“Failure to supervise” is not the sort of charge that typically grabs Wall Street’s attention. Unless the target is one of the world’s best-known hedge fund managers.

In an order on Friday, the U.S. Securities and Exchange Commission detailed how it believes Steven Cohen, the billionaire founder of SAC Capital Advisors LLC, turned a blind eye to what it called illegal trades by two of his portfolio managers.

“Faced with red flags of potentially unlawful conduct by employees under his supervision, Cohen allowed his traders to execute the recommended trades and stood by,” the SEC said.

The case centers on Cohen’s dealings with two managers at affiliated hedge funds, Mathew Martoma of CR Intrinsic Advisors LLC and Michael Steinberg of Sigma Capital Management LLC. Both have pleaded not guilty to criminal insider trading charges.

In March, Cohen agreed to pay about $616 million to settle SEC probes into alleged insider trading at CR Intrinsic and Sigma. By beginning administrative proceedings, the SEC said it now wants him to stop managing other people’s money.

SAC said on Friday the charges against Cohen have no merit.

Elan And Wyeth

Part of the SEC case focuses on trades in Ireland’s Elan Corp. and Wyeth, which were working on a joint clinical trial of a drug to treat Alzheimer’s disease.

According to the SEC, Martoma, now 39, had a close relationship with University of Michigan doctor Sidney Gilman, a consultant to both companies. Gilman, then in his mid-70s, saw in Martoma a friend and pupil, the SEC said.

Starting in 2007, Gilman allegedly began giving Martoma regular tips about how the Alzheimer’s trial was going. In time, Martoma was allegedly touting Elan and Wyeth to Cohen as top investment ideas.

By July 2008, Martoma and Cohen had built up combined positions of more than $700 million in Elan and Wyeth stock.

The SEC said this occurred even though two CR Intrinsic analysts had warned Cohen in April 2008 that the trial might be in trouble. They allegedly cited their talk with another doctor, and suggested that perhaps he should hedge his bets.

Rather than be concerned about whether this doctor was disclosing nonpublic information, the SEC said Cohen wanted to know more and urged Martoma to follow up.

By July 2008, the SEC said it had become obvious to the companies that the trial results would disappoint, and Gilman conveyed details to Martoma.

On the morning of July 20, a Sunday, Martoma supposedly reached out to Cohen. “It’s important,” he said, according to the SEC, and the two supposedly spoke for nearly 20 minutes. It seemed Martoma had had an abrupt change of heart about Elan.

The next day, according to the SEC, Cohen’s head trader began dumping Elan and Wyeth shares, and by July 29 SAC and CR Intrinsic had taken sizable short positions in both companies.

On July 30, just after the drug trial results were announced, Elan shares fell 42 percent and Wyeth shares fell 12 percent. Wyeth is now part of Pfizer Inc.

Total alleged gains and avoided losses for Cohen on the trades: $275 million. Total alleged gain for Martoma: $9.3 million, in the form of his bonus for 2008.

By 2010, unable to repeat his success, Martoma was fired.

Dell

The other part of the case against Cohen focuses on trades in Dell Inc., based on alleged advance tips about the computer maker’s results for the second quarter of 2008.

According to the SEC, Jon Horvath, a research analyst at Sigma who reported to Steinberg, received tips from a friend at another hedge fund, but knew the original source was a Dell insider.

Horvath has since pleaded guilty to criminal charges.

On Aug. 25 and 26, 2008, Cohen was working at his vacation home on Long Island, New York, and according to the SEC bought a half million Dell shares for more than $12 million.

At 1:09 p.m. on Aug. 26, Steinberg was copied on an email in which Horvath said “someone at the company” had signaled that Dell’s gross margins would disappoint investors. “Please keep to yourself as obviously not well known,” it said.

At 1:29 p.m., this email was allegedly sent to Cohen’s email box, but Cohen was on his cellphone, where he would remain until 1:36 p.m. A minute later, he supposedly chatted for 48 seconds with a trader, according to the SEC‘s timeline.

By 1:39 p.m., the selling of the Dell stake supposedly began, and by the close of trading it was done. Steinberg, meanwhile, was selling Dell shares short, the SEC said.

The SEC said the “highly suspicious” email reflected “the clear possibility that Steinberg and Horvath were unlawfully in possession of material nonpublic information and that Steinberg had traded or might trade on that information.” But it said Cohen did not investigate.

On Aug. 28, when Dell reported its second-quarter results, its gross margin came in well short of what investors had been expecting.

“Nice job on Dell,” Cohen emailed Steinberg, according to the SEC.

The next day, Dell shares fell more than 13 percent, and Steinberg allegedly soon closed out his short positions.

Cohen avoided losses of $1.7 million by selling his Dell shares, the SEC said. Net gain for Steinberg: $1 million.

(CM Editor’s Note: In the property/casualty insurance industry, Cohen is a founding investor of Bermuda-based S.A.C. Re Holdings.)