certain conditions
are met, certain of these covenants may be suspended. In the fourth quarter of 2016 the Company’s consolidated fixed charge
coverage ratio was 1.3 to 1.0 compared to the minimum of 2.0 to 1.0 required by the Senior Indenture. As a result, the
Company may not currently incur new debt or make restricted payments, other than in limited permitted amounts set out in the
Senior Indenture. We cannot assure you when or if the Company’s consolidated fixed charge ratio will be above the minimum
2.0 to 1.0 required by the Senior Indenture.
The certificate of designations governing our Series A Convertible Preferred Stock contains certain restrictions on our and
our subsidiaries’ ability to, among other things, pay dividends on, redeem or repurchase our Class A common stock and, under
certain circumstances, our Series A Convertible Preferred Stock, and to issue additional preferred stock. Additionally, if
dividends on our Series A Convertible Preferred Stock are in arrears and unpaid for at least six or more quarterly periods, the
holders (voting as a single class) of our outstanding Series A Convertible Preferred Stock will be entitled to elect two additional
directors to our Board of Directors until paid in full.
12
The conditional conversion feature of the Cash Convertible Notes, if triggered, may adversely affect our financial condition
and operating results.
In the event the conditional conversion feature of the Cash Convertible Notes is triggered, holders of notes will be entitled
to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, we
would be required to pay cash to settle any such conversion, which could adversely affect our liquidity. In addition, even if
holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion
of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction
of our net working capital.
The accounting for the Cash Convertible Notes will result in our having to recognize interest expense significantly greater
than the stated interest rate of the notes and may result in volatility to our Consolidated Statements of Operations.
We will settle conversions of the Cash Convertible Notes entirely in cash. Accordingly, the conversion option that is part
of the Cash Convertible Notes is accounted for as a derivative pursuant to accounting standards relating to derivative
instruments and hedging activities. In general, this results in an initial valuation of the conversion option, which is bifurcated
from the debt component of the Cash Convertible Notes, resulting in an original issue discount. The original issue discount will
be accreted to interest expense over the term of the Cash Convertible Notes, which will result in an effective interest rate
reported in our financial statements significantly in excess of the stated coupon rate of the Cash Convertible Notes. This
accounting treatment will reduce our US GAAP earnings and could adversely affect the price at which our Class A common
stock trades, but it will not affect the amount of cash interest paid to holders of the Cash Convertible Notes or our cash flows.
For each financial statement period after issuance of the Cash Convertible Notes, a gain (or loss) will be reported in our
Consolidated Statements of Operations to the extent the valuation of the conversion option changes from the previous period.
The Cash Convertible Notes economic hedge transaction we entered into in connection with the issuance of the Cash
Convertible Notes will also be accounted for as a derivative instrument, offsetting the gain (or loss) associated with changes to
the valuation of the conversion option. Although we do not expect there to be a material net impact to our financial statements
as a result of our issuing the Cash Convertible Notes and entering into the Cash Convertible Notes economic hedge transaction,
we cannot assure you that these transactions will be completely offset, which may result in volatility to our financial statements.
Risks Related to the Company's Alternative Investment Business.
The Company's profitability may be adversely affected by decreases in revenue relating to changes in market and economic
conditions.
Market conditions have been and remain inherently unpredictable and outside of the Company's control, and may result in
reductions in the Company's revenue and results of operations. Such reductions may be caused by a decline in assets under
management, resulting in lower management fees and incentive income, an increase in the cost of financial instruments, lower
investment returns or reduced demand for assets held by investment advisory products managed by the Company's alternative
investment business, which would negatively affect its ability to realize value from such assets or continued investor
redemptions, resulting in lower fees and increased difficulty in raising new capital.
These factors may reduce the Company's revenue, revenue growth and income and may slow the growth of the alternative
investment business or may cause the contraction of the alternative investment business. In particular, negative performance
reduces assets under management, which decreases the management fees and incentive income that the Company ultimately
earns. Negative performance of the Company's investment advisory products or its own proprietary investments also decreases
revenue derived from the Company's returns on investment of its own capital.
The Company's ability to increase revenues and improve profitability will depend on increasing assets under management in
existing alternative investment strategies and developing and marketing new investment products and strategies, including
identifying and hiring or affiliating with new investment teams.
The Company’s alternative investment business generates management and incentive fee income based on its assets under
management. If the Company is unable to increase its assets under management in its existing products it may be difficult to
increase its revenues. The Company has recently developed and launched several new products, including a UCITS listed
company offering a merger arbitrage strategy, and a long/short equity strategy. The Company may also launch new alternative
investment products and hire or affiliate with new investment teams focusing on new investment strategies. If these products or
strategies are not successful, or if the Company is unable to hire or affiliate with new investment teams, or successfully manage
its relationships with its affiliated investment teams, the Company's profitability could be adversely affected.
The Company's revenues and, in particular, its ability to earn incentive income, would be adversely affected if its investment
advisory products fall beneath their "high-water marks" as a result of negative performance.
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Incentive income, which has historically comprised a substantial portion of the Company’s alternative investment
advisory business annual revenues, is, in most cases, subject to "high-water marks" whereby incentive income is earned by the
Company only to the extent that the net asset value of an investment advisory product at the end of a measurement period
exceeds the highest net asset value as of the end of a preceding measurement period for which the Company earned incentive
income. The Company's incentive allocations are also subject, in some cases, to performance hurdles or benchmarks. To the
extent the Company's investment advisory products experience negative investment performance, the investors in or beneficial
owners of these investment advisory products would need to recover cumulative losses before the Company can earn incentive
income with respect to the investments of those who previously suffered losses.
It may be difficult for the Company's alternative investment business to retain investment professionals during periods
where market conditions make it more difficult to generate positive investment returns.
Certain of the Company's investment advisory products face particular retention issues with respect to investment
professionals whose compensation is tied, often in large part, to such performance thresholds. This retention risk is heightened
during periods where market conditions make it more difficult to generate positive investment returns. For example, several
investment professionals receive performance-based compensation at the end of each year based upon their annual investment
performance, and this performance-based compensation represents substantially all of the compensation the professional is
entitled to receive during the year. If the investment professional's annual performance is negative, the professional may not be
entitled to receive any performance-based compensation for the year. If investment professionals or funds, as the case may be,
produce investment results that are negative (or below the applicable hurdle or benchmark), the affected investment
professionals may be incentivized to join a competitor because doing so would allow them to earn performance-based
compensation without the requirement that they first satisfy the high-water mark.
Investors and beneficial owners in the Company's investment advisory products can generally redeem investments with prior
notice. The rate of redemptions could accelerate at any time. Historically, redemptions have created difficulties in managing
the liquidity of certain of the Company's investment advisory products, reduced assets under management and adversely
affected the Company's revenues, and may do so in the future.
Investors in the Company's funds and investors with managed accounts may generally redeem their investments with
prior notice, subject to certain initial holding periods. Investors may reduce the aggregate amount of their investments, or
transfer their investments to other funds or asset managers with different fee rate arrangements, for any number of reasons,
including investment performance, changes in prevailing interest rates and financial market performance. Furthermore,
investors in the Company's funds may be investors in products managed by other alternative asset managers where redemptions
have been restricted or suspended. Such investors may redeem capital from Company's funds, even if the Company's funds'
performance is superior, due to an inability to redeem capital from other managers. Increased volatility in global markets could
accelerate the pace of fund and managed account redemptions. Redemptions of investments in the Company's funds could also
take place more quickly than assets may be sold by those funds to meet the price of such redemptions, which could result in the
relevant funds and/or the Company being in breach of applicable legal, regulatory and contractual requirements in relation to
such redemptions, resulting in possible regulatory and investor actions against the Company and/or the Company's funds. If the
Company's funds or managed accounts underperform, existing investors may decide to reduce or redeem their investments or
transfer asset management responsibility to other asset managers and the Company may be unable to obtain new alternative
investment business. Any such action could potentially cause further redemptions and/or make it more difficult to attract new
investors.
The redemption of investments in the Company's funds or in managed accounts could also adversely affect the revenues
of the Company's alternative investment business, which are substantially dependent upon the assets under management in the
Company's funds. If redemptions of investments cause revenues to decline, they would likely have a material adverse effect on
our business, results of operations or financial condition. If market conditions, negative performance or other factors cause an
increased level of redemption activity returns, it could become more difficult to manage the liquidity requirements of the
Company's funds, making it more difficult or more costly for the Company's funds to liquidate positions rapidly to meet
redemption requests or otherwise. This in turn may negatively impact the Company's returns on its own invested capital.
In addition to the impact on the market value of assets under management, illiquidity and volatility of the global financial
markets could negatively affect the ability of the Company's alternative investment business to manage inflows and outflows
from the Company's funds. Several alternative investment managers, including the Company's alternative investment business,
have in the past exercised, and may in the future exercise, their rights to limit, and in some cases, suspend, redemptions from
the funds they manage. The Company's alternative investment business has also negotiated, and may in the future negotiate,
with investors or exercise such rights in an attempt to limit redemptions or create a variety of other investor structures to bring
fund assets and liquidity requirements into a more manageable balance. To the extent that the Company's alternative investment
business has negotiated with investors to limit redemptions, it may be likely that such investors will continue to seek further
redemptions in the future. Such actions may have an adverse effect on the ability of the Company's funds to attract new capital
14
to existing funds or to develop new investment platforms. Poor performance relative to other asset management firms may
result in reduced investments in the Company's funds and managed accounts and increased redemptions from the Company's
funds and managed accounts. As a result, investment underperformance would likely have a material adverse effect on the
Company's results of operations and financial condition.
Hedge fund investments, including the investments of the Company's own capital in the Company's funds, are subject to
other additional risks.
Investments by the Company's funds are subject to certain risks that may result in losses. Decreases to assets under
management as a result of investment losses or client redemptions may have a material adverse effect on the Company's
revenues, net income and cash flows and could harm our ability to maintain or grow assets under management in existing funds
or raise additional funds in the future. Additional risks include the following:
• Generally, there are few limitations on hedge funds' investment strategies, which are often subject to the sole discretion
of the management company or the general partner of such funds.
• Hedge funds may engage in short selling, which is subject to a theoretically unlimited risk of loss because there is no
limit on how much the price of a security sold short may appreciate before the short position is closed out. A fund may
be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot
be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions. Furthermore,
by the SEC and other regulatory authorities outside the United States have imposed trading restrictions and reporting
requirements on short selling, which in certain circumstances may impair hedge funds' ability to use short selling
effectively.
• The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall
market position through a combination of financial instruments. A hedge fund's trading orders may not be executed in
a timely and efficient manner due to various circumstances, including systems failures or human error. In such event,
the fund might only be able to acquire some but not all of the components of the position, or if the overall position
were in need of adjustment, the fund might not be able to make such an adjustment. As a result, a hedge fund would
not be able to achieve the market position selected by the management company or general partner of such fund, and
might incur a loss in liquidating its position.
• Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet
their respective liquidity or operational needs, so that a default by one institution causes a series of defaults by the
other institutions. This "systemic risk" may adversely affect the financial intermediaries (such as clearing agencies,
clearing houses, banks, securities firms, other counterparties and exchanges) with which the hedge funds interact on a
daily basis.
• Hedge funds are subject to risks due to the potential illiquidity of assets. Hedge funds may make investments or hold
trading positions in markets that are volatile and which may become illiquid. The timely sale of trading positions can
be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the
ability to transfer positions in highly specialized or structured transactions to which they may be a party, and changes
in industry and government regulations. It may be impossible or highly costly for hedge funds to liquidate positions
rapidly to meet margin calls, redemption requests or otherwise, particularly if there are other market participants
seeking to dispose of similar assets at the same time, if the relevant market is otherwise moving against a position or in
the event of trading halts or daily price movement limitations on the market. In addition, increased levels of
redemptions may result in increased illiquidity as more liquid assets are sold to fund redemptions.
• Hedge fund investments are subject to risks relating to investments in commodities, futures, options and other
derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in
certain circumstances. Price movements of commodities, futures and options contracts and payments pursuant to swap
agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade,
fiscal, monetary and exchange control programs and policies of governments and national and international political
and economic events and policies. The value of futures, options and swap agreements also depends upon the price of
the commodities underlying them. In addition, hedge funds' assets are subject to the risk of the failure of any of the
exchanges on which their positions trade.
• Hedge fund investments that are not denominated in the U.S. dollar are subject to the risk that the value of a particular
currency will change in relation to one or more other currencies. Among the factors that may affect currency values are
trade balances, the level of short-term interest rates, differences in relative values of similar assets in different
currencies, long-term opportunities for investment and capital appreciation and political developments. Officials in
foreign countries may, from time to time, take actions in respect of their currencies that could significantly affect the
value of a hedge fund’s assets denominated in those currencies or the liquidity of such investments. For example, a
15
foreign government may unilaterally devalue its currency against other currencies, which would typically have the
effect of reducing the U.S. dollar value of investments denominated in that currency. A foreign government may also
limit the convertibility or repatriation of its currency or assets denominated in that currency. While the Company
generally expects to hedge its exposure to currencies other than the U.S. dollar, and may do so through foreign
currency futures contracts and options thereon, forward foreign currency exchange contracts, swaps or any
combination thereof, but there can be no assurance that such hedging strategies will be implemented, or if
implemented, will be effective. While a hedge fund may enter into currency hedging transactions to seek to reduce
risk, such transactions may result in a poorer overall performance than if it had not engaged in such hedging
transactions. For a variety of reasons, the Company may not seek to establish a perfect correlation between the
hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the
Company from achieving the intended hedge or expose a fund to risk of loss.
• Hedge funds are also subject to the risk that war, terrorism, and related geopolitical events may lead to increased short-
term market volatility and have adverse long-term effects on the U.S. and world economies and markets generally, as
well as adverse effects on issuers of securities and the value of investments. War, terrorism, and related geopolitical
events have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term
effects on U.S. and non-U.S. economies and markets generally. Those events, as well as other changes in U.S. and
non-U.S. economic and political conditions, also could adversely affect individual issuers or related groups of issuers,
securities markets, interest rates, credit ratings, inflation, investor sentiment and other factors affecting the value of the
Company’s investments.
If the Company's or managed account's counterparty for any of its derivative or non-derivative contracts defaults on the
performance of those contracts, the Company may not be able to cover its exposure under the relevant contract.
The Company's funds and managed accounts enter into numerous types of financing arrangements with a wide array of
counterparties around the world, including loans, hedge contracts, swaps, repurchase agreements and other derivative and non-
derivative contracts. The terms of these contracts are generally complex and often customized and generally are not subject to
regulatory oversight. The Company is subject to the risk that the counterparty to one or more of these contracts may default,
either voluntarily or involuntarily, on its performance under the contract. Any such default may occur at any time without
notice. Additionally, the Company may not be able to take action to cover its exposure if a counterparty defaults under such a
contract, either because of a lack of the contractual ability or because market conditions make it difficult to take effective
action. The impact of market stress or counterparty financial condition may not be accurately foreseen or evaluated and, as a
result, the Company may not take sufficient action to reduce its risks effectively.
Counterparty risk is accentuated where the fund or managed account has concentrated its transactions with a single or
small group of counterparties. Generally, hedge funds are not restricted from concentrating any or all of their transactions with
one counterparty. Moreover, the Company's internal review of the creditworthiness of their counterparties may prove
inaccurate. The absence of a regulated market to facilitate settlement and the evaluation of creditworthiness may increase the
potential for losses.
In addition, these financing arrangements often contain provisions that give counterparties the ability to terminate the
arrangements if any of a number of defaults occurs with respect to the Company or its funds or managed accounts, as the case
may be, including declines in performance or assets under management and losses of key management personnel, each of
which may be beyond our control. In the event of any such termination, the Company's funds or managed accounts may not be
able to enter into alternative arrangements with other counterparties and our business may be materially adversely affected.
The Company may suffer losses in connection with the insolvency of prime brokers, custodians, administrators and other
agents whose services the Company uses and who may hold assets of the Company's funds.
All of the Company's funds use the services of prime brokers, custodians, administrators or other agents to carry out
certain securities transactions and to conduct certain business of the Company's funds. In the event of the insolvency of a prime
broker and/or custodian, the Company's funds might not be able to recover equivalent assets in full as they may rank among the
prime broker's and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or
otherwise uses. In addition, the Company's funds' cash held with a prime broker or custodian (if any) may not be segregated
from the prime broker's or custodian's own cash, and the funds will therefore rank as unsecured creditors in relation thereto.
Operational risks relating to the failure of data processing systems and other information systems and technology may
disrupt our alternative investment business, result in losses and/or limit the business's operations and growth.
The Company's alternative investment business and its funds rely heavily on financial, accounting, trading and other data
processing systems to, among other things, execute, confirm, settle and record transactions across markets and geographic
locations in a time-sensitive, efficient and accurate manner. If any of these systems does not operate properly or are disabled,
16
the Company could suffer financial loss, a disruption of its business, liability to the Company's funds, regulatory intervention
and/or reputational damage. In addition, the Company's alternative investment business is highly dependent on information
systems and technology, and the cost of maintaining such systems may increase from its current level. Such a failure to
accommodate the operational needs of the Company's alternative investment business, or an increase in costs related to such
information systems, could have a material adverse effect on the Company, both with respect to a decrease in the operational
performance of its alternative investment business and an increase in costs that may be necessary to improve such systems.
The Company depends on its presence in New York, New York, where most of the Company's alternative investment
personnel are located, for the continued operation of its business. We have taken precautions to limit the impact that a
disruption to operations at our New York headquarters could cause (for example, by ensuring that the Company can operate
independently of offices in other geographic locations). Although these precautions have been taken, a disaster or a disruption
in the infrastructure that supports our alternative investment business, including a disruption involving electronic
communications or other services used by the third parties with whom the Company's alternative investment business conducts
business (including the funds invested in by the Company’s fund of funds platform), or directly affecting the New York, New
York, headquarters, could have a material adverse impact on the Company's ability to continue to operate its alternative
investment business without interruption. The Company's disaster recovery programs may not be sufficient to mitigate the harm
that may result from such a disaster or disruption. In addition, insurance might only partially reimburse us for our losses, if at
all. Finally, the Company relies on third party service providers for certain aspects of its business, including for certain
information systems and technology and administration of the Company's funds. Severe interruptions or deteriorations in the
performance of these third parties or failures of their information systems and technology could impair the quality of the
Company's alternative investment business operations and could impact the Company's reputation and materially adversely
affect our alternative investment business.
Certain of the Company's funds may invest in relatively high-risk, illiquid assets, and the Company may fail to realize any
profits from these activities for a considerable period of time or lose some or all of the principal amounts of these
investments.
Certain of the Company's funds and managed accounts invest a portion of their assets in securities that are not publicly
traded. In many cases, such funds may be prohibited by contract or by applicable securities laws from selling such securities for
a period of time or there may not be a public market for such securities. Even if the securities are publicly traded, large holdings
of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of
downward movement in market prices during the disposition period. Accordingly, under certain conditions, the Company's
funds may be forced to either sell securities at lower prices than they had expected to realize or defer, potentially for a
considerable period of time, sales that they had planned to make. Investing in these types of investments can involve a high
degree of risk, and the Company's funds may lose some or all of the principal amount of such investments, including our own
invested capital.
Risk management activities may materially adversely affect the return on the Company's funds' investments if such activities
do not effectively limit a fund's exposure to decreases in investment values or if such exposure is overestimated.
When managing the Company's funds' exposure to market risks, the relevant fund (or one of the funds invested in by the
Company) may use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of
derivative financial instruments to limit its exposure to changes in the relative values of investments that may result from
market developments, including changes in interest rates, currency exchange rates and asset prices. The success of such
derivative transactions generally will depend on the Company's (or the underlying fund manager's) ability to accurately predict
market changes in a timely fashion, the degree of correlation between price movements of a derivative instrument, the position
being hedged, the creditworthiness of the counterparty and other factors. As a result, these transactions may result in poorer
overall investment performance than if they had not been executed. Such transactions may also limit the opportunity for gain if
the value of a hedged position increases. A perfect correlation between the instruments used in a hedging or other derivative
transaction and the position being hedged may not be attained. An imperfect correlation could give rise to a loss. Also, it may
not be possible to fully or perfectly limit exposure against all changes in the value of an investment because the value of an
investment is likely to fluctuate as a result of a number of factors, many of which will be beyond the Company's (or the
underlying fund manager's) control or ability to hedge.
Fluctuations in currency exchange rates could materially affect the Company's alternative investment business and its
results of operations and financial condition.
The Company uses U.S. dollars as its reporting currency. Investments in the Company's funds and managed accounts are
made in different currencies, including Euros, Pounds Sterling, Australian Dollar and Yen. In addition, the Company's funds and
managed accounts hold investments denominated in many foreign currencies. To the extent that the Company's revenues from
its alternative investment business are based on assets under management denominated in such foreign currencies, our reported
revenues may be significantly affected by the exchange rate of the U.S. dollar against these currencies. Typically, an increase in
17
the exchange rate between U.S. dollars and these currencies will reduce the impact of revenues denominated in these currencies
in the financial results of our alternative investment business. For example, management fee revenues derived from each Euro
and Australian Dollar of assets under management denominated in Euros and Australian Dollar will decline in U.S. dollar terms
if the value of the U.S. dollar appreciates against the Euro and Australian Dollar. In addition, the calculation of the amount of
assets under management is affected by exchange rate movements as assets under management denominated in foreign
currencies are converted to U.S. dollars. The Company's alternative investment business also incurs a portion of its
expenditures in currencies other than U.S. dollars. As a result, our alternative investment business is subject to the effects of
exchange rate fluctuations with respect to any currency conversions and the Company’s ability to hedge these risks and the cost
of such hedging or the Company’s decision not to hedge could impact the performance of the Company's funds and our
alternative investment business and its results of operations and financial condition.
The due diligence process that the Company's alternative investment business undertakes in connection with investments by
the Company's funds is inherently limited and may not reveal all facts that may be relevant in connection with making an
investment.
Before making investments, particularly investments in securities that are not publicly traded, the Company endeavors to
conduct a due diligence review of such investment that it deems reasonable and appropriate based on the facts and
circumstances applicable to each investment. When conducting due diligence, the Company is often required to evaluate critical
and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors,
accountants, investment bankers and financial analysts may be involved in the due diligence process in varying degrees
depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an
investment, the Company is limited to the resources available, including information provided by the target of the investment
and, in some circumstances, third party investigations. The due diligence investigation that the Company conducts with respect
to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such
investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful, which
may adversely affect the performance of the Company's funds and managed accounts and the Company's ability to generate
returns on its own invested capital from any such investment.
The Company's real estate business is subject to the risks inherent in the ownership and operation of real estate and the
construction and development of real estate.
The Company's real estate business is subject to the risks inherent in the ownership and operation of real estate and real
estate-related businesses and assets. These risks include those associated with general and local economic conditions, changes
in supply of and demand for competing properties in an area, changes in environmental regulations and other laws, various
uninsured or uninsurable risks, natural disasters, changes in real property tax rates, changes in interest rates, the reduced
availability of mortgage financing which may render the sale or refinancing of properties difficult or impracticable,
environmental liabilities, contingent liabilities on disposition of assets, terrorist attacks, war and other factors that are beyond
our control. Further, the U.S. Environmental Protection Agency has found that global climate change could increase the severity
and perhaps the frequency of extreme weather events, which could subject real property to increased weather-related risks in
the coming years. There are also presently a number of current and proposed regulatory initiatives, both domestically and
globally, that are geared towards limiting and scaling back the emission of greenhouse gases, which certain scientists have
linked to global climate change. Although not known with certainty at this time, such regulation could adversely affect the costs
to construct and operate real estate in the coming years, such as through increased energy costs.
In recent years commercial real estate markets in the United States generally experienced major disruptions due to the
unprecedented lack of available capital, in the form of either debt or equity, and declines in value as a result of the overall
economic decline. If these conditions were to occur again transaction volume may drop precipitously, negatively impacting the
valuation and performance of the Company's real estate investments significantly. Additionally, if the Company's real estate
business acquires direct or indirect interests in undeveloped land or underdeveloped real property, which may often be non-
income producing, they will be subject to the risks normally associated with such assets and development activities, including
risks relating to the availability and timely receipt of zoning and other regulatory or environmental approvals, the cost, potential
for cost overruns and timely completion of construction (including risks beyond the control of the investor, such as weather or
labor conditions or material shortages) and the availability of both construction and permanent financing on favorable terms.
Our third party reinsurance business could expose us to losses.
We provide third party reinsurance coverage through our Luxembourg subsidiary, Hollenfels Re S.A (“Hollenfels”). We
have written polices relating to property and casualty, worker's compensation, general liability and construction performance
bonds and may issue reinsurance policies relating to other types of insurance. Because we write reinsurance, the success of our
underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original
underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume
initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate
18
premium rates or the claims we receive exceed the premiums and retrocession recoverables we are able to collect, we will
suffer losses.
We may be unable to purchase retrocession reinsurance and our retrocession agreements subject us to third-party credit
risk.
We may enter into retrocession agreements with third parties in order to limit our exposure to losses from the reinsurance
coverage provided by Hollenfels. Changes in the availability and cost of retrocession reinsurance, which are subject to market
conditions that are outside of our control, may reduce to some extent our ability to use retrocession reinsurance to balance
exposures across our reinsurance operations. Accordingly, we may not be able to obtain our desired amounts of retrocession
reinsurance. In addition, even if we are able to obtain such reinsurance, we may not be able to negotiate terms that we deem
appropriate or acceptable or obtain such reinsurance from entities with satisfactory creditworthiness. While we seek to do
business with creditworthy counterparties, if the parties who provide us with retrocession are not able to meet their obligations
to us or fail to make timely payments under the terms of our retrocession agreements, we could be materially and adversely
affected because we may remain liable under the terms.
The alternative investment industry is intensely competitive, which may adversely affect the Company's ability to attract and
retain investors and investment professionals.
The alternative investment industry is extremely competitive. Competition includes numerous international, national,
regional and local asset management firms and broker-dealers, commercial bank and thrift institutions, and other financial
institutions. Many of these institutions offer products and services that are similar to, or compete with, those offered by us and
have substantially more personnel and greater financial resources than the Company does. The key areas for competition
include historical investment performance, the ability to identify investment opportunities, the ability to attract and retain the
best investment professionals and the quality of service provided to investors. The Company's ability to compete may be
adversely affected if it underperforms in comparison to relevant benchmarks, peer groups or competing asset managers. The
competitive market environment may result in increased downward pressure on fees, for example, by reduced management fee
and incentive allocation percentages. The future results of operations of the Company's alternative investment business are
dependent in part on its ability to maintain appropriate fee levels for its products and services. In the current economic
environment, many competing asset managers experienced substantial declines in investment performance, increased
redemptions, or counterparty exposures which impaired their businesses. Some of these asset managers have reduced their fees
in an attempt to avoid additional redemptions. Competition within the alternative investment industry could lead to pressure on
the Company to reduce the fees that it charges its clients for alternative investment products and services. A failure to compete
effectively may result in the loss of existing clients and business, and of opportunities to generate new business and grow assets
under management, each of which could have a material adverse effect on the Company's alternative investment business and
results of operations, financial condition and prospects. Furthermore, consolidation in the alternative investment industry may
accelerate, as many asset managers are unable to withstand the substantial declines in investment performance, increased
redemptions, and other pressures impacting their businesses, including increased regulatory, compliance and control
requirements. Some competitors may acquire or combine with other competitors. The combined business may have greater
resources than the Company does and may be able to compete more effectively against the Company and rapidly acquire
significant market share.
Increased regulatory focus could result in regulation that may limit the manner in which the Company and the investment
advisory products it manages invest in the Company's investment advisory products, materially impacting the Company's
business.
The Company's alternative investment business may be adversely affected if new or revised legislation or regulations are
enacted, or by changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC, other U.S. or
foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets and their
participants. Such changes could place limitations on the type of investor that can invest in alternative investment funds or on
the conditions under which such investors may invest. Further, such changes may limit the scope of investing activities that
may be undertaken by alternative investment managers as well as their funds. It is impossible to determine the extent of the
impact of any new or recently enacted laws, including the Dodd-Frank Act, or any regulations or initiatives that may be
proposed, or whether any of the proposals will become law. Compliance with any new laws or regulations could be difficult and
expensive and affect the manner in which the Company's alternative investment business conducts itself, which may adversely
impact its results of operations, financial condition and prospects.
Additionally, as a result of highly publicized financial scandals, investors, regulators and the general public have
exhibited concerns over the integrity of both the U.S. financial markets and the regulatory oversight of these markets. As a
result, the business environment in which Company's alternative investment business operates is subject to heightened
regulation. With respect to alternative investment funds, in recent years, there has been debate in both U.S. and foreign
governments about new rules or regulations, including increased oversight or taxation, in addition to the recently enacted
19
legislation described above. As calls for additional regulation have increased, there may be a related increase in regulatory
investigations of the trading and other investment activities of alternative investment funds, including the Company's funds.
Such investigations may impose additional expenses on the Company, may require the attention of senior management and may
result in fines if any of the Company's funds are deemed to have violated any regulations.
The Company's alternative investment business may suffer as a result of loss of business from key investors.
The loss of all or a substantial portion of the business provided by key investors could have a material impact on income
derived from management fees and incentive allocations and consequently have a material adverse effect on our alternative
investment business and results of operations or financial condition.
The success of our Cowen Aviation business depends on our ability to lease the aircraft we own and to dispose of the aircraft
at the end of the lease terms.
Our Cowen Aviation business leases specialized aircraft to various counterparties. We may incur losses if these
counterparties do not renew their leases with us if we are unable to re-lease the aircraft to different counterparties. In addition,
we may also incur losses if the residual value of the aircraft at the end of the lease terms is less than what we expected the value
to be or if we are unable to dispose of the aircraft at the end of the lease term.
Risks Related to the Company's Broker-Dealer Business
The Company's broker-dealer business focuses principally on specific sectors of the economy, and deterioration in the
business environment in these sectors or a decline in the market for securities of companies within these sectors could
materially affect our broker-dealer business.
The Company focuses principally on the Target Sectors of the economy. Therefore, volatility in the business environment
in these sectors or in the market for securities of companies within these sectors could substantially affect the Company's
financial results. The business environment for companies in these sectors has been subject to substantial volatility, and the
Company's financial results have consequently been subject to significant variations from year to year. The market for securities
in each of the Company's target sectors may also be subject to industry-specific risks. For example, changes in policies of the
United States Food and Drug Administration, along with changes to Medicare and government reimbursement policies, may
affect the market for securities of healthcare companies, and changes to how the U.S. government reviews foreign acquisitions
of U.S. based companies may make executing M&A transactions more difficult.
As an investment bank which focuses primarily on specific growth sectors of the economy, the Company also depends
significantly on private company transactions for sources of revenues and potential business opportunities. To the extent the
pace of these private company transactions slows or the average size declines due to a decrease in private equity financings,
difficult market conditions in the Company's target sectors or other factors, the Company's business and results of operations
may be adversely affected.
The financial results of the Company's broker-dealer business may fluctuate substantially from period to period.
The Company has experienced, and we expect to experience in the future, significant periodic variations in its revenues
and results of operations. These variations may be attributed in part to the fact that its investment banking revenues are typically
earned upon the successful completion of a transaction, the timing of which is uncertain and beyond the Company's control. In
most cases, the Company receives little or no payment for investment banking engagements that do not result in the successful
completion of a transaction. As a result, our broker-dealer business is highly dependent on market conditions as well as the
decisions and actions of its clients and interested third parties. For example, a client's acquisition transaction may be delayed or
terminated because of a failure to agree upon final terms with the counterparty, failure to obtain necessary regulatory consents
or board or stockholder approvals, failure to secure necessary financing, adverse market conditions or unexpected financial or
other problems in the client's or counterparty's business. If the parties fail to complete a transaction on which the Company is
advising or an offering in which the Company is participating, we will earn little or no revenue from the transaction, and we
may incur significant expenses that may not be recouped. This risk may be intensified by the Company's focus on growth
companies in the Target Sectors as the market for securities of these companies has experienced significant variations in the
number and size of equity offerings. Many companies initiating the process of an IPO are simultaneously exploring other
strategic alternatives, such as a merger and acquisition transaction. The Company's broker-dealer revenues would be adversely
affected in the event that an IPO for which it is acting as an underwriter is preempted by the company's sale if the Company is
not also engaged as a strategic advisor in such sale. As a result, our broker-dealer business is unlikely to achieve steady and
predictable earnings on a quarterly basis.
20
Pricing and other competitive pressures may impair the revenues of the Company's brokerage business.
The Company's brokerage business accounted for approximately 60% of the broker-dealer segment's revenues during
2016. Along with other firms, the Company has experienced price competition in this business in recent years. In particular, the
ability to execute trades electronically and through alternative trading systems has increased the pressure on trading
commissions and spreads. We expect to continue to experience competitive pressures in these and other areas in the future as
some of our competitors in the investment banking industry seek to obtain market share by competing on the basis of price or
use their own capital to facilitate client trading activities. In addition, the Company faces pressure from larger competitors, who
may be better able to offer a broader range of complementary products and services to clients in order to win their trading or
prime brokerage business. We are committed to maintaining and improving the Company's comprehensive research coverage to
support its brokerage business and the Company may be required to make additional investments in the Company's research
capabilities.
The Company faces strong competition from larger firms.
The research, brokerage and investment banking industries are intensely competitive, and the Company expects them to
remain so. The Company competes on the basis of a number of factors, including client relationships, reputation, the abilities of
the Company's professionals, market focus and the relative quality and price of the Company's services and products. The
Company has experienced intense price competition in some of its businesses, including trading commissions and spreads in its
brokerage business. In addition, pricing and other competitive pressures in investment banking, including the trends toward
multiple book runners, co-managers and financial advisors, and a larger share of the underwriting fees and discounts being
allocated to the book-runners, could adversely affect the Company's revenues from its broker-dealer business.
The Company is a relatively small investment bank. Many of the Company's competitors in the research, brokerage and
investment banking industries have a broader range of products and services, greater financial resources, larger customer bases,
greater name recognition and marketing resources, a larger number of senior professionals to serve their clients' needs, greater
global reach and more established relationships with clients than the Company has. These larger competitors may be better able
to respond to changes in the research, brokerage and investment banking industries, to compete for skilled professionals, to
finance acquisitions, to fund internal growth and to compete for market share generally.
The scale of our competitors in the investment banking industry has increased in recent years as a result of substantial
consolidation among companies in the research, brokerage and investment banking industries. In addition, a number of large
commercial banks and other broad-based financial services firms have established or acquired underwriting or financial
advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a
wider range of products than the Company does which may enhance their competitive position. They also have the ability to
support their investment banking and advisory groups with commercial banking and other financial services in an effort to gain
market share, which has resulted, and could further result, in pricing pressure in the Company's businesses. If we are unable to
compete effectively with our competitors in the investment banking industry, the Company's business and results of operations
may be adversely affected.
The Company's capital markets and strategic advisory engagements are singular in nature and do not generally provide for
subsequent engagements.
The Company's investment banking clients generally retain the Company on a short-term, engagement-by-engagement
basis in connection with specific capital markets or mergers and acquisitions transactions, rather than on a recurring basis under
long-term contracts. As these transactions are typically singular in nature and the Company's engagements with these clients
may not recur, the Company must seek out new engagements when its current engagements are successfully completed or are
terminated. As a result, high activity levels in any period are not necessarily indicative of continued high levels of activity in
any subsequent period. If the Company is unable to generate a substantial number of new engagements that generate fees from
new or existing clients, the Company's broker-dealer business and results of operations would likely be adversely affected.
Larger and more frequent capital commitments in the Company's trading and underwriting businesses increase the
potential for significant losses.
There has been a trend toward larger and more frequent commitments of capital by financial services firms in many of
their activities. For example, in order to compete for certain transactions, investment banks may commit to purchase large
blocks of stock from publicly traded issuers or significant stockholders, instead of the more traditional marketed underwriting
process in which marketing is completed before an investment bank commits to purchase securities for resale. To the extent the
total net capital of the Company's broker-dealers allows it, the Company anticipates participating in this trend and, as a result,
the Company will be subject to increased risk as it commits capital to facilitate business. As of December 31, 2016, the
Company has total net capital of approximately $65.3 million. Furthermore, the Company may suffer losses as a result of the
21
positions taken in these transactions even when economic and market conditions are generally favorable for others in the
industry.
The Company may enter into large transactions in which it commits its own capital as part of its trading business to
facilitate client trading activities. The number and size of these large transactions may materially affect the Company's results
of operations in a given period. Market fluctuations may also cause the Company to incur significant losses from its trading
activities. To the extent that the Company owns assets (i.e., has long positions), a downturn in the value of those assets or in the
markets in which those assets are traded could result in losses. Conversely, to the extent that the Company has sold assets it
does not own (i.e., has short positions), in any of those markets, an upturn in the value of those assets or in markets in which
those assets are traded could expose the Company's broker-dealer business to potentially large losses as it attempts to cover
short positions by acquiring assets in a rising market.
Operational risks relating to the failure of data processing systems and other information systems and technology or other
infrastructure may disrupt the Company's broker-dealer business and result in losses or limit our operations and growth in
the industry.
The Company's broker-dealer business is highly dependent on its ability to process, on a daily basis, a large number of
transactions across diverse markets, and the transactions that the Company processes have become increasingly complex. The
inability of the Company's systems to accommodate an increasing volume of transactions could also constrain the Company's
ability to expand its broker-dealer business. If any of these systems do not operate properly or are disabled, or if there are other
shortcomings or failures in the Company's internal processes, people or systems, the Company could suffer impairments,
financial loss, a disruption of its broker-dealer business, liability to clients, regulatory intervention or reputational damage.
The Company has outsourced certain aspects of its technology infrastructure including data centers and wide area
networks, as well as some trading applications. The Company is dependent on its technology providers to manage and monitor
those functions. A disruption of any of the outsourced services would be out of the Company's control and could negatively
impact our broker-dealer business. The Company has experienced disruptions on occasion, none of which has been material to
the Company's operations and results. However, there can be no guarantee that future material disruptions with these providers
will not occur.
The Company also faces the risk of operational failure of or termination of relations with any of the clearing agents,
exchanges, clearing houses or other financial intermediaries that the Company uses to facilitate its securities transactions. Any
such failure or termination could adversely affect the Company's ability to effect transactions and to manage its exposure to
risk.
In addition, the Company's ability to conduct its broker-dealer business may be adversely impacted by a disruption in the
infrastructure that supports Company and the communities in which we are located. This may affect, among other things, the
Company's financial, accounting or other data processing systems. This may include a disruption involving electrical,
communications, transportation or other services used by us or third parties with which the Company conducts business,
whether due to fire, other natural disaster, power or communications failure, act of terrorism or war or otherwise. Nearly all of
our broker-dealer employees in our primary locations in New York, Boston, San Francisco and London work in close proximity
to each other. Although the Company has a formal disaster recovery plan in place, if a disruption occurs in one location and our
broker-dealer employees in that location are unable to communicate with or travel to other locations, the Company's ability to
service and interact with its clients may suffer, and the Company may not be able to implement successfully contingency plans
that depend on communication or travel.
Our broker-dealer business also relies on the secure processing, storage and transmission of confidential and other
information in its computer systems and networks. The Company's computer systems, software and networks may be
vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact.
If one or more of such events occur, this could jeopardize our or our broker-dealer clients' or counterparties' confidential and
other information processed and stored in, and transmitted through, the Company's computer systems and networks, or
otherwise cause interruptions or malfunctions in our broker-dealer business', its clients', its counterparties' or third parties'
operations. The Company may be required to expend significant additional resources to modify its protective measures, to
investigate and remediate vulnerabilities or other exposures or to make required notifications, and the Company may be subject
to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by the
Company.
22
The market structure in which our market-making business operates may make it difficult for this business to maintain
profitability.
Market structure changes have had an adverse effect on the results of operations of our market-making business. These
changes may make it difficult for us to maintain and/or predict levels of profitability of, or may cause us to generate losses in,
our market-making business.
The growth of electronic trading and the introduction of new technology in the markets in which our market-making
business operates may adversely affect this business and may increase competition.
The continued growth of electronic trading and the introduction of new technologies is changing our market-making
business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically,
through alternative trading systems. It appears that the trend toward alternative trading systems will continue to accelerate. This
acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in
transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading
systems compete with our market-making business and with our algorithmic trading platform, and we may experience
continued competitive pressures in these and other areas. Significant resources have been invested in the development of our
electronic trading systems, which includes our ATM business, but there is no assurance that the revenues generated by these
systems will yield an adequate return on the investment, particularly given the increased program trading and increased
percentage of stocks trading off of the historically manual trading markets.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principle offices, all of which are leased, are located in New York City, Boston, San Francisco and London. Our
other offices, all of which are leased, are located in Atlanta, Chicago, Cleveland, Greenwich, Houston, Jersey City, Menlo Park,
Port Orange, Stamford, Purchase, Washington D.C., Luxembourg, Belfast, Hong Kong, and other various locations. Our
corporate headquarters are located in New York, New York and comprise approximately 150,000 square feet of leased space
pursuant to lease agreements through 2023. We lease approximately 19,000 square feet of space in Boston pursuant to a lease
agreement expiring in 2023, which is used primarily by our broker-dealer segment. In San Francisco, we lease approximately
22,000 square feet of space, pursuant to a lease agreement expiring in 2025 which is used by our broker-dealer segment. Our
London offices are subject to lease agreements expiring in 2022 which are used by our alternative investment and broker-dealer
segments.
Item 3. Legal Proceedings
In the ordinary course of business, we are named as defendants in, or as parties to, various legal actions and proceedings.
Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking,
anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened
legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for
injunctive relief.
In the ordinary course of business, we are also subject to governmental and regulatory examinations, information
gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties,
injunctions or other relief. Certain of our affiliates and subsidiaries are investment banks, registered broker-dealers, futures
commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by
various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal
inquiries by these regulators, we receive requests, and orders seeking documents and other information in connection with
various aspects of our regulated activities.
Due to the global scope of our operations, and presence in countries around the world, we may be subject to litigation, and
governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and
informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially
different risks, from those we are subject to in the United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best
interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the
amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is
probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a
23
contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss
because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or
range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that
are deemed remote.
The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is
probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued
expenses and other liabilities in the accompanying consolidated statements of financial condition. Estimates, by their nature, are
based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type
and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses
and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other
defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on
a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.
The following information reflects developments with respect to the Company's legal proceedings that occurred in the
year ended December 31, 2016.
On May 28, 2014, Energy Intelligence Group, Inc. and Energy Intelligence Group UK (collectively, "EIG") filed a lawsuit
against Cowen and Company, LLC in the United States Court for the Southern District of New York (Energy Intelligence
Group, Inc. and Energy Intelligence Group UK v. Cowen and Company, LLC, No. 14-CV-3789). The complaint alleged
copyright infringement based on alleged impermissible distribution of EIG's publication, Oil Daily, by Cowen and Company
and Dahlman Rose & Company, LLC, as Cowen's alleged predecessor-in-interest. EIG sought statutory damages based on
alleged willful infringement of their copyrights. On November 12, 2014, the Company filed an answer and affirmative defenses
to the EIG complaint. On September 25, 2015, the Company filed its motion for partial summary judgment to dismiss certain
of EIG’s claims relating to Dahlman Rose’s alleged copyright infringement. During the second quarter of 2016 the Company
also filed a motion to disqualify EIG’s copyright counsel on conflict of interest grounds. Both of the Company’s motions were
heard in the second quarter of 2016. On July 15, 2016 the District Court ruled in favor of the Company on both of its motions.
The Company and EIG entered into a settlement agreement on September 30, 2016, pursuant to which EIG agreed to withdraw
its lawsuit with prejudice. The settlement amount paid by the Company and the current period impact of the settlement was not
material to the Company’s financial position or the results of operations for the year ended December 31, 2016. The dismissal
of the lawsuit was approved by the District Court on October 4, 2016.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Stock Price Information and Stockholders
Our Class A common stock is listed and trades on the NASDAQ Global Market under the symbol "COWN." As of
February 24, 2017, there were approximately 40 holders of record of our Class A common stock. This number does not include
stockholders for whom shares were held in "nominee" or "street" name.
The following table contains historical quarterly price information for the year ended December 31, 2016. On December
5, 2016, we effected a one-for-four reverse stock split. On February 24, 2017, the last reported sale price of our Class A
common stock was $14.55.
