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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)    

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                  

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

(Address of Principal Executive Offices)

 

10022
(Zip Code)

(212) 845-7900
(Registrant's telephone number, including area code)

        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 ý    No o

        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 o    No o

        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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of August 8, 2011 there were 116,291,426 shares of the registrant's common stock outstanding.


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TABLE OF CONTENTS

Item No.
  Page No.  

PART I. FINANCIAL INFORMATION

       
 

1. Unaudited Condensed Consolidated Financial Statements

    4  
   

Condensed Consolidated Statements of Financial Condition

    4  
   

Condensed Consolidated Statements of Operations

    5  
   

Condensed Consolidated Statements of Changes in Equity

    6  
   

Condensed Consolidated Statements of Cash Flows

    7  
   

Notes to Condensed Consolidated Financial Statements

    9  
 

2. Management's Discussion and Analysis of Financial Condition and Results of Operations

    68  
 

3. Quantitative and Qualitative Disclosures About Market Risk

    108  
 

4. Controls and Procedures

    109  

PART II. OTHER INFORMATION

       
 

1. Legal Proceedings

    110  
 

1A. Risk Factors

    113  
 

2. Unregistered Sales of Equity Securities and Use of Proceeds

    118  
 

3. Defaults Upon Senior Securities

    118  
 

4. (Removed and Reserved)

    118  
 

5. Other Information

    118  
 

6. Exhibits

    118  

SIGNATURES

    119  

EXHIBIT INDEX

    120  
 

Exhibit 31.1

       
 

Exhibit 31.2

       
 

Exhibit 32

       

2


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Special Note Regarding Forward-Looking Statements

        We have made statements in this Quarterly Report on Form 10-Q (including in "Management's Discussion and Analysis of Financial Condition and Results of Operations") that are forward-looking statements within the meaning 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 contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.

        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.

        Unaudited Condensed Consolidated Financial Statements are presented for the three months and six months ended June 30, 2011 and 2010. The Condensed Consolidated Financial Statements as of December 31, 2010 were audited.

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PART I. FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements


Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(unaudited)

 
  As of
June 30, 2011
  As of
December 31, 2010
 

Assets

             
 

Cash and cash equivalents

  $ 110,175   $ 36,354  
 

Cash collateral pledged

    9,801     8,633  
 

Securities owned, at fair value

    986,424     474,095  
 

Securities purchased under agreements to resell

    77,332     97,755  
 

Other investments

    49,042     40,320  
 

Receivable from brokers

    124,987     95,937  
 

Fees receivable

    22,442     31,688  
 

Due from related parties (see Note 18)

    19,975     16,370  
 

Fixed assets, net of accumulated depreciation and amortization of $20,357 and $17,764, respectively

    47,064     36,591  
 

Goodwill

    27,179     27,179  
 

Intangible assets, net of accumulated amortization of $9,623 and $8,146, respectively

    16,598     12,754  
 

Other assets

    33,277     19,456  
 

Consolidated Funds

             
 

Cash and cash equivalents

    789     7,210  
 

Securities owned, at fair value

    6,191     8,722  
 

Other investments, at fair value

    261,898     333,374  
 

Other assets

    283     732  
           
       

Total Assets

  $ 1,793,457   $ 1,247,170  
           

Liabilities and Stockholders' Equity

             
 

Securities sold, not yet purchased, at fair value

  $ 442,261   $ 197,916  
 

Securities sold under agreements to repurchase

    169,439     192,165  
 

Payable to brokers

    321,226     85,655  
 

Compensation payable

    26,731     76,204  
 

Short-term borrowings and other debt

    6,618     31,733  
 

Fees payable (see Note 18)

    6,428     8,797  
 

Due to related parties (see Note 18)

    2,557     9,187  
 

Accounts payable, accrued expenses and other liabilities

    61,718     42,267  
 

Consolidated Funds

             
 

Capital withdrawals payable

    3,510     7,817  
 

Accounts payable, accrued expenses and other liabilities

    662     1,827  
           
       

Total Liabilities

    1,041,150     653,568  
           

Commitments and Contingencies (see Note 13)

             

Redeemable non-controlling interests

    114,349     144,346  
           

Stockholders' equity

             
 

Preferred stock, par value $0.01 per share; 10,000,000 shares authorized, no shares issued and outstanding

