Legal experts said the charges represented a strategic calculation by the SEC that some action had to be taken, but that the agency could end up struggling to prove its case.

The Securities and Exchange Commission charged Cohen, 57, with failing to supervise former SAC Capital Advisors portfolio manager Mathew Martoma and SAC executive Michael Steinberg, both of whom face criminal and civil insider trading charges.

The civil administrative proceeding is the most serious challenge yet to Cohen and his standing in the industry he helped build and which made him billions.

Several lawyers said that unlike federal prosecutors who have additional time to file criminal charges against Cohen, the SEC is bumping up against a five-year statute of limitations to bring civil charges stemming from its investigation.

"It would appear the commission, rather than doing nothing, feels it has to do something. This constitutes something," said C. Evan Stewart, a partner at Zuckerman Spaeder in New York who is not involved in the case.

A spokesman for SAC Capital said the SEC's administrative proceeding had no merit.

"Steve Cohen acted appropriately at all times and will fight this charge vigorously," said SAC's Jonathan Gasthalter.

The timing of the five-member commission's vote adds credence to the idea that the SEC was scrambling.

The SEC did not vote on Cohen in a previously scheduled closed-door session it held on Thursday. Instead, the commissioners discussed charging Cohen at 9 a.m. Friday morning, according to a person familiar with the commission's activities.

A vote outside of the normal meeting time can come up if the SEC is racing to beat the statute of limitations on filing a charge, the source said. Commissioner Troy Paredes was on a plane when the rest of the group met. He cast his vote when he landed in Texas.

The SEC charges stem from a six-year probe of Cohen and his $15 billion hedge fund by regulators and federal investigators in which nine one-time SAC employees have been charged or implicated.

Cohen, reputed to be one of the best traders of his generation, has emerged as the primary focus of the federal government's crackdown on insider trading in the $2.4 trillion hedge fund industry.

"Cohen ignored the red flags and allowed Martoma and Steinberg to execute the trades" in several stocks where the SEC found evidence of insider trading, the agency said.

The charges are not part of a civil lawsuit filed in court; rather, they are contained in an administrative proceeding. In a statement announcing the proceeding, the SEC said it would determine a penalty during the proceeding.

It is seeking to bar Cohen from the financial industry and from managing other people's money.

In March, SAC agreed to pay a record $616 million penalty to settle a lawsuit arising from an investigation of trading on illegal information.

Some observers had thought the settlement would end much of SAC and Cohen's troubles, but it did not. Soon afterward, federal prosecutors served grand jury subpoenas on Cohen and others at the firm seeking their testimony. Cohen asserted his Fifth Amendment right against self-incrimination and did not testify.

In June, outside investors moved to pull at least $3 billion from the fund because of the ongoing investigation.

It is too early to tell whether the latest charges will put pressure on some of SAC's 900 employees to look for other jobs. That has not happened so far.

"They are obviously trying to shut him down," said one investor with SAC Capital who declined to be identified. The investor said it would appear there will be no criminal charge against Cohen, but regulators have decided to use what they can to force him out of business.

"I think this is certainly, at this stage, a victory for Cohen to avoid far more serious charges," said Mark Kornfeld, a partner at Baker & Hostetler who is not connected to the case.

A spokeswoman for the U.S. Attorney's Office in New York declined to comment.

The 17-page administrative order charges that in the matters involving Steinberg and Martoma, Cohen "received highly suspicious information that should have caused any reasonable hedge fund manager in Cohen's position" to determine whether the employees had acted appropriately.

The order also charges that Cohen "tagged," or made specific notation of, some of the positions undertaken by the two men in his own portfolio, which entitled them to additional compensation.

Cohen personally oversees about $4 billion, along with a small group of traders, in a portfolio called "the Cohen account," which represents a good chunk of the estimated $6 billion he has invested with his 21-year-old hedge fund, Reuters has previously reported.

THE SEC'S STRATEGY

An administrative proceeding can be a less favorable environment than a federal court for a civil defendant in an SEC case.

There is no right to a jury trial, for example, and a defendant has fewer protections against the admission of unfavorable evidence. The ability to take depositions is also more limited.

Lawyers said that in a civil proceeding, Cohen could assert his Fifth Amendment right against self incrimination as he did in the criminal investigation. But the judge in the proceeding would be entitled to draw a "negative inference" from Cohen's refusal to answer specific questions.

"I think they don't have the evidence for insider trading so they brought this," Thomas Gorman, a partner at Dorsey & Whitney who is not connected to the case, said of the SEC charges against Cohen. "Bringing a case like this under circumstances here is going to be a difficult proof problem for them.

"They are going to have to show that Mr. Cohen was not only in charge but that basically he didn't act in good faith," Gorman added. "If he acted in good faith and did not induce these acts directly or indirectly, then he's not liable."

Several lawyers said since the SEC is not able to bring a conspiracy charge, it has fewer options than federal prosecutors to continue the investigation of Cohen.

Just this week, Manhattan U.S. Attorney Preet Bharara said at a CNBC conference: "People should be afraid that bad actions they have committed in the past" will catch up with them.

(Reporting by Emily Flitter; Additional reporting by Katya Wachtel, Jonathan Stempel, Svea Herbst-Bayliss and Sarah N. Lynch; Editing by Matthew Goldstein, Gerald E. McCormick, Andrew Hay and Dan Grebler)

By Emily Flitter