24
2016 Fiscal Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015 Fiscal Year
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
$
$
High
Low
15.88
$
15.56
15.32
16.75
High
Low
22.12
$
26.04
26.36
19.60
9.88
10.92
11.48
11.60
16.40
20.60
17.44
15.08
We have never declared or paid any cash dividends on Class A common stock or any other class of common stock. Any
payment of cash dividends on stock in the future will be at the discretion of our board of directors and will depend upon our
results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other
factors deemed relevant by our board of directors. We currently intend to retain any future earnings to fund the operation,
development and expansion of our business, and therefore we do not anticipate paying any cash dividends on common stock in
the foreseeable future.
Issuer Purchases of Equity Securities: Sales of Unregistered Securities
As of December 31, 2016, the Company's Board of Directors has approved a share repurchase program that authorizes the
Company to purchase up to $138.3 million of Cowen Class A common stock from time to time through a variety of methods,
including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. During
the year ended December 31, 2016, through the share repurchase program, the Company repurchased 533,939 shares of Cowen
Class A common stock at an average price of $14.33 per share.
The table below sets forth the information with respect to purchases made by or on the behalf of the Company or any
“affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act, as amended), of our common stock during the
year ended December 31, 2016. All amounts have been retroactively updated to reflect the one-for-four reverse stock split,
which was effective December 5, 2016.
25
Period
Month 1 (January 1, 2016 – January 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 2 (February 1, 2016 – February 29, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 3 (March 1, 2016 – March 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 4 (April 1, 2016 – April 30, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 5 (May 1, 2016 – May 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 6 (June 1, 2016 – June 30, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 7 (July 1, 2016 – July 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 8 (August 1, 2016 – August 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 9 (September 1, 2016 – September 30, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 10 (October 1, 2016 – October 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 11 (November 1, 2016 – November 30, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Month 12 (December 1, 2016 – December 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
Total (January 1, 2016 – December 31, 2016)
Common stock repurchases(1)
Employee transactions(2)
Total
(1)
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or
Programs
— $
$
888
888
— $
5,916
5,916
249,530
274,365
523,895
$
$
$
$
$
— $
20,284
20,284
$
$
— $
297,355
297,355
181,250
28,924
210,174
$
$
$
$
$
— $
781
781
$
$
— $
1,689
1,689
$
$
— $
14,503
14,503
$
$
— $
16
16
$
$
— $
1,585
1,585
103,159
1,624
104,783
533,939
647,930
1,181,869
$
$
$
$
$
$
$
$
—
18.27
—
12.93
12.93
14.31
14.28
14.29
—
14.32
14.32
—
12.98
12.98
13.48
13.83
13.53
—
10.92
10.92
—
13.60
13.60
—
13.70
13.70
—
12.96
12.96
—
12.42
12.42
15.90
14.00
15.87
14.33
13.64
13.95
—
—
—
—
249,530
—
—
—
—
—
181,250
—
—
—
—
—
—
—
—
—
—
—
103,159
—
533,939
—
18,019,322
—
25,000,000
—
21,429,975
—
25,000,000
—
25,000,000
—
22,556,160
—
22,556,160
—
22,556,160
—
22,556,160
—
22,556,160
—
22,556,160
—
20,916,234
—
20,916,234
—
The Company's Board of Directors have authorized the repurchase, subject to market conditions, of up to $138.3
million of the Company's outstanding common stock.
26
(2)
(3)
Represents shares of common stock withheld in satisfaction of tax withholding obligations upon the vesting of equity
awards or other similar transactions.
Board approval of repurchases is based on dollar amount. The Company cannot estimate the number of shares that
may yet be purchased.
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other data for the years ended December 31, 2016,
2015, 2014, 2013, and 2012. The selected consolidated statements of financial condition data and consolidated statements of
operations data as of and for the years ended December 31, 2016, 2015, 2014, 2013, and 2012 have been derived from our
audited consolidated financial statements. Our selected consolidated financial data are only a summary and should be read in
conjunction with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with our audited consolidated financial statements and related notes included elsewhere in this Annual Report
on Form 10-K.
Consolidated Statements of Operations Data:
Revenues
Investment banking
Brokerage
Management fees
Incentive income
Interest and dividends
Reimbursement from affiliates
Aircraft lease revenue
Reinsurance premiums
Other revenues
Consolidated Funds revenues
Total revenues
Expenses
Year Ended December 31,
2016
2015
2014
2013
2012
(in thousands except per share data)
$
133,279
$
222,781
$
170,506
$
105,333
$
199,180
157,722
140,132
114,593
40,612
8,334
14,732
10,504
4,161
32,459
22,355
5,949
41,906
1,466
13,796
21,557
—
—
3,726
1,613
40,627
2,785
48,870
12,495
—
—
9,446
2,915
37,303
12,586
39,454
10,434
—
—
5,418
3,398
71,762
91,167
38,116
5,411
24,608
6,274
—
—
3,668
509
471,565
464,567
427,776
328,519
241,515
Employee compensation and benefits
Non-compensation expense
Reinsurance claims, commissions and amortization of
deferred acquisition costs
Goodwill impairment
Consolidated Funds expenses
Total expenses
Other income (loss)
Net gains (losses) on securities, derivatives and other
investments
Consolidated Funds net gains (losses)
Total other income (loss)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to redeemable non-controlling
interests in consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc.
common stockholders
Weighted average common shares outstanding:
Basic (a)
Diluted (a)
Earnings (loss) per share:
Basic (a)
Diluted (a)
$
$
$
310,038
198,112
29,904
—
9,064
547,118
23,381
20,685
44,066
(31,487)
(19,092)
(12,395)
6,882
(19,277)
6,792
321,386
180,678
—
—
2,310
504,374
36,789
14,497
51,286
11,479
(47,496)
58,975
15,246
43,729
4,075
305,483
180,740
—
2,334
1,634
490,191
104,928
15,323
120,251
57,836
(124,944)
182,780
15,564
167,216
—
207,248
151,630
—
—
2,039
360,917
39,651
11,044
50,695
18,297
457
17,840
13,193
4,647
—
194,034
131,190
—
—
1,676
326,900
54,630
7,246
61,876
(23,509)
448
(23,957)
(72)
(23,885)
—
(26,069)
$
39,654
$
167,216
$
4,647
$
(23,885)
26,857
26,857
27,522
29,043
28,731
29,871
29,175
30,279
(0.97)
(0.97)
$
$
1.44
1.37
$
$
5.82
5.60
$
$
0.16
0.15
$
$
28,600
28,600
(0.84)
(0.84)
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
27
Consolidated Statements of Financial Condition
Data:
Total assets
Total liabilities
Redeemable non-controlling interests
Total Stockholders' Equity
As of December 31,
2016
2015
2014
2013
2012
(dollars in thousands)
$
$
2,018,523
$
1,787,659
$
2,399,718
$
1,842,000
$
866,668
379,205
810,755
186,911
1,635,967
86,076
1,248,420
85,814
772,650
$
789,993
$
677,675
$
507,766
$
1,638,476
1,057,664
85,703
495,109
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited consolidated financial statements and the related
notes that appear elsewhere in this Annual Report. In addition to historical information, this discussion includes forward-
looking information that involves risks and assumptions, which could cause actual results to differ materially from
management's expectations. See "Special Note Regarding Forward-Looking Statements" included elsewhere in this Annual
Report on Form 10-K.
Overview
Cowen Group, Inc. (the "Company"), a Delaware corporation formed in 2009, is a diversified financial services firm and,
together with its consolidated subsidiaries (collectively, "Cowen", "Cowen Group" or the "Company"), provides alternative
investment management, investment banking, research, sales and trading and prime brokerage services through its two business
segments: alternative investment and broker-dealer. The alternative investment segment includes private investment funds,
managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed
vehicles and also manages a significant portion of the Company’s proprietary capital. The broker-dealer segment offers
industry focused investment banking for growth-oriented companies including advisory and global capital markets origination
and domain knowledge-driven research and a sales and trading platform for institutional investors.
The Company's alternative investment platform, which operates primarily under the Ramius name, offers innovative
investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this
business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisors Act") since 1997. Ramius offers investors access to strategies to
meet their specific needs including long/short equity, merger arbitrage, activist equity, event driven credit, fundamental global
macro, managed futures, health care royalties and real estate direct lending and equity. Ramius focuses on attracting and
retaining talented in-house and affiliated investment teams and providing seed capital and working capital, an institutional
infrastructure, robust sales and marketing and industry knowledge. A significant portion of the Company’s capital is invested
alongside Ramius’s alternative investment clients. The Company has also invested some of its capital in its recently formed
aviation and reinsurance businesses. Our alternative investment business had approximately $10.5 billion of assets under
management as of January 1, 2017. See the section titled "Assets Under Management and Fund Performance" for further
analysis.
Our broker-dealer businesses include research, sales and trading, prime brokerage and investment banking services to
companies and primarily institutional investor clients. Our primary target sectors ("Target Sectors") are healthcare, technology,
media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and
transportation. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade
securities and other financial instruments, principally in our target sectors. The broker-dealer segment also offers a full-service
suite of introduced prime brokerage services targeting emerging hedge fund managers. Historically, we have focused our
investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time,
the Company invests in private capital raising transactions of its investment banking clients.
On December 5, 2016, the Company effected a one-for-four reverse sock split of our common stock. Except where the
context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.
Certain Factors Impacting Our Business
Our alternative investment business and results of operations are impacted by the following factors:
• Assets under management. Our revenues from management fees are directly linked to assets under management. As a
result, the future performance of our alternative investment business will depend on, among other things, our ability to
retain assets under management and to grow assets under management from existing and new products. In addition,
positive performance increases assets under management which results in higher management fees.
•
Investment performance. Our revenues from incentive income are linked to the performance of the funds and accounts
that we manage. Performance also affects assets under management because it influences investors' decisions to invest
assets in, or withdraw assets from, the funds and accounts managed by us.
• Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a
percentage of assets under management. Our incentive income revenues are linked to the incentive allocation rates we
charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to “high-
water marks,” whereby incentive income is generally earned by us only to the extent that the net asset value of a fund
at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period
for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles.
29
•
Investment performance of our own capital. We invest our own capital and the performance of such invested capital
affects our revenues.
Our broker-dealer business and results of operations are impacted by the following factors:
• Underwriting, private placement and strategic/financial advisory fees. Our revenues from investment banking are
directly linked to the underwriting fees we earn in equity and debt securities offerings in which the Company acts as an
underwriter, private placement fees earned in non-underwritten transactions, sales commissions earned in at-the-
market offerings and success fees earned in connection with advising both buyers and sellers, principally in mergers
and acquisitions. As a result, the future performance of our investment banking business will depend on, among other
things, our ability to secure lead manager and co-manager roles in clients capital raising transactions as well as our
ability to secure mandates as a client's strategic financial advisor.
• Commissions. Our commission revenues depend for the most part on our customer trading volumes.
• Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's
market-making activities and net trading gains and losses on inventory and other firm positions. Commissions
associated with these transactions are also included herein. In certain cases, the Company provides liquidity to clients
buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at
execution, which subjects the Company to market risk.
• Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and
credit research. The Company also permits institutional customers to allocate a portion of their commissions to pay for
research products and other services provided by third parties. Our ability to generate revenues relating to our equity
and credit research depends on the quality of our research and its relevance to our institutional customers and other
clients.
•
Investment performance of our own capital. Investment income in the broker-dealer business includes gains and
losses generated by the capital the Company invests in private capital raising transactions of its investment banking
clients. Our revenues from investment income are linked to the performance of the underlying investments.
External Factors Impacting Our Business
Our financial performance is highly dependent on the environment in which our businesses operate. We believe a
favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial
markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor
confidence. Unfavorable or uncertain economic or market conditions can be caused by declines in economic growth, business
activity or investor or business confidence, limitations on the availability (or increases in the cost of) credit and capital,
increases in inflation or interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities
or other geopolitical instability, corporate, political or other scandals that reduce investor confidence in the capital markets, or a
combination of these or other factors. Our businesses and profitability have been and may continue to be adversely affected by
market conditions in many ways, including the following:
• Our broker-dealer business has been, and may continue to be, adversely affected by market conditions. Increased
competition continues to affect our investment banking and capital markets businesses. The same factors also affect
trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market
volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and
may cause these revenues to vary from period to period.
• Our broker-dealer business focuses primarily on small to mid-capitalization and private companies in specific industry
sectors. These sectors may experience growth or downturns independent of general economic and market conditions,
or may face market conditions that are disproportionately better or worse than those impacting the economy and
markets generally. In addition, increased government regulation has had, and may continue to have, a disproportionate
effect on capital formation by smaller companies. Therefore, our broker-dealer business could be affected differently
than overall market trends.
• Our alternative investment business can be adversely affected by unanticipated levels of requested redemptions. We
experienced significant levels of requested redemptions during the 2008 financial crisis and, while the environment for
investing in alternative investment products has since improved, it is possible that we could intermittently experience
redemptions above historical levels, regardless of fund performance.
Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected
by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory
actions that impact our business and financial results.
30
Recent Developments
The Company completed its previously announced one-for-four reverse stock split of the Company's Class A and B
common stock. Pursuant to the reverse split, common shareholders automatically received one common share for every four
common shares owned. The Company’s Class A common stock began trading on a reverse split adjusted basis on the NASDAQ
Global Market at the opening of trading on December 5, 2016. The Company believes that existing stockholders will benefit
from the ability to attract a broader range of investors as a result of the reverse stock split and a higher per share stock price.
Basis of presentation
The Company's consolidated financial statements are prepared in accordance with US GAAP as promulgated by the
Financial Accounting Standards Board ("FASB") through Accounting Standards Codification as the source of authoritative
accounting principles in the preparation of financial statements, of the Company appearing in Part IV of this Form 10-K include
the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a
substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in
consolidation. Certain fund entities that are consolidated in the consolidated financial statements, are not subject to these
consolidation provisions with respect to their own investments pursuant to their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities
which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner
interest are consolidated with the Company pursuant to US GAAP as described below (the “Consolidated Funds”).
Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these
funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as redeemable
non-controlling interests in consolidated subsidiaries in the consolidated financial statements appearing elsewhere in this
Form 10-K. The management fees and incentive income earned by the Company from these funds are eliminated in
consolidation.
Acquisitions
On April 22, 2016, Cowen Aviation Finance Holdings Inc. ("Cowen Aviation Finance") entered into a transaction whereby
Cowen Aviation Finance acquired Low Country III, LLC, which is comprised of a portfolio of four specialized aircraft currently
on lease in exchange for an immaterial upfront payment and a minority equity interest in Cowen Aviation Finance. As part of
the transaction Cowen Aviation Finance also acquired the associated debt financing and lease contracts for each aircraft.
Separate from the transaction, Cowen Aviation Finance entered into services agreements with Tempus Applied Solutions, Inc., a
related party through common directors, which, among other services, will provide marketing, maintenance, and lease
administration services for Cowen Aviation Finance's current aircraft fleet. This acquisition was accounted for as an asset
acquisition in accordance with US GAAP because, upon separation from the seller, the acquired assets do not meet the
definition of a business.
On May 6, 2016, the Company completed its previously announced acquisition of the credit products, credit research,
special situations and emerging markets units from CRT Capital Group LLC (“CRT”). The acquisition was completed for a
combination of cash of $6.3 million and contingent consideration payable annually based on future revenues exceeding specific
targets. The acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such,
the results of operations of the businesses acquired are included in the accompanying condensed consolidated statements of
operations since the date of the acquisition and the assets acquired, liabilities assumed and the resulting goodwill were recorded
at their fair values within their respective line items on the accompanying condensed consolidated statement of financial
condition.
Divestitures
On September 23, 2016, the Company and the portfolio managers of Ramius Alternative Solutions
LLC ("RASL") completed the sale of their respective ownership interests in RASL, an investment advisor, and RASL was
deconsolidated as of that date. RASL offered a range of customized hedge fund investment solutions with approximately $2.5
billion in client assets. As the Company will continue to offer its alternative investment platform to institutional and retail
investors, the sale was not presented as discontinued operations. The overall impact on the consolidated financial position,
results of operations and cash flows is not expected to be significant.
Revenue recognition
Our principal sources of revenue are derived from two segments: an alternative investment segment and a broker-dealer
segment, as more fully described below.
31
Our alternative investment segment generates revenue through three principal sources: management fees, incentive
income and investment income from the Company's own capital.
Our broker-dealer segment generates revenue through three principal sources: investment banking, brokerage and
investment income.
Management fees
The Company earns management fees from affiliated funds and certain managed accounts that it serves as the investment
manager based on assets under management. The actual management fees received vary depending on distribution fees or fee
splits paid to third parties either in connection with raising the assets or structuring the investment.
Several general partners of the funds are owned jointly by the Company and third parties. Accordingly, the management
fees generated by these funds are split between the Company and the other general partners. Pursuant to US GAAP, these fees
received by the general partners that are accounted for under the equity method of accounting and are reflected under net gains
(losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for
capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are
as follows:
• Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of
assets under management or notional trading level. Management fees are generally calculated monthly based on assets
under management at the end of each month before incentive income.
• Registered Funds. Management fees for the Company’s registered funds (State Street/Ramius Managed Futures
Strategy Fund and Ramius Archview Credit and Distressed Fund) are generally charged at an annual rate of up to
1.50% of assets under management.
• Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from
0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of
the applicable fund after the investment period has ended. Management fees are typically paid to the general partners
on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments
throughout the investment period and invested capital after the investment period.
• HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined
in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of
committed capital. After the investment period, management fees for these funds are generally charged at an annual
rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds.
For the other funds (and managed account) managed by Healthcare Royalty Partners, the management fee ranges
from .2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare
Royalty Partners funds are calculated on a quarterly basis.
• Ramius Trading Strategies. Management fees and platform fees for the Company's private commodity trading
advisory business are generally charged at an annual rate of up to 0.5%. Management and platform fees are generally
calculated monthly based on each account's notional trading level at the end of each month.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management
agreements) with respect to certain of the Company's funds and managed accounts, allocable for each fiscal year that exceeds
cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products we offer, incentive
income earned is typically up to 20% for hedge funds (in certain cases on performance in excess of a benchmark), of the net
profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds
is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real
estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred
return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these
incentive fees upon the liquidation of the fund if the investor has not received a full return of its invested capital plus the
preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors
receive a full return of their capital plus a preferred return. Pursuant to US GAAP, incentive income received by the general
partners that are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities,
derivatives and other investments in the accompanying consolidated statements of operations.
32
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive
income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an
arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in
accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's funds and managed
accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive
income recognized in the accompanying consolidated statement of operations may be subject to future reversal based on
subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that
the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such,
the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued
expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that
would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying
funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising
transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-
capitalization companies within the Company's Target Sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent
fees.
• Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an
underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security
offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the
underwriting process have been completed and the amount of the underwriting revenue has been determined. This
generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become
effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment
for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that
it has been allotted.
When the Company is not the lead manager for an underwriting transaction, management must estimate the
Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue.
Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company
recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company
receives the final settlement, typically within 90 days following the closing of the transaction.
•
Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in
connection with advising companies, principally in mergers and acquisitions and restructuring transactions. The
Company also earns fees for related advisory work such as providing fairness opinions. The Company records
strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or
engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the
related revenue is recognized or the engagement is otherwise concluded.
• Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-
underwritten transactions such as private placements of loans and debt and equity securities, including, private
investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities.
The Company records placement revenues (which may be in cash and/or securities) when the services for the
transactions are completed under the terms of each assignment or engagement and collection is reasonably assured.
The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are
deferred until the related revenue is recognized or the engagement is otherwise concluded.
Brokerage
Brokerage revenue consists of commissions, principal transactions and research fees.
• Commissions. Commission revenue includes fees from executing client transactions. These fees are recognized on a
trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for
research products and other services provided by third parties. The amounts allocated for those purposes are
commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the
33
related expenditures on an accrual basis. Commission revenues also includes fees from making algorithms available to
clients.
• Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's
market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and
trading gains and losses on inventory and other firm positions, which include warrants previously received as part of
investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling
blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects
the Company to market risk. These positions are typically held for a very short duration.
• Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and
credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee
amount is fixed or determinable, and collection is reasonably assured.
Investment Income
Investment income earned by the alternative investment and broker-dealer segments are earned from investing the
Company's capital in various strategies and from investments in private capital raising transactions of its investment banking
clients.
Interest and Dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends
primarily from securities held by the Company for purposed of investing capital, investments held by its Consolidated Funds
and its brokerage balances. Interest is recognized on an accrual basis and interest income is recognized on the debt of those
issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on
debt investments based on criteria determined by the Company using the effective yield method, which assumes the
reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Reimbursement from Affiliates
The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund and real estate businesses.
These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition,
pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and
personnel costs for legal, compliance, accounting, tax compliance, risk and technology expenses that directly relate to
administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the
consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees,
communications, occupancy and equipment, client services and business development and other.
Aircraft lease revenue
Aircraft lease revenue associated with the Company's aircraft leasing business is recorded on a straight-line basis over the
term of the lease, net of the amortization of rent receivables, deferred rent, and/or prepaid initial direct costs.
Reinsurance premiums
Premiums for insurance-related contracts are earned over the coverage period. In most cases, premiums are recognized as
revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. For each of its contracts,
the Company determines if the contract provides indemnification against loss or liability relating to insurance risk, in
accordance with US GAAP. If the Company determines that a contract does not expose it to a reasonable possibility of a
significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net
amount receivable reflected as an asset in other assets, and any net amount payable reflected as a liability within accounts
payable, accrued expenses and other liabilities on the consolidated statements of financial condition.
The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including
reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual
case estimates and (3) estimates of incurred but not reported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and
estimates of recoverable amounts and are included in other expenses on the consolidated statements of operations.
Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been
deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include
commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets
on the consolidated statements of financial condition.
34
Expenses
The Company's expenses consist of compensation and benefits, interest expense and general, administrative and other
expenses.
• Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses
and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on
a combination of employees' performance, their contribution to their business segment, and the Company's
performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual
incentive compensation comprising a significant portion of total compensation and benefits expenses.
•
Interest and Dividends. Interest and dividend expense relates primarily to trading activity with respect to the
Company's investments and interest expense on debt issued during March and October 2014.
• Reinsurance claims, commissions and amortization of deferred acquisition costs. Reinsurance related expenses relate
to loss and claim reserves, acquisition costs and other expenses related to our insurance and reinsurance related
policies entered into during the second quarter of 2016 related to our respective businesses which commenced at the
end of the fourth quarter of 2015.
• General, Administrative and Other. General, administrative and other expenses are primarily related to professional
services, occupancy and equipment, business development expenses, communications, expenses associated with our
reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and
non-cash expenses.
• Consolidated Funds Expenses. Certain funds are consolidated by the Company pursuant to US GAAP. As such, the
Company's consolidated financial statements reflect the expenses of these consolidated entities and the portion
attributable to other investors is allocated to a redeemable non-controlling interest.
Income Taxes
The taxable results of the Company’s U.S. operations are subject to U.S. federal, state and city taxation as a corporation.
The Company is also subject to foreign taxation on income it generates in certain countries.
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from
differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for
operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a
level that, in management’s view, is more likely than not to be realized in the foreseeable future. This level will be estimated
based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be
realized, for tax purposes, in the foreseeable future. Deferred tax liabilities that cannot be realized in a similar future time period
and thus that cannot offset the Company’s deferred tax assets are not taken into account when calculating the Company’s net
deferred tax assets.
Redeemable Non-controlling Interests
Redeemable non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned
consolidated entities attributable to the other owners of such entities. Due to the fact that the non-controlling interests are
redeemable at the option of the holder they have been classified as temporary equity.
Assets Under Management and Fund Performance
Assets Under Management
Assets under management refer to all of our alternative investment products, solutions and services including hedge
funds, private equity structures, registered investment companies and listed vehicles. The Company's alternative investment
segment includes such strategies as long/short equity, activist equity, event driven equity, event driven credit, global macro,
customized portfolio solutions, managed futures, health care royalties and private real estate.
Assets under management also include the fair value of assets the Company manages pursuant to separately managed
accounts, collateralized debt obligations for which the Company is the collateral manager, and, as indicated in the footnotes to
the table below, proprietary assets which the Company has invested in these products. Also, as indicated, assets under
management for certain products may represent committed capital or committed funding that may not be under our control but
forms part of the alternative investment product’s trading level.
As of January 1, 2017, the Company had assets under management of $10.5 billion, a 20.9% decrease as compared to
assets under management of $13.3 billion as of January 1, 2016. The $2.8 billion decrease in assets under management during
35
the year ended December 31, 2016 primarily resulted from the sale of the alternative solutions business (see note (a) to the
following table).
The following table is a breakout of total assets under management by platform as of January 1, 2017 (which excludes
cross investments from other Ramius platforms):
Hedge Funds
(a) (b) (g) (l)
Alternative
Solutions
(a)
Ramius Trading
Strategies
(h)
Real Estate
(a) (i)
Healthcare
Royalty Partners
(c) (d) (j)
Other (k)
Total
Platform
(dollars in millions)
$
1,639
$
1,523
$
January 1, 2014
$
Subscriptions
Redemptions
Performance (e)
$
3,168
1,132
(935)
853
$
2,936
1,326
(272)
(206)
94
35
—
18
Net Return (f)
26.93 %
(7.02)%
19.15 %
January 1, 2015
Subscriptions
Redemptions
Performance (e)
4,218
2,725
(572)
(781)
3,784
997
(810)
(419)
147
—
(49)
(3)
Net Return (f)
(18.52)%
(11.07)%
(2.04)%
January 1, 2016
Subscriptions
Redemptions
Performance (e)
5,590
1,537
(714)
362
3,552
—
(3,641)
89
95
—
(40)
(3)
Net Return (f)
6.48 %
2.51 %
(3.16)%
249
(181)
—
—%
1,707
—
(65)
—
—%
1,642
—
(220)
—
—%
1,059
—
—
—%
2,582
—
(178)
5
0.19%
2,409
—
(137)
10
67
—
(19)
—
$
9,427
3,801
(1,407)
665
—%
7.05 %
48
—
(14)
—
12,486
3,722
(1,688)
(1,198)
—%
(9.59)%
34
—
(21)
—
13,322
1,537
(4,773)
458
0.42%
—%
3.44 %
January 1, 2017
$
6,775
$
—
$
52
$
1,422
$
2,282
$
13
$ 10,544
(a) The Company owns between 20% and 55% of the general partners or managing members of the real estate business,
the activist business, the global macro strategy business (the single strategy hedge funds) and the alternative solutions
business (starting as of September 2013). On September 23, 2016 the Company completed the sale of its interest in
the alternative solutions business, thereby reducing the Company’s estimated assets under management by
approximately $2.5 billion.
(b) These amounts include the Company's invested capital of approximately $176.6 million, $173.6 million and $172.2
million as of January 1, 2017, January 1, 2016 and January 1, 2015, respectively.
(c) These amounts include the Company's invested capital of approximately $10.5 million, $20.2 million and $20.7
million as of January 1, 2017, January 1, 2016 and January 1, 2015, respectively.
(d) This amount reflects committed capital.
(e) Performance and net returns are net of all management and incentive fees and includes the effect of any foreign
exchange translation adjustments and leverage in certain funds.
(f) Net returns are calculated on the platform as a whole. Net return of individual funds will vary based on the timing and
strategy the respective funds.
(g) The Company’s actively marketed hedge fund products have varying liquidity terms typically ranging from daily to
quarterly liquidity with less liquidity applying to certain co-investment vehicles. In 2010, the Company suspended
redemption rights with respect to certain hedge funds that are being wound down. The hedge funds that have
suspended redemption rights represent approximately 4.94% of the total hedge fund assets under management.
(h) The Ramius Trading Strategies products offer investors daily liquidity.
(i) The real estate business does not provide investors with redemption rights. Investors receive distributions upon
dispositions of the underlying real estate investments of which a portion reflects committed capital.
36
(j) The Healthcare Royalty funds do not provide investors with redemption rights. Investors receive distributions upon
realizations of the funds’ investments.
(k) The collateralized debt obligations managed by the Company is an amortizing pool of assets with cash returned to
investors in periodic distributions as it becomes available.
(l) Due to the sale of its interest in Orchard Square Partners, effective December 31, 2014, redemptions during the 2014
year include $420.8 million of assets under management related to this business.
Fund Performance
For the quarter ended December 31, 2016, the Company's strategies had mostly positive results relative to their respective
benchmarks, as was the case for the year ended December 31, 2016.
Our activist strategy had slightly negative results for the quarter, lagging the Russell 2000 Index, which rebounded sharply
following the U.S. presidential and congressional elections in November. This strategy was positive for the year but
underperformed the Russell 2000 Index in 2016; however, the portfolio management team has maintained its long term out
performance since the strategy’s inception. The merger arbitrage strategy finished the year in positive territory despite losses
relating to one specific transaction in the second quarter. The strategy significantly outperformed its benchmark index for the
fourth quarter and for the the period after the loss relating to the specific merger arbitrage transaction in the second quarter.
There was substantial growth in assets under management in 2016 pursuant to this strategy. The new UCITS Merger Fund, in
partnership with Bank America Merrill Lynch, also had positive results since trading was initiated in July. The Ramius event
team manages the merger arbitrage component for two multi-manager Advisor Act funds. Positive results were also achieved in
these products for the quarter.
Our options-based global macro strategy had positive performance for the fourth quarter despite the continuance of an
overall decline in volatility across multiple asset classes throughout 2016. Another of our affiliate managers engages in equity
long/short investing in consumer-related stocks. Since joining Ramius, the strategy had generated positive results, but
experienced a challenging fourth quarter due to extreme intra-sector movements within the consumer space. Our other equity
long/short affiliate successfully launched its commingled fund on October 1, 2016 and enjoyed a positive fourth quarter,
substantially exceeding the results of the HFRX Equity Hedge Index. In contrast to our affiliate manager that engages in equity
long/short investing in consumer-related stocks, this team follows a multi-sector approach and was able to take advantage of the
performance dispersion across various equity sectors.
The State Street Ramius Managed Futures Strategy Fund, which offers exposure to multi-manager managed futures, had
negative returns for both the fourth quarter and the year. During a challenging period for commodity trading advisors, in
general, performance was slightly better than the relevant index for the quarter and slightly behind for the full year. The
internally managed multi-strategy vehicles maintained their focus on capital preservation, while also experiencing an overall
increase in valuation on the remaining assets during the quarter. The management team continues to execute opportunistic
transactions linked to certain holdings in order to create liquidity. As a result, we expect further distributions to investors in this
product during 2017.
With regard to the longer-dated investment vehicles in real estate, the largest legacy real estate debt vehicle, as well as the
legacy equity vehicles experienced minimal changes in value for the fourth quarter. Certain of the legacy real estate funds,
inclusive of these two, are in the process of returning capital to investors. The most recent real estate debt vehicle remains
active, with interim results meeting performance expectations. Our healthcare royalty strategy, having raised a substantial
amount of capital in 2014, still remains in its investment period. As noted in previous quarterly comments, ongoing turbulence
in the pharmaceutical and health care sectors in 2016 presented attractive opportunities to long term investors. As a result, the
strategy has been able to invest significant capital in both its latest commingled fund and separate managed accounts.
Invested Capital
The Company invests a significant portion of its capital base to help drive results and facilitate the growth of its
alternative investment and broker/dealer businesses. Management allocates capital to three primary investment categories:
(i) trading strategies; (ii) merchant banking investments; and (iii) real estate investments. The Company seeks to make strategic
and opportunistic investments in varying capital structures across a diverse array of businesses, hedge funds and mutual funds.
Much of the Company's trading strategy portfolio is invested alongside the Company's alternative investment clients and
includes liquid investment strategies such as corporate credit trading, event driven, macro trading, and enhanced cash
management. Within its merchant banking investments, management generally takes a long-term view that typically involves
investing directly in public and private companies globally, private equity funds and alongside its alternative investment clients.
In addition, from time to time the Company makes investments in private capital raising transactions of its investment banking
37
clients. The Company's real estate investment strategy focuses on making investments alongside the alternative investment
clients invested in the RCG Longview funds, as well as in direct investments in commercial real estate projects.
As of December 31, 2016, the Company's invested capital amounted to a net value of $656.8 million (supporting a long
market value of $1,030.0 million), representing approximately 85% of Cowen Group's stockholders' equity presented in
accordance with US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of
Cowen Group's stockholders' equity as of December 31, 2016. The net values presented in the table below do not tie to Cowen
Group's consolidated statement of financial condition as of December 31, 2016 because they are included in various line items
of the accompanying consolidated statement of financial condition, including “securities owned, at fair value”, “other
investments”, “cash and cash equivalents”, and “consolidated funds-securities owned, at fair value”.
Strategy
Trading
Merchant Banking
Real Estate
Total
Stockholders' Equity
$
$
Net Value
% of Stockholders' Equity
(dollars in millions)
426.6
176.2
54
656.8
772.7
55%
23%
7%
85%
100%
The allocations shown in the table above will change over time.
Results of Operations
To provide comparative information of the Company's operating results for the periods presented, a discussion of
Economic Income (Loss) (which is a non-GAAP measure) of our alternative investment and broker-dealer segments follows the
discussion of our total consolidated US GAAP results. Economic Income (Loss) reflects, on a consistent basis for all periods
presented in the Company's consolidated financial statements, income earned from the Company's funds and managed accounts
and from its own invested capital. Economic Income (Loss) excludes certain adjustments required under US GAAP. See the
section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company-
Segment Analysis and Economic Income (Loss),” and Note 23 to the accompanying Company's consolidated financial
statements, appearing elsewhere in this Form 10-K, for a reconciliation of Economic Income (Loss) to total Company US
GAAP net income (loss).
38
Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
Consolidated Statements of Operations
Year Ended December 31,
Period to Period
2016
2015
$ Change
% Change
(dollars in thousands)
$
133,279
$
222,781
$
199,180
40,612
8,334
14,732
10,504
4,161
32,459
22,355
5,949
471,565
310,038
29,308
29,904
168,804
9,064
547,118
23,381
20,685
44,066
(31,487)
(19,092)
(12,395)
6,882
(19,277)
6,792
157,722
41,906
1,466
13,796
21,557
—
—
3,726
1,613
464,567
321,386
26,220
—
154,458
2,310
504,374
36,789
14,497
51,286
11,479
(47,496)
58,975
15,246
43,729
4,075
(89,502)
41,458
(1,294)
6,868
936
(11,053)
4,161
32,459
18,629
4,336
6,998
(11,348)
3,088
29,904
14,346
6,754
42,744
(13,408)
6,188
(7,220)
(42,966)
28,404
(71,370)
(8,364)
(63,006)
2,717
$
(26,069) $
39,654
$
(65,723)
(40 )%
26 %
(3 )%
468 %
7 %
(51 )%
NM
NM
500 %
269 %
2 %
(4 )%
12 %
NM
9 %
292 %
8 %
(36 )%
43 %
(14)%
(374)%
60 %
(121)%
(55 )%
(144 )%
67 %
(166)%
Revenues
Investment banking
Brokerage
Management fees
Incentive income
Interest and dividends
Reimbursement from affiliates
Aircraft lease revenue
Reinsurance premiums
Other revenues
Consolidated Funds revenues
Total revenues
Expenses
Employee compensation and benefits
Interest and dividends
Reinsurance claims, commissions and amortization of deferred
acquisition costs
General, administrative and other expenses
Consolidated Funds expenses
Total expenses
Other income (loss)
Net gains (losses) on securities, derivatives and other investments
Consolidated Funds net gains (losses)
Total other income (loss)
Income (loss) before income taxes
Income taxes expense (benefit)
Net income (loss)
Net income (loss) attributable to redeemable non-controlling interests in
consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common
stockholders
Revenues
Investment Banking
Investment banking revenues decreased $89.5 million to $133.3 million for the year ended December 31, 2016 compared
with $222.8 million in the prior year period. During the year ended December 31, 2016, the Company completed 76
underwriting transactions, 15 strategic advisory transactions and seven debt capital market transactions. During the year ended
December 31, 2015, the Company completed 129 underwriting transactions, 13 strategic advisory transactions and seven debt
capital market transactions. The average underwriting fee per transaction was 12.2% less for the twelve months ended
December 31, 2016 as compared to the prior year.
Brokerage
Brokerage revenues increased $41.5 million to $199.2 million for the year ended December 31, 2016 compared with
$157.7 million in the prior year period. This was attributable to higher commissions due to an increase in customer trading
volumes, the initiation of our prime brokerage businesses in the third and fourth quarters of 2015 and the initiation of our credit
trading business in May 2016. Customer trading volumes across the industry (according to Bloomberg) increased 6% for the
twelve months ended December 31, 2016 compared to the prior year.
39
Management Fees
Management fees decreased $1.3 million to $40.6 million for the year ended December 31, 2016 compared with $41.9
million in the prior year period. The decrease was primarily related to lower management fees from our alternative solutions
business (due to the sale of our interest in the business) offset partially by an increase in management fees from our prime
services business (acquired during the fourth quarter of 2015) and our macro options business.
Incentive Income
Incentive income increased $6.8 million to $8.3 million for the year ended December 31, 2016, compared with $1.5
million in the prior year period. This increase was primarily related to an increase in performance fees from certain private
investments.
Interest and Dividends
Interest and dividends increased $0.9 million to $14.7 million for the year ended December 31, 2016 compared with
$13.8 million in the prior year period. This was primarily attributable to an increase in the number of investments in interest
bearing securities during 2016 as compared to 2015.
Reimbursements from Affiliates
Reimbursements from affiliates decreased $11.1 million to $10.5 million for the year ended December 31, 2016
compared with $21.6 million in the prior year period. The decrease is primarily related to a decrease in reimbursements from
the activist business.
Aircraft lease revenues
Aircraft lease revenues were $4.2 million for the year ended December 31, 2016 relating to our new aircraft leasing
business which began during 2016.
Reinsurance premiums
Reinsurance premiums of $32.5 million relate to premiums from our insurance-related business (which was entered into
at the end of the fourth quarter of 2015).
Other Revenues
Other revenues increased $18.7 million to $22.4 million for the year ended December 31, 2016 compared with $3.7
million in the prior year period. The increase primarily relates to the sale of our interest in the alternative solutions business.
Consolidated Funds Revenues
Consolidated Funds revenues increased $4.3 million to $5.9 million for the year ended December 31, 2016 compared
with $1.6 million in the prior year period. The increase is due to the consolidation of new funds during 2016.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses decreased $11.3 million to $310.0 million for the year ended
December 31, 2016 compared with $321.4 million in the prior year period. The decrease is primarily due to $7.0 million higher
total revenues offset by $7.2 million lower other income (loss) during 2016 as compared to 2015, resulting in a lower
compensation and benefits accrual. The compensation to revenue ratio, including other income (loss), was 60% for the year
ended December 31, 2016, compared with 62% in the prior year period.
Interest and Dividends
Interest and dividend expenses increased $3.1 million to $29.3 million for the year ended December 31, 2016 compared
with $26.2 million in the prior year period. This was primarily attributable to an increase in the number of debt securities held
during 2016 as compared to 2015.
Reinsurance claims, commissions and amortization of deferred acquisition costs
Reinsurance related expenses of $29.9 million relate to loss and claim reserves, acquisition costs and other expenses
related to our insurance and reinsurance related policies entered into during the second quarter of 2016 and are related to our
respective businesses which commenced at the end of the fourth quarter of 2015.
40
General, Administrative and Other Expenses
General, administrative and other expenses increased $14.3 million to $168.8 million for the year ended December 31,
2016 compared with $154.5 million in the prior year period. The increase is primarily related to higher floor brokerage and
trade execution costs, due to higher brokerage revenue, and increased marketing and business development expenses, legal and
other professional fees, depreciation and amortization and increased occupancy costs, some of which is related to acquisitions
during late 2015 and during 2016.
Consolidated Funds Expenses
Consolidated Funds expenses increased $6.8 million to $9.1 million for the year ended December 31, 2016 compared
with $2.3 million in the prior year period. The increase is due to the consolidation of new funds during 2016.
Other Income (Loss)
Other income (loss) decreased $7.2 million to $44.1 million for the year ended December 31, 2016 compared with $51.3
million in the prior year period. The decrease primarily relates to decrease in performance of the Company's own invested
capital. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such funds, and
the portion of those gains or losses that are attributable to other investors is allocated to redeemable non-controlling interests.
Income Taxes
Income tax benefit decreased $28.4 million to $19.1 million for the year ended December 31, 2016 compared with an
income tax benefit of $47.5 million in the prior year period. This decrease in benefit is primarily attributable to the deferred
tax benefit recognized by the Company’s Luxembourg subsidiary in 2015, partially offset by the reversal of a basis difference in
the Company’s Luxembourg subsidiaries in 2016.
Income (Loss) Attributable to Redeemable Non-controlling Interests
Income (loss) attributable to redeemable non-controlling interests decreased $8.4 million to income of $6.9 million for the
year ended December 31, 2016 compared with income of $15.2 million in the prior year period. The decrease was primarily the
result of losses incurred by one of our consolidated funds. Non-controlling interests represent the pro rata share of the income
or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative
perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of
5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
41
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Consolidated Statements of Operations
Year Ended December 31,
Period to Period
2015
2014
$ Change
% Change
(dollars in thousands)
$
222,781
$
170,506
$
157,722
140,132
41,906
1,466
13,796
21,557
3,726
1,613
40,627
2,785
48,870
12,495
9,446
2,915
464,567
427,776
321,386
26,220
154,458
—
2,310
504,374
36,789
14,497
51,286
11,479
(47,496)
58,975
15,246
43,729
4,075
305,483
42,752
137,988
2,334
1,634
490,191
104,928
15,323
120,251
57,836
(124,944)
182,780
15,564
167,216
—
52,275
17,590
1,279
(1,319)
(35,074)
9,062
(5,720)
(1,302)
36,791
15,903
(16,532)
16,470
(2,334)
676
14,183
(68,139)
(826)
(68,965)
(46,357)
77,448
(123,805)
(318)
(123,487)
4,075
$
39,654
$
167,216
$
(127,562)
31 %
13 %
3 %
(47 )%
(72 )%
73 %
(61 )%
(45 )%
9 %
5 %
(39 )%
12 %
NM
41 %
3 %
(65 )%
(5 )%
(57)%
(80)%
(62 )%
(68)%
(2 )%
(74 )%
NM
(76)%
Revenues
Investment banking
Brokerage
Management fees
Incentive income
Interest and dividends
Reimbursement from affiliates
Other revenues
Consolidated Funds revenues
Total revenues
Expenses
Employee compensation and benefits
Interest and dividends
General, administrative and other expenses
Goodwill impairment
Consolidated Funds expenses
Total expenses
Other income (loss)
Net gain (loss) on securities, derivatives and other investments
Consolidated Funds net gains (losses)
Total other income (loss)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to redeemable non-controlling interests in
consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common
stockholders
Revenues
Investment Banking
Investment banking revenues increased $52.3 million to $222.8 million for the year ended December 31, 2015 compared
with $170.5 million in the prior year period. During the year ended December 31, 2015, the Company completed 129
underwriting transactions, 13 strategic advisory transactions and seven debt capital market transactions. During the year ended
December 31, 2014, the Company completed 129 underwriting transactions, 12 strategic advisory transactions and 16 debt
capital market transactions. The average underwriting fee per transaction was 45.0% greater for the year ended December 31,
2015 as compared to the prior year period.
Brokerage
Brokerage revenues increased $17.6 million to $157.7 million for the year ended December 31, 2015 compared with
$140.1 million in the prior year period. This was attributable to higher commissions due to an increase in customer trading
volumes, a decrease in facilitation losses in our cash equity and option businesses, an increase in payments for research services
and the initiation of our prime brokerage businesses in the third and fourth quarter of 2015. Customer trading volumes across
the industry (according to Bloomberg) increased 9% for the year ended December 31, 2015 compared to the prior year.
Management Fees
Management fees increased $1.3 million to $41.9 million for the year ended December 31, 2015 compared with $40.6
million in the prior year period. This increase was primarily related to an increase in management fees from our healthcare
42
royalty business and prime services business offset partially by a decrease in management fees from the long/short credit
business, which was sold in the fourth quarter of 2014.
Incentive Income
Incentive income decreased $1.3 million to $1.5 million for the year ended December 31, 2015, compared with $2.8
million in the prior year period. This decrease was primarily related to a decrease in performance fees from our alternative
solutions business and a decrease in performance fees from the long/short credit business, which was sold in the fourth quarter
of 2014.
Interest and Dividends
Interest and dividends decreased $35.1 million to $13.8 million for the year ended December 31, 2015 compared with
$48.9 million in the prior year period. This decrease was attributable to the completion of the wind down of our securities
lending business during the first quarter of 2015.
Reimbursements from Affiliates
Reimbursements from affiliates increased $9.1 million to $21.6 million for the year ended December 31, 2015 compared
with $12.5 million in the prior year period. The increase is primarily related to an increase in reimbursements from the activist
business.
Other Revenues
Other revenues decreased $5.7 million to $3.7 million for the year ended December 31, 2015 compared with $9.4 million
in the prior year period.
Consolidated Funds Revenues
Consolidated Funds revenues decreased $1.3 million to $1.6 million for the year ended December 31, 2015 compared
with $2.9 million in the prior year period.
Expenses
Employee Compensation and Benefits
Employee compensation and benefits expenses increased $15.9 million to $321.4 million for the year ended
December 31, 2015 compared with $305.5 million in the prior year period. The increase is primarily due to $36.8 million
higher total revenues partially offset by $69.0 million lower other income (loss) during 2015 as compared to 2014, resulting in a
higher compensation and benefits accrual to remain consistent with the Company's compensation to revenue ratio. The
compensation to revenue ratio, based on total revenues only, was 69% for the year ended December 31, 2015, compared with
71% in the prior year period. The compensation to revenue ratio, including other income (loss), was 62% for the year ended
December 31, 2015, compared with 56% in the prior year period.
Interest and Dividends
Interest and dividend expenses decreased $16.6 million to $26.2 million for the year ended December 31, 2015 compared
with $42.8 million in the prior year period. This decrease was attributable to the completion of the wind down of our securities
lending business during the first quarter of 2015 offset partially by an increase related to the convertible debt and other notes
payable issued during the first and fourth quarters of 2014.
General, Administrative and Other Expenses
General, administrative and other expenses increased $16.5 million to $154.5 million for the year ended December 31,
2015 compared with $138.0 million in the prior year period. This was primarily due to higher legal and other professional fees,
increased occupancy costs and an increase in client services and business development and floor brokerage and trade execution,
which are variable expenses, related to higher revenues, as well as transaction costs related to acquisitions.
Goodwill Impairment
During the fourth quarter of 2014, the Company made a decision to wind down the operations of its securities lending
business, therefore, the Company recorded a goodwill impairment charge of $2.3 million.
Consolidated Funds Expenses
Consolidated Funds expenses increased $0.7 million to $2.3 million for the year ended December 31, 2015 compared
with $1.6 million in the prior year period.
43
Other Income (Loss)
Other income (loss) decreased $69.0 million to $51.3 million for the year ended December 31, 2015 compared with
$120.3 million in the prior year period. The decrease primarily relates to a decrease in performance in our activist strategy and
the Company's own invested capital offset partially by the agreement to sell a portion of the Company's ownership in the
activist business to the principal owners of Starboard Value. The gains and losses shown under Consolidated Funds reflect the
consolidated total performance for such funds, and the portion of those gains or losses that are attributable to other investors is
allocated to redeemable non-controlling interests.
Income Taxes
Income tax benefit decreased $77.4 million to an income tax benefit of $47.5 million for the year ended December 31,
2015 compared to an income tax benefit of $124.9 million in the prior year period. This increase in expense is primarily
attributable to the release, in 2014, of the Company’s valuation allowance that were previously recorded against the Company’s
US federal and state deferred tax assets, partially offset by the deferred tax benefit recognized by the Company's Luxembourg
subsidiary in 2015.
Income (Loss) Attributable to Redeemable Non-controlling Interests
Income (loss) attributable to redeemable non-controlling interests decreased $0.4 million to $15.2 million for the year
ended December 31, 2015 compared with $15.6 million in the prior year period. The decrease was primarily the result of losses
incurred by our merchant banking co-investments and a decrease in performance in the alternative solutions business offset
partially by an increase in performance in our healthcare royalty business. Non-controlling interests represent the pro rata share
of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.
Preferred Stock Dividends
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative
perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of
5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.
Segment Analysis and Economic Income (Loss)
Segments
The Company conducts its operations through two segments: an alternative investment segment and a broker-dealer
segment.
For the years ended December 31, 2016, 2015, and 2014, the Company's alternative investment segment includes hedge
funds, private equity structures, registered investment companies and listed vehicles operating results and other investment
platforms operating results.
For the years ended December 31, 2016, 2015, and 2014, the Company's broker-dealer segment includes investment
banking, research, sales and trading and prime brokerage businesses' operating results.
Economic Income (Loss)
The performance measure used by the Company for each segment is Economic Income (Loss), which management uses
to evaluate the financial performance of and to make operating decisions for the firm as a whole and each segment.
Accordingly, management assesses its business by analyzing the performance of each segment and believes that investors
should review the same performance measure that it uses to analyze its segment and business performance. In addition,
management believes that Economic Income (Loss) is helpful to gain an understanding of its segment results of operations
because it reflects such results on a consistent basis for all periods presented.
Our Economic Income (Loss) may not be comparable to similarly titled measures used by other companies. We use
Economic Income (Loss) as a measure of each segment's operating performance, not as a measure of liquidity. Economic
Income (Loss) should not be considered in isolation or as a substitute for operating income, net income, operating cash flows,
investing and financing activities, or other income or cash flow statement data prepared in accordance with US GAAP. As a
result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) has limitations in that it does not
take into account certain items included or excluded under US GAAP, including our Consolidated Funds. Economic Income
(Loss) is considered by management as a supplemental measure to the US GAAP results to provide a more complete
understanding of each segment's performance as measured by management. For a reconciliation of Economic Income (Loss) to
US GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments
discussed above, see Note 23 to the Company's consolidated financial statements included in this 10-K.
44
In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated
funds (ii) excludes goodwill and intangible impairment (iii) excludes certain other acquisition-related adjustments and/or
reorganization expenses and (iv) excludes preferred stock dividends. In addition, Economic Income (Loss) revenues include
investment income that represents the income the Company has earned in investing its own capital, including realized and
unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes,
these items are included in each of their respective line items. Economic Income (Loss) revenues also include management
fees, incentive income and investment income earned through the Company's investment as a general partner in certain real
estate entities and the Company's investment in the activist business. For US GAAP purposes, all of these items are recorded in
other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for
US GAAP purposes is presented gross as part of revenue.
Economic Income (Loss) Revenues
The Company's principal sources of Economic Income (Loss) revenues are derived from activities in the following
business segments:
Our alternative investment segment generates Economic Income (Loss) revenues through three principal sources:
management fees, incentive income and investment income from our own capital. Management fees are directly impacted by
any increase or decrease in assets under management, while incentive income is impacted by our funds' performance and
resulting increase or decrease in assets under management. Investment income from the Company's own capital is impacted by
the performance of the funds and other securities in which our capital is invested.
Our broker-dealer segment generates Economic Income (Loss) revenues through two principal sources: investment
banking and brokerage. The Company earns investment banking revenue primarily from fees associated with public and private
capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from
small and mid-capitalization companies within the Company's Target Sectors: healthcare, technology, media and
telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and
transportation. The Company's brokerage revenues consist of commissions, principal transactions and fees paid for equity
research. Cowen's broker-dealer segment also offers a full-service suite of prime brokerage services. Management reviews
brokerage revenue on a combined basis as the vast majority of the revenue is derived from the same group of clients. The
Company derives its brokerage revenue primarily from trading equity and equity-linked securities on behalf of institutional
investors. The majority of the Company's trading gains and losses are a result of activities that support the facilitation of client
orders in both listed and over-the-counter securities, although all trading gains and losses are recorded in brokerage in the
accompanying consolidated statement of operations.
Economic Income (Loss) Expenses
The Company's Economic Income expenses consist of non-interest expenses and interest expense. Non interest expenses
consist of compensation and benefits and non-compensation expenses (fixed and variable), less reimbursement from affiliates.
Interest expense is primarily interest from indebtedness, not trading activity (which is included within investment income
(loss)).
Non-controlling Interests
Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities
attributable to the partners of such entities.
45
Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
Year Ended December 31,
2016
2015
Alternative
Investment
Broker-
Dealer
Total
Alternative
Investment
Broker-
Dealer
(dollars in thousands)
Total
Period-to-Period
$
Total
Change % Change
Economic Income Revenues
Investment banking
$
— $
133,279
$ 133,279
$
— $
222,781
$ 222,781
$ (89,502)
—
64,086
26,274
3,015
29,202
207,040
207,040
—
160,436
160,436
46,604
3,162
—
1,008
565
67,248
26,274
4,023
29,767
68,989
(1,544)
49,244
14,492
1,026
70,015
(2,767)
—
(1,544)
27,818
13,352
890
62,596
15,382
(58,573)
14,385
(40 )%
29 %
(4 )%
NM
(94 )%
94 %
122,577
345,054
467,631
131,181
398,485
529,666
(62,035)
(12)%
Brokerage
Management fees
Incentive income (loss)
Investment income (loss)
Other income (loss)
Total economic income
revenues
Economic Income (Loss)
Total Economic Income (Loss) was a loss of $28.8 million for the year ended December 31, 2016, a decrease of $63.3
million compared to Economic Income (Loss) of $34.5 million in the prior year period.
Total Economic Income (Loss) revenues were $467.6 million for the year ended December 31, 2016, a decrease of $62.1
million compared to Economic Income (Loss) revenues of $529.7 million in the prior year period. This was related to a
decrease in investment banking activity and a decrease in performance in investment income offset partially by an increase in
brokerage activity, incentive fees and other income.
Alternative Investment Segment Revenues
Alternative investment segment Economic Income (Loss) revenues were $122.6 million for the year ended December 31,
2016, a decrease of $8.6 million compared to Economic Income (Loss) revenues of $131.2 million in the prior year period.
Management Fees. Management fees for the segment decreased $4.9 million to $64.1 million for the year ended
December 31, 2016 compared with $69.0 million in the prior year period. This decrease was primarily related to a decrease in
management fees for our alternative solutions and activist businesses offset partially by an increase in management fees from
our macro options and equities businesses.
Incentive Income (Loss). Incentive income for the segment increased $27.8 million to $26.3 million for the year ended
December 31, 2016 compared with a loss of $1.5 million in the prior year period. This increase was primarily related to an
increase in performance from our activist business and certain private investments.
Investment Income (Loss). Investment income for the segment decreased $46.2 million to $3.0 million for the year
ended December 31, 2016 compared with $49.2 million in the prior year period. The decrease primarily relates to a prior year
deferred tax benefit recorded pursuant to the acquisition of Hollenfels and a decrease in performance of the Company's own
invested capital.
Other Income (Loss). Other income (loss) for the segment increased $14.7 million to $29.2 million for the year ended
December 31, 2016 compared with $14.5 million in the prior year period. This increase is primarily related to the sale of our
interest in the alternative solutions business and the principal owners of Starboard Value exercising their right to acquire a
portion of the Company’s ownership interest in the activist business.
Broker-Dealer Segment Revenues
Broker-dealer segment Economic Income (Loss) revenues were $345.1 million for the year ended December 31, 2016, a
decrease of $53.4 million compared with Economic Income (Loss) revenues of $398.5 million in the prior year.
Investment Banking. Investment banking revenues decreased $89.5 million to $133.3 million for the year ended
December 31, 2016 compared with $222.8 million in the prior year period. During the year ended December 31, 2016, the
Company completed 76 underwriting transactions, 15 strategic advisory transactions and seven debt capital market transactions.
During the year ended December 31, 2015, the Company completed 129 underwriting transactions, 13 strategic advisory
transactions and seven debt capital market transactions. The average underwriting fee per transaction was 12.2% less for the
twelve months ended December 31, 2016 as compared to the prior year.
46
Brokerage. Brokerage revenues increased $46.6 million to $207.0 million for the year ended December 31, 2016,
compared with $160.4 million in the prior year period. This was attributable to higher commissions due to an increase in
customer trading volumes, the initiation of our prime brokerage businesses in the third and fourth quarters of 2015 and the
initiation of our credit trading business in May 2016. Customer trading volumes across the industry (according to Bloomberg)
increased 6% for the twelve months ended December 31, 2016 compared to the prior year.
Investment Income (Loss). Investment income for the segment decreased $12.4 million to $1.0 million for the year
ended December 31, 2016, compared with $13.4 million in the prior year period. The decrease is a result of a decrease in
overall investment income which is allocated amongst the segments.
Other Income (Loss). Other income (loss) for the segment decreased $0.3 million to $0.6 million for the year ended
December 31, 2016, compared with $0.9 million in the prior year period.
Non-Interest Expenses
Non-interest expenses. Total non-interest expenses increased $1.6 million to $471.4 million for the year ended
December 31, 2016, compared with $469.8 million in the prior year period.
Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses,
decreased $17.2 million to $300.4 million for the year ended December 31, 2016 compared with $317.6 million in the prior
year period. The decrease is due to $62.1 million lower revenues during 2016 as compared to 2015 which resulted in a lower
compensation and benefits accrual. The compensation to revenue ratio was 64% for the year ended December 31, 2016
compared with 60% in the prior year period.
Non-compensation Expenses—Fixed. Fixed non-compensation expenses, included within non-interest expenses,
increased $6.8 million to $101.0 million for the year ended December 31, 2016 compared with $94.2 million in the prior year
period. This increase was primarily due to higher communications and increased occupancy costs both of which are primarily
related to acquisitions during late 2015 and during 2016.
The following table shows the components of the non-compensation expenses—fixed, for the year ended December 31,
2016 and 2015:
Non-compensation expenses—fixed:
Communications
Professional, advisory and other fees
Occupancy and equipment
Service fees
Expenses from equity investments
Other
Total
Year Ended December 31,
Period-to-Period
2016
2015
$ Change
% Change
(dollars in thousands)
$
$
17,752
$
14,320
$
17,280
29,975
7,831
15,844
12,297
17,605
26,739
7,503
14,156
13,913
100,979
$
94,236
$
3,432
(325)
3,236
328
1,688
(1,616)
6,743
24 %
(2)%
12 %
4 %
12 %
(12)%
7 %
Depreciation and amortization expenses. Depreciation and amortization expenses increase $1.5 million to $11.0 million
for the year ended December 31, 2016 compared with $9.5 million in the prior year period. The increase is primarily related to
an increase in amortization on intangible assets related to acquisitions during late 2015 and during 2016.
Non-compensation Expenses—Variable. Variable non-compensation expenses, included within non-interest expenses,
which primarily are comprised of expenses which are incurred as a direct result of the processing and soliciting of revenue
generating activities, increased $5.0 million to $61.2 million for the year ended December 31, 2016 compared with $56.2
million in the prior year period. The increase is primarily related to higher floor brokerage and trade execution costs, due to
higher brokerage revenue, and increased marketing and business development expenses, some of which is related to
acquisitions during late 2015 and during 2016. Costs related to the 2015 acquisition of Hollenfels also decreased.
47
The following table shows the components of the non-compensation expenses—variable, for the year ended
December 31, 2016 and 2015:
Non-compensation expenses—Variable:
Floor brokerage and trade execution
HealthCare Royalty Partners syndication costs
Expenses related to Luxembourg companies
Marketing and business development
Other
Total
Year Ended December 31,
Period-to-Period
2016
2015
$ Change
% Change
(dollars in thousands)
$
$
29,432
$
24,054
$
528
2,406
26,163
2,649
528
5,475
23,367
2,726
61,178
$
56,150
$
5,378
—
(3,069)
2,796
(77)
5,028
22 %
— %
(56)%
12 %
(3)%
9 %
Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to
the alternative investment segment, decreased $5.4 million to $2.3 million for the year ended December 31, 2016 compared
with $7.7 million in the prior year period.
Interest expense
Interest expense, which primarily relates to debt issued during the first and fourth quarters of 2014, increased $0.6 million
to $17.2 million for the year ended December 31, 2016 compared with $16.6 million in the prior year period.
Non-Controlling Interest
Income (loss) attributable to redeemable non-controlling interests decreased by $1.0 million to $7.8 million for the year
ended December 31, 2016 compared with $8.8 million in the prior year period. Non-Controlling interest represents the portion
of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those
subsidiaries.
Year Ended December 31, 2015 Compared with the Year Ended December 31, 2014
Year Ended December 31,
2015
2014
Alternative
Investment
Broker-
Dealer
Total
Alternative
Investment
Broker-
Dealer
(dollars in thousands)
Total
Period-to-Period
$
Total
Change % Change
Economic Income Revenues
Investment banking
$
— $
222,781
$ 222,781
$
— $
170,506
$ 170,506
$ 52,275
—
68,989
(1,544)
49,244
14,492
160,436
160,436
1,026
—
13,352
890
70,015
(1,544)
62,596
15,382
55
64,774
45,708
45,193
4,645
146,192
146,247
14,189
—
—
20,022
523
64,774
45,708
65,215
5,241
(47,252)
(2,619)
5,168
10,214
31 %
10 %
8 %
(103 )%
(4 )%
198 %
131,181
398,485
529,666
160,375
337,243
497,618
32,048
6 %
Brokerage
Management fees
Incentive income (loss)
Investment income (loss)
Other income (loss)
Total economic income
revenues
Economic Income (Loss)
Total Economic Income (Loss) was a loss of $34.5 million for the year ended December 31, 2015, a decrease of $9.7
million compared to Economic Income (Loss) of $44.2 million in the prior year period.
Total Economic Income (Loss) revenues were $529.7 million for the year ended December 31, 2015, an increase of $32.1
million compared to Economic Income (Loss) revenues of $497.6 million in the prior year period. The increase was related to
investment banking activity, which was partially offset with decreased performance in investment and incentive income. For
purposes of the following section, all references to revenue refer to Economic Income (Loss) revenues.
48
Alternative Investment Segment Revenues
Alternative investment segment Economic Income (Loss) revenues were $131.2 million for the year ended December 31,
2015, a decrease of $29.2 million compared to Economic Income (Loss) revenues of $160.4 million in the prior year period.
Management Fees. Management fees for the segment increased $4.2 million to $69.0 million for the year ended
December 31, 2015 compared with $64.8 million in the prior year period. This increase was primarily related to an increase in
management fees for our activist and healthcare royalty businesses offset partially by lower management fees from the real
estate business and from the long/short credit business, which was sold in the fourth quarter of 2014.
Incentive Income (Loss). Incentive income for the segment decreased $47.2 million to a loss of $1.5 million for the year
ended December 31, 2015 compared with income of $45.7 million in the prior year period. This decrease was primarily related
to a decrease in performance fees from our activist business.
Investment Income (Loss). Investment income for the segment increased $4.0 million to $49.2 million for the year
ended December 31, 2015 compared with $45.2 million in the prior year period. The increase primarily relates to the deferred
tax benefit recorded pursuant to the acquisition of Hollenfels partially offset by a decrease in performance of the Company's
own invested capital.
Other Income (Loss). Other income (loss) for the segment increased $9.9 million to $14.5 million for the year ended
December 31, 2015 compared with $4.6 million in the prior year period. This increase is related to the Company reaching an
agreement at the end of the fourth quarter of 2015, with an effective date of December 31, 2015, to sell a portion of the
Company's ownership interest in the activist business back to the principal owners of Starboard Value offset partially by a sale
of our credit business during the fourth quarter of 2014.
Broker-Dealer Segment Revenues
Broker-dealer segment Economic Income (Loss) revenues were $398.5 million for the year ended December 31, 2015, an
increase of $61.3 million compared with Economic Income (Loss) revenues of $337.2 million in the prior year.
Investment Banking. Investment banking revenues increased $52.3 million to $222.8 million for the year ended
December 31, 2015 compared with $170.5 million in the prior year period. During the year ended December 31, 2015, the
Company completed 129 underwriting transactions, 13 strategic advisory transactions and seven debt capital market
transactions. During the year ended December 31, 2014, the Company completed 129 underwriting transactions, 12 strategic
advisory transactions and 16 debt capital market transactions. The average underwriting fee per transaction was 45.0% greater
for the year ended December 31, 2015 as compared to the prior year period.
Brokerage. Brokerage revenues increased $14.2 million to $160.4 million for the year ended December 31, 2015,
compared with $146.2 million in the prior year period. This was attributable to higher commissions due to an increase in
customer trading volumes, a decrease in facilitation losses in our cash equity and option businesses, an increase in payments for
research services and the initiation of our prime brokerage businesses in the third and fourth quarter of 2015. Customer trading
volumes across the industry (according to Bloomberg) increased 9% for the year ended December 31, 2015 compared to the
prior year.
Investment Income (Loss). Investment income for the segment decreased $6.6 million to $13.4 million for the year
ended December 31, 2015, compared with $20.0 million in the prior year period. The decrease is a result of a decrease in
overall investment income which is allocated amongst the segments.
Other Income (Loss). Other income (loss) for the segment increased $0.4 million to $0.9 million for the year ended
December 31, 2015, compared with $0.5 million in the prior year period.
Non-Interest Expenses
Non-interest expenses. Total non-interest expenses increased $33.9 million to $469.8 million for the year ended
December 31, 2015, compared with $435.9 million in the prior year period.
Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses,
increased $15.4 million to $317.6 million for the year ended December 31, 2015 compared with $302.2 million in the prior year
period. The increase is due to $32.1 million higher revenues during 2015 as compared to 2014 and resulted in a higher
compensation and benefits accrual to remain consistent with the Company's compensation to revenue ratio. The compensation
to revenue ratio was 60% for year ended December 31, 2015 compared with 61% in the prior year period.
Non-compensation Expenses—Fixed. Fixed non-compensation expenses, included within non-interest expenses,
increased $8.0 million to $94.2 million for the year ended December 31, 2015 compared with $86.2 million in the prior year
49
period. This increase was primarily due to higher legal and other professional fees and increased occupancy costs related to
additional office space.
The following table shows the components of the non-compensation expenses—fixed, for the year ended December 31,
2015 and 2014:
Fixed expenses:
Communications
Professional, advisory and other fees
Occupancy and equipment
Service fees
Expenses from equity investments
Other
Total
Year Ended December 31,
Period-to-Period
2015
2014
$ Change
% Change
(dollars in thousands)
$
$
14,320
$
13,046
$
17,605
26,739
7,503
14,156
13,913
14,634
24,177
8,065
14,606
11,647
94,236
$
86,175
$
1,274
2,971
2,562
(562)
(450)
2,266
8,061
10 %
20 %
11 %
(7)%
(3)%
19 %
9 %
Depreciation and amortization expenses. Depreciation and amortization expenses increase $0.2 million to $9.5 million
for the year ended December 31, 2015 compared with $9.3 million in the prior year period
Non-compensation Expenses—Variable. Variable non-compensation expenses, included within non-interest expenses,
which primarily are comprised of expenses which are incurred as a direct result of the processing and soliciting of revenue
generating activities, increased $10.5 million to $56.2 million for the year ended December 31, 2015 compared with $45.7
million in the prior year period. The increase is primarily related to an increase in client services and business development,
increased floor brokerage and trade execution costs and expenses related to the acquisition of a Luxembourg reinsurance
company offset partially by a decrease in syndication costs.
The following table shows the components of the non-compensation expenses—variable, for the year ended
December 31, 2015 and 2014:
Year Ended December 31,
Period-to-Period
2015
2014
$ Change
% Change
(dollars in thousands)
Variable expenses:
Floor brokerage and trade execution
HealthCare Royalty Partners syndication costs
Expenses related to Luxembourg reinsurance companies
Marketing and business development
Other
Total
$
$
24,054
$
19,273
$
528
5,475
23,367
2,726
2,310
2,855
19,862
1,437
4,781
(1,782)
2,620
3,505
1,289
56,150
$
45,737
$
10,413
25 %
NM
92 %
18 %
90 %
23%
Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to
the alternative investment segment, increased $0.1 million to $7.7 million for the year ended December 31, 2015 compared
with $7.6 million in the prior year period.
Interest expense
Interest expense, which primarily relates to debt issued during the first and fourth quarters of 2014, increased $6.8 million
to $16.6 million for the year ended December 31, 2015 compared with $9.8 million in the prior year period.
Non-Controlling Interest
Income (loss) attributable to redeemable non-controlling interests increased by $1.0 million to $8.8 million for the year
ended December 31, 2015 compared with $7.8 million in the prior year period. Non-Controlling interest represents the portion
of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those
subsidiaries.
50
Liquidity and Capital Resources
We continually monitor our liquidity position. The working capital needs of the Company's business have been met
through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating
activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and
brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months
will be:
•
•
pay our operating expenses, primarily consisting of compensation and benefits, interest on debt and other general and
administrative expenses; and
provide capital to facilitate the growth of our existing business.
Based on our historical results, management's experience, our current business strategy and current assets under
management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and
capital expenditure requirements for at least the next twelve months. Our cash reserves include cash, cash equivalents and
assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are
generally readily marketable. As of December 31, 2016, we had cash and cash equivalents of $112.0 million and net liquid
investment assets of $438.8 million. Cash and cash equivalents and short-term investments held by foreign subsidiaries as of
December 31, 2016 and 2015 were $13.7 million and $53.8 million, respectively. The Company intends to permanently
reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but remits the current
earnings of its foreign subsidiaries to the United States to the extent permissible under local regulatory rules. The undistributed
earnings of the Company’s foreign subsidiaries totaled $0.8 million and $1.0 million as of December 31, 2016 and 2015,
respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately
$0.1 million and $0.1 million, respectively.
The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period
to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which can
make up a significant portion of total compensation, are generally paid once a year by March 15th.
Unfunded commitments
The following table summarizes unfunded commitments as of December 31, 2016:
Entity
Unfunded Commitments
Commitment term
($ in millions)
Real estate (a)
HealthCare Royalty Partners funds (b)
Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.)
Lagunita Biosciences, LLC
Eclipse Fund II, L.P.
Eclipse Continuity Fund I, L.P.
$
$
$
$
$
$
7.6
7.3
0.8
3
0.9
0.9
(a)
2 years
7 years
3 years
8 years
9 years
(a) The Company had unfunded commitments pertaining to capital commitments in five real estate investments held by
the Company, all of which pertain to related party investments. Such commitments can be called at any time up to three years,
subject to advance notice.
(b) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare
Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata
investment in the HealthCare Royalty Partners funds along with the other limited partners.
Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash
and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the
dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by
our customers and clearing house requirements, among others. Certain regulatory requirements constrain the use of a portion of
our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital
necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different
requirements and uses.
Revolver
On July 31, 2015, the Company entered into a $25.0 million 364 day revolving unsecured credit facility with multiple
financial institutions primarily for working capital management. On July 29, 2016, the Company amended its credit facility to,
among other things, extend the existing stated maturity thereof from August 3, 2016 to September 29, 2016, reduce the
aggregate revolving commitments thereunder from $25 million to $15 million and make future draws on the revolver during the
51
extension period subject to the sole discretion of the lenders thereunder. In connection with the amendment, the Company
repaid all outstanding amounts under the credit facility. The facility terminated in accordance with its terms on September 29,
2016.
Preferred Stock and Purchase of Capped Call Option
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative
perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided $117.2 million of proceeds, net of
underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to
dividends at a rate of 5.625% per annum which will be payable, when and if declared by the board of directors of the Company,
quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay
dividends in cash, common stock or a combination thereof.
Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class
A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the
Company's existing and future indebtedness with respect to divided rights and rights upon the Company's involuntary
liquidation, dissolution or winding down.
Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, into a number of shares of
our Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion
rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the
Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20,
2020, the Company may elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the
Company’s Class A common stock, cash or a combination thereof, at the Company’s election, in each case, based on the then-
applicable conversion rate, if the last reported sale price of the Company’s Class A common stock equals or exceeds 150% of
the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive
trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion,
the conversion rate may be adjusted based on certain events including but not limited to the issuance of cash dividends or Class
A common stock as a dividends to the Company's Class A common shareholders or a share split or combination.
In connection with the issuance and sale of the Series A Convertible Preferred Stock, the Company entered into a
privately negotiated capped call option transaction (the “Capped Call Option Transaction”) with Nomura Global Financial
Products Inc. (the “option counterparty”) for $15.9 million. The Capped Call Option Transaction is expected generally to
reduce the potential dilution to the Company’s Class A common stock (if the Company elects to convert to common shares)
and/or offset any cash payments that the Company is required to make upon conversion of any Series A Convertible Preferred
Stock. The Capped Call Option Transaction has an initial effective strike price of $26.27 per share, which matches the initial
conversion price of the Series A Convertible Preferred Stock, and a cap price of $33.54 per share. However, to the extent that
the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the
cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call
Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if
it is settled in cash or stock it qualifies for equity classification as a reduction to additional paid in capital.
The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to
market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds
or raise additional capital.
Regulation
As registered broker-dealers, Cowen and Company, ATM Execution and Cowen Prime are subject to the SEC's Uniform
Net Capital Rule 15c3-1 (the “Rule”), which requires the maintenance of minimum net capital. Under the alternative method
permitted by the Rule, Cowen and Company's minimum net capital requirement, as defined, is $1.0 million. Under the
alternative method ATM Execution and Cowen Prime are required to maintain minimum net capital, as defined, equal to
$250,000. The broker-dealers are not permitted to withdraw equity if certain minimum net capital requirements are not met. As
of December 31, 2016, Cowen and Company had total net capital of approximately $65.3 million, which was approximately
$64.3 million in excess of its minimum net capital requirement of $1.0 million. As of December 31, 2016, ATM Execution had
total net capital of approximately $3.5 million, which was approximately $3.2 million in excess of its minimum net capital
requirement of $250,000. As of December 31, 2016, Cowen Prime had total net capital of approximately $13.9 million, which
was approximately $13.6 million in excess of its minimum net capital requirement of $250,000.
Cowen and Company, ATM Execution and Cowen Prime claim exemption from the provisions of Rule 15c3-3 under the
Exchange Act as their activities are limited to those set forth in the conditions for exemption appearing in paragraph (k)(2)(ii) of
the Rule.
52
Proprietary accounts of broker-dealers (“PAB”) held at the clearing broker are considered allowable assets for net capital
purposes, pursuant to agreements between Cowen and Company, ATM Execution and Cowen Prime and the clearing brokers,
which require, among other things, that the clearing brokers perform computations for PAB and segregate certain balances on
behalf of Cowen and Company, ATM Execution and Cowen Prime, if applicable.
Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the
Financial Conduct Authority (“FCA”) of the UK. Financial Resources, as defined, must exceed the requirement of the FCA. As
of December 31, 2016, Ramius UK's Financial Resources of $0.22 million exceeded its minimum requirement of $0.05 million
by $0.17 million. As of December 31, 2016, CIL's Financial Resources of $9.6 million exceeded its minimum requirement of
$2.6 million by $7.0 million.
Cowen’s Luxembourg reinsurance companies, Vianden RCG Re SCA (“Vianden”) and Hollenfels, are required to
maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in
Luxembourg. Each company’s solvency capital ratio as of December 31, 2016 was in excess of this minimum requirement.
Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive
insurance companies, RCG Insurance Company, Cowen’s captive insurance company incorporated and licensed in the state of
New York, was required to maintain capital and surplus of approximately $0.3 million as of December 31, 2016. RCG
Insurance Company’s capital and surplus as of December 31, 2016 totaled approximately $22.5 million.
Cash Flows Analysis
The Company's primary sources of cash are derived from its operating activities, fees and realized returns on its own
invested capital. The Company's primary uses of cash include compensation and general and administrative expenses.
Operating Activities. Net cash used in operating activities of $354.8 million for the year ended December 31, 2016 was
primarily related to purchases of other investments and cash used to pay for year end bonuses. Net cash used in operating
activities of $67.4 million for the year ended December 31, 2015 was primarily related to purchases of securities and other
investments partially offset by a decrease in cash held at other brokers. Net cash used in operating activities of $63.7 million for
the year ended December 31, 2014 was primarily related to purchases of securities partially offset by an increase in cash held at
other brokers.
Investing Activities. Net cash provided by investing activities of $58.5 million for the year ended December 31, 2016
was primarily related to repayment of certain loans made for investing purposes and sales of other investments offset partially
by the purchases of other investments and fixed assets. Net cash used in investing activities of $47.4 million for the year ended
December 31, 2015 was primarily related to the purchases of businesses, other investments and fixed assets partially offset by
proceeds from sales of other investments. Net cash used in investing activities of $37.5 million for the year ended
December 31, 2014 was primarily related to the cash convertible note economic hedge transaction and purchase of fixed assets.
Financing Activities. Net cash provided by financing activities for the year ended December 31, 2016 of $249.8 million
was primarily related to contributions from non-controlling interests in Consolidated Funds. Net cash provided by financing
activities for the year ended December 31, 2015 of $143.8 million was primarily related to the proceeds from issuance of
preferred stock and contributions from non-controlling interests in Consolidated Funds offset partially by repurchase of shares
of our common stock. Net cash provided by financing activities for the year ended December 31, 2014 of $176.0 million was
primarily related to the issuance of convertible debt and other notes payable offset partially by the purchase of treasury stock.
Debt
Convertible Debt
On March 10, 2014, the Company issued $149.5 million of 3.0% cash convertible senior notes ("Convertible Notes").
The Convertible Notes are due on March 15, 2019 unless earlier repurchased by the Company or converted by the holder into
cash in accordance with their terms prior to such date. The interest on the Convertible Notes is payable semi-annually on
March 15 and September 15 of each year. The Convertible Notes are senior unsecured obligations and rank senior in right of
payments to other obligations. The Convertible Notes may be converted into cash, upon the occurrence of certain events,
whereby a holder will receive, per $1,000 principal amount of notes being converted, an amount equal to the sum of principal
amount outstanding and the conversion amount based on the current conversion price (the "Conversion Option"). The
Convertible Notes were issued with an initial conversion price of $21.32 per share (per share amounts have been retroactively
updated to reflect the one-for-four reverse stock split effective as of December 5, 2016).
The Company recorded interest expense of $4.5 million, $4.5 million and $3.6 million for the years ended December 31,
2016, 2015 and 2014, respectively. The initial unamortized discount on the Convertible Notes was $35.7 million and is shown
net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount,
included within interest expense in the accompanying consolidated statements of operations is $6.9 million $6.3 million, and
53
$4.7 million for the years ended December 31, 2016, 2015 and 2014, respectively, based on an effective interest rate of 8.89%.
The Company capitalized the debt issuance costs in the amount of $3.7 million, which is a direct deduction from the carrying
value of the debt and will be amortized over the life of the Convertible Notes.
Of the net proceeds from the sale of the Convertible Notes, approximately $20.5 million was applied to pay the net cost of
a cash convertible note economic hedge and warrant transaction which increases the effective conversion price to $28.72 (see
Note 5), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The remainder of
the net proceeds is being used for general corporate purposes.
Note Payable
On October 10, 2014 the Company completed its public offering of $63.3 million aggregate principal amount of 8.25%
senior notes due on October 15, 2021 ("2021 Notes"). Interest on the 2021 Notes is payable quarterly in arrears on January 15,
April 15, July 15 and October 15, commencing on January 15, 2015. The Company recorded interest expense of $5.2 million
and $5.2 million for the years ended December 31, 2016 and 2015, respectively. The Company capitalized debt issuance costs
of approximately $2.9 million which is a direct deduction from the carrying value of the debt and will be amortized over the life
of the 2021 Notes.
The 2021 Notes were issued pursuant to an Indenture, dated as of October 10, 2014 (the “Senior Indenture”), by and
among the Company and The Bank of New York Mellon, as trustee. The Senior Indenture contains covenants that, among other
things, limit (subject to certain exceptions) the Company’s ability and the ability of the Company’s Restricted Subsidiaries (as
defined in the Senior Indenture) to: (1) incur debt (including certain preferred stock), if the incurrence of such indebtedness
would cause the Company’s consolidated fixed charge coverage ratio, as defined in the Senior Indenture, to fall below 2.0 to
1.0, (2) pay dividends or make distributions on its capital stock, or purchase, redeem or otherwise acquire its capital stock, and
(3) grant liens securing indebtedness of the Company without securing the 2021 Notes equally and ratably. If certain conditions
are met, certain of these covenants may be suspended. The Company’s consolidated fixed charge coverage ratio was 1.3 to 1.0
compared to the minimum of 2.0 to 1.0 required by the Senior Indenture. As a result, the Company may not currently incur new
debt or make restricted payments, other than in limited permitted amounts set out in the Senior Indenture.
Other Notes Payable
During January 2016, the Company borrowed $2.0 million to fund insurance premium payments. This note has an
effective interest rate of 1.38% and was due on December 31, 2016, with monthly payment requirements of $0.2 million. As of
December 31, 2016, the note was fully repaid. Interest expense for the year ended December 31, 2016 was insignificant.
During the second quarter of 2016, the Company entered into financing for two of its aircraft and incurred additional debt
when four other aircraft were acquired (See Note 2). The aircraft financing, net of debt costs, is recorded in notes payable and
short-term borrowings in the accompanying consolidated statements of financial condition. The debt maturities ranged from
February 2017 to May 2021 and interest rates ranged from 4.80% to 7.25%. As of December 31, 2016, the remaining balance
on the aircraft financing agreements was $14.4 million. Interest expense was $0.8 million for the year ended December 31,
2016.
Revolver
On July 31, 2015, the Company entered into a $25.0 million 364 day revolving unsecured credit facility with multiple
financial institutions primarily for working capital management. On July 29, 2016, the Company amended its credit facility to,
among other things, extend the existing stated maturity thereof from August 3, 2016 to September 29, 2016, reduce the
aggregate revolving commitments thereunder from $25 million to $15 million and make future draws on the revolver during the
extension period subject to the sole discretion of the lenders thereunder. In connection with the amendment, the Company
repaid all outstanding amounts under the credit facility. The facility terminated in accordance with its terms on September 29,
2016. Interest accrued on borrowed funds at LIBOR plus 3.0% and interest accrued on the undrawn facility amount at LIBOR
plus 0.38%. Interest expense for the years ended December 31, 2016 and 2015, was $0.4 million and $0.2 million, respectively.
Capital Lease Obligations
The Company entered into several capital leases for computer equipment during the fourth quarter of 2010 and one in
January 2014. These leases amounted to $7.6 million and are recorded in fixed assets and as capital lease obligations, which are
included in short-term borrowings and other debt in the accompanying consolidated statements of financial condition, and have
lease terms that range from 48 to 60 months and interest rates that range from 0.60% to 6.03%. As of December 31, 2016, the
remaining balance on these capital leases was $1.8 million. Interest expense was $0.1 million, $0.2 million, and $0.2 million
for the years ended December 31, 2016, 2015, and 2014, respectively.
54
Letters of Credit
As of December 31, 2016, the Company has the following nine irrevocable letters of credit, related to leased office space,
for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The
Company also has a letter of credit, in the amount of $5.5 million, due March 2017, for which cash is pledged as collateral
under a reinsurance agreement.
Location
Amount
Maturity
(dollars in thousands)
San Francisco
Connecticut
New York
Boston
New York
New York
New York
New York
New York
$
$
$
$
$
$
$
$
$
710
65
1,000
382
355
70
695
2,811
1,600
January 2017
January 2017
February 2017
March 2017
May 2017
May 2017
October 2017
October 2017
November 2017
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of
December 31, 2016 and 2015, there were no amounts due related to these letters of credit.
Contractual Obligations
The following tables summarize the Company's contractual cash obligations as of December 31, 2016:
Equipment/Aircraft Leases, Service Payments and Facility
Leases
Real Estate
Service Payments
Equipment leases
Aircraft
Total
Debt
Convertible Debt
Note Payable
Other Notes Payable
Total
Clawback obligations
Total
< 1 Year
1-3 Years
3-5 Years
More Than
5 Years
(dollars in thousands)
$
97,405
$
16,745
$
32,472
$
30,894
$
17,294
28,406
2,455
3,255
131,521
160,713
89,034
16,680
15,674
1,157
1,260
34,836
4,485
4,912
4,225
11,316
1,293
1,995
47,076
156,228
10,436
5,927
1,416
5
—
—
—
—
32,315
17,294
—
73,686
6,528
—
—
—
—
$
266,427
$
13,622
$
172,591
$
80,214
$
For financial reporting purposes, the general partners of a real estate fund have recorded a liability for potential clawback
obligations to the limited partners, due to changes in the unrealized value of the fund's remaining investments and where the
fund's general partner has previously received carried interest distributions.
The clawback liability, however, is not realized until the end of the fund's life. The life of the real estate funds with a
potential clawback obligation is currently in a winding-up phase whereby the remaining assets of the fund are being liquidated
as promptly as possible so as to maximize value, however a final date for liquidation has not been set.
The fund is currently winding-down as of December 31, 2016 and the clawback obligations were $6.2 million (see Note 5
to the Company's consolidated financial statements).
Minimum payments for all debt outstanding
Annual scheduled maturities of debt and minimum payments for all debt outstanding as of December 31, 2016, is as
follows:
55
2017
2018
2019
2020
2021
Thereafter
Subtotal
Less: Amount representing interest (a)
Total
Convertible
Debt
Note Payable
Other Note
Payable
Capital Lease
Obligation
(dollars in thousands)
$
4,485
$
4,912
$
4,225
$
4,485
151,743
—
—
—
160,713
(30,684)
5,218
5,218
5,218
68,468
—
89,034
(28,081)
2,225
3,702
1,805
4,723
—
16,680
(2,443)
$
130,029
$
60,953
$
14,237
$
938
938
78
—
—
—
1,954
(114)
1,840
(a) Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at
inception. This amount also includes the unamortized discount on the convertible debt.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as of December 31, 2016. However, through indemnification
provisions in our clearing agreements, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the
clearing agreements, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a
counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying
security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.
Cowen and Company, Cowen Prime and ATM Execution are members of various securities exchanges. Under the
standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if
another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the
shortfall. The Company's liability under these arrangements is not quantifiable. Accordingly, no contingent liability is carried
in the accompanying consolidated statements of financial condition for these arrangements.
Critical Accounting Policies and Estimates
Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions
that affect amounts reported in its consolidated financial statements or the notes thereto. The Company bases its judgments,
estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be
reasonable and prudent. Actual results may differ materially from these estimates.
The following is a summary of what the Company believes to be its most critical accounting policies and estimates.
Consolidation
These consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the
Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a controlling
general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The
Company’s funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized
accounting.
The Company’s consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the
Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the
Consolidated Funds were eliminated in consolidation; however, the Company’s allocated share of net income from these funds
was increased by the amount of this eliminated income. Hence, the consolidation of these funds had no net effect on the
Company’s net earnings.
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those
funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company
consolidates all variable interest entities for which it is the primary beneficiary.
The Company adopted the new accounting pronouncement regarding consolidation accounting using the modified
retrospective method with an effective adoption date of January 1, 2016. The modified retrospective method did not require the
restatement of prior year periods. The adoption of the new accounting pronouncement also resulted in a reclassification of
certain entities which were previously considered voting interest entities and are considered variable interest entities.
56
In accordance with these standards, the Company presently consolidates six funds for which it acts as the general partner
and investment manager. As of December 31, 2016 the Company consolidated the following funds: Ramius Enterprise LP
(“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), (as of
May 1, 2016) Caerus Select Fund LP ("Caerus LP"), Ramius Archview Credit and Distressed Master Fund ("Archview Master
Fund") and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds"). Archview Credit
and Distressed Fund ("Archview Feeder Fund") was consolidated during the year but was deconsolidated during the fourth
quarter of 2016 upon sale of the Company's investment in this fund.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity
is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP.
Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the
entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to
receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic
performance.
Under US GAAP, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting
interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
In connection with the adoption of the new accounting pronouncement regarding consolidation accounting, the Company
reevaluated all of its investment products for consolidation. As of January 1, 2016, in accordance with the adoption of the new
accounting pronouncement, the Company deconsolidated Quadratic Fund LLC ("Quadratic LLC"). Adoption of this
pronouncement also resulted in a reclassification of certain entities for which the Company was presumed to have control and
will now be VIEs.
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with
US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation
model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's
economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could
potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate
it.
The Company reconsiders whether it is the primary beneficiary of a VIE by performing a periodic qualitative and/or
quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements
between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the
design of the VIE.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs.
These VIEs are primarily funds and real estate entities for which the Company serves as the general partner, managing member
and/or investment manager with decision-making rights.
The Company does not consolidate certain entities that are VIEs as it has concluded that it is not the primary beneficiary
in each instance. Fund investors are entitled to all of their economics of these VIEs with the exception of the management fee
and incentive income, if any, earned by the Company. The Company's involvement with funds and real estate entities that are
unconsolidated VIEs is limited to providing investment management services in exchange for management fees and incentive
income. Although the Company may advance amounts and pay certain expenses on behalf of the funds and real estate entities
that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these
entities outside of regular investment management services.
Equity Method Investments—For operating entities over which the Company exercises significant influence but which
do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The
Company's investments in equity method investees are recorded in other investments in the accompanying consolidated
statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net
gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances
indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of
the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is
deemed other than temporary.
Other—If the Company does not consolidate an entity, apply the equity method of accounting or account for an
investment under the cost method, the Company accounts for such entities (primarily, all securities of such entity which are
bought and held principally for the purpose of selling them in the near term as trading securities) in accordance with US GAAP,
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at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities,
derivatives and other investments in the accompanying consolidated statements of operations.
Retention of Specialized Accounting—The Consolidated Funds and certain other consolidated companies are investment
companies and apply specialized industry accounting for investment companies. The Company has retained this specialized
accounting for these funds pursuant to US GAAP. The Company reports its investments on the consolidated statements of
financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected
within net realized and unrealized gains (losses) on investments and other transactions. Accordingly, the accompanying
consolidated financial statements reflect different accounting policies for investments depending on whether or not they are
held through a consolidated investment company. In addition, the Company's broker-dealer subsidiaries also apply the
specialized industry accounting for brokers and dealers in securities also prescribed under US GAAP and International
Financial Reporting Standards ("IFRS"). The Company also retains specialized accounting upon consolidation.
Valuation of investments and derivative contracts
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy are as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; and
Level 3 Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little,
if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this
category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants
use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics,
specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy
is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what
constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that
market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by
independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the
hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's
perceived risk of that instrument. For additional information regarding the use of unobservable inputs to fair value assets and
liabilities see Note 6 in the accompanying Consolidated Financial Statement in Part 1 Item 1.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the
Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair
value of these investments is generally estimated based on proprietary models developed by the Company, which include
discounted cash flow analysis, public market comparables, and other techniques and may be based, at least in part, on
independently sourced market information. The material estimates and assumptions used in these models include the timing and
expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of,
and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate
valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect
to investments could be materially different from values derived based on the use of those estimates. The valuation
methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated
Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and
may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly
from the fair values that would have been used had a ready market for the investments existed and such differences could be
material.
The Company primarily uses the “market approach” to value its financial instruments measured at fair value. In
determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three
categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further
be divided between those held long or sold short.
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair
value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an
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asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the
fair value option for certain of its investments held by its operating companies. This option has been elected because the
Company believes that it is consistent with the manner in which the business is managed as well as the way that financial
instruments in other parts of the business are recorded.
Securities— Securities with values based on quoted market prices in active markets for identical assets are classified
within level 1 of the fair value hierarchy. These securities include active listed equities, certain U.S. government and sovereign
obligations, ETF's, mutual funds and certain money market securities. The Company does not adjust the quoted price for such
instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate
debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The
estimated fair values assigned by management are determined in good faith and are based on available information considering,
trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants,
and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As
level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions,
valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”).
Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within
level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC
derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and
are therefore classified within level 2. OTC derivatives, such as swaps and options where market data is not readily available or
observable are classified as level 3.
Other investments—Other investments consist primarily of portfolio funds, real estate investments and equity method
investments, which are valued as follows:
i. Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds and investment companies which may
be managed by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and
disclosures relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its
equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either
are investment companies as defined by the AICPA Audit and Accounting Guide, Investment Companies, or have
attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair
value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or
its equivalent, without adjustment. In accordance with US GAAP, investments which are valued using NAV per share
as a practical expedient are not categorized within the fair value hierarchy.
ii. Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate
investments are estimated based on the price that would be received to sell an asset in an orderly transaction between
marketplace participants at the measurement date. Real estate investments without a public market are valued based on
assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash
flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment,
analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from
third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for
obsolescence, as well as independent external appraisals. In general, the Company considers several valuation
techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single
valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for
significant changes at the property level or a significant change in the overall market which would impact the value of
the real estate investment resulting in unrealized appreciation or depreciation.
Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other
things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the
Company invests in real estate and real estate related investments for which no liquid market exists. The market prices
for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the
Company from investments sold may differ from the fair values presented, and the differences could be material.
The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchy
as management uses significant unobservable inputs in determining their estimated fair value.
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Revenue recognition
The Company's principal sources of revenue are derived from two segments: an alternative investment segment and a
broker-dealer segment, as more fully described below.
Our alternative investment segment generates revenue through three principal sources: management fees, incentive
income and investment income from the Company's own capital.
Our broker-dealer segment generates revenue through three principal sources: investment banking, brokerage and
investment income.
Management fees
The Company earns management fees from affiliated funds and certain managed accounts that it serves as the investment
manager based on assets under management. The actual management fees received vary depending on distribution fees or fee
splits paid to third parties either in connection with raising the assets or structuring the investment.
Several general partners of the funds are owned jointly by the Company and third parties. Accordingly, the management
fees generated by these funds are split between the Company and the other general partners. Pursuant to US GAAP, these fees
received by the general partners that are accounted for under the equity method of accounting and are reflected under net gains
(losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for
capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are
as follows:
• Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2%
of assets under management or notional trading level. Management fees are generally calculated monthly based on
assets under management at the end of each month before incentive income.
• Registered Funds. Management fees for the Company’s registered funds (State Street/Ramius Managed Futures
Strategy Fund and Ramius Archview Credit and Distressed Fund) are generally charged at an annual rate of up to
1.50% of assets under management.
• Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from
0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of
the applicable fund after the investment period has ended. Management fees are typically paid to the general partners
on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments
throughout the investment period and invested capital after the investment period.
• HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined
in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of
committed capital. After the investment period, management fees for these funds are generally charged at an annual
rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds.
For the other funds (and managed account) managed by Healthcare Royalty Partners, the management fee ranges
from .2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare
Royalty Partners funds are calculated on a quarterly basis.
• Ramius Trading Strategies. Management fees and platform fees for the Company's private commodity trading
advisory business are generally charged at an annual rate of up to 0.5%. Management and platform fees are generally
calculated monthly based on each account's notional trading level at the end of each month.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management
agreements) with respect to certain of the Company's funds and managed accounts, allocable for each fiscal year that exceeds
cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products we offer, incentive
income earned is typically up to 20% for hedge funds (in certain cases on performance in excess of a benchmark), of the net
profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds
is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real
estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred
return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these
incentive fees upon the liquidation of the fund if the investor has not received a full return of its invested capital plus the
preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors
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receive a full return of their capital plus a preferred return. Pursuant to US GAAP, incentive income received by the general
partners that are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities,
derivatives and other investments in the accompanying consolidated statements of operations.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive
income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an
arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in
accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's funds and managed
accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive
income recognized in the accompanying consolidated statement of operations may be subject to future reversal based on
subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that
the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such,
the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued
expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that
would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying
funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising
transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-
capitalization companies within the Company's Target Sectors.
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales
agent fees.
• Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an
underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security
offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the
underwriting process have been completed and the amount of the underwriting revenue has been determined. This
generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become
effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment
for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that
it has been allotted.
When the Company is not the lead manager for an underwriting transaction, management must estimate the
Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue.
Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company
recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company
receives the final settlement, typically within 90 days following the closing of the transaction.
•
Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in
connection with advising companies, principally in mergers and acquisitions and restructuring transactions. The
Company also earns fees for related advisory work such as providing fairness opinions. The Company records
strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or
engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the
related revenue is recognized or the engagement is otherwise concluded.
• Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-
underwritten transactions such as private placements of loans and debt and equity securities, including, private
investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities.
The Company records placement revenues (which may be in cash and/or securities) when the services for the
transactions are completed under the terms of each assignment or engagement and collection is reasonably assured.
The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are
deferred until the related revenue is recognized or the engagement is otherwise concluded.
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Brokerage
Brokerage revenue consists of commissions, principal transactions and research fees.
• Commissions. Commission revenue includes fees from executing client transactions. These fees are recognized on a
trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for
research products and other services provided by third parties. The amounts allocated for those purposes are
commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the
related expenditures on an accrual basis.
• Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's
market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and
trading gains and losses on inventory and other firm positions, which include warrants previously received as part of
investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling
blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects
the Company to market risk. These positions are typically held for a very short duration.
• Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and
credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee
amount is fixed or determinable, and collection is reasonably assured.
Investment Income
Investment income earned by the alternative investment and broker-dealer segments are earned from investing the
Company's capital in various strategies and from investments in private capital raising transactions of its investment banking
clients.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value
assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the
date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its
identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair
value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis or at an interim period if
events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Under US GAAP, the Company first assesses the qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amounts as a basis for determining if it is necessary to perform the two-step
approach. The first step requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If
the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further
analysis is required. If the carrying value of the reporting unit exceeds the fair value, there is an indication that the related
goodwill might be impaired and the step two is performed to measure the amount of impairment, if any.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its
carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the
reporting unit is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount
equal to that excess. Goodwill impairment tests involve significant judgment in determining the estimates of future cash flows,
discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the
market approach (earning and or transactions multiples) and / or income approach (discounted cash flow method). Changes in
these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill.
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any
intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or
changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment
loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is
recognized in the consolidated statements of operations if the sum of the estimated discounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
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Legal Reserves
The Company estimates potential losses that may arise out of legal and regulatory proceedings and records a reserve and
takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in
accordance with US GAAP. These amounts are reported in other expenses, net of recoveries, in the consolidated statements of
operations. See Note 18 "Commitments and Contingencies" in our accompanying consolidated financial statements for the year
ended December 31, 2016 for further discussion.
Recently adopted and future adoption of accounting pronouncements
For a detailed discussion, see Note 3 "Recently issued accounting pronouncements" in our accompanying consolidated
financial statements for the year ended December 31, 2016.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary exposure to market risk is a function of our role as investment manager for our funds and
managed accounts, our role as a financial intermediary in customer trading and market making activities, as well as the fact that
a significant portion of our own capital is invested in securities. Adverse movements in the prices of securities that are either
owned or sold short may negatively impact the Company's management fees and incentive income, as well as the value of our
own invested capital.
The market value of the assets and liabilities in our funds and managed accounts, as well as the Company's own
securities, may fluctuate in response to changes in equity prices, interest rates, credit spreads, currency exchange rates,
commodity prices, implied volatility, dividends, prepayments, recovery rates and the passage of time. The net effect of market
value changes caused by fluctuations in these risk factors will result in gains (losses) for our funds and managed accounts
which will impact our management fees and incentive income and for the Company's securities which will impact the value of
our own invested capital as well as the capital utilized in facilitating customer trades.
The Company's risk measurement and risk management processes are an integral part of our proprietary investment
process as well as market making and customer facilitation trading activities. These processes are implemented at the individual
position, strategy and total portfolio levels and are designed to provide a complete picture of the risks of the Company's balance
sheet. The key elements of our risk reporting include sensitivities, exposures, stress testing and profit and loss attribution. As a
result of our views of levels of risk being taken, the firm may undertake to hedge out some or all of any or all risks at either the
individual position, strategy or total portfolio levels.
Impact on Management Fees
The Company's management fees are generally based on the net asset value of the Company's funds and managed
accounts. Accordingly, management fees will change in proportion to changes in the market value of investments held by the
Company's funds and managed accounts.
Impact on Incentive Income
The Company's incentive income is generally based on a percentage of the profits of the Company's various funds and
managed accounts, which is impacted by global economies and market conditions as well as other factors. Consequently,
incentive income cannot be readily predicted or estimated.
Custody and prime brokerage risks
There are risks involved in dealing with the custodians or prime brokers who settle trades. Under certain circumstances,
including certain transactions where the Company's assets are pledged as collateral for leverage from a non-broker-dealer
custodian or a non-broker-dealer affiliate of the prime broker, or where the Company's assets are held at a non-U.S. prime
broker, the securities and other assets deposited with the custodian or broker may be exposed to credit risk with regard to such
parties. In addition, there may be practical or timing problems associated with enforcing the Company's rights to its assets in the
case of an insolvency of any such party.
Market risk
Market risk represents the risk of loss that may result from the change in value of a financial instrument due to
fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain
from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is primarily related to the
fluctuation in the fair values of securities owned and sold, but not yet purchased in the Company's funds and our role as a
financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in
financial instruments and risks arise in options, warrants and derivative contracts from changes in the fair values of their
underlying financial instruments. Securities sold, but not yet purchased, represent obligations of the Company's funds to deliver
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specified securities at contracted prices and thereby create a liability to repurchase the securities at prevailing future market
prices. We trade in equity securities as an active participant in both listed and over the counter markets. We typically maintain
securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk
management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures. In
connection with our trading business, management also reviews reports appropriate to the risk profile of specific trading
activities. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These
activities are intended to ensure that our trading strategies are conducted within acceptable risk tolerance parameters,
particularly when we commit our own capital to facilitate client trading. Activities include price verification procedures,
position reconciliations and reviews of transaction booking. We believe these procedures, which stress timely communications
between traders, trading management and senior management, are important elements of the risk management process.
A 10% change in the fair value of the investments held by the Company's funds as of December 31, 2016 would result in
a change of approximately $1.1 billion in our assets under management and would impact management fees by approximately
$5.6 million on an annual basis. This number is an estimate. The amount would be dependent on the fee structure of the
particular fund or funds that experienced such a change.
Currency risk
The Company is also exposed to foreign currency fluctuations. Currency risk arises from the possibility that fluctuations
in foreign currency exchange rates will affect the value of such financial instruments, including direct or indirect investments in
securities of non-U.S. companies. A 10% weakening or strengthening of the U.S. dollar against all or any combination of
currencies to which the Company's investments or the Company's funds have exposure to exchange rates would not have a
material effect on the Company's revenues, net loss or Economic Income.
Inflation risk
Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate
of inflation affects such expenses as employee compensation and communications charges, which may not be readily
recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects
on the securities markets, it may adversely affect our financial condition and results of operations in certain businesses.
Leverage and interest rate risk
There is no guarantee that the Company's borrowing arrangements or other arrangements for obtaining leverage will
continue to be available, or if available, will be available on terms and conditions acceptable to the Company. Unfavorable
economic conditions also could increase funding costs, limit access to the capital markets or result in a decision by lenders not
to extend credit to the Company. In addition, a decline in market value of the Company's assets may have particular adverse
consequences in instances where we have borrowed money based on the market value of those assets. A decrease in market
value of those assets may result in the lender (including derivative counterparties) requiring the Company to post additional
collateral or otherwise sell assets at a time when it may not be in the Company's best interest to do so.
Credit risk
The Company clears all of its securities transactions through clearing brokers on a fully disclosed basis. Pursuant to the
terms of the agreements between the Company and the clearing brokers, the clearing brokers have the right to charge the
Company for losses that result from a counterparty's failure to fulfill its contractual obligations. As the right to charge the
Company has no maximum amount and applies to all trades executed through the clearing brokers, we believe there is no
maximum amount assignable to this right. Accordingly, at December 31, 2016, the Company had recorded no liability.
Credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make
payments according to the terms of a contract. The Company's exposure to credit risk at any point in time is represented by the
fair value of the amounts reported as assets at such time.
In the normal course of business, our activities may include trade execution for our clients as well as agreements to
borrow or lend securities. These activities may expose us to risk arising from price volatility which can reduce clients' ability to
meet their obligations. To the extent investors are unable to meet their commitments to us, we may be required to purchase or
sell financial instruments at prevailing market prices to fulfill clients' obligations.
In accordance with industry practice, client trades are settled generally three business days after trade date. Should either
the client or the counterparty fail to perform, we may be required to complete the transaction at prevailing market prices.
We manage credit risk by monitoring the credit exposure to and the standing of each counterparty, requiring additional
collateral where appropriate, and using master netting agreements whenever possible.
64
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from
external events. We outsource all or a portion of certain critical business functions, such as clearing. Accordingly, we negotiate
our agreements with these firms with attention focused not only on the delivery of core services but also on the safeguards
afforded by back-up systems and disaster recovery capabilities. We make specific inquiries on any relevant exceptions noted in
a service provider's Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization
report on the state of its internal controls, when available.
Our service offerings in electronic and algorithmic trading require us to maintain consistent levels of speed and accuracy
in the management of orders generated by our models. We monitor these activities on a continuous basis and do not believe
that they comprise a material risk.
Our Internal Audit department oversees, monitors, measures, analyzes and reports on operational risk across the
Company. The scope of Internal Audit encompasses the examination and evaluation of the adequacy and effectiveness of the
Company's system of internal controls and is sufficiently broad to help determine whether the Company's network of risk
management, control and governance processes, as designed by management, is adequate and functioning as intended. Internal
Audit works with the senior management to help ensure a transparent, consistent and comprehensive framework exists for
managing operational risk within each area, across the Company and globally.
We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these
risks through a formalized control assessment process to ensure awareness and adherence to key policies and control
procedures. Primary responsibility for management of operational risk is with the businesses and the business managers therein.
The business managers, generally, maintain processes and controls designed to identify, assess, manage, mitigate and report
operational risk. As new products and business activities are developed and processes are designed and modified, operational
risks are considered.
Legal risk
Legal risk includes the risk of non-compliance with applicable legal and regulatory requirements and standards. Legal risk
also includes contractual and commercial risk such as the risk that a counterparty's performance obligations will be
unenforceable. The Company has established procedures based on legal and regulatory requirements that are designed to
achieve compliance with applicable statutory and regulatory requirements. The Company, principally through the Legal and
Compliance Division, also has established procedures that are designed to require that the Company's policies relating to
conduct, ethics and business practices are followed. In connection with its businesses, the Company has and continuously
develops various procedures addressing issues such as regulatory capital requirements, sales and trading practices, new
products, potential conflicts of interest, use and safekeeping of customer funds and securities, money laundering, privacy and
recordkeeping. In addition, the Company has established procedures to mitigate the risk that a counterparty's performance
obligations will be unenforceable, including consideration of counterparty legal authority and capacity, adequacy of legal
documentation, the permissibility of a transaction under applicable law and whether applicable bankruptcy or insolvency laws
limit or alter contractual remedies. The legal and regulatory focus on the financial services industry presents a continuing
business challenge for the Company.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are listed in Item 15—"Exhibits and Financial
Statement Schedules" of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, that are designed to
provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of December 31, 2016, we carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and
65
operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective and were operating at the reasonable assurance
level.
For Management's report on internal control over financial reporting see page F-2, and attestation report of our
independent registered public accounting firm see page F-3.
In addition, there were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) under the
Exchange Act, that occurred in the fourth quarter.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information in the definitive proxy statement for our 2017 annual meeting of stockholders under the captions
"Executive Officers," "Board of Directors," "Information Regarding the Board of Directors and Corporate Governance—
Committees of the Board—Audit Committee," "Information Regarding the Board of Directors and Corporate Governance—
Director Nomination Process," "Information Regarding the Board of Directors and Corporate Governance—Procedures for
Nominating Director Candidates," "Information Regarding the Board of Directors and Corporate Governance—Code of
Business Conduct and Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by
reference.
Item 11. Executive Compensation
The information in the definitive proxy statement for our 2017 annual meeting of stockholders under the captions
"Executive Compensation—Compensation and Benefits Committee Report," "Certain Relationships and Related Transactions
—Compensation and Benefits Committee Interlocks and Insider Participation" and "Information Regarding the Board of
Directors and Corporate Governance—Compensation Program for Non-Employee Directors" is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in the definitive proxy statement for our 2017 annual meeting of stockholders under the captions
"Security Ownership—Beneficial Ownership of Directors, Nominees and Executive Officers," "Security Ownership—
Beneficial Owners of More than Five Percent of our Common Stock" and "Securities Authorized for Issuance Under Equity
Compensation Plans" are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information in the definitive proxy statement for our 2017 annual meeting of stockholders under the captions
"Information Regarding the Board of Directors and Corporate Governance—Director Independence," "Certain Relationships
and Related Transactions—Transactions with Related Persons," and "Certain Relationships and Related Transactions—Review
and Approval of Transactions with Related Persons" is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information in the definitive proxy statement for our 2017 annual meeting of stockholders under the captions "Audit
Committee Report and Payment of Fees to Our Independent Auditor—Auditor Fees" and "Audit Committee Report and
Payment of Fees to Our Independent Auditor—Auditor Services Pre-Approval Policy" is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
PART IV
The consolidated financial statements required to be filed in the Annual Report on Form 10-K are listed on
page F-1 hereof. The required financial statements appear on pages F-1 through F-66 hereof.
66
2.
Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because
the required information is included in the consolidated financial statements.
3. Exhibits
See the Exhibit Index on pages E-1 through E-2 for a list of the exhibits being filed or furnished with or
incorporated by reference into this Annual Report on Form 10-K.
Item 16. Form 10-K Summary
Not Applicable.
67
(This page has been left blank intentionally.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1—Organization and Business
Note 2—Acquisition and Divestitures
Note 3—Significant Accounting Policies
Note 4—Cash Collateral Pledged
Note 5—Investments of Operating Entities and Consolidated Funds
Note 6—Fair Value Measurements for Operating Entities and Consolidated Funds
Note 7—Receivable from and Payable to Brokers
Note 8—Fixed Assets
Note 9—Goodwill and Intangible Assets
Note 10—Other Assets
Note 11—Accounts Payable, Accrued Expenses and Other Liabilities
Note 12—Redeemable Non-controlling Interests in Consolidated Subsidiaries and Funds
Note 13—Reinsurance
Note 14—Other Revenues and Expenses
Note 15—Share-Based and Deferred Compensation and Employee Ownership Plans
Note 16—Defined Contribution Plans
Note 17—Income Taxes
Note 18—Commitments and Contingencies
Note 19—Convertible Debt and Notes Payable
Note 20—Stockholder's Equity
Note 21—Accumulated Other Comprehensive Income (Loss)
Note 22—Earnings Per Share
Note 23—Segment Reporting
Note 24—Regulatory Requirements
Note 25—Related Party Transactions
Note 26—Guarantees and Off-Balance Sheet Arrangements
Note 27—Subsequent Events
Page
F- 2
F- 3
F- 4
F- 5
F- 6
F- 7
F- 8
F- 10
F- 10
F- 10
F- 12
F- 24
F- 24
F- 36
F- 42
F- 42
F- 43
F- 45
F- 46
F- 46
F- 46
F- 47
F- 47
F- 49
F- 50
F- 52
F- 54
F- 56
F- 58
F- 58
F- 59
F- 63
F- 63
F- 64
F- 65
F- 1
Management's Report on Internal Control over Financial Reporting
Management of Cowen Group, Inc. (the "Company") is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial reporting is a process designed under the
supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
As of the end of the Company's 2016 fiscal year, management conducted an assessment of the Company's internal control
over financial reporting based on the framework established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has
determined that the Company's internal control over financial reporting as of December 31, 2016 was effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements.
The Company's internal control over financial reporting as of December 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included herein, which
expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of
December 31, 2016.
F- 2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cowen Group, Inc.
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements
of operations, comprehensive income (loss), changes in equity, and cash flows present fairly, in all material respects, the
financial position of Cowen Group, Inc. and its subsidiaries (the Company) at December 31, 2016 and December 31, 2015, and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Report on Internal Control over Financial Reporting appearing on page F-2. Our
responsibility is to express opinions on these financial statements and on the Company's internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 27, 2017
F- 3
Cowen Group, Inc.
Consolidated Statements of Financial Condition
(dollars in thousands, except share and per share data)
As of December 31, 2016
As of December 31, 2015
Assets
Cash and cash equivalents
Cash collateral pledged
Securities owned, at fair value
Receivable on derivative contracts, at fair value
Other investments
Receivable from brokers
Fees receivable, net of allowance
Due from related parties
Fixed assets, net of accumulated depreciation and amortization of $23,867 and $29,953, respectively
Goodwill
Intangible assets, net of accumulated amortization of $29,418 and $28,301, respectively
Deferred tax asset, net
Other assets
Consolidated Funds
Cash and cash equivalents
Securities owned, at fair value
Receivable on derivative contracts, at fair value
Other investments
Receivable from brokers
Other assets
Total Assets
Liabilities and Stockholders' Equity
Liabilities
Securities sold, not yet purchased, at fair value
Payable for derivative contracts, at fair value
Payable to brokers
Compensation payable
Notes payable and other debt
Convertible debt
Fees payable
Due to related parties
Accounts payable, accrued expenses and other liabilities
Consolidated Funds
Securities sold, not yet purchased, at fair value
Payable for derivative contracts, at fair value
Payable to brokers
Due to related parties
Contributions received in advance
Capital withdrawals payable
Accounts payable, accrued expenses and other liabilities
Total Liabilities
Commitments and Contingencies (Note 18)
Redeemable non-controlling interests
Stockholders' equity
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding
as of December 31, 2016 (aggregate liquidation preference of $120,750,000) and 120,750 shares issued and
outstanding as of as of December 31, 2015 (aggregate liquidation preference of $120,750,000), respectively
Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 36,542,091 shares issued and
26,731,289 outstanding as of December 31, 2016 and 35,030,097 shares issued and 26,401,164 outstanding as of
December 31, 2015, respectively (including 162,176 and 124,392 restricted shares, respectively)
Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding
Additional paid-in capital
(Accumulated deficit) retained earnings
Accumulated other comprehensive income (loss)
Less: Class A common stock held in treasury, at cost, 9,810,802 and 8,628,933 shares, respectively
Total Stockholders' Equity
$
112,014
$
13,342
700,876
22,901
157,279
87,837
45,883
39,629
42,408
60,678
25,769
165,656
38,406
17,761
79,237
893
401,465
5,978
511
158,485
10,085
609,234
39,618
141,647
117,757
34,413
39,659
27,231
58,361
25,663
143,560
71,531
13,934
32,000
—
263,818
—
663
2,018,523
$
1,787,659
$
$
266,090
$
20,762
210,309
98,084
77,030
130,029
3,272
573
51,115
883
572
3,700
189
2,000
1,408
652
866,668
379,205
1
292
—
928,646
(2,442)
(2)
(153,845)
772,650
257,159
21,183
131,789
150,403
68,565
122,401
5,638
329
52,233
—
—
—
3
850
78
124
810,755
186,911
1
292
—
903,429
23,627
—
(137,356)
789,993
1,787,659
Total Liabilities and Stockholders' Equity
$
2,018,523
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
Cowen Group, Inc.
Consolidated Statements of Operations
(dollars in thousands, except per share data)
Year Ended December 31,
2016
2015
2014
Revenues
Investment banking
Brokerage
Management fees
Incentive income
Interest and dividends
Reimbursement from affiliates
Aircraft lease revenue
Reinsurance premiums
Other revenues
Consolidated Funds
Interest and dividends
Other revenues
Total revenues
Expenses
Employee compensation and benefits
Floor brokerage and trade execution
Interest and dividends
Professional, advisory and other fees
Service fees
Communications
Occupancy and equipment
Depreciation and amortization
Client services and business development
Goodwill impairment
Reinsurance claims, commissions and amortization of deferred acquisition costs
Other expenses
Consolidated Funds
Interest and dividends
Professional, advisory and other fees
Floor brokerage and trade execution
Other expenses
Total expenses
Other income (loss)
$
133,279
$
222,781
$
199,180
157,722
170,506
140,132
40,627
2,785
48,870
12,495
—
—
9,446
2,189
726
41,906
1,466
13,796
21,557
—
—
3,726
1,086
527
40,612
8,334
14,732
10,504
4,161
32,459
22,355
4,792
1,157
471,565
464,567
427,776
310,038
321,386
305,483
32,286
29,308
23,190
7,918
17,768
32,286
12,713
27,828
—
29,904
14,815
6,434
1,148
431
1,051
27,460
26,220
25,578
7,535
14,325
29,055
9,498
25,413
—
—
15,594
1,104
654
51
501
23,425
42,752
18,724
8,071
13,449
26,025
10,188
22,897
2,334
—
15,209
788
620
16
210
547,118
504,374
490,191
Net gains (losses) on securities, derivatives and other investments
23,381
36,789
104,928
Consolidated Funds
Net realized and unrealized gains (losses) on investments and other transactions
Net realized and unrealized gains (losses) on derivatives
Net gains (losses) on foreign currency transactions
Total other income (loss)
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common stockholders
Weighted average common shares outstanding:
Basic (a)
Diluted (a)
Earnings (loss) per share:
Basic (a)
Diluted (a)
7,085
13,503
97
44,066
(31,487)
(19,092)
(12,395)
6,882
(19,277)
6,792
12,517
2,071
(91)
51,286
11,479
(47,496)
58,975
15,246
43,729
4,075
12,890
2,451
(18)
120,251
57,836
(124,944)
182,780
15,564
167,216
—
$
$
$
(26,069)
$
39,654
$
167,216
26,857
26,857
27,522
29,043
(0.97)
(0.97)
$
$
1.44
1.37
$
$
28,731
29,871
5.82
5.60
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
The accompanying notes are an integral part of these consolidated financial statements.
F- 5
Cowen Group, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(dollars in thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation
Defined benefit pension plans:
Net gain/(loss) arising during the period
Add: amortization of prior service cost included in
net periodic pension cost
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
Year Ended December 31, 2016
Year Ended December 31, 2015
Year Ended December 31, 2014
$
(12,395)
$
58,975
$
182,780
(2)
—
—
—
(17)
—
—
—
(231)
(344)
—
(344)
(2)
$
(12,397)
(17)
$
58,958
(575)
$
182,205
The accompanying notes are an integral part of these consolidated financial statements.
F- 6
Cowen Group, Inc.
Consolidated Statements of Changes in Equity
(dollars in thousands, except share data)
Common
Shares
Outstanding
Common
Stock
Preferred
Shares
Outstanding
Preferred
Stock
Treasury
Stock
Additional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Retained Earnings/
(Accumulated deficit)
Total
Stockholders'
Equity
Redeemable Non-
controlling Interest
— $
— $
(48,084)
$
738,211
$
592
$
(183,243)
$
507,766
$
Balance, December 31, 2013
28,756,658
$
Net income (loss) attributable to Cowen Group, Inc.
Net income (loss) attributable to redeemable non-controlling interests
in consolidated subsidiaries and funds
Defined benefit plans
Foreign currency translation
Capital contributions
Capital withdrawals
Deconsolidation of funds
Restricted stock awards issued
Purchase of treasury stock, at cost
Stock options exercised
Warrants issued
Income tax effect from share based compensation
Amortization of share based compensation
—
—
—
—
—
—
—
1,066,334
(1,908,526)
8,333
—
—
—
Balance, December 31, 2014
27,922,799
$
Net income (loss) attributable to Cowen Group, Inc.
Net income (loss) attributable to redeemable non-controlling interests
in consolidated subsidiaries and funds
Foreign currency translation
Capital contributions
Capital withdrawals
Restricted stock awards issued
Purchase of treasury stock, at cost
Common stock issuance upon acquisition (See Note 2)
Preferred stock issuance, net of issuance costs (See Note 20)
Preferred stock dividends (See Note 20)
Capped call option transaction (See Note 20)
Stock options exercised
Income tax effect from share based compensation
Amortization of share based compensation
—
—
—
—
—
1,068,227
(2,752,019)
137,156
—
—
—
25,000
—
—
Balance, December 31, 2015
26,401,163
$
Net income (loss) attributable to Cowen Group, Inc.
Net income (loss) attributable to redeemable non-controlling interests
in consolidated subsidiaries and funds
Foreign currency translation
Capital contributions
Capital withdrawals
Deconsolidation of entities
Restricted stock awards issued
Purchase of treasury stock, at cost
Preferred stock dividends (See Note 20)
Income tax effect from share based compensation
Amortization of share based compensation
—
—
—
—
—
—
1,511,995
(1,181,869)
—
—
—
290
—
—
—
—
—
—
—
—
—
—
—
290
—
—
—
—
—
2
—
—
—
—
—
—
292
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(31,687)
—
—
—
—
—
—
—
—
—
—
—
116
15,218
1,324
18,297
— $
— $
(79,771)
$
773,166
$
—
—
—
—
—
—
(57,585)
—
—
—
—
—
—
—
—
—
—
—
—
3,006
117,194
—
(15,878)
395
3,806
21,740
—
—
—
—
—
—
—
—
120,750
—
—
—
—
—
120,750
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
1
Balance, December 31, 2016
26,731,289
$
292
120,750
$
The accompanying notes are an integral part of these consolidated financial statements.
F- 7
—
—
(344)
(231)
—
—
—
—
—
—
—
—
—
17
—
—
(17)
—
—
—
—
—
—
—
—
—
—
—
167,216
167,216
—
—
—
—
—
—
—
—
—
—
—
—
—
(344)
(231)
—
—
—
—
(31,687)
116
15,218
1,324
18,297
$
(16,027)
$
677,675
$
43,729
43,729
—
—
—
—
—
—
—
—
(4,075)
—
—
—
—
—
(17)
—
—
—
(57,585)
3,008
117,195
(4,075)
(15,878)
395
3,806
21,740
85,814
—
15,564
—
—
10,441
(24,585)
(1,158)
—
—
—
—
—
—
86,076
—
15,246
—
110,178
(24,589)
—
—
—
—
—
$ (137,356)
$
903,429
$
— $
23,627
$
789,993
$
186,911
—
—
—
—
—
—
—
—
—
—
—
—
—
(16,489)
—
—
—
—
(822)
26,039
—
—
(2)
—
—
—
—
—
—
—
—
(19,277)
(19,277)
—
—
—
—
—
—
—
(6,792)
—
—
—
(2)
—
—
—
—
(16,489)
(6,792)
(822)
26,039
—
6,882
—
276,923
(18,469)
(73,042)
—
—
—
—
—
$ (153,845)
$
928,646
$
(2)
$
(2,442)
$
772,650
$
379,205
Cowen Group, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
Depreciation and amortization
Net gain on sale of divested business
Amortization of debt issuance costs
Amortization of debt discount
Tax benefit (expense) from share-based payment arrangements
Share-based compensation
Deferred tax benefit
Deferred rent obligations
Net loss on disposal of fixed assets
Net gain on disposal of capital leases
Goodwill impairment
Contingent liability adjustment
Purchases of securities owned, at fair value
Proceeds from sales of securities owned, at fair value
Proceeds from sales of securities sold, not yet purchased, at fair value
Payments to cover securities sold, not yet purchased, at fair value
Net (gains) losses on securities, derivatives and other investments
Consolidated Funds
Purchases of securities owned, at fair value
Proceeds from sales of securities owned, at fair value
Proceeds from sales of securities sold, not yet purchased, at fair value
Payments to cover securities sold, not yet purchased, at fair value
Purchases of other investments
Proceeds from sales of other investments
Net realized and unrealized (gains) losses on investments and other transactions
(Increase) decrease in operating assets:
Cash at deconsolidated entity
Cash collateral pledged
Securities owned, at fair value, held at broker-dealer
Receivable on derivative contracts, at fair value
Securities borrowed
Receivable from brokers
Fees receivable, net of allowance
Due from related parties
Other assets
Consolidated Funds
Cash and cash equivalents
Receivable on derivative contracts, at fair value
Receivable from brokers
Other assets
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at fair value, held at broker-dealer
Payable for derivative contracts, at fair value
Securities loaned
Payable to brokers
Compensation payable
Fees payable
Due to related parties
Accounts payable, accrued expenses and other liabilities
Consolidated Funds
Contributions received in advance
Payable to brokers
Payable for derivative contracts, at fair value
Due to related parties
Accounts payable, accrued expenses and other liabilities
Net cash provided by / (used in) operating activities
Year Ended December 31,
2016
2015
2014
$
(12,395)
$
58,975
$
182,780
12,713
(15,638)
1,208
6,885
(822)
26,039
(21,274)
(880)
—
—
—
2,139
(4,483,975)
4,447,094
3,016,934
(3,054,869)
(28,878)
9,498
—
1,163
6,302
3,806
21,740
(17,966)
(2,333)
54
—
—
(200)
10,188
—
692
4,685
1,324
18,297
(130,724)
(2,348)
1,575
(1,261)
2,334
(2,055)
(5,856,112)
(4,722,554)
6,039,719
2,730,939
(2,674,153)
(34,495)
4,272,785
1,992,965
(1,898,102)
(97,013)
(113,653)
(25,000)
73,011
2,226
(1,799)
(221,897)
17,116
(17,402)
—
(3,257)
(17,005)
16,717
—
29,921
(12,632)
(176)
(10,048)
(3,827)
(893)
(5,978)
152
7,160
(421)
—
78,520
(60,279)
(2,366)
244
(8,891)
1,150
3,699
572
453
528
—
—
—
(92,305)
31,417
(13,552)
—
(1,779)
14,877
10,259
676,100
(27,750)
11,099
(13,344)
4,580
(13,433)
—
—
770
(11,747)
(20,147)
(682,493)
(204,186)
5,540
(693)
(145)
(3,112)
850
—
—
3
(98)
$
(354,774)
$
(67,352)
$
—
—
—
—
(19,736)
34,225
(16,386)
(784)
2,601
(3,939)
(4,092)
251,673
(15,533)
(1,406)
(109)
(13,687)
1,547
—
—
4,187
(21,633)
(2,055)
(236,084)
258,587
78,264
(129)
92
7,375
—
—
—
—
(327)
(63,781)
The accompanying notes are an integral part of these consolidated financial statements.
F- 8
Cowen Group, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
Year Ended December 31,
2016
2015
2014
(continued)
Cash flows from investing activities:
Purchases of other investments
Purchase of business, net of cash acquired (Note 2)
Cash convertible note economic hedge transaction
Proceeds from sales of other investments
Loans issued
Proceeds from loans held for investment
Proceeds from divested business, net of cash divested
Purchase of fixed assets
Net cash provided by / (used in) investing activities
Cash flows from financing activities:
Securities sold under agreement to repurchase
Proceeds from issuance of convertible debt
Proceeds from issuance of preferred stock, net of issuance costs
Capped call option transaction
Deferred debt issuance cost
Proceeds from sale of warrant
Borrowings on notes and other debt
Repayments on notes and other debt
Income tax effect from share-based payment arrangements
Proceeds from stock options exercised
Purchase of treasury stock
Cash paid to acquire net assets (contingent liability payment)
Capital contributions by redeemable non-controlling interests in operating entities
Capital withdrawals to redeemable non-controlling interests in operating entities
Consolidated Funds
Capital contributions by redeemable non-controlling interests in Consolidated Funds
Capital withdrawals to redeemable non-controlling interests in Consolidated Funds
Net cash provided by / (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental information
Cash paid during the year for interest
Cash paid during the year for taxes
Supplemental non-cash information
Purchase of treasury stock, at cost, through net settlement (See Note 20)
Notes payable increase through asset acquisition
Preferred stock dividends declared (See Note 20)
Cash conversion option (see Note 5)
Net assets (liabilities) acquired upon acquisition (net of cash) (See Note 2)
Common stock issuance upon close of acquisition (see Note 2)
Asset acquired under capital lease
Net assets of deconsolidated entities
$
(33,786)
$
(6,258)
—
54,068
—
42,800
17,303
(15,613)
58,514
—
—
—
—
—
—
30,638
(29,800)
(822)
—
(7,654)
(2,358)
10
(6,995)
276,914
(10,144)
249,789
(46,471)
158,485
(14,149)
(38,416)
—
58,166
(46,000)
—
—
(7,030)
(47,429)
—
—
117,194
(15,878)
—
—
7,140
(3,299)
3,806
394
(48,678)
(1,725)
5,644
(13,860)
104,533
(11,514)
143,757
28,976
129,509
$
$
$
$
$
$
$
$
$
$
$
112,014
$
158,485
$
17,540
5,085
8,835
7,164
6,792
$
$
$
$
$
— $
— $
— $
— $
73,042
$
17,525
4,161
$
$
8,907
$
— $
4,075
$
— $
22,468
3,008
$
$
— $
— $
(81,597)
—
(35,710)
82,072
—
—
—
(2,224)
(37,459)
(3,657)
149,500
—
—
(6,650)
15,218
65,392
(3,627)
1,324
116
(26,038)
(800)
705
(8,279)
9,736
(16,911)
176,029
74,789
54,720
129,509
32,032
547
5,649
—
—
35,710
—
—
4,075
1,544
The accompanying notes are an integral part of these consolidated financial statements.
F- 9
Cowen Group, Inc.
Notes to Consolidated Financial Statements
1. Organization and Business
Cowen Group, Inc., a Delaware corporation formed in 2009, is a diversified financial services firm and, together with its
consolidated subsidiaries (collectively, “Cowen,” “Cowen Group” or the “Company”), provides alternative investment
management, investment banking, research, sales and trading and prime brokerage services through its two business segments:
alternative investment and broker-dealer. The Company's alternative investment segment, includes hedge funds, private equity
structures, registered investment companies and listed vehicles. The Company's broker-dealer segment offers research, sales
and trading, prime brokerage and investment banking services to companies and primarily institutional investor clients. Our
primary target sectors are healthcare, technology, media and telecommunications, information and technology services,
consumer, aerospace and defense, industrials, energy and transportation sectors.
On December 5, 2016, the Company effected a one-for-four reverse stock split of our common stock. Except where the
context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.
2. Acquisitions and Divestitures
Acquisitions
Low Country
On April 22, 2016, Cowen Aviation Finance Holdings Inc. ("Cowen Aviation Finance") entered into a transaction whereby
Cowen Aviation Finance acquired Low Country III, LLC, which is comprised of a portfolio of four specialized aircraft currently
on lease in exchange for an immaterial upfront payment and a non-controlling equity interest in Cowen Aviation Finance. As
part of the transaction Cowen Aviation Finance also acquired the associated debt financing and lease contracts for each aircraft.
Separate from the transaction, Cowen Aviation Finance entered into services agreements with Tempus Applied Solutions, Inc., a
related party through common directors, which, among other services, will provide marketing, maintenance, and lease
administration services for Cowen Aviation Finance's current aircraft fleet. This acquisition was accounted for as an asset
acquisition in accordance with accounting principles generally accepted in the United States of America ("US GAAP") because,
upon separation from the seller, the acquired assets do not meet the definition of a business.
CRT business
On May 6, 2016, the Company completed its previously announced acquisition of the credit products, credit research,
special situations and emerging markets units from CRT Capital Group LLC (“CRT”). The acquisition was completed for a
combination of cash of $6.3 million and contingent consideration payable annually based on future revenues exceeding specific
targets. In the aggregate, the purchase price, assets acquired and liabilities assumed were not significant and the near term
impact to the Company and its consolidated results of operations and cash flows is not expected to be significant. Following the
acquisition, the businesses acquired from CRT are included in the broker-dealer segment.
In accordance with the terms of the purchase agreement, the Company is required to pay to the sellers a portion of future
revenue of the business exceeding specified targets over the period through June 2018. The Company estimated the contingent
consideration using the income approach (discounted cash flow method) which requires the Company to make estimates and
assumptions regarding the future cash flows. Changes in these estimates and assumptions could have a significant impact on the
amount recognized. On the acquisition date, the undiscounted amount ranged from zero to $8.0 million.
The acquisition was accounted for under the acquisition method of accounting in accordance with US GAAP. As such, the
results of operations of the businesses acquired are included in the accompanying consolidated statements of operations since
the date of the acquisition and the assets acquired, liabilities assumed and the resulting goodwill were recorded at their fair
values within their respective line items on the accompanying consolidated statement of financial condition (see Note 9).
The Company recognized approximately $0.4 million of acquisition-related costs, including legal, accounting, and
valuation services. These costs are included in professional, advisory and other fees in the accompanying consolidated
statements of operations. The Company also assumed contractual obligations, of up to $6 million, toward certain employees
which will vest over a 12 month period. These obligations are recorded as compensation expenses on a straight line basis.
The results of operations of the businesses acquired from CRT for the period from May 6, 2016 through December 31,
2016 are integrated with the broker-dealer business and are included within respective line items. Included in the
accompanying consolidated statements of operations for the year ended December 31, 2016 are revenues of $20.5 million,
respectively and net income of $4.1 million, respectively (excluding corporate allocated expenses) related to the businesses
acquired from CRT.
F- 10
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Concept and Conifer
During the year ended December 31, 2015, the Company completed two acquisitions. On September 1, 2015, the
Company completed its acquisition of all of the outstanding interests in Concept Capital Markets, LLC ("Concept") offering
prime brokerage services and outsourced trading. On October 1, 2015 the Company completed its acquisition of all of the
outstanding interests in Conifer Securities, LLC ("Conifer") representing the prime brokerage services division of Conifer
Financial Services LLC. Following the acquisitions, Concept was renamed Cowen Prime Services LLC ("Cowen Prime") and
Conifer was renamed Cowen Prime Services Trading LLC ("Cowen Prime Trading"). Both were registered broker-dealers
(members Financial Industry Regulatory Authority "FINRA" and Securities Industry Protection Corporation "SIPC").
Following the acquisitions, Conifer and Concept were integrated. During the second quarter of 2016, Cowen Prime Trading's
broker-dealer withdrawal request, filed with FINRA, became effective and the business was combined into Cowen Prime.
The acquisitions were accounted for under the acquisition method of accounting in accordance with US GAAP. As such,
the results of operations for Concept and Conifer are included in the accompanying consolidated statements of operations since
the dates of the respective acquisitions and the assets acquired, liabilities assumed and the resulting goodwill were recorded at
their fair values within their respective line items on the accompanying consolidated statement of financial condition. Both of
the acquisitions were not deemed material individually but were material in the aggregate.
Included in the accompanying consolidated statements of operations for the year ended December 31, 2016 are revenues
of $40.2 million and net income of $3.7 million, respectively (excluding corporate allocated expenses) related to the Concept
and Conifer combined results of operations.
The following unaudited supplemental pro forma information presents consolidated financial results for the year ended
December 31, 2015 as if the acquisitions were completed as of the beginning of that period. This supplemental pro forma
information has been prepared for comparative purposes only and is not intended to be indicative of what the Company's results
would have been had the acquisitions been completed on January 1, 2015, nor does it purport to be indicative of any future
results.
Revenues
Net income (loss) attributable to Cowen Group, Inc. common stockholders
Net income per common share:
Basic
Diluted
Divestitures
For the year ended
December 31, 2015
(dollars in thousands,
except per share data)
(unaudited)
$
$
$
496,543
40,613
1.48
1.40
On September 23, 2016, the Company and the portfolio managers of Ramius Alternative Solutions LLC ("RASL")
completed the sale of their respective ownership interests in RASL, an investment advisor, and RASL was deconsolidated as of
that date. RASL offered a range of customized hedge fund investment solutions with approximately $2.5 billion in client
assets. In accordance with the terms of the agreement, the Company was only required to transfer an immaterial target working
capital balance on the closing date. The net consideration received by the Company was approximately $17.3 million. Along
with the target working capital transferred at closing, the Company also allocated a portion of goodwill associated with the
alternative investment segment to the sale price which is shown net in other revenues in the accompanying consolidated
statements of operations.
As the Company will continue to offer its alternative investment platform to institutional and retail investors, the sale was
not presented as discontinued operations. The overall impact on the consolidated financial position, results of operations and
cash flows was not significant.
F- 11
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Significant Accounting Policies
a. Basis of Presentation
These consolidated financial statements are prepared in accordance with US GAAP as promulgated by the Financial
Accounting Standards Board ("FASB") through Accounting Standards Codification as the source of authoritative accounting
principles in the preparation of financial statements, and include the accounts of the Company, its operating and other
subsidiaries, and entities in which the Company has a controlling financial interest or a general partner interest. All material
intercompany transactions and balances have been eliminated on consolidation. Certain fund entities that are consolidated in
these accompanying consolidated financial statements, as further discussed below, are not subject to the consolidation
provisions with respect to their own controlled investments pursuant to their specialized accounting.
The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which
it sponsors and manages. Funds in which the Company has a controlling financial interest are consolidated with the Company
pursuant to US GAAP as described below. Consequently, the Company's consolidated financial statements reflect the assets,
liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds that are not owned by
the Company are reflected as redeemable non-controlling interests in consolidated subsidiaries in the accompanying
consolidated financial statements. The management fees and incentive income earned by the Company from these funds are
eliminated in consolidation.
Certain reclassifications have been made to prior period amounts in order to conform to current period presentation.
b.
Principles of consolidation
The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those
funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company
consolidates all variable interest entities for which it is the primary beneficiary.
The Company adopted the new accounting pronouncement regarding consolidation accounting using the modified
retrospective method with an effective adoption date of January 1, 2016. The modified retrospective method did not require the
restatement of prior year periods. The adoption of the new accounting pronouncement also resulted in a reclassification of
certain entities which were previously considered voting interest entities and are considered variable interest entities.
In accordance with these standards, the Company presently consolidates six funds for which it acts as the general partner
and investment manager. As of December 31, 2016 the Company consolidated the following funds: Ramius Enterprise LP
(“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), (as of
May 1, 2016) Caerus Select Fund LP ("Caerus LP"), Ramius Archview Credit and Distressed Master Fund ("Archview Master
Fund") and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds"). Archview Credit
and Distressed Fund ("Archview Feeder Fund") was consolidated during the year but was deconsolidated during the fourth
quarter of 2016 upon sale of the Company's investment in this fund.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity
is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP.
Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the
entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to
receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic
performance.
Under US GAAP, the usual condition for a controlling financial interest in a VOE is ownership of a majority voting
interest. Accordingly, the Company consolidates all VOEs in which it owns a majority of the entity's voting shares or units.
In connection with the adoption of the new accounting pronouncement regarding consolidation accounting, the Company
reevaluated all of its investment products for consolidation. As of January 1, 2016, in accordance with the adoption of the new
accounting pronouncement, the Company deconsolidated Quadratic Fund LLC ("Quadratic LLC"). Adoption of this
pronouncement also resulted in a reclassification of certain entities for which the Company was presumed to have control and
will now be VIEs.
Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with
US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP consolidation
model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's
economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could
F- 12
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
potentially be significant to the VIE, is considered to be the primary beneficiary of the VIE and thus is required to consolidate
it.
The Company reconsiders whether it is the primary beneficiary of a VIE by performing a periodic qualitative and/or
quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements
between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the
design of the VIE. As of December 31, 2016 and December 31, 2015, the total net assets of the consolidated VIEs were $461.6
million and $1.5 million, respectively. The VIEs act as investment managers and/or investment companies that may be
managed by the Company or the Company may have equity interest in those investment companies. The VIEs are financed
through their operations and/or loan agreements with the Company.
As of December 31, 2016 the Company holds variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise
Master”), Ramius Merger Master Fund Ltd ("Merger Master") and Caerus Select Master Fund Ltd ("Caerus Master")
(collectively the “Unconsolidated Master Funds”) through the Consolidated Funds. Investment companies, which account for
their investments under the specialized industry accounting guidance for investment companies prescribed under US GAAP, are
not subject to the consolidation provisions for their investments. Therefore, the Company has not consolidated the
Unconsolidated Master Funds.
In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs.
These VIEs are primarily funds and real estate entities for which the Company serves as the general partner, managing member
and/or investment manager with decision-making rights.
The Company does not consolidate the Unconsolidated Master Funds or real estate entities that are VIEs as it has
concluded that it is not the primary beneficiary in each instance. Fund investors are entitled to all of their economics of these
VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company's
involvement with funds and real estate entities that are unconsolidated VIEs is limited to providing investment management
services in exchange for management fees and incentive income. Although the Company may advance amounts and pay certain
expenses on behalf of the funds and real estate entities that it considers to be VIEs, it does not provide, nor is it required to
provide, any type of substantive financial support to these entities outside of regular investment management services (see Note
5 for additional disclosures on VIEs).
Equity Method Investments—For operating entities over which the Company exercises significant influence but which
do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The
Company's investments in equity method investees are recorded in other investments in the accompanying consolidated
statements of financial condition. The Company's share of earnings or losses from equity method investees is included in net
gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances
indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of
the equity method investment and its estimated fair value is recognized as an impairment charge when the loss in value is
deemed other than temporary.
Other—If the Company does not consolidate an entity, apply the equity method of accounting or account for an
investment under the cost method, the Company accounts for such entities (primarily, all securities of such entity which are
bought and held principally for the purpose of selling them in the near term as trading securities) in accordance with US GAAP,
at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities,
derivatives and other investments in the accompanying consolidated statements of operations.
Retention of Specialized Accounting—The Consolidated Funds and certain other consolidated companies are investment
companies and apply specialized industry accounting for investment companies. The Company has retained this specialized
accounting for these funds pursuant to US GAAP. The Company reports its investments on the consolidated statements of
financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected
within net realized and unrealized gains (losses) on investments and other transactions. Accordingly, the accompanying
consolidated financial statements reflect different accounting policies for investments depending on whether or not they are
held through a consolidated investment company. In addition, the Company's broker-dealer subsidiaries, Cowen and Company,
LLC ("Cowen and Company"), ATM Execution LLC ("ATM Execution"), Cowen International Limited ("CIL"), Ramius UK
Ltd. ("Ramius UK") and Cowen Prime also apply the specialized industry accounting for brokers and dealers in securities also
prescribed under US GAAP and International Financial Reporting Standards ("IFRS"). The Company also retains specialized
accounting upon consolidation.
F- 13
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
c.
Use of estimates
The preparation of the accompanying consolidated financial statements in conformity with US GAAP requires the
management of the Company to make estimates and assumptions that affect the fair value of securities and other investments,
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the accompanying
consolidated financial statements, the accounting for goodwill and identifiable intangible assets and the reported amounts of
revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
d.
Cash and cash equivalents
The Company considers investments in money market funds and other highly liquid investments with original maturities
of three months or less which are deposited with a bank or prime broker to be cash equivalents. Cash and cash equivalents held
at Consolidated Funds, although not legally restricted, are not available to fund the general liquidity needs of the Company. The
Company may also be exposed to credit risk as a result of cash being held at several banks.
e.
Valuation of investments and derivative contracts
US GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy are as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; and
Level 3 Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little,
if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this
category requires significant management judgment or estimation.
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants
use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics,
specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy
is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what
constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be that
market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by
independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the
hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's
perceived risk of that instrument.
The Company and its operating subsidiaries act as the manager for the Consolidated Funds. Both the Company and the
Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair
value of these investments is generally estimated based on proprietary models developed by the Company, which include
discounted cash flow analysis, public market comparables, and other techniques and may be based, at least in part, on
independently sourced market information. The material estimates and assumptions used in these models include the timing and
expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of,
and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate
valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect
to investments could be materially different from values derived based on the use of those estimates. The valuation
methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated
Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and
may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly
from the fair values that would have been used had a ready market for the investments existed and such differences could be
material.
The Company primarily uses the “market approach” to value its financial instruments measured at fair value. In
determining an instrument's level within the hierarchy, the Company categorizes the Company's financial instruments into three
categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further
be divided between those held long or sold short.
F- 14
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in
fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of
an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected
the fair value option for certain of its investments held by its operating companies. This option has been elected because the
Company believes that it is consistent with the manner in which the business is managed as well as the way that financial
instruments in other parts of the business are recorded.
Securities—Securities with values based on quoted market prices in active markets for identical assets are classified
within level 1 of the fair value hierarchy. These securities include active listed equities, certain U.S. government and sovereign
obligations, ETF's, mutual funds and certain money market securities. The Company does not adjust the quoted price for such
instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
Certain positions for which trading activity may not be readily visible, consisting primarily of convertible debt, corporate
debt and loans and restricted equities, are stated at fair value and classified within level 2 of the fair value hierarchy. The
estimated fair values assigned by management are determined in good faith and are based on available information considering,
trading activity, broker quotes, quotations provided by published pricing services, counterparties and other market participants,
and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. As
level 2 investments include positions that are not always traded in active markets and/or are subject to transfer restrictions,
valuations may be adjusted to reflect illiquidity and/or non-transferability.
Derivative contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter (“OTC”).
Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within
level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC
derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and
are therefore classified within level 2. OTC derivatives, such as swaps and options where market data is not readily available or
observable are classified as level 3.
Other investments—Other investments consist primarily of portfolio funds, real estate investments and equity method
investments, which are valued as follows:
i. Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds and investment companies which may
be managed by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and
disclosures relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its
equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either
are investment companies as defined by the AICPA Audit and Accounting Guide, Investment Companies, or have
attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair
value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or
its equivalent, without adjustment. In accordance with US GAAP, investments which are valued using NAV per share
as a practical expedient are not categorized within the fair value hierarchy.
ii. Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate
investments are estimated based on the price that would be received to sell an asset in an orderly transaction between
marketplace participants at the measurement date. Real estate investments without a public market are valued based on
assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash
flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment,
analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from
third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for
obsolescence, as well as independent external appraisals. In general, the Company considers several valuation
techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single
valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for
significant changes at the property level or a significant change in the overall market which would impact the value of
the real estate investment resulting in unrealized appreciation or depreciation.
Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other
things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the
Company invests in real estate and real estate related investments for which no liquid market exists. The market prices
for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the
Company from investments sold may differ from the fair values presented, and the differences could be material.
F- 15
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The Company's real estate investments are typically categorized as level 3 investments within the fair value hierarchy
as management uses significant unobservable inputs in determining their estimated fair value.
See Notes 5 and 6 for further information regarding the Company's investments, including equity method investments,
and fair value measurements.
f.
Due from/due to related parties
The Company may advance amounts and pay certain expenses on behalf of employees of the Company or other affiliates
of the Company. These amounts settle in the ordinary course of business. Such amounts are included in due from and due to
related parties, respectively, on the accompanying consolidated statements of financial condition.
g.
Receivable from and payable to brokers
Receivable from and payable to brokers, includes cash held at clearing brokers, amounts receivable or payable for
unsettled transactions, monies borrowed and proceeds from short sales equal to the fair value of securities sold, but not yet
purchased. Pursuant to the Company's prime broker agreements, these balances are presented net (assets less liabilities) across
balances with the same broker.
h.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation or amortization. Leasehold improvements are amortized on a
straight-line basis over the lesser of their useful life or lease term. When the Company commits to a plan to abandon fixed
assets or leasehold improvements before the end of its original useful life, the estimated depreciation or amortization period is
revised to reflect the shortened useful life of the asset. Other fixed assets are depreciated on a straight-line basis over their
estimated useful lives.
Aircraft and related equipment, which are leased out under operating leases, are carried at cost less accumulated
depreciation and are depreciated to estimated residual value using the straight-line method over the lease term or estimated
useful life of the asset. Any assets received at the end of the lease are marked to the lower of cost or fair value with the
adjustment recorded in other income.
Asset
Telephone and computer equipment
Computer software
Furniture and fixtures
Leasehold improvements
Capitalized lease asset
Aircraft and related equipment
Modifications to aircraft
i.
Goodwill and intangible assets
Depreciable Lives
Principal Method
3-8 years
3-7 years
5-8 years
5-15 years
5 years
10-20 years
4-10 years
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Straight-line
Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value
assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the
date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its
identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair
value of each reporting unit is available to support the value of goodwill allocated to the unit.
In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis, at December 31st each
year, or at an interim period if events or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Under US GAAP, the Company tests goodwill for impairment by assessing the
qualitative factors including, macroeconomic environment, industry and market specific conditions, financial performance and
events specific to the reporting unit to determine whether it is more likely than not that the fair value of the reporting unit is less
than its carrying amount. Based on the results of the qualitative assessment the Company performs the two-step goodwill
impairment test. The first step requires a comparison of the fair value of the reporting unit to its carrying value, including
goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and
no further analysis is required. If the carrying value of the reporting unit exceeds the fair value, there is an indication that the
related goodwill might be impaired and the step two is performed to measure the amount of impairment, if any.
F- 16
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its
carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same
manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the
reporting unit is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying
amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount
equal to that excess. Goodwill impairment tests involve significant judgment in determining the estimates of future cash flows,
discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the
market approach (earning and or transactions multiples) and / or income approach (discounted cash flow method). Changes in
these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill. See
Note 9 for further discussion.
Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any
intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or
changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. Similar to goodwill
impairment test, an impairment loss, calculated as the difference between the estimated fair value and the carrying value of an
asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated
undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.
j.
Debt
Long-term debt is carried at the principal amount borrowed net of any discount/premium. The discount is accreted to
interest expense using the effective interest method over the remaining life of the underlying debt obligations. Accrued but
unpaid coupon interest is included in accrued expenses and other liabilities in the accompanying consolidated statements of
financial condition. The Company adopted a new accounting pronouncement, during the first quarter of 2016, which
reclassified the unamortized debt issuance costs in the Company's previously reported consolidated statements of financial
condition from other assets to a direct reduction from the carrying amount of the debt. Notes payable and other debt and
convertible debt as of December 31, 2015 was previously presented as $195.7 million. Due to the retrospective application,
notes payable and other debt and convertible debt is now presented as $191.0 million as of December 31, 2015.
k.
Deferred rent
Deferred rent primarily consists of step rent, allowances from landlords and valuing the Company's lease properties in
accordance with US GAAP. Step rent represents the difference between actual operating lease payments due and straight-line
rent expense, which is recorded by the Company over the term of the lease, including the build-out period. This amount is
recorded as deferred rent in the early years of the lease, when cash payments are generally lower than straight-line rent expense,
and reduced in the later years of the lease when payments begin to exceed the straight-line expense. Landlord allowances are
generally comprised of amounts received and/or promised to the Company by landlords and may be received in the form of
cash or free rent. These allowances are part of the negotiated terms of the lease. The Company records a receivable from the
landlord and a deferred rent liability when the allowances are earned. This deferred rent is amortized into income (through
lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease, and the receivable is
reduced as amounts are received from the landlord. Liabilities resulting from valuing the Company's leased properties acquired
through business combinations are quantified by comparing the current fair value of the leased space to the current rental
payments on the date of acquisition. Deferred rent, included in accounts payable, accrued expenses and other liabilities in the
accompanying consolidated statements of financial condition, as of December 31, 2016 and 2015 is $10.3 million and $12.0
million, respectively. Deferred rent asset, included in other assets in the accompanying consolidated statements of financial
condition, as of December 31, 2016 and 2015 is $0.1 million and $0.3 million, respectively.
l.
Legal reserves
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is
probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a
contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss
because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or
range of loss for those matters, for which an estimate can be made. Neither reserve nor disclosure is required for losses that are
deemed remote.
F- 17
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
m. Capital withdrawals payable
Capital withdrawals from the Consolidated Funds are recognized as liabilities, net of any incentive income, when the
amount requested in the withdrawal notice represents an unconditional obligation at a specified or determined date (or dates) or
upon an event certain to occur. This generally may occur either at the time of the receipt of the notice, or on the last day of a
reporting period, depending on the nature of the request. As a result, withdrawals paid after the end of the year, but based upon
year-end capital balances are reflected as liabilities at the balance sheet date.
n.
Redeemable non-controlling interests in consolidated subsidiaries
Redeemable non-controlling interests represent the pro rata share of the book value of the financial positions and results
of operations attributable to the other owners of the consolidated subsidiaries. Redeemable non-controlling interests related to
Consolidated Funds are generally subject to annual, semi-annual or quarterly withdrawals or redemptions by investors in these
funds, sometimes following the expiration of a specified period of time (generally one year), or may only be withdrawn subject
to a redemption fee (generally ranging from 1% to 5%). Likewise, non-controlling interests related to certain other consolidated
entities are generally subject to withdrawal, redemption, transfer or put/call rights that permit such non-controlling investors to
withdraw from the entities on varying terms and conditions. Because these non-controlling interests are redeemable at the
option of the non-controlling interests, they have been classified as temporary equity in the accompanying consolidated
statements of financial condition. When redeemed amounts become legally payable to investors on a current basis, they are
reclassified as a liability.
o.
Treasury stock
In accordance with the US GAAP relating to repurchases of an entity's own outstanding common stock, the Company
records the purchases of stock held in treasury at cost and reports them separately as a deduction from total stockholders' equity
on the accompanying consolidated statements of financial condition and changes in equity.
p.
Comprehensive income (loss)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). The Company's other
comprehensive income (loss) is comprised of valuation adjustments to the Company's defined benefit plans and foreign
currency cumulative translation adjustments.
q.
Revenue recognition
The Company's principle sources of revenue are derived from two segments: an alternative investment segment and a
broker-dealer segment, as more fully described below.
Our alternative investment segment generates revenue through three principle sources: management fees, incentive
income and investment income from the Company's own capital.
Our broker-dealer segment generates revenue through three principle sources: investment banking, brokerage and
investment income.
Management fees
The Company earns management fees from affiliated funds and certain managed accounts that it serves as the investment
manager based on assets under management. The actual management fees received vary depending on distribution fees or fee
splits paid to third parties either in connection with raising the assets or structuring the investment.
Several general partners of the funds are owned jointly by the Company and third parties. Accordingly, the management
fees generated by these funds are split between the Company and the other general partners. Pursuant to US GAAP, these fees
received by the general partners that are accounted for under the equity method of accounting and are reflected under net gains
(losses) on securities, derivatives and other investments in the accompanying consolidated statements of operations.
Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for
capital inflows and redemptions. While some investors may have separately negotiated fees, in general the management fees are
as follows:
• Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of
assets under management or notional trading level. Management fees are generally calculated monthly based on assets
under management at the end of each month before incentive income.
F- 18
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
• Registered Funds. Management fees for the Company’s registered funds (State Street/Ramius Managed Futures
Strategy Fund and Ramius Archview Credit and Distressed Fund) are generally charged at an annual rate of up to
1.50% of assets under management.
• Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from
0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of
the applicable fund after the investment period has ended. Management fees are typically paid to the general partners
on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments
throughout the investment period and invested capital after the investment period.
• HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined
in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of
committed capital. After the investment period, management fees for these funds are generally charged at an annual
rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds.
For the other funds (and managed account) managed by Healthcare Royalty Partners, the management fee ranges
from .2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare
Royalty Partners funds are calculated on a quarterly basis.
• Ramius Trading Strategies. Management fees and platform fees for the Company's private commodity trading
advisory business are generally charged at an annual rate of up to 0.5%. Management and platform fees are generally
calculated monthly based on each account's notional trading level at the end of each month.
Incentive income
The Company earns incentive income based on net profits (as defined in the respective investment management
agreements) with respect to certain of the Company's funds and managed accounts, allocable for each fiscal year that exceeds
cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products the Company
offers, incentive income earned is typically up to 20% for hedge funds (in certain cases on performance in excess of a
benchmark), of the net profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive
income on real estate funds is earned after the investor has received a full return of their invested capital, plus a preferred
return. However, for certain real estate funds, the Company is entitled to receive incentive fees earlier, provided that the
investors have received their preferred return on a current basis or on an investor by investor basis. These funds are generally
subject to a potential clawback of these incentive fees upon the liquidation of the fund if the investor has not received a full
return of its invested capital plus the preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is
generally earned only after investors receive a full return of their capital plus a preferred return. Pursuant to US GAAP,
incentive income received by the general partners that are accounted for under the equity method of accounting and are
reflected under net gains (losses) on securities, derivatives and other investments in the accompanying consolidated statements
of operations.
In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive
income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an
arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in
accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's funds and managed
accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive
income recognized in the accompanying consolidated statement of operations may be subject to future reversal based on
subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.
Carried interest in the real estate funds and HealthCare Royalty Partners funds are subject to clawback to the extent that
the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such,
the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued
expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that
would need to be repaid to certain funds if these funds were to be liquidated based on the current fair value of the underlying
funds' investments as of the reporting date. The actual clawback liability does not become realized until the end of a fund's life.
Investment Banking
The Company earns investment banking revenue primarily from fees associated with public and private capital raising
transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-
capitalization companies within the Company's Target Sectors.
F- 19
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent
fees.
• Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an
underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security
offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the
underwriting process have been completed and the amount of the underwriting revenue has been determined. This
generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become
effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment
for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that
it has been allotted.
When the Company is not the lead manager for an underwriting transaction, management must estimate the
Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue.
Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company
recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company
receives the final settlement, typically within 90 days following the closing of the transaction.
•
Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in
connection with advising companies, principally in mergers and acquisitions and restructuring transactions. The
Company also earns fees for related advisory work such as providing fairness opinions. The Company records
strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or
engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the
related revenue is recognized or the engagement is otherwise concluded.
• Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-
underwritten transactions such as private placements of loans and debt and equity securities, including, private
investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities.
The Company records placement revenues (which may be in cash and/or securities) when the services for the
transactions are completed under the terms of each assignment or engagement and collection is reasonably assured.
The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are
deferred until the related revenue is recognized or the engagement is otherwise concluded.
Brokerage
Brokerage revenue consists of commissions, principal transactions and research fees.
• Commissions. Commission revenue includes fees from executing client transactions. These fees are recognized on a
trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for
research products and other services provided by third parties. The amounts allocated for those purposes are
commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the
related expenditures on an accrual basis. Commission revenues also includes fees from making algorithms available to
clients.
• Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's
market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and
trading gains and losses on inventory and other firm positions, which include warrants previously received as part of
investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling
blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects
the Company to market risk. These positions are typically held for a very short duration.
• Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and
credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee
amount is fixed or determinable, and collection is reasonably assured.
Interest and dividends
Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends
primarily from securities held by the Company for purposed of investing capital, investments held by its Consolidated Funds
and its brokerage balances. Interest is recognized on an accrual basis and interest income is recognized on the debt of those
issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on
F- 20
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
debt investments based on criteria determined by the Company using the effective yield method, which assumes the
reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.
Reimbursement from affiliates
The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund and real estate businesses.
These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition,
pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and
personnel costs for legal, compliance, accounting, tax compliance, risk and technology expenses that directly relate to
administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the
accompanying consolidated statements of operations as employee compensation and benefits, professional, advisory and other
fees, communications, occupancy and equipment, client services and business development and other.
Aircraft lease revenue
Aircraft lease revenue associated with the Company's aircraft leasing business is recorded on a straight-line basis over
the term of the lease, net of the amortization of rent receivables, deferred rent, and/or prepaid initial direct costs.
Reinsurance-related contracts
Premiums for reinsurance-related contracts are earned over the coverage period. In most cases, premiums are recognized
as revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. For each of its
contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk, in
accordance with US GAAP. If the Company determines that a contract does not expose it to a reasonable possibility of a
significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net
amount receivable reflected as an asset in other assets, and any net amount payable reflected as a liability within accounts
payable, accrued expenses and other liabilities on the consolidated statements of financial condition.
The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including
reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual
case estimates and (3) estimates of incurred but not reported losses.
Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and
estimates of recoverable amounts and are included in other expenses on the consolidated statements of operations.
Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been
deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include
commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets
on the consolidated statements of financial condition.
r.
Investments transactions and related income/expenses
Purchases and sales of securities, net of commissions, and derivative contracts, and the related revenues and expenses are
recorded on a trade date basis with net trading gains and losses included as a component of net gains (losses) on securities,
derivatives and other investments, and with respect to the Consolidated Funds and other real estate entities as a component of
net realized and unrealized gains (losses) on investments and other transactions and net realized and unrealized gains (losses)
on derivatives, in the accompanying consolidated statements of operations.
s.
Share-based compensation
The Company accounts for its share-based awards granted to individuals as payment for employee services in accordance
with US GAAP and values such awards based on grant date fair value. Unearned compensation associated with share-based
awards is amortized over the vesting period of the option or award. The Company estimates forfeiture for equity-based awards
that are not expected to vest. See Note 15 for further information regarding the Company's share-based compensation plans.
t.
Leases
The Company leases certain facilities and equipment used in its operations. The Company evaluates and classifies its
leases as operating or capital leases for financial reporting purposes. Assets held under capital leases are included in fixed
assets. Operating lease expense is recorded on a straight-line basis over the lease term. Landlord incentives are recorded as
deferred rent and amortized, as reductions to lease expense, on a straight-line basis over the life of the applicable lease.
F- 21
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
u.
Income taxes
The Company accounts for income taxes in accordance with US GAAP which requires the recognition of tax benefits or
expenses based on the estimated future tax effects of temporary differences between the financial statement and tax basis of its
assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that
includes the enactment date. Valuation allowances are established to reduce deferred tax assets to an amount that is more likely
than not to be realized.
US GAAP clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements,
requiring the Company to determine whether a tax position is more likely than not to be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting
the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company
recognizes accrued interest and penalties related to its uncertain tax positions as a component of income tax expense.
In accordance with federal and state tax laws, the Company and its subsidiaries file consolidated federal, state, and local
income tax returns as well as stand-alone state and local tax returns. The Company also has subsidiaries that are resident in
foreign countries where tax filings have to be submitted on a stand-alone or combined basis. These subsidiaries are subject to
tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries in
the consolidated statement of operations. The countries where the Company owns subsidiaries and has tax filing obligations are
the United Kingdom, Luxembourg, and Hong Kong.
v.
Foreign currency transactions
The Company consolidates certain foreign subsidiaries that have designated a foreign currency as their functional
currency. For entities that have designated a foreign currency as their functional currency, assets and liabilities are translated
into U.S. dollars based on current rates, which are the spot rates prevailing at the end of each statement of financial condition
date, and revenues and expenses are translated at historical rates, which are the average rates for the relevant periods. The
resulting translation gains and losses, and the tax effects of such gains and losses, are recorded in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
For subsidiaries that have designated the U.S. Dollar as their functional currency, securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. Dollar amounts at the date of valuation. Purchases and sales of
securities and other assets and liabilities and the related income and expenses denominated in foreign currencies are translated
into U.S. Dollar amounts on the respective dates of the transactions. The Company does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on these balances from fluctuations arising from changes in market
prices of securities and other assets/liabilities held or sold. Such fluctuations are included in the accompanying consolidated
statements of operations as a component of net gains (losses) on securities, derivatives and other investments. Gains and losses
primarily relating to foreign currency broker balances are included in Other income (loss) in the accompanying consolidated
statements of operations.
w.
Recently issued accounting pronouncements
In January 2017, the FASB issued guidance which clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. Under the current guidance, there are three elements of a business-inputs, processes, and outputs. While an
integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be
present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can
acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and
processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a
group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively
for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently
evaluating the impact of this guidance on the Company’s consolidated financial statements.
In November 2016, the FASB issued guidance which reduces the diversity in practice as to how changes in restricted cash
are presented and classified in the statement of cash flows. The guidance requires that a statement of cash flows explain the
change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the
F- 22
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
statement of cash flows. The guidance does not provide a definition of restricted cash or restricted cash equivalents. For public
business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods
within those fiscal years. The Company currently presents its restricted cash and changes in its restricted cash, separately on its
consolidated statement of financial condition and consolidated statements of cash flows respectively. The Company is currently
evaluating the impact of this guidance on the Company’s consolidated financial statements.
In October 2016, the FASB issued guidance to amend the consolidation guidance on how a reporting entity that is the
single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common
control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of
a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting
entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE.
The amendments require that reporting entity, in determining whether it satisfies the second characteristic of a primary
beneficiary, to include all of its direct variable interests in a VIE and, on a proportionate basis, its indirect variable interests in a
VIE held through related parties, including related parties that are under common control with the reporting entity. That is,
under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are
under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single
decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through
other related parties. The amendments in this guidance are effective for public business entities for fiscal years beginning after
December 15, 2016 and interim periods within those fiscal years. The Company is currently evaluating the impact of this
guidance on the Company’s consolidated financial statements.
In August 2016, the FASB issued guidance which reduces the diversity in practice as to how certain cash receipts and cash
payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues
with the objective of reducing the existing and potential future diversity in practice. The amendments in this guidance are
effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal
years. The Company is currently evaluating the impact of this guidance on the Company’s cash flows presentation.
In March 2016, as part of its simplification initiative, the FASB issued a new accounting pronouncement which simplified
the requirements for share based payments. The guidance among other things covers the income tax consequences and
classification of excess tax benefit and tax withholding on the statement of cash flows. For public business entities, the
guidance is effective for reporting periods beginning after December 15, 2016. The Company will reflect the impact in the
Company’s consolidated statements of cash flows.
In May 2014, the FASB issued guidance which amends and supersedes the revenue recognition requirements and most
industry-specific guidance and creates a single source of revenue guidance. The new guidance outlines the principles an entity
must apply to measure and recognize revenue and related cash flows. The guidance also provides a model for the measurement
and recognition of gains and losses on the sale of certain non-financial assets. The guidance is effective for reporting periods
beginning after December 15, 2017. In July 2015, the FASB confirmed a deferral of the effective date by one year, with early
adoption on the original effective date permitted. In 2016, the FASB issued various new guidance to clarify the implementation
guidance on principal versus agent considerations, revenue from contracts with customers and identifying performance
obligations and licensing implementation. The Company is currently evaluating the impact of this guidance on the Company’s
financial condition, results of operations and cash flows.
In March 2016, as part of its simplification initiative, the FASB issued a new accounting pronouncement which eliminates
the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of
ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings
retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment
had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the
investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date
the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of
accounting, no retroactive adjustment of the investment is required. The guidance is effective prospectively for reporting
periods beginning after December 15, 2016. As of December 31, 2016 the Company determined that it does not have any
impact from this pronouncement.
In March 2016, the FASB issued two amendments relating to Derivatives and Hedging. The amendments clarify that a
change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does
not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria
continue to be met. The second amendment relates to Contingent Put and call option in a debt instrument and clarify the
requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt
F- 23
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
instruments are clearly and closely related to their debt hosts when assessed under the current guidance. For public business
entities the guidance is effective for reporting periods beginning after December 15, 2016. The Company is currently evaluating
the impact of this guidance on the Company’s financial condition and its disclosures. As of December 31, 2016 the Company
determined that it does not have any impact from this pronouncement.
In February 2016, the FASB issued guidance which amends and supersedes its previous guidance regarding leases. The
new guidance requires the lessee to recognize the right to use assets and lease liabilities that arise from leases and present them
in its statement of financial condition. The recognition of these lease assets and lease liabilities represents an improvement over
previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from
previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal
difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized
in the statement of financial condition. For public business entities the guidance is effective for reporting periods beginning
after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s financial
condition and its disclosures.
In January 2016, as a joint project with International Accounting Standards Board (IASB), the FASB issued a new
accounting pronouncement to address certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. The amendments in the update made improvements to US GAAP for equity investments and investments carried at
amortized cost. The guidance also simplifies the impairment assessment for equity investments and clarifies the need for
valuation allowance on deferred tax asset related to available for sale securities. For public business entities the guidance is
effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this
guidance on the Company’s financial condition and its disclosure.
In January 2017, the FASB issued guidance which simplify the subsequent measurement of goodwill, the new guidance
eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill.
Instead, under the new amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax
deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The amendments in this guidance are effective for public business entities for annual and interim goodwill impairment tests
performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The
Company is currently evaluating the impact of this guidance on the Company’s consolidated financial statements.
4. Cash Collateral Pledged
As of December 31, 2016 and 2015, the Company pledged cash collateral in the amount of $7.8 million and $10.1
million, respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City,
Boston, Stamford and San Francisco. The Company also has a letter of credit, in the amount of $5.5 million, due March 2017,
for which cash is pledged as collateral under a reinsurance agreement. (See Note 19).
5. Investments of Operating Entities and Consolidated Funds
a.
Operating Entities
Securities owned, at fair value
Securities owned, at fair value are held by the Company and are considered held for trading. Substantially all equity
securities are pledged to the clearing brokers under terms which permit the clearing broker to sell or re-pledge the securities to
others subject to certain limitations.
F- 24
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2016 and 2015, securities owned, at fair value consisted of the following:
Common stocks (b)
Preferred stock (b)
Warrants and rights
U.S. Government securities (a) (b)
Corporate bonds (d)
Convertible bonds (c)
Trade claims
Mutual funds (b) (e)
As of December 31,
2016
2015
(dollars in thousands)
669,655
$
15,811
8,335
3,780
3,029
250
10
6
700,876
$
515,108
25,563
3,059
3,016
47,192
819
—
14,477
609,234
$
$
(a) As of December 31, 2016, maturities ranged from February 2017 to December 2017 with an interest rate of 0%. As of
December 31, 2015, maturities ranged from January 2016 to August 2016 with interest rates ranged between 0% to
5.95%.
(b) The Company has elected the fair value option for investments in securities of preferred and common stocks with a
fair value of $7.0 million and $5.2 million at December 31, 2016 and preferred and common stock with a fair value of
$11.6 million and $9.4 million, respectively, at December 31, 2015. The Company has also elected the fair value
option for investments in mutual funds and U.S. government securities with a fair value of $0.1 million and $3.8
million at December 31, 2016 and mutual funds and U.S. government securities with a fair value of $5.5 million and
$3.0 million, respectively, at December 31, 2015, respectively.
(c) As of December 31, 2016, the maturity was March 2018 with an interest rate of 8%. As of December 31, 2015,
maturities ranged from July 2016 to March 2018 with interest rates ranged between 8% to 10.00%.
(d) As of December 31, 2016, maturities ranged from January 2017 to January 2036 and interest rates ranged between
6.25% to 13.00%. As of December 31, 2015, maturities ranged from March 2016 to February 2046 and interest rates
ranged between 3.25% to 9.00%.
(e) Included in this amount as of December 31, 2015, are investments in affiliated funds of $13.4 million all of which was
liquidated during the three months ended March 31, 2016.
Receivable on and Payable for derivative contracts, at fair value
The Company's direct involvement with derivative financial instruments includes total return swaps, futures, currency
forwards, equity swaps, credit default swaps and options. The Company's derivatives trading activities exposes the Company to
certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, counterparty risk, foreign currency
movements and changes in the liquidity of markets.
Upon issuance of the Company's cash convertible unsecured senior notes ("Convertible Notes") (See Note 19), the
Company recognized the embedded cash conversion option at fair value of $35.7 million which is valued as of December 31,
2016 at $14.8 million and is included in payable for derivative contracts in the accompanying consolidated statement of
financial condition. Also, on the date of issuance of the Convertible Notes, the Company entered into a separate cash
convertible note economic hedge transaction (the "Hedge Transaction") with a counterparty (the “Option Counterparty”)
whereby, the Company purchased a cash settled option contract with terms identical to the conversion option embedded in the
Convertible Notes and simultaneously sold an equity settled warrant with a higher strike price. The Hedge Transaction is
expected to reduce the Company’s exposure to potential cash payments in excess of the principal amount of converted notes
that the Company may be required to make upon conversion of the Convertible Notes. The Company paid a premium of $35.7
million for the option under the Hedge Transaction and received a premium of $15.2 million for the equity settled warrant
transaction, for a net cost of $20.5 million. The Hedge Transaction is valued at $14.8 million as of December 31, 2016 and is
included in receivable on derivative contracts in the accompanying consolidated statement of financial condition. Aside from
the initial premium paid, the Company will not be required to make any cash payments under the Hedge Transaction and could
be entitled to receive an amount of cash from the Option Counterparty generally equal to the amount by which the market price
per share of common stock exceeds the strike price of the Hedge Transaction during the relevant valuation period. The
warrants cover 7,012,196 shares of the Company's Class A common stock and have an initial exercise price of $28.72 per share
F- 25
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
(share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of
December 5, 2016). The warrants expire over a period of 80 trading days beginning on November 14, 2018. The warrant
transaction could have a dilutive effect to the extent that the market value per share of the Company’s Class A common stock
exceeds the applicable strike price of the warrants.
The Company's long and short exposure to derivatives is as follows:
Receivable on derivative contracts
Futures
Currency forwards
Swaps
Options other (a)
Foreign currency options
As of December 31,
2016
2015
Number of
contracts /
Notional Value
Fair value
Number of
contracts /
Notional Value
Fair value
$
$
$
$
12,421
$
80,608
46,462
256,097
57,051
$
(dollars in thousands)
$
$
$
$
104
592
468
21,539
198
22,901
9,416
$
67,862
118,488
289,433
283,797
$
189
659
2,327
31,456
4,987
39,618
(a) Includes index, equity, commodity future and cash conversion options.
Payable for derivative contracts
Futures
Currency forwards
Swaps
Options other (a)
As of December 31,
2016
2015
Number of
contracts /
Notional Value
Fair value
Number of
contracts /
Notional Value
Fair value
(dollars in thousands)
$
$
$
38,345
$
—
9,533
23,726
$
642
$
— $
181
$
19,939
20,762
11,995
$
44,156
7,605
16,632
$
101
463
71
20,548
21,183
(a) Includes index, equity, commodity future and cash conversion options.
The following tables present the gross and net derivative positions and the related offsetting amount, as of December 31,
2016 and 2015. This table does not include the impact of over collateralization.
F- 26
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Gross amounts not offset in the
Consolidated Statement of
Financial Condition
Gross
amounts
recognized
Gross amounts offset
on the Consolidated
Statements of
Financial Condition
(a)
Net amounts
included on the
Consolidated
Statements of
Financial
Condition
Financial
instruments
Cash
Collateral
pledged (b)
Net
amounts
(dollars in thousands)
As of December 31, 2016
Receivable on derivative contracts, at fair
value
$
22,901
$
— $
22,901
$
— $
1,382
$
21,519
Payable for derivative contracts, at fair
value
20,762
As of December 31, 2015
Receivable on derivative contracts, at fair
value
Payable for derivative contracts, at fair
value
39,618
21,183
—
—
—
20,762
39,618
21,183
—
—
—
181
20,581
9,339
30,279
534
20,649
(a) Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the
extent an event of default has occurred.
(b) Includes the amount of collateral held or posted.
The realized and unrealized gains/(losses) related to derivatives trading activities were $(11.2) million ,$(5.6) million and
$(0.5) million for the years ended December 31, 2016, 2015, and 2014 respectively, and are included in other income in the
accompanying consolidated statements of operations.
Pursuant to the various derivatives transactions discussed above, except for the cash convertible note hedge (see Note 19)
and exchange traded derivatives, the Company is required to post/receive collateral. As of December 31, 2016 and 2015,
collateral consisting of $17.1 million and $27.1 million of cash, respectively, is included in receivable from brokers and payable
to brokers on the accompanying consolidated statements of financial condition. As of December 31, 2016 and 2015 all
derivative contracts were with multiple major financial institutions.
Other investments
As of December 31, 2016 and 2015, other investments included the following:
Portfolio Funds, at fair value (1)
Equity method investments (2)
Lehman claims, at fair value
As of December 31,
2016
2015
(dollars in thousands)
$
$
120,023
$
36,991
265
157,279
$
114,281
27,067
299
141,647
F- 27
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
(1) Portfolio Funds, at fair value
The Portfolio Funds, at fair value as of December 31, 2016 and 2015, included the following:
As of December 31,
2016
2015
(dollars in thousands)
27,424
$
22,234
16,187
Starboard Value and Opportunity Fund LP (c)(*)
$
Formation8 Partners Fund I, L.P. (f)
RCG Longview Debt Fund V, L.P. (i) (*)
HealthCare Royalty Partners LP (a)(*)
Quadratic Fund LLC (k) (*)
Green Energy Metals Fund, LP (o)
Starboard Partners Fund LP (d)(*)
Orchard Square Partners Credit Fund LP (b)
RCG LPP2 PNW5 Co-Invest, L.P. (j) (*)
HealthCare Royalty Partners II LP (a)(*)
Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.) (g)
Lagunita Biosciences, LLC (n)
Starboard Leaders Fund LP (e)(*)
RCGL 12E13th LLC (i) (*)
RCG LV Park Lane LLC (h) (*)
Other private investment (l) (*)
Other affiliated funds (m)(*)
7,147
6,729
6,241
5,067
4,327
3,152
2,091
1,790
1,698
1,231
348
—
8,548
5,809
$
120,023
$
20,369
19,454
18,147
12,127
—
—
14,036
4,170
2,468
6,006
1,101
1,000
1,080
609
809
6,909
5,996
114,281
* These portfolio funds are affiliates of the Company.
The Company has no unfunded commitments regarding the portfolio funds held by the Company except as noted in Note 18.
(a) HealthCare Royalty Partners, L.P. and HealthCare Royalty Partners II, L.P. are private equity funds and therefore
distributions will be made when cash flows are received from the underlying investments, typically on a quarterly
basis.
(b) Orchard Square Partners Credit Fund LP has a quarterly redemption policy with a 60 day notice period and a 4%
penalty on redemptions of investments of less than a year in duration.
(c) Starboard Value and Opportunity Fund LP permits quarterly withdrawals upon 90 days notice.
(d) Starboard Partners Fund LP permits redemptions on a semi-annual basis on 180 days prior written notice subsequent to
an initial two year lock up.
(e) Starboard Leaders Fund LP does not permit withdrawals, but instead allows terminations with respect to capital
commitments upon 30 days prior written notice at any time following the first anniversary of an investors initial
capital contribution.
(f) Formation8 Partners Fund I, L.P. is a private equity fund which invests in early stage and growth transformational
information and energy technology companies. Distributions will be made when the underlying investments are
liquidated.
(g) Eclipse Ventures Fund I, L.P. (Formerly Formation8 Partners Hardware Fund I, L.P.) is a private equity fund which
invests in early stage and growth hardware companies. Distributions will be made when the underlying investments
are liquidated.
(h) RCG LV Park Lane LLC was a single purpose entity formed to participate in a joint venture which acquired, at a
discount, the mortgage notes on a portfolio of multifamily real estate properties located in Birmingham, Alabama.
RCG LV Park Lane LLC is a private equity fund and therefore distributions will be made when the underlying
investments are liquidated.
F- 28
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
(i) RCGL 12E13th LLC and RCG Longview Debt Fund V, L.P. are real estate private equity structures and therefore
distributions will be made when the underlying investments are liquidated.
(j) RCG LPP2 PNW5 Co-Invest, L.P. is a single purpose entity formed to participate in a joint venture which acquired
five multi-unit residential rental properties located in the Pacific Northwest. RCG LPP2 PNW5 Co-Invest, L.P. is a
private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(k) Quadratic Fund LLC permits redemptions on a 30 days prior written notice.
(l) Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless
broadband communication provider in Italy.
(m) The majority of these funds are affiliates of the Company or are managed by the Company and the investors can
redeem from these funds as investments are liquidated.
(n) Lagunita Biosciences, LLC, a healthcare investment company that creates and grows early stage companies to
commercialize impactful translational science that addresses significant clinical needs, is a private equity structure and
therefore distributions will be made when the underlying investments are liquidated.
(o) The Green Energy Metals Fund, LP invests the vast majority of its capital in physical off-exchange traded minor
metals that are crucial to the production and sustainability of clean energy, emerging technology and energy efficiency.
The Company is invested in a managed account specifically targeting Cobalt. The Green Energy Metals Fund, LP is a
private equity structure and therefore distributions will be made when the underlying investments are liquidated.
(2) Equity method investments
Equity method investments include investments held by the Company in several operating companies whose operations
primarily include the day to day management of a number of real estate funds, including the portfolio management and
administrative services related to the acquisition, disposition, and active monitoring of the real estate funds' underlying debt and
equity investments. The Company's ownership interests in these equity method investments range from 20% to 57%. The
Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in RCG Longview Partners II, LLC and
in Surf House Ocean Views Holdings, LLC. The operating agreement that governs the management of day-to-day operations
and affairs of these entities stipulates that certain decisions require support and approval from other members in addition to the
support and approval of the Company. As a result, all operating decisions made in these entities requires the support of both the
Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company. As the
Company does not possess control over any of these entities, the presumption of consolidation has been overcome pursuant to
current accounting standards and the Company accounts for these investments under the equity method of accounting. Also
included in equity method investments are the investments in (a) HealthCare Royalty Partners General Partners and
(b) Starboard Value (and certain related parties) which serves as an operating company whose operations primarily include the
day to day management (including portfolio management) of several activist hedge funds and related managed accounts and c)
Surf House Ocean Views Holdings, LLC which is a joint venture in a real estate development project. The Company recorded
no impairment charges in relation to its equity method investments for the years ended December 31, 2016, 2015 and 2014.
The Company holds a non-controlling financial interest in Starboard Value entities. The independent portfolio managers
are responsible for activities which are significant to the overall business and hold the majority of the equity interest. The
Starboard Value entities were formed to provide a full range of investment advisory and management services and act as a
general partner, investment advisor, and pension advisor or in similar capacity to clients. In accordance with the respective
offering documents of the underlying funds, Starboard Value entities are entitled to a fixed percentage of management fee and
performance fees. The principal owners of Starboard Value exercised their right to acquire a portion of the Company’s
ownership interest in the activist business for a gain of $9.6 million which is recorded in Other Income (Loss) in the
accompanying Consolidated Statements of Operations and Due From Related Parties in the accompanying Consolidated
Statements of Financial Condition. The sale price is being financed through the profits of the relevant Starboard entities over a
five year period and earns interest at 5% per annum.
F- 29
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table summarizes equity method investments held by the Company:
Surf House Ocean Views Holdings, LLC
Starboard Value LP
RCG Longview Debt Fund V Partners, LLC
RCG Longview Management, LLC
HealthCare Royalty GP, LLC
HealthCare Royalty GP II, LLC
RCG Longview Debt Fund IV Management, LLC
HealthCare Royalty GP III, LLC
RCG Kennedy House, LLC
RCG Longview Equity Management, LLC
HealthCare Overflow Fund GP, LLC
Urban American Real Estate Fund II, LLC
RCG Urban American Management, LLC
RCG Urban American, LLC
Other
As of December 31,
2016
2015
(dollars in thousands)
13,522
$
12,501
7,256
656
583
354
331
208
183
114
68
—
—
—
1,215
36,991
$
—
15,769
4,655
656
989
1,017
331
88
304
114
—
1,211
379
120
1,434
27,067
$
$
For the period ended December 31, 2016, one equity method investments have met the significance criteria as defined
under Regulation S-X Rule 4-08(g) of the SEC guidance. As such, the Company is presenting the following summarized
financial information:
Assets
Cash
Performance & management fee receivable
Investments in Portfolio Funds, at fair value
Liabilities
Equity
Revenues
Expenses
Net realized and unrealized gains (losses)
Net Income
As of December 31,
2016
2015
(dollars in thousands)
$
$
1,176
$
10,146
2,490
5,604
8,208
$
213
16,839
3,425
—
20,477
Year Ended December 31,
2016
2015
2014
(dollars in thousands)
24,008
$
(19,246) $
90,905
—
301
—
(221)
—
734
24,309
$
(19,467) $
91,639
$
$
For the period ended December 31, 2016, equity method investments held by the Company in aggregate have met the
significance criteria as defined under SEC guidance. As such, the Company is required to present summarized financial
information for these significant investees for the years ended December 31, 2016, 2015 and 2014, and such information is as
follows.
F- 30
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Assets
Liabilities
Equity
Other equity method investment
Revenues
Expenses
Net realized and unrealized gains (losses)
Net Income
As of December 31,
2016
2015
(dollars in thousands)
$
$
88,965
22,504
66,461
$
$
96,529
10,669
85,860
Year Ended December 31,
2016
2015
2014
$
$
(dollars in thousands)
90,337
$
38,571
$
(34,490)
(6,305)
(20,658)
9,715
49,542
$
27,628
$
139,360
(20,044)
12,342
131,658
As of December 31, 2016 and 2015, the Company's share of losses in its equity method investment in RCG Longview
Partners II, LLC has exceeded the carrying amount recorded in this investee. These amounts are included in accounts payable,
accrued expenses and other liabilities in the accompanying consolidated statements of financial condition. RCG Longview
Partners II, LLC, as general partner to a real estate fund, has reversed previously recorded incentive income allocations and has
recorded a current clawback obligation to the limited partners in the fund. This obligation is due to a change in unrealized value
of the fund on which there have previously been distributed carried interest realizations; however, the settlement of a potential
obligation is not due until the end of the life of the respective fund. As the Company is obligated to return previous distributions
it received from RCG Longview Partners II, LLC, it has continued to record its share of gains/losses in the investee including
reflecting its share of the clawback obligation in the amount of $6.2 million.
The Company's income (loss) from equity method investments was a gain of $14.4 million, $3.4 million, and $49.1
million for the years ended December 31, 2016, 2015 and 2014, respectively, and is included in net gains (losses) on securities,
derivatives and other investments on the accompanying consolidated statements of operations.
Securities sold, not yet purchased, at fair value
Securities sold, not yet purchased, at fair value represent obligations of the Company to deliver a specified security at a
contracted price and, thereby, create a liability to purchase that security at prevailing prices. The Company's liability for
securities to be delivered is measured at their fair value as of the date of the consolidated financial statements. However, these
transactions result in off-balance sheet risk, as the Company's ultimate cost to satisfy the delivery of securities sold, not yet
purchased, at fair value may exceed the amount reflected in the accompanying consolidated statements of financial condition.
Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to
sell or re-pledge the securities to others subject to certain limitations. As of December 31, 2016 and 2015, securities sold, not
yet purchased, at fair value consisted of the following:
Common stocks
Corporate bonds (a)
Warrants and rights
As of December 31,
2016
2015
(dollars in thousands)
263,460
$
2,591
39
266,090
$
257,101
58
—
257,159
$
$
(a) As of December 31, 2016 and 2015, the maturities ranged from April 2021 to January 2036 with interest rates ranged
between 5.50% to 6.25%.
Variable Interest Entities
The total assets and liabilities of the variable interest entities for which the Company has concluded that it holds a
variable interest, but for which it is not the primary beneficiary, are $5.3 billion and $1.0 billion as of December 31, 2016 and
$3.1 billion and $473.3 million as of December 31, 2015, respectively. In addition, the maximum exposure relating to these
variable interest entities as of December 31, 2016 was $508.1 million, and as of December 31, 2015 was $327.8 million, all of
F- 31
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
which is included in other investments, at fair value in the accompanying consolidated statements of financial condition. The
exposure to loss primarily relates to the Consolidated Feeder Funds' investment in their Unconsolidated Master Funds and the
Company's investment in unconsolidated investment companies.
b.
Consolidated Funds
Securities owned, at fair value
As of December 31, 2016 and 2015, securities owned, at fair value, held by the Consolidated Funds consisted of the
following:
Preferred stock
Common stocks
U.S. Government securities (a)
Corporate bonds (b)
Term Loan
Warrants and rights
As of December 31,
2016
2015
(dollars in thousands)
37,343
$
28,474
6,994
4,214
2,209
3
32,000
—
—
—
—
—
79,237
$
32,000
$
$
(a) As of December 31, 2016, the maturity was March 2017 with an interest rate of 0%.
(b) As of December 31, 2016, maturities ranged from October 2017 to June 2038 and interest rates ranged between
0% and 14.37%.
Securities sold, not yet purchased, at fair value
As of December 31, 2016, securities sold, not yet purchased, at fair value, held by the Consolidated Funds consisted of the
following:
Corporate bonds (a)
Common stocks
As of December 31, 2016
(dollars in thousands)
$
$
672
211
883
(a) As of December 31, 2016, maturities ranged from September 2019 to September 2023 and interest rates ranged
between 4.38% and 9.25%.
Receivable on derivative contracts
As of December 31, 2016, receivable on derivative contracts, at fair value, held by the Consolidated Funds are comprised
of:
Currency forwards
Equity swaps
Options
As of December 31, 2016
(dollars in thousands)
$
$
18
731
144
893
F- 32
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Payable for derivative contracts
As of December 31, 2016, payable for derivative contracts, at fair value, held by the Consolidated Funds are comprised
of:
Currency forwards
Futures
Options
$
$
As of December 31, 2016
(dollars in thousands)
Other investments, at fair value
Investments in Portfolio Funds, at fair value
As of December 31, 2016 and 2015, investments in Portfolio Funds, at fair value, included the following:
Investments of Enterprise LP
Investments of Merger Fund
Investments of Caerus Select Fund LP
Investments of Quadratic LLC
As of December 31,
2016
2015
(dollars in thousands)
114,159
$
281,572
5,734
—
401,465
$
$
$
10
495
67
572
111,075
74,348
—
78,395
263,818
Consolidated portfolio fund investments of Enterprise LP
Enterprise LP operates under a “master-feeder” structure, whereby Enterprise Master's shareholders are Enterprise LP and
RCG II Intermediate Fund, L.P. The consolidated investments in Portfolio Funds include Enterprise LP's investment of
$114.2 million and $111.1 million in Enterprise Master as of December 31, 2016 and 2015, respectively. On May 12, 2010, the
Company announced its intention to close Enterprise Master. Prior to this announcement, strategies utilized by Enterprise
Master included merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capital
structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages,
structured credit investments, investments in mortgage backed securities and other structured finance products, investments in
real estate and real property interests, structured private placements and other relative value strategies. Enterprise Master had
broad investment powers and maximum flexibility in seeking to achieve its investment objective. Enterprise Master was
permitted to invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. As
Enterprise Master winds down its positions, it will return capital to its investors. There are no unfunded commitments at
Enterprise LP.
Consolidated portfolio fund investments of Merger Fund
The Merger Fund operates under a “master-feeder” structure, whereby Ramius Merger Master Ltd's ("Merger Master")
shareholders are Merger Fund and Ramius Merger Fund Ltd. The consolidated investments in Portfolio Funds include Merger
Fund's investment of $281.6 million and $74.3 million in Merger Master as of December 31, 2016 and 2015, respectively. The
Merger Master’s investment objective is to achieve consistent absolute returns while emphasizing the preservation of investor
capital. The Merger Master seeks to achieve these objectives by taking a fundamental, research-driven approach to investing,
primarily in the securities of issuers engaged in, or subject to, announced (or unannounced but otherwise anticipated)
extraordinary corporate transactions, which may include, but are not limited to, mergers, acquisitions, leveraged buyouts, tender
offers, hostile takeover bids, sale processes, exchange offers, and recapitalizations. Merger Master invests in the securities of
one or more issuers engaged in or subject to such extraordinary corporate transactions. Merger Master typically seeks to derive
a profit by realizing the price differential, or “spread,” between the market price of securities purchased or sold short and the
market price or value of securities realized in connection with the completion or termination of the extraordinary corporate
transaction, or in connection with the adjustment of market prices in anticipation thereof, while seeking to minimize the market
risk associated with the aforementioned investment activities. Merger Master will, depending on markets conditions, generally
focus the majority of its investment program on announced transactions. If the investment manager of Merger Master considers
it necessary, it may either alone or as part of a group, also initiate shareholder actions seeking to maximize value. Such
F- 33
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
shareholder actions may include, but are not limited to, re-orienting management’s focus or initiating the sale of the company
(or one or more of its divisions) to a third party. There are no unfunded commitments at Merger Fund.
Consolidated portfolio fund investments of Caerus LP
Caerus LP operates under a “master-feeder” structure, whereby Caerus Select Master Fund Ltd's ("Caerus Master")
shareholder is Caerus LP. The consolidated investments in Portfolio Funds include Caerus LP's investment of $5.7 million in
Caerus Master as of December 31, 2016. Caerus Master’s investment objective is to achieve superior risk-adjusted rates of
return that bear little correlation to the overall market. Caerus Master seeks to achieve this objective by utilizing a long/short
investment strategy, investing primarily in equities and options on equities that trade on major global market exchanges. Caerus
Master focuses on investments in the global consumer sector, including, but not limited to, securities in sub-sectors such as
retail, apparel and footwear, restaurants, gaming and lodging, consumer products, food and beverage, consumer technology,
media, transportation and homebuilding and building materials. There are no unfunded commitments at Caerus LP.
Consolidated portfolio fund investments of Quadratic Fund LLC
Quadratic LLC operates under a “master-feeder” structure, whereby Quadratic Master Fund Ltd's ("Quadratic Master")
shareholders are Quadratic Fund LLC and Quadratic Fund Ltd. The consolidated investments in Portfolio Funds include
Quadratic Fund LLC's investment of $78.4 million in Quadratic Master as of December 31, 2015. Quadratic LLC was
deconsolidated on January 1, 2016 (See Note 3). The Quadratic Master’s investment objective is to achieve attractive, risk-
adjusted rates of return through the use of proprietary fundamental global macro and options/swaptions based strategies.
Quadratic Master’s strategy is primarily executed via options and swaptions.
Indirect Concentration of the Underlying Investments Held by Consolidated Funds
From time to time, either directly or indirectly through its investments in the Consolidated Funds, the Company may
maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Company's
equity. Based on information that is available to the Company as of December 31, 2016 and 2015, the Company assessed
whether or not its interests in an issuer for which the Company's pro-rata share exceeds 5% of the Company's equity. There
were no indirect concentrations that exceeded 5% of the Company's equity as of December 31, 2016 and 2015.
Underlying Investments of Unconsolidated Funds Held by Consolidated Funds
Enterprise Master and Merger Master
Enterprise LP's investment in Enterprise Master represents Enterprise LP's proportionate share of Enterprise Master's net
assets; as a result, the investment balances of Enterprise Master reflected below may exceed the net investment which
Enterprise LP has recorded. Merger Fund's investment in Merger Master represents Merger Fund's proportionate share of
Merger Master's net assets; as a result, the investment balances of Merger Master reflected below may exceed the net
investment which Merger Fund has recorded. The following tables present summarized investment information for the
underlying investments and derivatives held by Enterprise Master and Merger Master as of December 31, 2016 and 2015:
Securities owned by Enterprise Master, at fair value
Preferred stock
Common stock
Rights
Trade claims
Restricted stock
As of December 31,
2016
2015
(dollars in thousands)
1,581
$
835
—
—
—
2,416
$
1,484
724
321
128
124
2,781
$
$
Receivable/(Payable) on derivative contracts, at fair value, owned by Enterprise Master
Description
Currency forwards
As of December 31,
2016
2015
(dollars in thousands)
$
$
— $
— $
(4)
(4)
F- 34
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Portfolio Funds, owned by Enterprise Master, at fair value
RCG Special Opportunities Fund, Ltd*
RCG Longview Equity Fund, LP*
RCG Longview Debt Fund IV, LP*
RCG Longview II, LP*
RCG Renergys, LLC*
RCG Energy, LLC *
RCG Soundview, LLC*
RCG Urban American Real Estate Fund, L.P.*
Other Private Investments
Other Real Estate Investments *
*
Affiliates of the Company.
Merger Master
Securities owned by Merger Master, at fair value
Common stocks
Corporate bonds (a)
As of December 31,
2016
2015
Strategy
(dollars in thousands)
Multi-Strategy
$
101,832
$
Real Estate
Real Estate
Real Estate
Energy
Energy
Real Estate
Real Estate
Various
Real Estate
4,744
1,637
836
1
—
—
—
8,682
295
$
118,027
$
81,544
7,635
3,577
698
1
1,189
452
312
10,515
5,753
111,676
As of December 31,
2016
2015
(dollars in thousands)
$
$
835,672
—
835,672
$
$
157,429
492
157,921
(a) As of December 31, 2015, the maturity was June 2024 with an interest rate of 5.25%.
Securities sold, not yet purchased, by Merger Master, at fair value
As of December 31, 2016 and 2015, Merger Master held common stock, sold not yet purchased, of $395.5 million and
$73.8 million, respectively.
Receivable on derivative contracts, at fair value, owned by Merger Master
Description
Options
Equity swaps
Currency forwards
Payable for derivative contracts, at fair value, owned by Merger Master
Description
Options
Equity swaps
F- 35
As of December 31,
2016
2015
(dollars in thousands)
4,264
$
255
—
4,519
$
As of December 31,
2016
2015
(dollars in thousands)
2,285
$
123
2,408
$
1,275
1,001
235
2,511
563
30
593
$
$
$
$
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Caerus Master
As of December 31, 2016, Caerus Master held common stock, of $3.2 million and common stock, sold not yet purchased,
of $2.6 million.
6. Fair Value Measurements for Operating Entities and Consolidated Funds
The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the
accompanying consolidated statements of financial condition by caption and by level within the valuation hierarchy as of
December 31, 2016 and 2015:
Assets at Fair Value as of December 31, 2016
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Operating Entities
Securities owned
US Government securities
$
3,780
$
— $
— $
Preferred stock
Common stocks
Convertible bonds
Corporate bonds
Trade claims
Warrants and rights
Mutual funds
Receivable on derivative contracts, at fair value
Futures
Currency forwards
Swaps
Options
Other investments
Lehman claim
Consolidated funds
Securities owned
US Government securities
Preferred stock
Common stocks
Corporate Bonds
Warrants and rights
Term loan
Receivable on derivative contracts, at fair value
Currency forwards
Futures
Options
—
658,179
—
—
—
4,616
6
104
—
—
6,662
—
6,994
—
19,467
—
—
—
—
—
132
—
1,355
—
2,477
—
—
—
—
592
468
322
—
—
415
8,712
4,214
—
1,552
18
731
12
Percentage of total assets measured at fair value
87.0%
2.6%
$
699,940
$
20,868
$
Portfolio funds measured at net asset value (a)
Consolidated funds' portfolio funds measured at net
asset value (a)
Equity method investments
Total investments
15,811
10,121
250
552
10
3,719
—
—
—
—
14,753
265
—
36,928
295
—
3
657
—
—
—
83,364
$
10.4%
$
3,780
15,811
669,655
250
3,029
10
8,335
6
104
592
468
21,737
265
6,994
37,343
28,474
4,214
3
2,209
18
731
144
804,172
120,023
401,465
36,991
1,362,651
F- 36
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Liabilities at Fair Value as of December 31, 2016
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
263,460
$
— $
— $
—
39
642
—
5,186
—
211
—
—
67
—
2,591
—
—
181
—
—
—
672
10
—
495
—
—
—
—
14,753
263,460
2,591
39
642
181
19,939
5,997
5,997
—
—
—
—
—
211
672
10
67
495
Operating Entities
Securities sold, not yet purchased
Common stocks
Corporate bonds
Warrants and rights
Payable for derivative contracts, at fair value
Futures
Swaps
Options
Accounts payable, accrued expenses and other
liabilities
Contingent consideration liability (b)
Consolidated funds
Securities sold, not yet purchased
Common stocks
Corporate bonds
Payable for derivative contracts, at fair value
Currency forwards
Options
Futures
Percentage of total liabilities measured at fair value
91.6%
$
269,605
$
3,949
$
1.3%
20,750
$
294,304
7.1%
(a) In accordance with US GAAP, certain investments that are measured at fair value using the net asset value per
share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value
amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts
presented in the consolidated statement of financial condition.
(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the third and fourth
quarter of 2015 and the second quarter of 2016, the Company is required to pay to the sellers a portion of future net
income and/or revenues of the acquired businesses, if certain revenue targets are achieved through the periods ended
August 2016, December 2018, December 2020, and June 2018, respectively. The Company estimated the contingent
consideration liability using the income approach (discounted cash flow method) which requires the Company to make
estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions
could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2016 can
range from $0.1 million to $15.1 million.
F- 37
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Assets at Fair Value as of December 31, 2015
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
— $
— $
Operating Entities
Securities owned
US Government securities
$
Preferred stock
Common stocks
Convertible bonds
Corporate bonds
Warrants and rights
Mutual funds
Receivable on derivative contracts, at fair value
Futures
Currency forwards
Equity swaps
Options
Other investments
Lehman claim
Consolidated funds
Preferred stock
3,016
7,891
505,303
—
—
487
14,477
189
—
—
11,895
—
—
4,800
7,527
—
47,192
—
—
—
659
2,327
6,354
—
—
Percentage of total assets measured at fair value
79.8%
10.1%
$
543,258
$
68,859
$
Portfolio funds measured at net asset value (a)
Consolidated funds' portfolio funds measured at net asset
value (a)
Equity method investments
Total investments
12,872
2,278
819
—
2,572
—
—
—
—
18,194
299
32,000
69,034
$
10.1%
$
3,016
25,563
515,108
819
47,192
3,059
14,477
189
659
2,327
36,443
299
32,000
681,151
114,281
263,818
27,067
1,086,317
Securities sold, not yet purchased
Common stocks
Corporate bonds
Payable for derivative contracts, at fair value
Futures
Currency forwards
Equity and credit default swaps
Options
Accounts payable, accrued expenses and other
liabilities
Contingent consideration liability (b)
Liabilities at Fair Value as of December 31, 2015
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
257,101
$
— $
— $
257,101
—
101
—
—
2,354
—
58
—
463
71
—
—
—
—
—
58
101
463
71
18,194
20,548
—
592
0.2%
$
6,158
24,352
$
8.6%
6,158
284,500
Percentage of total liabilities measured at fair value
91.2%
$
259,556
$
(a) In accordance with US GAAP, certain investments that are measured at fair value using the net asset value per
share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value
amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts
presented in the consolidated statement of financial condition.
(b) In accordance with the terms of the purchase agreements for acquisitions that closed during 2012 and the third and
fourth quarter of 2015, the Company is required to pay to the sellers a portion of future net income of the acquired
businesses, if certain revenue targets are achieved through the periods ended August 2016, December 2018, and
F- 38
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
December 2020, respectively. The Company estimated the contingent consideration liability using the income
approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding
the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the
amounts recognized. The undiscounted amounts as of December 31, 2015 can range from $0.1 million to $10.0
million.
The following table includes a rollforward of the amounts for the year ended December 31, 2016 and 2015, for financial
instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance
of the unobservable inputs to the overall fair value measurement.
Year Ended December 31, 2016
Balance at
December 31,
2015
Transfers
in
Transfers
out
Purchases/
(covers)
(Sales)/
shorts
Realized and
Unrealized
gains/losses
Balance at
December
31, 2016
(dollars in thousands)
Change in
unrealized gains
/losses relating
to instruments
still held (1)
Operating Entities
Preferred stock
Common stocks
Convertible bonds
Corporate bond
Options, asset
Options, liability
Warrants and Rights
Trade claims
Lehman claim
Contingent consideration liability
Consolidated Funds
Preferred stock
Common stocks
Warrants and rights
Term Loan
$
12,872
$
2,278
819
—
18,194
18,194
2,572
—
299
6,158
32,000
—
—
—
—
—
—
675 (c)
—
—
—
—
—
—
—
—
—
—
$
(1,000) (a) $
3,717
$
(218)
$
440
$
15,811
$
—
—
—
—
—
—
—
—
—
7,099
(3,222)
3,966
10,121
—
279
—
—
(569)
(325)
—
—
1,914
(817)
10
—
—
—
—
(77)
(3,441)
(3,441)
50
—
(34)
2,397
(4,697)
2,139
250
552
14,753
14,753
3,719
10
265
5,997
(11,000) (a)
13,483
—
—
—
314
—
590
—
—
—
—
2,445
36,928
(19)
3
67
295
3
657
34
3,972
—
(111)
(3,441)
(3,441)
79
—
(35)
—
2,445
(19)
3
67
Balance at
December 31,
2014
Transfers
in
Transfers
out
Year Ended December 31, 2015
Purchases/
(covers)
(Sales)/
shorts
(dollars in thousands)
Realized and
Unrealized
gains/losses
Balance at
December
31, 2015
Change in
unrealized gains
/losses relating
to instruments
still held (1)
Operating Entities
Preferred stock
Common stocks
Convertible bonds
Options, asset
Options, liability
Warrants and Rights, asset
Lehman claim
Contingent consideration
liability
Consolidated Funds
Preferred Stock
Lehman claim
$
12,517
$
412
900
36,807
36,807
1,322
380
4,083
—
493
—
—
—
—
—
—
—
—
7,000 (b)
—
$ (11,322) (a) (b) $
14,850
$ (6,665)
$
3,492
$
12,872
$
—
—
—
—
—
—
—
—
—
2,398
250
—
—
824
—
(441)
—
—
—
(71)
—
3,600
(1,725)
25,000
—
—
(739)
(91)
(331)
(18,613)
(18,613)
497
(81)
200
—
246
2,278
819
18,194
18,194
2,572
299
6,158
32,000
—
217
90
(331)
(18,613)
(18,613)
715
(81)
200
—
—
(1) Unrealized gains/losses are reported in other income (loss) in the accompanying consolidated statements of
operations.
(a) The investments were converted to common stock.
F- 39
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
(b) The Company transferred investments to a consolidated fund.
(c) The investment undertook a reorganization and subsequently is not traded in an active market.
All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying
consolidated statements of operations.
Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables
above.
The Company recognizes all transfers and the related unrealized gain (loss) at the beginning of the reporting period.
Transfers between level 1 and 2 generally relate to whether the principal market for the security becomes active or
inactive. Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the
fair value measurements or due to change in liquidity restrictions for the investments.
During the years ended December 31, 2016, 2015 and 2014, there were no transfers between level 1 and level 2 assets
and liabilities.
The following table includes quantitative information as of December 31, 2016 and 2015 for financial instruments classified
within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement
of the Company's level 3 financial instruments.
Level 3 Assets
Fair Value at
December 31, 2016
(dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Valuation techniques
Unobservable Inputs
Range
Common and preferred stocks
$
10,917
Guideline companies/
transaction price
Option pricing method,
discounted cash flow
Corporate and Convertible bonds
520
Discounted cash flows
Warrants and rights, net
3,719
Model based
Options
Other level 3 assets (a)
Total level 3 assets
Level 3 Liabilities
Option pricing models
14,753
53,455
83,364
Volatility
Market multiples
Discount rate
Market multiples
Discount rate
Volatility
Volatility
37%
0.8x to 9.3x
9.5% to 10%
6x
20%
30% to 85%
(weighted average 73%)
40%
Options
14,753
Option pricing models
Volatility
40%
Contingent consideration
Total level 3 liabilities
$
5,997
20,750
Discounted cash flows
Projected cash flow and
discount rate
8% - 25%
(weighted average 23%)
F- 40
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Level 3 Assets
Fair Value at
December 31, 2015
(dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
Valuation techniques
Unobservable Inputs
Range
Common and preferred stocks
$
2,569
Market multiples and option
pricing method
Volatility
Market multiples
34%
1x to 4.75x
Convertible bonds
819
Recovery analysis
Recovery rate
50%
Warrants and rights, net
2,572
Model based
Options
Other level 3 assets (a)
Total level 3 assets
Level 3 Liabilities
Option pricing models
18,194
44,880
69,034
Options
18,194
Option pricing models
Volatility
Volatility
Volatility
Credit spreads
18% to 61%
(weighted average 43%)
38%
38%
Contingent consideration
Total level 3 liabilities
$
6,158
24,352
Discounted cash flows
Projected cash flow and
discount rate
6.6% - 24.5%
(weighted average 16.4%)
(a) The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices
from recent transactions.
The Company has established valuation policies and procedures and an internal control infrastructure over its fair value
measurement of financial instruments which includes ongoing oversight by the valuation committee as well as periodic audits
performed by the Company's internal audit group. The valuation committee is comprised of senior management, including non-
investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments,
including the review of the results of the independent price verification process, approval of new trading asset classes and use
of applicable pricing models and approaches.
The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the
designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the
investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third
party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the
internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of,
improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions.
The Company reviews a daily profit and loss report, as well as other periodic reports, and analyzes material changes from
period-to-period in the valuation of its investments as part of its control procedures. The Company also performs back testing
on a regular basis by comparing prices observed in executed transactions to previous valuations.
The fair market value for level 3 securities may be highly sensitive to the use of industry standard models, unobservable
inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight
given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight
may be applied to industry standard models representing standard valuation metrics such as: discounted cash flows, market
multiples, comparative transactions, capital rates, recovery rates and timing, and bid levels. Generally, changes in the weights
ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or
higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to
interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the
valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst
level 3 securities as they are generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation
can result in a significantly lower (higher) fair value measurement.
Other financial assets and liabilities
The following table presents the carrying values and fair values, at December 31, 2016 and 2015, of financial assets and
liabilities and information on their classification within the fair value hierarchy which are not measured at fair value on a
recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the
methods and significant assumptions used to estimate their fair value see Note 3.
F- 41
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Financial Assets
Operating companies
Cash and cash equivalents
Cash collateral pledged
Loans receivable
Consolidated funds
Cash and cash equivalents
Financial Liabilities
Convertible debt
Notes payable and other debt
December 31, 2016
December 31, 2015
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Fair Value
Hierarchy
(dollars in thousands)
$
112,014
$
13,342
31,088
17,761
112,014
13,342
31,088
(d)
$ 158,485
$
10,085
65,612
158,485
10,085
65,612 (d)
Level 1
Level 2
Level 3
17,761
13,934
13,934
Level 1
130,029 (a)
77,030
149,545
80,817
(b)
(c)
122,401
(a)
68,565
144,946 (b)
71,945 (c)
Level 2
Level 2
(a) The carrying amount of the convertible debt includes an unamortized discount of $17.8 million and $24.7 million as of
December 31, 2016 and 2015.
(b) The convertible debt includes the conversion option and is based on the last broker quote available.
(c) Notes payable and other debt are based on the last broker quote available.
(d) The fair market value of level 3 loans is calculated using discounted cash flows.
7. Receivables from and Payable to Brokers
Receivables from and payable to brokers includes cash held at the clearing brokers, amounts receivable or payable for
unsettled transactions, monies borrowed and proceeds from short sales (including commissions and fees related to securities
transactions) equal to the fair value of securities sold, not yet purchased, which are restricted until the Company purchases the
securities sold short. Pursuant to the master netting agreements the Company entered into with its brokers, these balances are
presented net (assets less liabilities) across balances with the same broker. As of December 31, 2016 and 2015, receivable from
brokers was $87.8 million and $117.8 million, respectively. Payable to brokers was $210.3 million and $131.8 million as of
December 31, 2016 and 2015, respectively. The Company's receivables from and payable to brokers balances are held at
multiple financial institutions.
8. Fixed Assets
As of December 31, 2016 and 2015, fixed assets consisted of the following:
Telephone and computer equipment
Computer software
Furniture and fixtures
Leasehold improvements
Assets acquired under capital leases—equipment
Aircraft and related equipment
Other
Less: Accumulated depreciation and amortization
As of December 31,
2016
2015
(dollars in thousands)
$
2,787
$
2,167
1,204
35,092
4,075
20,893
57
66,275
(23,867)
$
42,408
$
6,521
1,680
6,131
35,215
7,637
—
—
57,184
(29,953)
27,231
Depreciation and amortization expense related to fixed assets was $7.7 million, $6.8 million and $6.6 million for the
years ended December 31, 2016, 2015, and 2014, respectively and are included in depreciation and amortization expense in the
accompanying consolidated statements of operations.
On April 22, 2016, the Company entered into a transaction whereby the Company acquired a portfolio of four specialized
aircraft which were on lease (See Note 2). During the year ended December 31, 2016, the Company purchased two aircraft and
F- 42
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
entered into two additional lease agreements. As of December 31, 2016 aircraft and related equipment of $20.9 million is held
for leasing purposes. Depreciation expense related to leased assets was $1.7 million for the year ended December 31, 2016. As
of December 31, 2016 accumulated depreciation related to leased assets was $1.7 million.
Assets acquired under capital leases were $4.1 million and $7.6 million as of December 31, 2016 and 2015, respectively.
If the assets acquired under capital leases transfer title at the end of the lease term or contain a bargain purchase option, the
assets are amortized over their estimated useful lives; otherwise, the assets are amortized over the respective lease term. The
depreciation of assets capitalized under capital leases is included in depreciation and amortization expenses and was $1.2
million, $1.5 million, and $1.5 million for the years ended December 31, 2016, 2015, and 2014, respectively. As of
December 31, 2016 accumulated depreciation related to assets acquired under capital leases was $2.4 million.
9. Goodwill and Intangible Assets
Goodwill
In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis or at an interim period if
events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Under US GAAP, the Company first assesses the qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amounts as a basis for determining if it is necessary to perform the two-step
approach. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of
significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an
impairment charge is recorded and the magnitude of such a charge.
The Company estimated the fair value using the income and market approach which involves estimates of future cash
flows, discount rates, economic forecast and other assumption which are then used in the market approach (earning and / or
transactions multiples) and / or income approach (discounted cash flow method).
In connection with the CRT transaction (See Note 2), in May 2016, the Company recognized goodwill of $3.5 million.
Goodwill, which primarily relates to expected synergies from combining operations, is fully deductible for tax purposes and has
been assigned to the broker-dealer segment of the Company.
On September 23, 2016, the Company and the portfolio managers of RASL completed the sale of their respective
ownership interests in RASL, an investment advisor. In contemplation with the sale transaction, the Company allocated $1.2
million of goodwill to the RASL disposal group (See Note 2) which was included in the alternative investment reporting unit.
No impairment charges for goodwill were recognized during the years ended December 31, 2016 and 2015, respectively.
Based on the results of the impairment analysis as of December 31, 2016, the Company did not recognize any impairment
relating to the alternative investment or broker dealer reporting units.
F- 43
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The following table presents the changes in the Company's goodwill balance, by reporting unit for the years ended
December 31, 2016, 2015, and 2014:
Beginning balance - December 31, 2014
Goodwill
Accumulated impairment charges
Net
Activity: 2015
Recognized goodwill
Goodwill impairment charges
Ending balance: December 31, 2015
Goodwill
Accumulated impairment charges
Net
Activity: 2016
Recognized goodwill
Goodwill allocated to disposal group
Goodwill impairment charges
Ending balance: December 31, 2016
Goodwill
Accumulated impairment charges
Net
Intangible assets
Alternative
Investment
Broker-
Dealer
Total
(dollars in thousands)
$
30,228
$
24,363
$
54,591
(10,200)
20,028
(9,485)
14,878
(19,685)
34,906
—
—
23,455
—
23,455
—
30,228
(10,200)
20,028
—
(1,202)
—
47,818
(9,485)
38,333
3,519
—
—
78,046
(19,685)
58,361
3,519
(1,202)
—
29,026
(10,200)
51,337
(9,485)
80,363
(19,685)
$
18,826
$
41,852
$
60,678
Information for the Company's intangible assets that are subject to amortization is presented below as of December 31,
2016 and 2015.
December 31, 2016
December 31, 2015
Amortization
Period
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
(in thousands)
Net
Carrying
Amount
5
$
— $
— $
— $
3,900
$
(3,900) $
Investment contracts
Trade names
Customer relationships
Customer contracts
Non compete agreements and covenants
with limiting conditions acquired
Intellectual property
1 - 7.5
3 - 14
1.2
3 - 5
3 - 10
9,962
33,874
800
2,268
8,283
(9,689)
273
(12,948)
20,926
(800)
—
(818)
(5,163)
1,450
3,120
9,712
29,484
800
1,831
8,237
—
815
(8,897)
(10,338)
19,146
(800)
—
(172)
(4,194)
1,659
4,043
$
55,187
$
(29,418) $
25,769
$
53,964
$
(28,301) $
25,663
The Company tests intangible assets for impairment if events or circumstances suggest that the asset groups carrying
value may not be fully recoverable. For the years ended December 31, 2016 and 2015, no impairment charge for intangible
assets was recognized.
In connection with the CRT transaction (See Note 2), in May 2016, the Company recognized intangible assets (including
customer relationships, trade name, intellectual property and non-compete arrangements) with an estimated fair value of $5.1
F- 44
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
million which are included within intangible assets, net in the condensed consolidation statements of financial condition with
the expected useful lives ranging from 1 to 9 years with a weighted average useful life of 8.1 years.
Amortization expense related to intangible assets was $5.0 million, $2.7 million, and $3.6 million (including impairment
charges of $0.9 million related to the broker-dealer segment) for the years ended December 31, 2016, 2015, and 2014,
respectively, which is included in depreciation and amortization expense in the accompanying consolidated statements of
operations. All of the Company's intangible assets have finite lives.
The estimated future amortization expense for the Company's intangible assets as of December 31, 2016 is as follows:
2017
2018
2019
2020
2021
Thereafter
10. Other Assets
Other assets in Operating Entities are as follows:
Prepaid expenses
Deposits
Reinsurance receivables, net (d)
Loan receivable (a)
Tax receivables
Miscellaneous receivables (See Note 2)
Interest and dividends receivable
Deferred acquisition costs (d)
Deferred rent asset
Short term bridge loan (b)
Other (c)
(dollars in thousands)
$
$
4,681
3,688
2,929
2,733
2,674
9,064
25,769
As of December 31,
2016
2015
(dollars in thousands)
10,669
5,322
5,187
3,700
3,267
1,313
718
677
52
—
7,501
$
38,406
$
7,783
674
—
8,000
2,855
2,788
2,006
—
341
38,000
9,084
71,531
(a) As of December 31, 2016, the maturity was August 2017 with interest rate of 12%.
(b) As of December 31, 2015, the maturity was February 2016, was secured by the real estate assets and had an effective
annualized interest rate of 8%.
(c) Included in this amount is $4.5 million, due January 2024, with interest rate of 8% for the first five years and 8.5% for the
remainder of the term, related to the Company's commercial reinsurance activities.
(d) Balances relate to the Company's reinsurance business entered into during 2016 (See Note 13 ).
F- 45
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
11. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities in Operating Entities are as follows:
Deferred rent obligations (see Note 3(k))
Contingent consideration payable (see Note 2)
Equity in RCG Longview Partners II, LLC (see Note 5a(3))
Interest and dividends payable
Loss reserves and claims incurred but not reported (a)
Professional fees payable
Unearned premiums (a)
Fees payable
Accrued tax liabilities
Deferred income
Litigation reserve
Accrued expenses and accounts payable
As of December 31,
2016
2015
(dollars in thousands)
$
10,335
$
11,979
5,997
5,948
3,541
3,455
3,143
2,375
1,093
456
353
—
$
14,419
51,115
$
6,158
5,969
3,574
—
4,811
—
1,555
1,236
428
1,300
15,223
52,233
(a) Balances relate to the Company's reinsurance business entered into during 2016 (See Note 13 ).
12. Redeemable Non-Controlling Interests in Consolidated Subsidiaries and Funds
Redeemable non-controlling interests in consolidated subsidiaries and funds and the related net income (loss) attributable
to redeemable non-controlling interests in consolidated subsidiaries and funds are comprised as follows:
Redeemable non-controlling interests in consolidated subsidiaries and funds
Operating companies
Consolidated funds
Income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries
and funds
Operating companies
Consolidated funds
13. Reinsurance
As of December 31,
2016
2015
(dollars in thousands)
7,638
371,567
379,205
$
$
10,906
176,005
186,911
Year Ended December 31,
2016
2015
2014
(dollars in thousands)
3,717
3,165
6,882
$
$
9,503
5,743
15,246
$
$
10,094
5,470
15,564
$
$
$
$
The Company’s wholly-owned Luxembourg subsidiary, Hollenfels Re SA (“Hollenfels”) provides reinsurance to third
party insurance and reinsurance companies. As Hollenfels started its operations in 2016, all claims it experienced (reported or
not reported) were from the 2016 accident year. During the twelve months ended December 31, 2016, Hollenfels’ share of
incurred and paid claims, as reported to it by the underlying insurance and reinsurance companies, amounted to $10.9 million.
For the same period, Hollenfels’ share of claims incurred but not reported plus expected development on reported claims totaled
$3.5 million. Hollenfels generally employs an estimation methodology whereby historical average claims ratios over a period
of 5 or 10 years, based on availability of data, are utilized. In cases where an event may have occurred that could give rise to
claims in excess of the amount calculated using the above-mentioned methodology, then actuarial methods are used to calculate
the impact of such an event. Hollenfels did not change its methodology for determining claim liability or claim adjustment
expenses.
F- 46
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
While Hollenfels typically settles its premiums and claim payments on a quarterly basis, the frequency of claims in the
underlying policies is impractical for Hollenfels to obtain. This is because certain contracts Hollenfels has written are on a
quota-share basis and others provide aggregate loss protection and the underlying information is not available for all contracts.
Hollenfels did not discount any of its reserves and did not cede any portion of its exposures during the twelve months ended
December 31, 2016. As a result, the figures above are the same as reported on the Company’s balance sheet.
14. Other Revenues and Expenses
On September 23, 2016, the Company and the portfolio managers RASL completed the sale of their respective ownership
interests in RASL (See Note 2). Along with the target working capital transferred at closing, the Company also allocated a
portion of goodwill associated with the alternative investment segment to the sale price (See Note 9) which is shown net in
other revenues in the accompanying consolidated statements of operations.
Upon closing of the sale of the Company's long/short credit business, on December 31, 2014, the company recorded a
gain of $4.5 million included in other revenues in the accompanying consolidated statements of operations (See Note 2).
During the fourth quarter of 2014, the company adjusted the value of the contingent liability related to the securities
lending business by $2.1 million due to the Company's decision to wind down the operations of the business. This amount is
included in other revenues in the accompanying consolidated statements of operations (See Note 2).
Other expenses, during the years ended December 31, 2016, 2015, and 2014, are primarily the general administrative
expenses of the various operating company subsidiaries or the Consolidated Funds.
15. Share-Based and Deferred Compensation and Employee Ownership Plans
On December 5, 2016, the Company effected a one-for-four reverse stock split of our class A and class B common stock.
All share and per share information has been retroactively adjusted to reflect the reverse stock split.
The Company issues share based compensation under the 2006 Equity and Incentive Plan, the 2007 Equity and Incentive
Plan (both established prior to the November 2009 transaction between Ramius and Cowen) and the Cowen Group, Inc. 2010
Equity and Incentive Plan (collectively, the “Equity Plans”). The Equity Plans permit the grant of options, restricted shares,
restricted stock units, stock appreciation rights ("SAR's") and other equity based awards to the Company's employees and
directors. Stock options granted generally vest over two-to-five-year periods and expire seven years from the date of grant.
Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two-to-five-year
period. SAR's vest and expire after five years from grant date. Awards are subject to the risk of forfeiture. As of December 31,
2016, there were approximately 0.1 million shares available for future issuance under the Equity Plans.
Under the 2010 Equity Plan, the Company awarded $25.9 million of deferred cash awards to its employees during the
year ended December 31, 2016. These awards vest over a four year period and accrue interest between 0.70% to 0.75% per
year. As of December 31, 2016, the Company had unrecognized compensation expense related to deferred cash awards of
$32.9 million.
The Company measures compensation cost for share based awards according to the equity method. In accordance with
the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share
based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity
Plans, the Company recognized compensation expense of $26.0 million, $21.7 million, and $18.3 million for the years ended
December 31, 2016, 2015 and 2014, respectively. The income tax effect recognized for the Equity Plans was a benefit of $11.4
million, $5.0 million, and $6.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Stock Options and Stock Appreciation Rights
The Company values options and SAR's on grant date using the Black-Scholes valuation model which requires the
Company to make assumptions regarding the expected term, volatility, risk-free rate and dividend yield:
Expected term. Expected term represents the period of time that awards granted are expected to be outstanding. The
Company elected to use the "simplified" calculation method, as applicable to companies that lack extensive historical data. The
mid-point between the vesting date and the contractual expiration date is used as the expected term under this method.
Expected volatility. The Company bases its expected volatility on its own stock price history.
Risk free rate. The risk-free rate for periods within the expected term of the award is based on the interest rate of a
traded zero-coupon U.S. Treasury bond with a term equal to the awards' expected term on the date of grant.
F- 47
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Dividend yield. The Company has not paid and does not expect to pay dividends in the foreseeable future.
Accordingly, the assumed dividend yield is zero.
The following table summarizes the Company's stock option activity for the years ended December 31, 2016 and 2015:
Shares Subject
to Option (2)
Weighted Average
Exercise Price/Share (2)
Weighted Average
Remaining Term
Aggregate Intrinsic
Value(1)
Balance outstanding at December 31, 2014
54,168
$
Options granted
Options acquired
Options exercised
Options forfeited
Options expired
—
—
(25,000)
—
(25,001)
Balance outstanding at December 31, 2015
4,167
$
Options granted
Options exercised
Options expired
Balance outstanding at December 31, 2016
Options exercisable at December 31, 2015
Options exercisable at December 31, 2016
—
—
—
4,167
4,167
4,167
$
$
$
22.6
—
—
15.84
—
29.96
19.56
—
—
—
19.56
19.56
19.56
(in years)
1.6
$
(dollars in
thousands)
—
—
—
—
—
1.10
$
—
—
—
0.10
1.10
0.10
$
$
$
87
—
—
—
—
—
—
—
—
—
—
—
—
(1) Based on the Company's closing stock price of $15.50 on December 31, 2016 and $15.32 on December 31, 2015.
(2) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as
of December 5, 2016.
As of December 31, 2016, the Company's stock options were fully expensed.
The following table summarizes the Company's SAR's for the years ended December 31, 2016 and 2015:
Shares Subject
to Option (2)
Weighted Average
Exercise Price/Share (2)
Weighted Average
Remaining Term
Aggregate Intrinsic
Value(1)
(in years)
(dollars in
thousands)
Balance outstanding at December 31, 2014
100,000
$
SAR's granted
SAR's acquired
SAR's expired
—
—
—
Balance outstanding at December 31, 2015
100,000
$
SAR's granted
SAR's acquired
SAR's expired
—
—
—
Balance outstanding at December 31, 2016
100,000
$
SAR's exercisable at December 31, 2015
SAR's exercisable at December 31, 2016
— $
— $
11.60
—
—
—
11.60
—
—
—
11.60
—
—
3.21
$
—
—
—
2.21
$
—
—
—
1.21
$
— $
— $
913
—
—
—
558
—
—
—
435
—
—
(1) Based on the Company's closing stock price of $15.50 on December 31, 2016 and $15.32 on December 31, 2015.
(2) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as
of December 5, 2016.
As of December 31, 2016 and 2015, the unrecognized compensation expense related to the Company's grant of SAR's
was $0.1 million and $0.1 million, respectively.
F- 48
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Restricted Shares and Restricted Stock Units Granted to Employees
Restricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes
the Company's restricted share and restricted stock unit activity for the years ended December 31, 2016 and 2015:
Balance outstanding at December 31, 2014
Granted (1)
Vested
Canceled
Forfeited
Balance outstanding at December 31, 2015
Granted (1)
Vested
Canceled
Forfeited
Balance outstanding at December 31, 2016 (1)
Nonvested Restricted
Shares and Restricted
Stock Units (2)
Weighted-Average
Grant Date
Fair Value (2)
4,413,646
$
2,260,901
(1,047,072)
—
(257,384)
5,370,091
$
2,157,403
(1,487,092)
—
(322,470)
5,717,932
$
14.80
17.96
12.32
—
13.68
16.68
14.02
14.95
—
14.89
16.23
(1) Performance linked restricted stock units of 481,438 were awarded to employees of the Company in December 2013
and January 2014. An additional 700,000 performance linked restricted stock units were awarded in March 2016. Of
the awards granted, 96,875 have been forfeited through December 31, 2016. The remaining awards, included in the
outstanding balance as of December 31, 2016, will vest between March 2019 and December 2020 and will be earned
only to the extent that the Company attains specified market conditions relating to its volume-weighted average share
price and total shareholder return in relation to certain benchmark indices and performance goals relating to aggregate
net income and average return on shareholder equity. The actual number of RSUs ultimately earned could vary from 0,
if performance goals are not met, to as much as 150% of the targeted award. Each RSU is equal to the one share of the
Company’s Class A common stock. Compensation expense is recognized to the extent that it is probable that the
Company will attain the performance goals.
(2) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as
of December 5, 2016.
The fair value of restricted stock (excluding performance linked units which are valued using the Monte Carlo valuation
model) is determined based on the number of shares granted and the quoted price of the Company's common stock on the date
of grant.
As of December 31, 2016, there was $60.6 million of unrecognized compensation expense related to the Company's grant
of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to
nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-
average period of 2.49 years.
Restricted Shares and Restricted Stock Units Granted to Non-employee Board Members
There were 56,100 restricted stock units awarded during the year ended December 31, 2016. As of December 31, 2016
there were 162,176 restricted stock units outstanding.
16. Defined Contribution Plans
The Company sponsors a Retirement and Savings Plan which is a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code (the "401k Plans"). All full-time employees of the Company can contribute on a tax deferred basis to
the 401k Plans up to federal contribution limits or up to 100% of their annual compensation, subject to certain limitations. The
Company provides matching contributions for certain employees that are equal to a specified percentage of the eligible
participant's contribution as defined by the 401k Plans. For the years ended December 31, 2016 and 2015, the Company's
contributions to the Plans were $0.5 million and $0.5 million, respectively. The Company did not contribute to the Plans during
the year ended December 31, 2014.
F- 49
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
17. Income Taxes
The taxable results of the Company’s U.S. operations are included in the consolidated income tax returns of Cowen
Group, Inc. as well as
countries where tax filings have to be submitted on a
basis. These subsidiaries are subject to tax in their respective
countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the
Company owns subsidiaries with tax filing obligations are the United Kingdom, Luxembourg, and Hong Kong.
state and local tax returns. The Company has subsidiaries that are resident in foreign
The components of the Company's income tax expense for the years ended December 31, 2016, 2015 and 2014 are as
follows:
Current tax expense/(benefit)
Federal
State and local
Foreign
Total
Deferred tax expense/(benefit)
Federal
State and local
Foreign
Total
Total Tax expense/(benefit)
Year ended December 31,
2016
2015
2014
(dollars in thousands)
$
$
$
$
1,268
$
(635) $
1,972
262
3,502
$
313
348
26
$
(22,834) $
(37,979) $
(1,900)
2,140
(22,594)
(7,420)
(2,123)
(47,522)
(19,092) $
(47,496) $
2,247
573
341
3,161
(99,284)
(28,825)
4
(128,105)
(124,944)
Consolidated U.S. income/(loss) before income taxes was $(29.5) million in 2016, $8 million in 2015, and $56.7 million
in 2014. The corresponding amounts for non-U.S.-based income/(loss) were $(2.0) million in 2016, $3.5 million in 2015, and
$1.1 million in 2014.
The reconciliations of the Company's federal statutory rate to the effective income tax rate for the years ended
December 31, 2016, 2015, and 2014 are as follows:
Pre-tax loss at U.S. statutory rate
Deferred asset recognition
Unrecognized gains on foreign subsidiaries
Change in valuation allowance
Impact of change in NY tax law
State and foreign tax
Minority interest reversal
Other, net
Total
Year ended December 31,
2016
2015
2014
35.0%
—
38.7
(6.7)
—
1.3
1.3
(9.0)
60.6%
35.0 %
(323.8)
—
—
(27.9)
(39.6)
(46.5)
(11.0)
35.0 %
—
—
(252.7)
—
5.8
(9.4)
5.3
(413.8)%
(216.0)%
As of December 31, 2016, the Company has net income taxes receivable of approximately $2.0 million representing
Federal and foreign tax overpayments, which is included in other assets on the accompanying consolidated statements of
financial condition. The Company also has state income taxes payable of $0.02 million, which is included in other liabilities on
the accompanying consolidated statements of financial condition.
F- 50
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
The components of the Company's deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows:
Deferred tax assets, net of valuation allowance
Net operating loss
Deferred compensation
Goodwill
Fixed assets
Tax credits
Acquired lease liability
Other
Total deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities
Basis difference on investments
Unrealized gains on investments
Intangible assets
Other
Total deferred tax liabilities
Deferred tax assets/(liabilities), net
As of December 31,
2016
2015
(dollars in thousands)
$
126,037
$
44,966
4,758
3,541
2,898
4,111
2,238
188,549
(2,119)
186,430
—
(20,774)
—
—
$
(20,774)
165,656
$
110,904
65,162
7,009
2,003
1,630
4,843
2,317
193,868
—
193,868
(15,352)
(34,613)
(296)
(47)
(50,308)
143,560
Deferred tax assets, net of valuation allowance, are reported in the accompanying consolidated statements of financial
condition. In addition to the deferred tax balances in the table above, the Company records balances related to its operating
losses in Luxembourg, which are discussed below.
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from
differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for
operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a
level that, in management’s view, is more likely than not to be realized in the foreseeable future. This level will be estimated
based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be
realized, for tax purposes, in the foreseeable future. The Company recorded approximately $2.1 million valuation allowance
against its deferred tax assets of $188.5 million as of December 31, 2016 and recorded no valuation allowance against its
deferred tax assets of $193.9 million as of December 31, 2015. Separately, the Company has deferred tax liabilities of $20.8
million as of December 31, 2016, and $50.3 million as of December 31, 2015.
In December 2016, the Company recorded a deferred tax benefit of $22.6 million which was derived by the release of
deferred tax liabilities related to the previous acquisitions by a local subsidiary, and reversal of temporary items during the
course of normal operations. The deferred tax benefit of $47.5 million in December 31, 2015 was mainly represented the
deferred tax benefits generated by an acquisition of a local subsidiary. At the time of the acquisition, pursuant to an Advance
Tax Agreement, the local subsidiary generated deferred tax assets that fully offsets the deferred tax liabilities of the acquired
company, resulting in the recognition of the deferred tax benefit in 2015. The deferred tax benefit of $128.1 million recorded in
December 31, 2014, predominantly represented the release of valuation allowance due to the anticipation of future profits.
The Company has the following net operating loss carryforwards at December 31, 2016:
Jurisdiction:
Net operating loss (in millions)
Year of expiration
Federal
California Massachusetts
Illinois
New York
State
New York
City
Hong
Kong
$296.7
2036
$61.8
2036
$31.5
2036
$12.3
2028
$95.6
2036
$142.8
$12.8
2036
Indefinite
In addition to the net operating loss carryforwards in the table above, the Company also has net operating loss
carryforwards in Luxembourg. These loss carryforwards are only accessible to the extent of taxable income generated by the
Luxembourg reinsurance companies, including any deferred income that will be generated in the future. Consequently, the
F- 51
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Company recorded a deferred tax asset of $113.8 million, net of deferred tax liabilities of $357.1 million in connection with
future taxable income, and an offsetting valuation allowance of $113.8 million against its Luxembourg net operating loss
carryforwards that are in excess of such taxable income. The increase in deferred tax liabilities and corresponding reduction in
the valuation allowance was caused by the acquisition of Hollenfels, as described above.
The Company underwent a change of control under Section 382 of the Internal Revenue Code on November 2, 2009
(“Section 382”). Accordingly, a portion of the Company’s deferred tax assets, in particular a portion of its net operating loss and
foreign tax credit carryovers, are subject to an annual limitation. The deduction limitation is approximately $2.4 million
annually and applies to approximately $6.6 million of pre-transaction losses. Further, as a result of an acquisition of a
subsidiary with net operating loss carryovers in June 2011, a portion of the Company’s deferred tax assets, are subject to an
annual limitation under Section 382 of the Internal Revenue Code (“Section 382”). The deduction limitation is approximately
$6.7 million annually and applies to approximately $57.2 million of net operating losses. The Company is not expected to lose
any deferred tax assets as a result of these limitations.
The Company adopted the accounting guidance for accounting for uncertainty in income taxes as which clarifies the
criteria that must be met prior to recognition of the financial statement benefit of a position taken in a tax return. The Company
does not have any uncertain tax positions recorded for the years ended December 31, 2016, 2015, and 2014. Further, the
Company did not record any additions to its unrecognized tax benefit balances as a result of current or prior year tax positions
or reductions due to expired statute of limitations during the years ended December 31, 2016, 2015, and 2014.
The Company is subject to examination by the United States Internal Revenue Service, the United Kingdom Inland
Revenue Service as well as state, local and foreign tax authorities in jurisdictions where the Company has significant business
operations, such as New York. Currently, the Company is under audit by New York State for 2010 to 2012 tax years.
Management is not expecting a material tax liability from this audit.
The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the
respective subsidiary, but remits the current earnings of its foreign subsidiaries to the United States to the extent permissible
under local regulatory rules. The undistributed earnings of the Company’s foreign subsidiaries totaled $0.8 million and $1.0
million as of December 31, 2016 and 2015, respectively, and the tax liability that would arise if these earnings were remitted to
the United States would be approximately $0.1 million and $0.1 million, respectively.
18. Commitments and Contingencies
Lease Obligations
The Company has entered into leases for office space and equipment. These leases contain rent escalation clauses. The
Company records rent expense on a straight-line basis over the lease term, including any rent holiday periods. Rent expense
was $20.3 million, $18.5 million and $16.8 million for the years ended December 31, 2016, 2015, and 2014, respectively.
As of December 31, 2016, future minimum annual lease and service payments for the Company were as follows:
2017
2018
2019
2020
2021
Thereafter
Equipment Leases (a)
Service Payments
Facility Leases (b)
$
$
(dollars in thousands)
2,417
$
15,674
$
2,359
928
6
—
—
8,550
2,766
740
676
—
5,710
$
28,406
$
16,745
17,002
15,470
15,305
15,589
17,294
97,405
(a) Equipment Leases include the Company's commitments relating to operating and capital leases. See Note 19 for
further information on the capital lease minimum payments which are included in the table.
(b) The Company has entered into various agreements to sublease certain of its premises. The Company recorded
sublease income related to these leases of $2.2 million, $2.3 million, and $1.8 million and for the years ended
December 31, 2016, 2015, and 2014, respectively.
F- 52
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Clawback Obligations
For financial reporting purposes, the general partners of a real estate fund have recorded a liability for potential clawback
obligations to the limited partners, due to changes in the unrealized value of the fund's remaining investments and where the
fund's general partner has previously received carried interest distributions. The clawback liability, however, is not realized until
the end of the fund's life. The life of the real estate funds with a potential clawback obligation is currently in a winding-up
phase whereby the remaining assets of the fund are being liquidated as promptly as possible so as to maximize value, however a
final date for liquidation has not been set. The fund is currently winding-down and as of both December 31, 2016 and 2015,
and the clawback obligation was $6.2 million.
The Company serves as the general partner/managing member and/or investment manager to various affiliated and
sponsored funds. As such, the Company is contingently liable for obligations for those entities. These amounts are not included
above as the Company believes that the assets in these funds are sufficient to discharge any liabilities.
Unfunded Commitments
The following table summarizes unfunded commitments as of December 31, 2016:
Entity
Unfunded Commitments
Commitment term
($ in millions)
Real estate (a)
HealthCare Royalty Partners funds (b)
Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.)
Lagunita Biosciences, LLC
Eclipse Fund II, L.P.
Eclipse Continuity Fund I, L.P.
$
$
$
$
$
$
7.6
7.3
0.8
3.0
0.9
0.9
(a)
2 years
7 years
3 years
8 years
9 years
(a) The Company had unfunded commitments pertaining to capital commitments in five real estate investments held by
the Company, all of which pertain to related party investments. Such commitments can be called at any time up to three years,
subject to advance notice.
(b) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare
Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata
investment in the HealthCare Royalty Partners funds along with the other limited partners.
Litigation
In the ordinary course of business, the Company and its affiliates and subsidiaries and current and former officers,
directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions
and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of
securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these
actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive
damages, or for injunctive relief.
In the ordinary course of business, the Company and Related Parties are also subject to governmental and regulatory
examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments,
settlements, fines, penalties, injunctions or other relief. Certain affiliates and subsidiaries of the Company are investment banks,
registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those
capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In
connection with formal and informal inquiries by these regulators, the Company and such affiliates and subsidiaries receive
requests, and orders seeking documents and other information in connection with various aspects of their regulated activities.
Due to the global scope of the Company's operations, and its presence in countries around the world, the Company and
Related Parties may be subject to litigation, and governmental and regulatory examinations, information gathering requests,
investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may
differ substantially, and present substantially different risks, from those the Company and Related Parties are subject to in the
United States.
The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best
interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the
amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.
F- 53
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is
probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a
contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss
because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or
range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that
are deemed remote.
The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is
probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued
expenses and other liabilities in the accompanying consolidated statements of financial condition. Estimates, by their nature, are
based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type
and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses
and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other
defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on
a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.
On May 28, 2014, Energy Intelligence Group, Inc. and Energy Intelligence Group UK (collectively, "EIG") filed a lawsuit
against Cowen and Company, LLC in the United States Court for the Southern District of New York (Energy Intelligence
Group, Inc. and Energy Intelligence Group UK v. Cowen and Company, LLC, No. 14-CV-3789). The complaint alleged
copyright infringement based on alleged impermissible distribution of EIG's publication, Oil Daily, by Cowen and Company
and Dahlman Rose & Company, LLC, as Cowen's alleged predecessor-in-interest. EIG sought statutory damages based on
alleged willful infringement of their copyrights. On November 12, 2014, the Company filed an answer and affirmative defenses
to the EIG complaint. On September 25, 2015, the Company filed its motion for partial summary judgment to dismiss certain
of EIG’s claims relating to Dahlman Rose’s alleged copyright infringement. During the second quarter of 2016 the Company
also filed a motion to disqualify EIG’s copyright counsel on conflict of interest grounds. Both of the Company’s motions were
heard in the second quarter of 2016. On July 15, 2016 the District Court ruled in favor of the Company on both of its motions.
The Company and EIG entered into a settlement agreement on September 30, 2016, pursuant to which EIG agreed to withdraw
its lawsuit with prejudice. The settlement amount paid by the Company and the current period impact of the settlement was not
material to the Company’s financial position or the results of operations for the year ended December 31, 2016. The dismissal
of the lawsuit was approved by the District Court on October 4, 2016.
19. Convertible Debt and Notes Payable
As of December 31, 2016 and 2015, the Company's outstanding debt was as follows:
Convertible debt
Note payable
Other notes payable
Revolver
Capital lease obligations
Convertible Debt
As of December 31,
2016
2015
(dollars in thousands)
130,029
$
60,953
14,237
—
1,840
207,059
$
122,401
60,831
—
5,000
2,734
190,966
$
$
On March 10, 2014, the Company issued $149.5 million of 3.0% cash convertible senior notes ("Convertible Notes").
The Convertible Notes are due on March 15, 2019 unless earlier repurchased by the Company or converted by the holder into
cash in accordance with their terms prior to such date. The interest on the Convertible Notes is payable semi-annually on
March 15 and September 15 of each year. The Convertible Notes are senior unsecured obligations and rank senior in right of
payments to other obligations. The Convertible Notes may be converted into cash, upon the occurrence of certain events,
whereby a holder will receive, per $1,000 principal amount of notes being converted, an amount equal to the sum of principal
amount outstanding and the conversion amount based on the current conversion price (the "Conversion Option"). The
Convertible Notes were issued with an initial conversion price of $21.32 per share (per share amounts have been retroactively
updated to reflect the one-for-four reverse stock split effective as of December 5, 2016).
The Company recorded interest expense of $4.5 million, $4.5 million and $3.6 million for the years ended December 31,
2016, 2015, and 2014, respectively. The initial unamortized discount on the Convertible Notes was $35.7 million and is shown
F- 54
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
net in convertible debt in the accompanying consolidated statements of financial condition. Amortization on the discount,
included within interest expense in the accompanying consolidated statements of operations is $6.9 million$6.3 million, and
$4.7 million for the years ended December 31, 2016, 2015, and 2014, respectively, based on an effective interest rate of 8.89%.
The Company capitalized the debt issuance costs in the amount of $3.7 million, which is a direct deduction from the carrying
value of the debt and will be amortized over the life of the Convertible Notes.
Of the net proceeds from the sale of the Convertible Notes, approximately $20.5 million was applied to pay the net cost of
a cash convertible note economic hedge and warrant transaction which increases the effective conversion price to $28.72 (see
Note 5) (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of
December 5, 2016), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The
remainder of the net proceeds is being used for general corporate purposes.
Note Payable
On October 10, 2014 the Company completed its public offering of $63.3 million aggregate principal amount of 8.25%
senior notes due on October 15, 2021 ("2021 Notes"). Interest on the 2021 Notes is payable quarterly in arrears on January 15,
April 15, July 15 and October 15, commencing on January 15, 2015. The Company recorded interest expense of $5.2 million
and $5.2 million for the years ended December 31, 2016 and 2015, respectively. The Company capitalized debt issuance costs
of approximately $2.9 million which is a direct deduction from the carrying value of the debt and will be amortized over the life
of the 2021 Notes. As of December 31, 2016, the Company fell below a minimum calculation as required by a covenant. As a
result, the Company may not currently incur new debt or make restricted payments, other than in limited permitted amounts set
out in the Senior Indenture.
Other Notes Payable
During January 2016, the Company borrowed $2.0 million to fund insurance premium payments. This note has an
effective interest rate of 1.38% and was due on December 31, 2016, with monthly payment requirements of $0.2 million. As of
December 31, 2016, the note was fully repaid. Interest expense for the year ended December 31, 2016 was insignificant.
During the second quarter of 2016, the Company entered into financing for two of its aircraft and incurred additional debt
when four other aircraft were acquired (See Note 2). The aircraft financing, net of debt costs, is recorded in notes payable and
short-term borrowings in the accompanying consolidated statements of financial condition. The debt maturities ranged from
February 2017 to May 2021 and interest rates ranged from 4.80% to 7.25%. As of December 31, 2016, the remaining balance
on the aircraft financing agreements was $14.4 million. Interest expense was $0.8 million for the year ended December 31,
2016.
Revolver
On July 31, 2015, the Company entered into a $25.0 million 364 day revolving unsecured credit facility with multiple
financial institutions primarily for working capital management. On July 29, 2016, the Company amended its credit facility to,
among other things, extend the existing stated maturity thereof from August 3, 2016 to September 29, 2016, reduce the
aggregate revolving commitments thereunder from $25 million to $15 million and make future draws on the revolver during the
extension period subject to the sole discretion of the lenders thereunder. In connection with the amendment, the Company
repaid all outstanding amounts under the credit facility. The facility terminated in accordance with its terms on September 29,
2016. Interest accrued on borrowed funds at LIBOR plus 3.0% and interest accrued on the undrawn facility amount at LIBOR
plus 0.38%. Interest expense for the years ended December 31, 2016 and 2015, was $0.4 million and $0.2 million, respectively.
Capital Lease Obligations
The Company entered into several capital leases for computer equipment during the fourth quarter of 2010 and one in
January 2014. These leases amounted to $7.6 million and are recorded in fixed assets and as capital lease obligations, which are
included in short-term borrowings and other debt in the accompanying consolidated statements of financial condition, and have
lease terms that range from 48 to 60 months and interest rates that range from 0.60% to 6.03%. As of December 31, 2016, the
remaining balance on these capital leases was $1.8 million. Interest expense was $0.1 million, $0.2 million, and $0.2 million
for the years ended December 31, 2016, 2015, and 2014, respectively.
F- 55
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Annual scheduled maturities of debt and minimum payments for all debt outstanding as of December 31, 2016, is as follows:
2017
2018
2019
2020
2021
Thereafter
Subtotal
Less: Amount representing interest (a)
Total
Convertible
Debt
Note
Payable
Other Note
Payable
(dollars in thousands)
Capital
Lease
Obligation
$
4,485
$
4,912
$
4,225
$
4,485
151,743
—
—
—
160,713
(30,684)
5,218
5,218
5,218
68,468
—
89,034
(28,081)
2,225
3,702
1,805
4,723
—
16,680
(2,443)
$
130,029
$
60,953
$
14,237
$
938
938
78
—
—
—
1,954
(114)
1,840
(a) Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at
inception. This amount also includes the unamortized discount on the convertible debt.
Letters of Credit
As of December 31, 2016, the Company has nine irrevocable letters of credit, related to leased office space, for which
there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also
has a letter of credit, in the amount of $5.5 million, due March 2017, for which cash is pledged as collateral under a reinsurance
agreement.
Location
Amount
Maturity
(dollars in thousands)
San Francisco
Connecticut
New York
Boston
New York
New York
New York
New York
New York
$
$
$
$
$
$
$
$
$
710
65
1,000
382
355
70
695
2,811
1,600
January 2017
January 2017
February 2017
March 2017
May 2017
May 2017
October 2017
October 2017
November 2017
To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of
December 31, 2016 and 2015, there were no amounts due related to these letters of credit.
20. Stockholder's Equity
On December 5, 2016, the Company effected a one-for-four reverse stock split of our class A and class B common stock.
All share and per share information has been retroactively adjusted to reflect the reverse stock split. In addition, there was a
reclassification of $0.9 million from the par value of our class A common stock to additional paid-in capital to reflect the impact
of the reverse stock split.
The Company is authorized to issue 125,000,000 shares of common stock, which shall consist of 62,500,000 shares of
Class A common stock, par value $0.01 per share, and 62,500,000 shares of Class B common stock, par value $0.01 per share.
The Company is also authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. Subject to the rights of
holders of any outstanding preferred stock, the number of authorized shares of common stock or preferred stock may be
increased or decreased by the affirmative vote of the holders of a majority of the shares entitled to vote on such matters, but in
no instance can the number of authorized shares be reduced below the number of shares then outstanding.
Common stock
The certificate of incorporation of the Company provides for two classes of common stock, and for the conversion of
each class into the other, to provide a mechanism by which holders of Class A common stock of the Company who may be
F- 56
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
limited in the amount of voting common stock of the Company they can hold pursuant to federal, state or foreign bank laws, to
convert their shares into non-voting Class B common stock to prevent being in violation of such laws. Each holder of Class A
common stock is entitled to one vote per share in connection with the election of directors and on all other matters submitted to
a stockholder vote, provided, however, that, except as otherwise required by law, holders of Class A common stock are not
entitled to vote on any amendment to the Company's amended and restated certificate of incorporation that relates solely to the
terms of one or more outstanding series of the Company's preferred stock, if holders of the preferred stock series are entitled to
vote on the amendment under the Company's certificate of incorporation or Delaware law. No holder of Class A common stock
may accumulate votes in voting for directors of the Company.
Each holder of Class B common stock is not entitled to vote except as otherwise provided by law, provided however that
the Company must obtain the consent of a majority of the holders of Class B common stock to effect any amendment, alteration
or repeal of any provision of the Company's amended and restated certificate of incorporation or amended and restated by-laws
that would adversely affect the voting powers, preferences or rights of holders of Class B common stock. Except as otherwise
provided by law, Class B common stock shares will not be counted as shares held by stockholders for purposes of determining
whether a vote or consent has been approved or given by the requisite percentage of shares.
Each share of Class A common stock is convertible at the option of the holder and at no cost into one share of Class B
common stock, and each share of Class B common stock is convertible at the option of the holder and at no cost into one share
of Class A common stock. The conversion ratios will be adjusted proportionally to reflect any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the Class A common stock and Class B common stock. Upon
conversion, converted shares resume the status of authorized and unissued shares.
Subject to the preferences of the holders of any of the Company's preferred stock that may be outstanding from time to
time, each share of Class A common stock and Class B common stock will have an equal and ratable right to receive dividends
and other distributions in cash, property or shares of stock as may be declared by the Company's board of directors out of assets
or funds legally available for the payment of dividends and other distributions.
In the event of the liquidation, dissolution or winding up of the Company, subject to the preferences of the holders of any
preferred stock of the Company that may be outstanding from time to time, holders of Class A common stock and Class B
common stock will be entitled to share equally and ratably in the assets available for distribution to the Company's
stockholders. There are no redemption or sinking fund provisions applicable to the Class A or the Class B common stock.
Preferred stock
The Company's amended and restated certificate of incorporation permits the Company to issue up to 10,000,000 shares
of preferred stock in one or more series with such designations, titles, voting powers, preferences and rights and such
qualifications, limitations and restrictions as may be fixed by the board of directors of the Company without any further action
by the Company's stockholders. The Company's board of directors may increase or decrease the number of shares of any series
of preferred stock following the issuance of that series of preferred stock, but in no instance can the number of shares of a series
of preferred stock be reduced below the number of shares of the series then outstanding.
Preferred Stock and Purchase of Capped Call Option
On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative
perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided $117.2 million of proceeds, net of
underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to
dividends at a rate of 5.625% per annum which will be payable, when and if declared by the board of directors of the Company,
quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay
dividends in cash, common stock or a combination thereof. During the years ended December 31, 2016, and 2015 the
Company declared and accrued a cash dividend of $6.8 million and $4.1 million.
Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class
A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the
Company's existing and future indebtedness with respect to divided rights and rights upon the Company's involuntary
liquidation, dissolution or winding down.
Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, into a number of shares of
our Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion
rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the
Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20,
2020, the Company may elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the
F- 57
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Company’s Class A common stock, cash or a combination thereof, at the Company’s election, in each case, based on the then-
applicable conversion rate, if the last reported sale price of the Company’s Class A common stock equals or exceeds 150% of
the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive
trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion,
the conversion rate may be adjusted based on certain events including but not limited to the issuance of cash dividends or Class
A common stock as a dividends to the Company's Class A common shareholders or a share split or combination.
In connection with the issuance and sale of the Series A Convertible Preferred Stock, the Company entered into a
privately negotiated capped call option transaction (the “Capped Call Option Transaction”) with Nomura Global Financial
Products Inc. (the “option counterparty”) for $15.9 million. The Capped Call Option Transaction is expected generally to
reduce the potential dilution to the Company’s Class A common stock (if the Company elects to convert to common shares)
and/or offset any cash payments that the Company is required to make upon conversion of any Series A Convertible Preferred
Stock. The Capped Call Option Transaction has an initial effective strike price of $26.27 per share, which matches the initial
conversion price of the Series A Convertible Preferred Stock, and a cap price of $33.54 per share. However, to the extent that
the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the
cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call
Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if
it is settled in cash or stock it qualifies for equity classification as a reduction to additional paid in capital.
Treasury Stock
Treasury stock of $153.8 million as of December 31, 2016, compared to $137.4 million as of December 31, 2015, resulted
from $8.8 million acquired through repurchases of shares to cover employee minimum tax withholding obligations related to
stock compensation vesting events under the Company's Equity Plan or other similar transactions and $7.6 million purchased in
connection with a share repurchase program.
The following represents the activity relating to the treasury stock held by the Company during the year ended
December 31, 2016:
Treasury stock shares
(a)
Cost
(dollars in thousands)
Average cost
per share (a)
Balance outstanding at December 31, 2015
8,628,933
$
137,356
$
Shares purchased for minimum tax withholding under the Equity Plan or
other similar transactions
Purchase of treasury stock
Balance outstanding at December 31, 2016
647,930
533,939
8,835
7,654
9,810,802
$
153,845
$
15.92
13.64
14.33
15.68
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
21. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income includes the after tax change in unrealized gains and losses on foreign
currency translation adjustments. During the periods presented, the Company did not have material reclassifications out of other
comprehensive income.
Beginning Balance
Defined benefit plans
Foreign currency translation
Ending Balance
22. Earnings Per Share
Year Ended December 31,
2016
2015
2014
$
$
(dollars in thousands)
— $
—
(2)
$
17
—
(17)
(2) $
— $
592
(344)
(231)
17
The Company calculates its basic and diluted earnings per share in accordance with US GAAP. Basic earnings per share
is calculated by dividing net income attributable to the Company's common stockholders by the weighted average number of
common shares outstanding for the period. As of December 31, 2016, there were 26,731,289 shares outstanding. The Company
has included 162,176 fully vested, unissued restricted stock units in its calculation of basic earnings per share.
F- 58
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume
conversion of all potentially dilutive items. The Company uses the treasury stock method to reflect the potential dilutive effect
of the warrants (see Note 5(a)), unexercised stock options, unvested restricted shares, restricted stock units, and SAR's. In
calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and
restricted stock units are assumed to have been delivered, and options and warrants are assumed to have been exercised, on the
grant date. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the sum of (a) the
amount of compensation cost attributed to future services and not yet recognized and (b) the amount of tax benefit that would
be credited to additional paid-in capital assuming vesting and delivery of the shares. The tax benefit is the amount resulting
from a tax deduction for compensation in excess of compensation expense recognized for financial statement reporting
purposes. All outstanding stock options, SAR's, unvested restricted shares and warrants were not included in the computation of
diluted net income (loss) per common share for the year ended December 31, 2016 as their inclusion would have been anti-
dilutive. The Company can elect to settle the Series A Convertible Preferred Stock in shares, cash, or a combination of both.
The Company's intent is to settle in cash and, based on current and projected liquidity needs, the Company has the ability to do
so.
The computation of earnings per share is as follows:
Net income (loss)
Net income (loss) attributable to redeemable non-controlling interests in consolidated
subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common stockholders
Shares for basic and diluted calculations:
Weighted average shares used in basic computation (a)
Stock options (a)
Performance based restricted stock (a)
Stock appreciation rights (a)
Restricted stock (a)
Weighted average shares used in diluted computation (a)
Earnings (loss) per share:
Basic (a)
Diluted (a)
Year Ended December 31,
2016
2015
2014
(dollars in thousands, except per share data)
(12,395) $
58,975
$
182,780
6,882
(19,277)
6,792
15,246
43,729
4,075
15,564
167,216
—
(26,069) $
39,654
$
167,216
26,857
27,522
28,731
—
—
—
—
26,857
3
65
35
1,418
29,043
(0.97) $
(0.97) $
1.44
1.37
$
$
—
—
15
1,125
29,871
5.82
5.60
$
$
$
$
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.
23. Segment Reporting
The Company conducts its operations through two segments: the alternative investment segment and the
segment. These activities are conducted primarily in the United States and substantially all of its revenues are generated
domestically. The performance measure for these segments is Economic Income (Loss), which management uses to evaluate the
financial performance of and make operating decisions for the segments including determining appropriate compensation
levels. Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable,
including headcount, square footage and other factors.
In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated
funds (ii) excludes goodwill and intangible impairment (iii) excludes certain other acquisition-related adjustments and/or
reorganization expenses and (iv) excludes preferred stock dividends. In addition, Economic Income (Loss) revenues include
investment income that represents the income the Company has earned in investing its own capital, including realized and
unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes,
these items are included in each of their respective line items. Economic Income (Loss) revenues also include management
fees, incentive income and investment income earned through the Company's investment as a general partner in certain real
estate entities and the Company's investment in the activist business. For US GAAP purposes, all of these items are recorded in
F- 59
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for
US GAAP purposes is presented gross as part of revenue.
As further stated below, one major difference between Economic Income (Loss) and US GAAP net income (loss) is that
Economic Income (Loss) presents the segments' results of operations without the impact resulting from the full consolidation of
any of the Consolidated Funds. Consolidation of these funds results in including in income the pro rata share of the income or
loss attributable to other owners of such entities which is reflected in net income (loss) attributable to redeemable non-
controlling interest in consolidated subsidiaries in the accompanying consolidated statements of operations. This pro rata share
has no effect on the overall financial performance for the alternative investment segment, as ultimately, this income or loss is
not income or loss for the alternative investment segment itself. Included in Economic Income (Loss) is the actual pro rata share
of the income or loss attributable to the Company as an investor in such entities, which is relevant in management making
operating decisions and evaluating financial performance.
The following tables set forth operating results for the Company's alternative investment and broker-dealer segments and
related adjustments necessary to reconcile the Company's Economic Income (Loss) measure to arrive at the Company's
consolidated US GAAP net income (loss):
Year Ended December 31, 2016
Adjustments
Alternative
Investment
Broker-
Dealer
Total Economic
Income/(Loss)
Funds
Consolidation
Other
Adjustments
US GAAP
(dollars in thousands)
$
— $ 133,279
$
133,279
$
Revenues
Investment banking
Brokerage
Management fees
Incentive income (loss)
Investment income (loss)
Interest and dividends
Aircraft lease revenue
Reimbursement from affiliates
Reinsurance premiums
Other revenue
Consolidated Funds revenues
Expenses
Non interest expense
Interest and dividends
Consolidated Funds expenses
Total expenses
Total other income (loss)
Income taxes expense / (benefit)
(Income) loss attributable to
redeemable non-controlling interests in
consolidated subsidiaries and funds
Economic Income (Loss) / Net
Income (loss) attributable to
Cowen Group, Inc.
—
207,040
64,086
26,274
3,015
—
—
—
—
29,202
—
3,162
—
1,008
—
—
—
—
565
—
102,163
12,827
—
369,188
4,363
—
114,990
373,551
—
—
(7,821)
—
—
—
Total revenues
122,577
345,054
207,040
67,248
26,274
4,023
—
—
—
—
29,767
—
467,631
471,351
17,190
—
488,541
—
—
— $
—
(1,665)
(714)
—
—
—
(303)
—
—
5,949
3,267
(429)
—
9,064
8,635
8,532
—
—
$
133,279
(7,860)
(24,971)
(17,226)
(4,023)
14,732
4,161
10,807
32,459
(a)
(a)
(c)
(c)
(f)
(e)
(h)
(7,412)
(f) (h) (c)
—
667
37,824
(b)(c)(d)
12,118
(c)
—
49,942
35,534
(19,092)
(c)
(b)
199,180
40,612
8,334
—
14,732
4,161
10,504
32,459
22,355
5,949
471,565
508,746
29,308
9,064
547,118
44,066
(19,092)
(7,821)
(3,164)
4,103
(6,882)
$
(234) $
(28,497) $
(28,731) $
— $
9,454
$
(19,277)
F- 60
Total revenues
131,181
398,485
Revenues
Investment banking
Brokerage
Management fees
Incentive income (loss)
Investment income (loss)
Interest and dividends
Reimbursement from affiliates
Other revenue
Consolidated Funds revenues
Expenses
Non interest expense
Interest and dividends
Consolidated Funds expenses
Total expenses
Total other income (loss)
Income taxes expense / (benefit)
(Income) loss attributable to redeemable
non-controlling interests in consolidated
subsidiaries and funds
Economic Income (Loss) / Net
Income (loss) attributable to
Cowen Group, Inc.
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Year Ended December 31, 2015
Adjustments
Alternative
Investment
Broker-
Dealer
Total Economic
Income/(Loss)
Funds
Consolidation
Other
Adjustments
US
GAAP
(dollars in thousands)
$
— $
222,781
$
222,781
$
—
160,436
68,989
(1,544)
49,244
—
—
14,492
—
1,026
—
13,352
—
—
890
—
107,291
11,839
—
362,463
4,745
—
119,130
367,208
—
—
(8,796)
—
—
—
160,436
70,015
(1,544)
62,596
—
—
15,382
—
529,666
469,754
16,584
—
486,338
—
—
— $
—
(1,307)
(736)
—
—
(190)
—
1,613
(620)
—
—
2,310
2,310
8,781
—
—
$ 222,781
(2,714)
(26,802)
3,746
(62,596)
13,796
21,747
(11,656)
(a)
(a)
(c)
(c)
(e)
(c)
—
(64,479)
157,722
41,906
1,466
—
13,796
21,557
3,726
1,613
464,567
6,090
(b)(c)(d)
475,844
9,636
(c)
—
15,726
42,505
(47,496)
(c)
(b)
26,220
2,310
504,374
51,286
(47,496)
(8,796)
(5,851)
(599)
(15,246)
$
3,255
$
31,277
$
34,532
$
— $
9,197
$ 43,729
F- 61
Total revenues
160,375
337,243
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Year Ended December 31, 2014
Adjustments
Alternative
Investment
Broker-
Dealer (1)
Total Economic
Income/(Loss)
Funds
Consolidation
Other
Adjustments
US
GAAP
(dollars in thousands)
$
— $
170,506
$
170,506
$
— $
—
$ 170,506
55
146,192
64,774
45,708
45,193
—
—
4,645
—
—
—
20,022
—
—
523
—
115,601
320,261
435,862
—
7,804
—
—
1,994
—
—
9,798
—
123,405
322,255
445,660
—
—
(7,802)
—
—
—
146,247
64,774
45,708
65,215
—
—
5,168
—
497,618
—
—
—
(963)
(281)
—
—
(342)
—
2,915
1,329
—
—
—
1,634
1,634
5,775
—
(6,115)
(23,184)
(42,642)
(65,215)
48,870
12,837
4,278
(a)
(a)
(c)
(c)
(e)
(c)
—
(71,171)
140,132
40,627
2,785
—
48,870
12,495
9,446
2,915
427,776
7,609
(b)(c)(d)
443,471
2,334
32,954
(g)
(c)
—
42,897
114,476
(124,944)
(c)
(b)
2,334
42,752
1,634
490,191
120,251
(124,944)
(7,802)
(5,470)
(2,292)
(15,564)
Revenues
Investment banking
Brokerage
Management fees
Incentive income (loss)
Investment income (loss)
Interest and dividends
Reimbursement from affiliates
Other revenue
Consolidated Funds revenues
Expenses
Non interest expense
Goodwill impairment
Interest and dividends
Consolidated Funds expenses
Total expenses
Total other income (loss)
Income taxes expense / (benefit)
(Income) loss attributable to redeemable
non-controlling interests in consolidated
subsidiaries and funds
Economic Income (Loss) / Net
Income (loss) attributable to
Cowen Group, Inc. stockholders
$
29,168
$
14,988
$
44,156
$
— $
123,060
$ 167,216
The following is a summary of the adjustments made to US GAAP net income (loss) for the segment to arrive at
Economic Income (Loss):
Funds Consolidation: The impacts of consolidation and the related elimination entries of the Consolidated Funds are not
included in Economic Income (Loss). Adjustments to reconcile to US GAAP net income (loss) include elimination of incentive
income and management fees earned from the Consolidated Funds and addition of fund expenses excluding management fees
paid, fund revenues and investment income (loss).
Other Adjustments:
(a)
Economic Income (Loss) recognizes revenues (i) net of distribution fees paid to agents and (ii) our proportionate share
of management and incentive fees of certain real estate operating entities and the activist business.
Economic Income (Loss) excludes income taxes and acquisition related adjustments as management does not consider
(b)
these items when evaluating the performance of the segment.
(c)
(d)
Economic Income (Loss) recognizes Company income from proprietary trading (including interest and dividends).
Economic Income (Loss) recognizes the Company's proportionate share of expenses for certain real estate and other
operating entities for which the investments are recorded under the equity method of accounting for investments.
Reimbursement from affiliates is shown as a reduction of Economic Income expenses, but is included as a part of
revenues under US GAAP.
Aircraft lease revenue is shown net of expenses in other revenue for Economic Income (Loss).
Economic Income (Loss) excludes goodwill impairment and other reorganization expenses.
Economic Income (Loss) recognizes underwriting income from the Company's insurance related activities net of
expenses.
(e)
(f)
(g)
(h)
For the year ended December 31, 2016 and 2015, there was no one fund or other customer which represented more than
10% of the Company's total revenues.
F- 62
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
24. Regulatory Requirements
As registered broker-dealers, Cowen and Company, ATM Execution and Cowen Prime are subject to the SEC's Uniform
Net Capital Rule 15c3-1 (the “Rule”), which requires the maintenance of minimum net capital. Under the alternative method
permitted by the Rule, Cowen and Company's minimum net capital requirement, as defined, is $1.0 million. Under the
alternative method ATM Execution and Cowen Prime are required to maintain minimum net capital, as defined, equal to
$250,000. The broker-dealers are not permitted to withdraw equity if certain minimum net capital requirements are not met. As
of December 31, 2016, Cowen and Company had total net capital of approximately $65.3 million, which was approximately
$64.3 million in excess of its minimum net capital requirement of $1.0 million. As of December 31, 2016, ATM Execution had
total net capital of approximately $3.5 million, which was approximately $3.2 million in excess of its minimum net capital
requirement of $250,000. As of December 31, 2016, Cowen Prime had total net capital of approximately $13.9 million, which
was approximately $13.6 million in excess of its minimum net capital requirement of $250,000.
Cowen and Company, ATM Execution and Cowen Prime claim exemption from the provisions of Rule 15c3-3 under the
Securities Exchange Act of 1934 as their activities are limited to those set forth in the conditions for exemption appearing in
paragraph (k)(2)(ii) of the Rule.
Proprietary accounts of broker-dealers (“PAB”) held at the clearing broker are considered allowable assets for net capital
purposes, pursuant to agreements between Cowen and Company, ATM Execution and Cowen Prime and the clearing brokers,
which require, among other things, that the clearing brokers perform computations for PAB and segregate certain balances on
behalf of Cowen and Company, ATM Execution and Cowen Prime, if applicable.
Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the
Financial Conduct Authority (“FCA”) of the UK. Financial Resources, as defined, must exceed the requirement of the FCA. As
of December 31, 2016, Ramius UK's Financial Resources of $0.22 million exceeded its minimum requirement of $0.05 million
by $0.17 million. As of December 31, 2016, CIL's Financial Resources of $9.6 million exceeded its minimum requirement of
$2.6 million by $7.0 million.
Cowen’s Luxembourg reinsurance companies, Vianden RCG Re SCA (“Vianden”) and Hollenfels, are required to
maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in
Luxembourg. Each company’s solvency capital ratio as of December 31, 2016 was in excess of this minimum requirement.
Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive
insurance companies, RCG Insurance Company, Cowen’s captive insurance company incorporated and licensed in the state of
New York, was required to maintain capital and surplus of approximately $0.3 million as of December 31, 2016. RCG
Insurance Company’s capital and surplus as of December 31, 2016 totaled approximately $22.5 million.
25. Related Party Transactions
The Company and its affiliated entities are the managing member, general partner and/or investment manager to the
Company's alternative asset management products and certain managed accounts. Management fees and incentive income are
primarily earned from affiliated entities. As of December 31, 2016 and 2015, $12.6 million and $6.3 million, respectively,
included in fees receivable are earned from related parties. The Company may, at its discretion, reimburse certain fees charged
to the funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated
investment fund. For the year ended December 31, 2016, the Company reimbursed the funds it manages $0.2 million, which
were recorded net in management fees and incentive income in the accompanying consolidated statements of operation. For the
year ended December 31, 2015, these amounts were immaterial. For the year ended December 31, 2014, the Company
reimbursed the funds it manages $0.1 million. As of December 31, 2016 and 2015, related amounts still payable were $0.3
million and $0.1 million, respectively, and were reflected in fees payable in the accompanying consolidated statements of
financial condition. Fees receivable and fees payable are recorded at carrying value, which approximates fair value.
The Company may also make loans to employees or other affiliates, excluding executive officers of the Company. These
loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates and are included in due
from related parties in the accompanying consolidated statements of financial condition. As of December 31, 2016 and 2015,
loans to employees of $9.2 million and $5.5 million, respectively, were included in due from related parties on the
accompanying consolidated statements of financial condition. Of these amounts $3.3 million and $1.2 million, respectively, are
related to forgivable loans. These forgivable loans provide for a cash payment up-front to employees, with the amount due back
to the Company forgiven over a vesting period. An employee that voluntarily ceases employment, or is terminated with cause,
is generally required to pay back to the Company any unvested forgivable loans granted to them. The forgivable loans are
recorded as an asset to the Company on the date of grant and payment, and then amortized to compensation expense on a
straight-line basis over the vesting period. The vesting period on forgivable loans is generally one to three years. The Company
F- 63
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
recorded compensation expense of $1.2 million, $3.2 million, and $4.4 million, for the years ended December 31, 2016, 2015,
and 2014, respectively. This expense is included in employee compensation and benefits in the accompanying consolidated
statement of operations. For the year ended December 31, 2016, 2015, and 2014, the interest income was insignificant for all
related party loans and advances.
Included in due to related parties is approximately $0.7 million and $0.3 million as of December 31, 2016 and 2015,
respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a
hypothetical liquidation of the real estate funds as of the balance sheet date.
As of December 31, 2016 and 2015, included in due from related parties is $18.7 million and $14.4 million, respectively,
related to the sales of portions of the Company's ownership interest in the activist business of Starboard Value to the Starboard
principals. It is being financed through the profits of the relevant Starboard entities over a five year period and earns interest
at 5% per annum. The interest income for the year ended December 31, 2016 was $0.6 million. The interest income for the
year ended December 31, 2015 was immaterial.
The remaining balance included in due from related parties of $11.8 million and $19.7 million as of December 31, 2016
and 2015, respectively, relates to amounts due to the Company from affiliated funds and real estate entities due to expenses
paid on their behalf.
Employees and certain other related parties invest on a discretionary basis within consolidated entities. These investments
generally are subject to preferential management fee and performance fee arrangements. As of December 31, 2016 and 2015,
such investments aggregated $32.9 million and $21.3 million, respectively, were included in redeemable non-controlling
interests on the accompanying consolidated statements of financial condition. Their share of the net income (loss) attributable
to redeemable non-controlling interests in consolidated subsidiaries and funds aggregated $5.7 million, $10.4 million, and
$10.6 million for the years ended December 31, 2016, 2015, and 2014 respectively.
26. Guarantees and Off-Balance Sheet Arrangements
Guarantees
US GAAP requires the Company to disclose information about its obligations under certain guarantee arrangements.
Those standards define guarantees as contracts and indemnification agreements that contingently require a guarantor to make
payments to the guaranteed party based on changes in an underlying security (such as an interest or foreign exchange rate,
security or commodity price, an index or the occurrence or nonoccurrence of a specified event) related to an asset, liability or
equity security of a guaranteed party. Those standards also define guarantees as contracts that contingently require the
guarantor to make payments to the guaranteed party based on another entity's failure to perform under an agreement as well as
indirect guarantees of the indebtedness of others.
In the normal course of its operations, the Company enters into contracts that contain a variety of representations and
warranties and which provide general indemnifications. The Company's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Company that have not yet occurred. However,
based on experience, the Company expects the risk of loss to be remote.
The Company indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and
administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the
Company or its affiliates. The Company also indemnifies some clients against potential losses incurred in the event specified
third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. The maximum
potential amount of future payments that the Company could be required to make under these indemnifications cannot be
estimated. However, the Company believes that it is unlikely it will have to make significant payments under these
arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.
The Company also provides representations and warranties to counterparties in connection with a variety of commercial
transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and
warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event
additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These
indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum
potential amount of future payments that the Company could be required to make under these indemnifications cannot be
estimated. However, the Company believes it is unlikely it will have to make material payments under these arrangements and
has not recorded any contingent liability in the accompanying consolidated financial statements for these indemnifications.
F- 64
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Off-Balance Sheet Arrangements
The Company has no material off-balance sheet arrangements as of December 31, 2016 and 2015. However, through
indemnification provisions in the clearing agreement, customer activities may expose the Company to off-balance-sheet credit
risk. Pursuant to the clearing agreement, the Company is required to reimburse the Company's clearing broker, without limit,
for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are
collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security
through the settlement date.
In addition, during the normal course of business, the Company has exposure to a number of risks including market risk,
currency risk, credit risk, operational risk, liquidity risk and legal risk. As part of the Company's risk management process,
these risks are monitored on a regular basis throughout the course of the year.
27. Subsequent Events
The Company has evaluated events that have occurred after the balance sheet date but before the financial statements are
issued and has determined that there were no subsequent events requiring adjustment or disclosure in the consolidated financial
statements.
F- 65
Cowen Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Supplemental Financial Information
The following table presents unaudited quarterly results of operations for 2016 and 2015. These quarterly results reflect
all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results.
Revenues and net income (loss) can vary significantly from quarter to quarter due to the nature of the Company's business
activities.
Cowen Group, Inc.
Quarterly Financial Information (Unaudited)
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
Quarter Ended
Total revenues
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Net income (loss) attributable to redeemable non-controlling
interests in consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common
stockholders
Earnings (loss) per share:
Basic (a)
Diluted (a)
Weighted average number of common shares:
(dollars in thousands, except per share data)
$
101,039
$
117,231
$
131,027
$
(11,315)
(3,320)
(7,995)
(4,297)
(3,698)
1,698
(39,153)
(11,992)
(27,161)
(16,705)
(10,456)
1,698
24,018
8,759
15,259
18,478
(3,219)
1,698
$
$
$
(5,396) $
(12,154) $
(4,917) $
(0.20) $
(0.20) $
(0.45) $
(0.45) $
(0.18) $
(0.18) $
Basic (a)
Diluted (a)
26,591
26,591
26,867
26,867
26,993
26,993
122,268
(5,037)
(12,539)
7,502
9,406
(1,904)
1,698
(3,602)
(0.13)
(0.13)
26,973
26,973
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
Quarter Ended
(dollars in thousands, except per share data)
$
121,094
$
119,608
$
113,254
$
Total revenues
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss) from continuing operations
Net income (loss) attributable to redeemable non-controlling
interests in consolidated subsidiaries and funds
Net income (loss) attributable to Cowen Group, Inc.
Preferred stock dividends
Net income (loss) attributable to Cowen Group, Inc. common
stockholders
Earnings (loss) per share:
Basic (a)
Diluted (a)
Weighted average number of common shares:
$
$
$
Basic (a)
Diluted (a)
26,365
6,947
19,418
2,720
16,698
—
16,698
0.60
0.56
28,013
29,647
$
$
$
13,978
3,346
10,632
3,916
6,716
755
5,961
0.21
0.20
27,978
29,556
$
$
$
(11,083)
(5,081)
(6,002)
4,344
(10,346)
1,603
(11,949) $
(0.44) $
(0.44) $
27,297
27,297
110,611
(17,781)
(52,708)
34,927
4,266
30,661
1,717
28,944
1.08
1.03
26,809
28,182
(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of
December 5, 2016.
F- 66
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
COWEN GROUP, INC.
By:
Name:
Title:
/s/ PETER A. COHEN
Peter A. Cohen
Chairman of the Board, Chief Executive
Officer and President
Date: February 27, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PETER A. COHEN
Peter A. Cohen
/s/ STEPHEN A. LASOTA
Stephen A. Lasota
/s/ KATHERINE E. DIETZE
Katherine E. Dietze
/s/ STEVEN KOTLER
Chairman of the Board, Chief Executive Officer
and President (Principal Executive Officer)
February 27, 2017
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
February 27, 2017
Director
February 27, 2017
Steven Kotler
Director
February 27, 2017
/s/ JEROME S. MARKOWITZ
Jerome S. Markowitz
Director
February 27, 2017
/s/ JACK H. NUSBAUM
Jack H. Nusbaum
Director
February 27, 2017
/s/ DOUGLAS A. REDIKER
Douglas A. Rediker
Director
February 27, 2017
/s/ JEFFREY M. SOLOMON
Jeffrey M. Solomon
Director
February 27, 2017
/s/ JOSEPH R. WRIGHT
Joseph R. Wright
Director
February 27, 2017
(This page has been left blank intentionally.)
Exhibit
No.
Description
2.1 Transaction Agreement and Agreement and Plan of Merger, dated as of June 3, 2009, by and among Cowen
Group, Inc., Lexington Park Parent Corp., Lexington Merger Corp., Park Exchange LLC and Ramius LLC
(included as Appendix A to the proxy statement/prospectus forming a part of the Registration Statement on
Form S-4 filed on July 10, 2009).
2.2 Agreement and Plan of Merger, dated as of February 16, 2011, by and among the Company, Louisiana Merger
Sub, Inc. and LaBranche (previously filed as Exhibit 2.1 to Form 8-K filed on February 17, 2011).
3.1 Amended and Restated Certificate of Incorporation of Cowen Group, Inc. (previously filed as Exhibit 3.1 to the
Form 10-Q filed November 25, 2009).
3.2 Amended and Restated By-Laws of Cowen Group, Inc. (previously filed as Exhibit 3.1 to the Form 10-Q filed
November 25, 2009).
3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Cowen Group, Inc.
(previously filed as Exhibit 3.1 to the Form 10-Q filed November 25, 2009).
3.4 Certificate of Designations of the Company for its Series A Cumulative Perpetual Preferred Stock (previously filed
as Exhibit 3.1 to Form 8-K filed May 20, 2015).
3.5 Amendment to the Amended and Restated Certificate of Incorporation of Cowen Group, Inc. (previously filed as
Exhibit 3.1 to the Form 8-K filed December 5, 2016).
4.1 Form of Class A Common Stock Certificate (previously filed as Exhibit 4.1 to Amendment No. 2 to Form S-1 filed
on December 14, 2009).
4.2
Indenture, dated March 10, 2014 by and between Cowen Group, Inc., as Issuer and The Bank of New York Mellon,
as Trustee (previously filed as Exhibit 4.1 to Form 8-K filed on March 11, 2014).
4.3 First Supplemental Indenture by and between Cowen Group, Inc., as Issuer and The Bank of New York Mellon, as
Trustee (previously filed as Exhibit 4.1 to the Form 10-Q filed May 8, 2014).
4.4 Senior Notes Indenture dated October 10, 2014, by and between Cowen Group, Inc. and The Bank of New York
Mellon (previously filed as Exhibit 4.1 to Form 8-K filed on October 10, 2014).
4.5 First Supplemental Indenture dated October 10, 2014, by and between Cowen Group, Inc. and The Bank of New
York Mellon (previously filed as Exhibit 4.2 to Form 8-K filed on October 10, 2014).
4.6 Certificate of Designations of the Company for its Series A Cumulative Perpetual Preferred Stock (previously filed
as Exhibit 3.1 to Form 8-K filed May 20, 2015).
10.1 Lease, dated as of June 22, 2007 by and between 599 Lexington Avenue LLC and Ramius LLC (as successor in
interest to RCG Holdings LLC (f/k/a Ramius Capital Group, LLC)), as amended by the First Amendment to Lease,
dated as of June 9, 2008, by and between BP 599 Lexington Avenue LLC and Ramius LLC (as successor in
interest to RCG Holdings LLC (f/k/a Ramius LLC)) (previously filed as Exhibit 10.14 to Amendment No. 2 to
Form S-1 filed on December 14, 2009).
10.2
Indemnification Agreement, dated as of July 11, 2006, by and among Société Générale, SG Americas Securities
Holdings, Cowen and Company, LLC and Cowen Holdings, Inc. (f/k/a Cowen Group, Inc.) (previously filed as
Exhibit 10.18 to Amendment No. 2 to Form S-1 filed on December 14, 2009).
10.3 Cowen Group, Inc. 2006 Equity and Incentive Plan (previously filed as Exhibit 10.20 to Amendment No. 2 to
Form S-1 filed on December 14, 2009).*
10.4 Cowen Group, Inc. 2007 Equity and Incentive plan (previously filed as Exhibit 10.21 to Amendment No. 2 to
Form S-1 filed on December 14, 2009).*
10.5 Form of RSU Award Agreement. (previously filed as Exhibit 10.23 to the Form 10-K filed on March 25, 2010).*
10.6 Cowen Group, Inc. 2010 Equity and Incentive Plan (incorporated by reference to Appendix A to the Definitive
Proxy Statement of Cowen Group, Inc., on Schedule 14A for the year ended December 31, 2009, as filed on
April 30, 2010).*
10.7 Form of Equity Award Agreement (previously filed as Exhibit 10.2 to the Form 8-K filed on June 10, 2010).*
10.8 Second Amendment to Lease dated August 20, 2010 between BP 599 Lexington Avenue and the Company,
amending that certain Lease dated as of June 22, 2007 by and between 599 Lexington Avenue LLC and
Ramius LLC (as successor in interest to RCG Holdings LLC (f/k/a Ramius Capital Group, LLC)), as amended by
the First Amendment to Lease, dated as of June 9, 2008, by and between BP 599 Lexington Avenue LLC and
Ramius LLC (previously filed as Exhibit 10.2 to Form 8-K filed August 24, 2010).
10.9 Form of Restricted Stock Unit and Deferred Cash Award Agreement (previously filed as Exhibit 10.18 to the Form
10-K filed on March 9, 2012).*
E- 1
Exhibit
No.
10.10 Employment Agreement, dated as of May 31, 2012, by and between Cowen Group, Inc. and Jeffrey Solomon
Description
(previously filed as Exhibit 10.1 to the Form 8-K filed June 1, 2012).*
10.11 Employment Agreement, dated as of August 2, 2012, by and between Cowen Group, Inc. and Stephen Lasota
(previously filed as Exhibit 10.1 to the Form 8-K filed August 3, 2012).*
10.12 Employment Agreement, dated as of August 2, 2012, by and between Cowen Group, Inc. and Owen Littman
(previously filed as Exhibit 10.2 to the Form 8-K filed August 3, 2012).*
10.13 Form of Stock Appreciation Right Award Agreement (previously filed as Exhibit 10.16 to the Form 10-K filed
March 7, 2013).*
10.14 Convertible note hedge transaction confirmation, dated as of March 4, 2014, by and between Cowen Group, Inc.
and Nomura Global Financial Products Inc. (previously filed as Exhibit 10.1 to Form 8-K filed on March 10,
2014).
10.15 Amendment to convertible note hedge transaction, dated as of March 5, 2014, by and between Cowen Group, Inc.
and Nomura Global Financial Products Inc. (previously filed as Exhibit 10.2 to Form 8-K filed on March 10,
2014).
10.16 Warrant transaction confirmation, dated as of March 4, 2014, by and between Cowen Group, Inc. and Nomura
Global Financial Products Inc. (previously filed as Exhibit 10.3 to Form 8-K filed on March 10, 2014).
10.17 Additional Warrant transaction confirmation, dated as of March 5, 2014, by and between Cowen Group, Inc. and
Nomura Global Financial Products Inc. (previously filed as Exhibit 10.4 to Form 8-K filed on March 10, 2014).
10.18 Amendment to the Employment Agreement between the Company and Stephen Lasota dated April 24, 2015
(previously filed as Exhibit 10.1 to Form 8-K filed April 27, 2015).*
10.19 Amendment to the Employment Agreement between the Company and John Holmes dated April 24, 2015
(previously filed as Exhibit 10.1 to Form 8-K filed April 27, 2015).*
10.20 Amendment to the Employment Agreement between the Company and Owen Littman dated April 24, 2015
(previously filed as Exhibit 10.1 to Form 8-K filed April 27, 2015).*
10.21
Initial capped call confirmation, dated as of May 13, 2015, by and between Nomura Global Financial Products
Inc. and the Company (previously filed as Exhibit 10.1 to Form 8-K filed May 20, 2015).
10.22 Additional capped call confirmation, dated as of May 19, 2015, by and between Nomura Global Financial
Products Inc. and the Company (previously filed as Exhibit 10.1 to Form 8-K filed May 20, 2015).
10.23 Form of Performance Shares Award Agreement (previously filed as Exhibit 10.1 to the Form 10-Q filed May 2,
2016).*
10.24 Employment Agreement, dated as of August 26, 2016, by and between Cowen Group, Inc. and Peter A. Cohen
(previously filed as Exhibit 10.1 to the Form 8-K filed August 30, 2016).*
10.25 First Amendment to the Revolving Credit Agreement, dated as of July 29, 2016, by and among Cowen Finance
Holdings, LLC, Cowen Structured Holdings LLC, RCG LV Pearl, LLC, Ramius LLC and Nomura Corporate
Funding America LLC, and Suntrust Bank (previously filed as Exhibit 10.1 to the Form 10-Q filed August 1,
2016).
12.1 Calculation of Ratio of Earnings to Total Fixed Charges (filed herewith).
21.1 Subsidiaries of Cowen Group, Inc. (filed herewith).
23.1 Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1 Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32 Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS XBRL INSTANCE DOCUMENT
101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
101.LAB XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
*
Signifies management contract or compensatory plan or arrangement.
E- 2
Exhibit 31.1
I, Peter A. Cohen, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cowen Group, Inc:
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2017
/s/ PETER A. COHEN
Name: Peter A. Cohen
Title: Chief Executive Officer
(principal executive officer)
Exhibit 31.2
I, Stephen A. Lasota, certify that:
1. I have reviewed this Annual Report on Form 10-K of Cowen Group, Inc:
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 27, 2017
/s/ STEPHEN A. LASOTA
Name: Stephen A. Lasota
Title: Chief Financial Officer (principal financial officer and
principal accounting officer)
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cowen Group, Inc. (the "Company") on Form 10-K for the year ended
December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the
undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 27, 2017
/s/ PETER A. COHEN
Name: Peter A. Cohen
Title: Chief Executive Officer
(principal executive officer)
/s/ STEPHEN A. LASOTA
Name: Stephen A. Lasota
Title: Chief Financial Officer (principal financial
officer and principal accounting officer)
* The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the
Report or as a separate disclosure document
(This page has been left blank intentionally.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended:
December 31, 2016
Commission file number: 001-34516
Cowen Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-0423711
(I.R.S. Employer
Identification No.)
599 Lexington Avenue
New York, New York 10022
(212) 845-7900
(Address, including zip code, and telephone number, including area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Exchange on Which Registered
Class A Common Stock, par value $0.01 per share
8.25% Senior Notes due 2021
The Nasdaq Global Market
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any
amendment to the Annual Report on Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of Class A common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the registrant's
most recently completed second fiscal quarter, based upon the closing sale price of the Class A common stock on the NASDAQ Global Market on that date was
$298,141,545.
As of March 22, 2017 there were 27,312,493 shares of the registrant's common stock outstanding.
Documents incorporated by reference:
Part III of this Annual Report on Form 10-K/A incorporates by reference information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2017 Annual Meeting of Stockholders.
Explanatory Note
This Amendment No. 1 to Annual Report on Form 10-K/A amends the Annual Report on Form 10-K for the year ended
December 31, 2016 of Cowen Group, Inc. (the "Company" or "Cowen"), which was filed with the Securities and Exchange
Commission on February 27, 2017. This Form 10-K/A is being filed solely for the purpose of providing separate audited financial
statements of Starboard Value A LP ("Starboard") which comprise the statements of assets, liabilities and partners’ capital as of
December 31, 2016 and December 31, 2015, and the related statements of income, statements of changes in partners’ capital and
statements of cash flows for each of the three years in the period ended December 31, 2016 in accordance with Rule 3-09 of
Regulation S-X. The audited financial statements and the Reports of Independent Auditors of Starboard Value A LP, are filed as
Exhibit 99.1 and are included as financial statement schedules in Item 15(c), "Exhibits and Financial Statement Schedules" of this
Form 10-K/A. The Company accounts for its interest in Starboard under the equity method of accounting. The financial statements
of Starboard as of December 31, 2016 and 2015 and for the three years in the period ended December 31, 2016 were not available
at the time that the Company filed its Annual Report on Form 10-K on February 27, 2017.
The consent of PricewaterhouseCoopers LLP and the consent of Ernst & Young LLP, both independent auditors, are also
filed as exhibits to this Amendment No. 1 to Annual Report on Form 10-K/A. In addition, this Form 10-K/A includes an updated
exhibit index in respect thereof and certifications under Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
Except as described above, this Amendment No. 1 on Form 10-K/A does not update or modify any other information
presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as originally filed. This
Amendment No. 1 does not update or modify in any way the financial position, results of operations, cash flows, equity or related
disclosures in the Company's Annual Report on Form 10-K, and does not reflect events occurring after the Form 10-K’s original
filing date of February 27, 2017. Accordingly, this Form 10-K/A should be read in conjunction with the Company's Annual Report
on Form 10-K for the year ended December 31, 2016 and the other Company filings made with the SEC subsequent to the filing
of the Annual Report on Form 10-K for the year ended December 31, 2016.
ii
Item 15. Exhibits and Financial Statement Schedules
(c) Refer to Exhibit 99.1 to this Amendment No 1. to the Annual Report on Form 10-K/A for the separate audited
financial statements and related disclosures of Starboard Value A LP pursuant to Rule 3-09 of Regulation S-X.
iii
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
COWEN GROUP, INC.
By:
Name:
Title:
/s/ PETER A. COHEN
Peter A. Cohen
Chairman of the Board and Chief Executive
Officer
Date: March 23, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PETER A. COHEN
Peter A. Cohen
/s/ STEPHEN A. LASOTA
Stephen A. Lasota
/s/ KATHERINE E. DIETZE
Katherine E. Dietze
/s/ STEVEN KOTLER
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
March 23, 2017
March 23, 2017
Director
March 23, 2017
Steven Kotler
Director
March 23, 2017
/s/ JEROME S. MARKOWITZ
Jerome S. Markowitz
Director
March 23, 2017
/s/ JACK H. NUSBAUM
Jack H. Nusbaum
Director
March 23, 2017
/s/ DOUGLAS A. REDIKER
Douglas A. Rediker
Director
March 23, 2017
/s/ JEFFREY M. SOLOMON
Jeffrey M. Solomon
Director
March 23, 2017
/s/ JOSEPH R. WRIGHT
Joseph R. Wright
Director
March 23, 2017
Exhibit
No.
Exhibit Index
Description
23.1 Consent of Independent Registered Public Accounting Firm (filed herewith).
23.2 Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1 Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32 Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (furnished herewith).
99.1 Starboard Value A LP Audited Financial Statements (filed herewith).
E- 1
(This page has been left blank intentionally.)
Exhibit 31.1
I, Peter A. Cohen, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Cowen Group, Inc:
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date:
March 23, 2017
/s/ PETER A. COHEN
Name: Peter A. Cohen
Title: Chief Executive Officer
(principal executive officer)
Exhibit 31.2
I, Stephen A. Lasota, certify that:
1. I have reviewed this Annual Report on Form 10-K/A of Cowen Group, Inc:
Certification
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date:
March 23, 2017
/s/ STEPHEN A. LASOTA
Name: Stephen A. Lasota
Title: Chief Financial Officer (principal financial officer and
principal accounting officer)
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Cowen Group, Inc. (the "Company") on Form 10-K/A for the year ended
December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the
undersigned officers of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
March 23, 2017
/s/ PETER A. COHEN
Name: Peter A. Cohen
Title: Chief Executive Officer
(principal executive officer)
/s/ STEPHEN A. LASOTA
Name: Stephen A. Lasota
Title: Chief Financial Officer (principal financial
officer and principal accounting officer)
* The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the
Report or as a separate disclosure document
(This page has been left blank intentionally.)
Starboard Value A LP
(a Delaware limited partnership)
Financial Statements
December 31, 2016
Starboard Value A LP
(a Delaware limited partnership)
Table of Contents
Independent Auditors’ Reports
Financial Statements
Statement of Assets, Liabilities and Partners’ Capital
Statement of Income
Statement of Changes in Partners’ Capital
Statement of Cash Flows
Notes to Financial Statements
Page(s)
3-4
5
6
7
8
9-13
Report of Independent Auditors
To the General Partner of
Starboard Value A LP:
We have audited the accompanying financial statements of Starboard Value A LP, which comprise the
statement of assets, liabilities and partners’ capital as of December 31, 2016, and the related
statements of income, changes in partners’ capital and cash flows for the year then ended, and the
related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design,
implementation and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free of material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Starboard Value A LP at December 31, 2016, and the results of its operations, the
changes in partners’ capital and its cash flows for the year then ended in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
March 22, 2017
Report of Independent Auditors
To the Management of Starboard Value A LP:
We have audited the accompanying financial statements of Starboard Value A LP, which comprise the
statement of assets, liabilities and partners’ capital as of December 31, 2015, and the related
statements of income, changes in partners’ capital and cash flows for each of the two years in the
period ended December 31, 2015.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether due to
fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, we consider internal control relevant to the Company's
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Starboard Value A LP as of December 31, 2015, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2015 in accordance
with accounting principles generally accepted in the United States of America.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 23, 2016
Starboard Value A LP
(a Delaware limited partnership)
Statement of Assets, Liabilities and Partners’ Capital
(dollars in thousands)
As of December 31, 2016 and 2015
Assets
Cash and cash equivalents
Investments in Portfolio Funds, at fair value (cost 2016 - $1,441; 2015 - $2,357)
Receivable of Realized Incentive Allocation from Portfolio Funds
Receivable of Unrealized Incentive Allocation from Portfolio Funds
Redemptions receivable from Portfolio Funds
December 31,
2016
2015
$
1,176
$
2,490
5,899
4,275
—
213
2,995
1,352
15,487
430
Total assets
$
13,840
$
20,477
Commitments and contingencies (Note 6)
Liabilities and Partners' Capital
Capital distributions payable
Partners’ capital
Total liabilities and Partners’ capital
$
5,604
$
—
8,236
20,477
$
13,840
$
20,477
The accompanying notes are an integral part of these financial statements.
5
Starboard Value A LP
(a Delaware limited partnership)
Statement of Income
(dollars in thousands)
For the Years Ended December 31, 2016, 2015 and 2014
Revenues
Incentive Allocation Income
Total revenues
Other income (loss)
Year ended December 31,
2016
2015
2014
$
24,036
$
(19,246) $
90,905
24,036
(19,246)
90,905
Net gains (losses) from Investments in Portfolio Funds
302
(221)
734
Net income (loss)
$
24,338
$
(19,467) $
91,639
The accompanying notes are an integral part of these financial statements.
6
Starboard Value A LP
(a Delaware limited partnership)
Statement of Changes in Partners’ Capital
(dollars in thousands)
For The Years Ended December 31, 2016, 2015 and 2014
General Partner
Limited Partners
Total
Balance at December 31, 2013
$
258
$
27,171
$
Capital Contributions
Net Income (loss)
Capital Distributions
Balance at December 31, 2014
Capital Contributions
Net Income (loss)
Capital Distributions
Balance at December 31, 2015
Capital Contributions
Net Income (loss)
Capital Distributions
5
853
(208)
908
1
(181)
(535)
193
1
227
(341)
597
90,786
(22,118)
96,436
108
(19,286)
(56,974)
20,284
63
24,111
(36,301)
Balance at December 31, 2016
$
80
$
8,157
$
27,429
602
91,639
(22,326)
97,344
109
(19,467)
(57,509)
20,477
64
24,338
(36,642)
8,237
The accompanying notes are an integral part of these financial statements.
7
Starboard Value A LP
(a Delaware limited partnership)
Statement of Cash Flows
(dollars in thousands)
For The Years Ended December 31, 2016, 2015 and 2014
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
For the year ended December 31,
2016
2015
2014
$
24,338
$ (19,467) $
91,639
Net (gains) losses from Investments in Portfolio Funds
(302)
221
(734)
(Increase)/decrease in operating assets and liabilities:
Receivable of Realized Incentive Allocation from Portfolio Funds
(4,547)
51,674
(34,440)
Receivable of Unrealized Incentive Allocation from Portfolio Funds
Net cash provided by operating activities
11,212
30,701
25,098
(33,957)
57,526
22,508
Cash flows from investing activities
Purchase of Portfolio Fund Investments
Proceeds from Sale of Portfolio Fund Investments
Net cash provided by (used in) investing activities
Cash flows from financing activities
Capital contributions
(64)
1,300
1,236
(109)
—
(109)
(602)
—
(602)
64
109
602
Capital distributions, net of change in capital distributions payable
(31,038)
(57,509)
(22,326)
Net cash used in financing activities
(30,974)
(57,400)
(21,724)
Net change in cash and cash equivalents
963
17
182
Cash and cash equivalents at beginning of year
213
196
Cash and cash equivalents at end of year
$
1,176
$
213
$
14
196
Supplemental non-cash information
Redemption receivable for sale of Portfolio Fund Investments
$
— $
430
$
—
The accompanying notes are an integral part of these financial statements.
8
Starboard Value A LP
(a Delaware limited partnership)
Notes to Financial Statements
(dollars in thousands)
1. Organization and Nature of Business
Starboard Value A LP (the “Partnership”), a Delaware limited partnership, was formed on February 9, 2011
for the purpose of providing a full range of investment advisory and management services and acting as
a general partner, investment advisor, or in similar capacity to clients. As of December 31, 2016 and 2015,
funds which the Partnership acted as general partner consisted of Starboard Value and Opportunity Fund
LP, Starboard Intermediate Fund, L.P., Starboard Leaders Fund LP, Starboard Partners Fund LP, Starboard
Leaders Select Fund LP, and other managed accounts (collectively the “Funds”).
The general partner of the Partnership is Starboard Value A GP LLC, a Delaware limited liability company
(the “General Partner”). The limited partners of the Partnership (the “Limited Partners”) are Starboard
Principal Co A LP, a Delaware limited partnership (the “Principal Co”), and Ramius V&O Holdings LLC, a
Delaware limited liability company (“Ramius”), which is a wholly-owned subsidiary of Cowen Group, Inc.
(“CGI”) (NASDAQ: COWN). Principal Co and Ramius are also the members of the General Partner.
Pursuant to the organization documents, the Partnership is entitled to receive the incentive income earned
from the Funds (See Note 2 Incentive Allocation).
2. Summary of Significant Accounting Policies
These financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”). The following is a summary of the significant
accounting policies followed by the Partnership:
Cash and Cash Equivalents
Cash and cash equivalents include cash balances and highly liquid investments with original maturities of
three months or less. As of December 31, 2016 and 2015, there were no cash equivalents. Cash and
cash equivalents, if any, may exceed the amount of Federal insurance provided for such amounts. The
Partnership has not experienced any losses on its cash and cash equivalents and the General Partner
believes the risk of such loss to be remote.
Consolidation
In the ordinary course of business, the Partnership sponsors various entities that it has determined to be
variable interest entities (“VIEs”). These VIEs are primarily funds for which the Partnership serves as the
general partner and/or investment manager with decision-making rights. The Partnership would consolidate
all entities that it controls through a majority voting interest or otherwise, including those funds that are
limited partnerships in which the general partner has a controlling financial interest in accordance with
guidance of ASC Subtopic 810-20, "Control of Partnerships and Similar Entities" and ASU 2015-02,
“Amendments to Consolidation Analysis,” which the Partnership elected to early adopt for the year ended
December 31, 2016.
An entity is determined to be the primary beneficiary if it holds a controlling financial interest. A controlling
financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact
the entity's business, and (b) the obligation to absorb losses of the entity or the right to receive benefits
from the entity that could potentially be significant to the VIE. The consolidation guidance requires an
analysis to (a) determine whether an entity in which the Partnership holds a variable interest is a VIE and
(b) whether the Partnership’s involvement, through holding interests directly or indirectly in the entity or
contractually through other variable interests (e.g., certain management and performance related fees),
would give it a controlling financial interest. The Partnership does not consolidate any of these funds that
are VIEs as it has concluded that it is not the primary beneficiary in each instance. Fund investors are
entitled to all of the economics of these VIEs with the exception of the management fee and incentive fee
9
Starboard Value A LP
(a Delaware limited partnership)
Notes to Financial Statements
(dollars in thousands)
income, if any, earned by the Partnership. The Partnership’s involvement with the Funds is limited to
providing investment management services in exchange for incentive allocation income.
Investments in Portfolio Funds
Portfolio funds (“Portfolio Funds”) include interests in funds and investment companies managed by the
Partnership. The Partnership elected the fair value option and follows US GAAP regarding fair value
measurements and disclosures relating to investments in certain entities that calculate net asset value
(“NAV”) per share (or its equivalent). The guidance permits, as a practical expedient, an entity holding
investments in certain entities that either are investment companies as defined by the ASC 946, Investment
Companies, or have attributes similar to an investment company, and calculate net asset value per share
or its equivalent for which the fair value is not readily determinable, to measure the fair value of such
investments on the basis of that NAV per share, or its equivalent, without adjustment. Generally, Starboard
Value A LP holds investments in Portfolio Funds until the earlier of (a) realization of the investment, or (b)
the dissolution/termination of the respective fund.
Revenue Recognition
The Partnership’s principal source of revenue is derived from alternative investments, which generates
revenue through two principal sources: incentive allocation income and investment income from the
Partnership’s own capital investments in the Funds.
Incentive Allocation
According to the offering documents of the respective Funds, the Funds shall pay the Partnership an
incentive allocation as compensation for services performed by the Partnership. Incentive allocations
earned are recognized on an accrual basis based on Fund performance during the period, subject to the
achievement of minimum return levels, or high water marks, as set out in the respective Fund’s confidential
offering memorandums or other governing documents. Realized incentive allocations are recognized when
the incentive allocations are payable to the Partnership. Unrealized incentive allocations are calculated
based on an assumed liquidation of the Fund’s ending capital on the reporting date, and distribution of the
net proceeds in accordance with the Fund’s income allocation provisions accrued but unpaid incentive
allocation charged directly to investors in the Funds are recorded within realized incentive allocation
receivable and unrealized incentive allocation respectively, in the Statements of Assets, Liabilities and
Partners’ Capital. Note that accrued but unrealized incentive allocations are not yet payable because they
are not yet realized and as such may be subject to reversal to the extent that the accrued amount exceeds
the actual future performance of the respective funds. The Partnership may, at its discretion, waive or
reduce the incentive allocation with respect to certain limited partners of the Funds.
Net gains (losses) on Investments in Portfolio Funds
Net gains (losses) on investments in Portfolio Funds represents the unrealized and realized gains and
losses on the Partnership’s investments. Gains (losses) on investments in Portfolio Funds are realized
when the Partnership redeems all or a portion of its investment or when the Partnership receives cash
income, such as dividends or distributions, from its investments. Unrealized gains (losses) on investments
in Portfolio Funds results from changes in the fair value of the underlying investment.
Income Taxes
The Partnership is not subject to U.S. Federal income tax and is generally not subject to state or local
income taxes. Such taxes are the responsibility of the partners and accordingly no provision for income
tax expense or benefit is reflected in the accompanying financial statements. The Partnership’s activities
do not subject it to tax from other jurisdictions outside the United States and, accordingly, no provision for
foreign taxes has been recorded in the accompanying financial statements.
10
Starboard Value A LP
(a Delaware limited partnership)
Notes to Financial Statements
(dollars in thousands)
The Partnership follows the authoritative guidance on accounting for and disclosure of uncertainty in tax
positions which requires the General Partner to determine whether a tax position of the Partnership is
more likely than not to be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. For tax positions meeting the more likely
than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing
authority. At December 31, 2016, there were no uncertain tax positions, interest, or related penalties
assessed.
Use of Estimates
The preparation of these financial statements in conformity with US GAAP requires the Partnership to
make estimates and assumptions that affect the fair value of investments and the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates, and the differences
could be material.
3. Investments and Fair Value Measurement
As of December 31, 2016 and 2015, investments in Portfolio Funds, at fair value, include the following:
Investments
Strategy
2016
2015
(dollars in thousands)
Redemption
Frequency and
Commitments
Fair Value as of December 31,
Starboard Value and Opportunity Fund LP
Activist
$
485
$
Starboard Intermediate Fund, L.P.
Starboard Intermediate Fund II, L.P.
Starboard Leaders Fund LP
Starboard Partners Fund LP
Other Managed Accounts
Activist
Activist
Activist
Non-Activist
Activist
1,447
—
344
35
179
435
433
865
277
(a) (b)
(a) (b)
(a) (b)
(c) (d)
33
(a) (d)
952
(c) (d)
$
2,490
$
2,995
(a) The Partnership has no unfunded commitments related to these Portfolio Funds.
(b) Investments may only be redeemed on a quarterly basis with 90 days prior written notice.
(c) As of December 31, 2016 and 2015, the Partnership had total commitments to Starboard Leaders Fund
and Other Managed Accounts of $255 and $600, respectively, of which the Partnership has funded $255
and $150, respectively. These commitments can be called at any time, subject to advance notice.
(d) Investments are only distributed upon realization of all or the specific investment opportunity, as
applicable, in the Portfolio Fund.
In accordance with US GAAP, the Partnership's investments in Portfolio Funds are measured at fair value
using the net asset value per share (or its equivalent) as a practical expedient and therefore have not been
classified in the fair value hierarchy.
Because of the inherent uncertainty of the valuation for the Partnership’s investments, the fair value
assigned may differ from the values that would have been used had a ready market existed for these
investments, and the differences may be material.
11
Starboard Value A LP
(a Delaware limited partnership)
Notes to Financial Statements
(dollars in thousands)
4. Related Party
The investment manager, Starboard Value LP, a related entity with the same Class A limited partners as
the Partnership, assumes all administrative expenses and costs of operations for the Partnership.
5. Partners’ Capital
Pursuant to the terms of the Limited Partnership Agreement (the “Agreement”), the Partnership initially
issued a total number of 1,000 profit units. One percent of these profit units were issued to the General
Partner and ninety-nine percent of the profit units were issued to the Class A limited partners, Principal
Co and Ramius. Class B and Class D partners are also entitled to distributions based on the Agreement.
According to the Agreement, the ownership interest of the Partnership may be adjusted from time to time
based on the contractual terms and the respective fair values.
Net income (losses) are allocated in proportion to the Class A limited partners ownership interests in the
Partnership. However, incentive allocations are available for distribution firstly to Class B limited partners
based on allocations as defined by the Agreement, next to Class D limited partners based on allocations
as defined by the Agreement, and thereafter, all remaining amounts are available for distribution to the
Class A limited partners in proportion to their respective ownership interest in the Partnership, subject to
certain priority distributions to Ramius as set forth in the Agreement.
In the event that the Partnership is liquidated or if all or substantially all its assets are sold, distributions
shall be made pro-rata based on ownership interests.
The General Partner and Limited Partners make periodic contributions for the purpose of funding the
Partnership’s investments in Portfolio Funds.
6. Commitments and Contingencies
In the normal course of business the Partnership enters into contracts that contain a variety of
representations and warranties and which provide general indemnifications. The Partnership’s maximum
exposure under these arrangements is unknown as this would involve future claims that may be made
against the Partnership that have not yet occurred. However, the Partnership expects the risk of loss to
be remote.
7. Risks
The Partnership is subject to a variety of risks in the conduct of its operations. The Partnership is
economically dependent on the performance of the Funds and its related parties as the source of its
incentive allocation revenues and, accordingly, may be materially affected by the actions of and the various
risks associated with such Funds and related parties. For instance, market risk, currency risk, credit risk,
operational risk and liquidity risk.
Legal, tax and regulatory changes could occur during the term of the Partnership that may adversely affect
the Partnership. The regulatory environment for investment funds is evolving, and changes in the regulation
of investment funds may adversely affect the Partnership’s operations.
12
Starboard Value A LP
(a Delaware limited partnership)
Notes to Financial Statements
(dollars in thousands)
8. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from
Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. The guidance requires revenue recognition of
an amount the entity expects to receive in exchange for the transfer of promised goods or services to
customers. An entity is required to (a) identify the contract(s) with a customer, (b) identify the performance
obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the
performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a
performance obligation. In determining the transaction price, an entity may include variable consideration
only to the extent that it is probable that a significant reversal in the amount of cumulative revenue
recognized would not occur when the uncertainty associated with the variable consideration is resolved.
In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which deferred the effective
date of the guidance of ASU 2014-09 by one year. The amended guidance relating to Revenue from
Contracts with Customers is effective for annual periods after December 15, 2018. The guidance may
have a material impact on the Partnership’s consolidated financial statements, including significantly
delaying the recognition of revenue associated with the incentive income that Partnership’s contracts
provide for. The Partnership is currently evaluating the accounting, transition and disclosure requirements
of the standard and cannot currently estimate the financial statement impact of adoption.
9. Subsequent Events
The Partnership has determined that no material events or transactions occurred subsequent to
December 31, 2016 and through March 22, 2017, the date the accompanying financial statements were
available to be issued, which require additional adjustments or disclosures in the accompanying financial
statements. For the period January 1, 2017 through March 22, 2017, the Partnership made distributions
of approximately $5.6 million to its partners, all of which were reflected as distributions payable at December
31, 2016.
13
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Stock Performance
The following graph and table compares the performance of an investment in our common stock with
investments in the S&P 500 Index and the S&P SmallCap 600 Financial Sector Index over the period of
December 30, 2011 through December 30, 2016, the last day of trading in fiscal 2016. Both the graph
and the table assume that $100 was invested on December 30, 2011 and the dividends, if any, were
reinvested on the date of payment. The performance shown in the graph represents past performance
and should not be considered indicative of future performance.
$300
$250
$200
$150
$100
$50
$0
.
12/11 3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14 9/14 12/14 3/15 6/15 9/15 12/15 3/16 6/16 9/16 12/16
Cowen Group, Inc
S&P 500
S&P SmallCap 600 Financial Sector
Cowen Group, Inc
S&P 500
S&P SmallCap 600 Financial Sector
12/30/11
12/30/16
$ 100.00
$ 149.61
100.00
100.00
198.18
235.01
www.cowen.com