         
 

Class A common stock, par value $0.01 per share: 250,000,000 shares authorized, 116,246,786 and 75,490,209 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively (including 1,110,836 and 1,554,124 restricted shares, respectively)

    1,130     726  
 

Class B common stock, par value $0.01 per share: 250,000,000 authorized, no shares issued and outstanding

         
 

Additional paid-in capital

    674,205     504,480  
 

(Accumulated deficit) retained earnings

    (35,851 )   (55,970 )
 

Accumulated other comprehensive income

    375     20  
 

Less: Class A common stock held in treasury, at cost: 499,136 shares as of June 30, 2011

    (1,901 )    
           
     

Total Stockholders' Equity

    637,958     449,256  
           
       

Total Liabilities and Stockholders' Equity

  $ 1,793,457   $ 1,247,170  
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Cowen Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2011   2010   2011   2010  

Revenues

                         
 

Investment banking

  $ 14,343   $ 9,938   $ 29,025   $ 15,943  
 

Brokerage

    24,607     29,793     52,198     59,369  
 

Management fees

    11,857     8,881     23,021     18,151  
 

Incentive income

    675     (100 )   5,056     1,994  
 

Interest and dividends

    5,840     1,380     10,399     2,183  
 

Reimbursement from affiliates

    981     1,741     1,990     3,484  
 

Other revenues

    232     398     922     1,020  
 

Consolidated Funds

                         
   

Interest and dividends

    136     2,965     305     8,746  
   

Other

    8     4     8     370  
                   
     

Total revenues

    58,679     55,000     122,924     111,260  

Expenses

                         
 

Employee compensation and benefits

    43,575     38,547     88,662     81,980  
 

Floor brokerage and trade execution

    3,685     3,945     7,795     8,973  
 

Interest and dividends

    3,115     621     5,724     1,067  
 

Professional, advisory and other fees

    10,398     2,879     17,538     5,267  
 

Service fees

    4,366     4,034     7,978     7,853  
 

Communications

    4,342     3,153     7,235     6,454  
 

Occupancy and equipment

    4,991     5,845     10,113     11,474  
 

Depreciation and amortization

    2,011     2,390     4,069     4,884  
 

Client services and business development

    4,132     4,379     8,809     8,544  
 

Other

    (259 )   4,710     4,034     12,092  
 

Consolidated Funds

                         
   

Interest and dividends

    40     (177 )   87     1,390  
   

Professional, advisory and other fees

    613     831     1,073     1,509  
   

Floor brokerage and trade execution

        285         994  
   

Other

    219     243     341     447  
                   
     

Total expenses

    81,228     71,685     163,458     152,928  

Other income (loss)

                         
 

Net gains (losses) on securities, derivatives and other investments

    76     249     17,358     1,774  
 

Bargain purchase gain

    22,244         22,244      
 

Consolidated Funds:

                         
   

Net realized and unrealized gains (losses) on investments and other transactions

    4,971     (8,211 )   7,314     11,006  
   

Net realized and unrealized gains (losses) on derivatives

    (84 )   720     (525 )   500  
   

Net gains (losses) on foreign currency transactions

    (117 )   777     (273 )   52  
                   
     

Total other income

    27,090     (6,465 )   46,118     13,332  
                   
     

Income (loss) before income taxes

    4,541     (23,150 )   5,584     (28,336 )
                   

Income tax expense (benefit)

    (17,954 )   599     (17,791 )   333  
                   
     

Net income (loss)

    22,495     (23,749 )   23,375     (28,669 )
                   
 

Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries

    2,458     (2,552 )   3,256     5,504  
                   
     

Net income (loss) attributable to Cowen Group, Inc. stockholders

  $ 20,037   $ (21,197 ) $ 20,119   $ (34,173 )
                   

Weighted average common shares outstanding:

                         
 

Basic

    76,330     72,693     75,600     72,601  
 

Diluted

    77,898     72,693     76,889     72,601  

Earnings (loss) per share:

                         
 

Basic

  $ 0.26   $ (0.29 ) $ 0.27   $ (0.47 )
                   
 

Diluted

  $ 0.26   $ (0.29 ) $ 0.26   $ (0.47 )
                   

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Cowen Group, Inc.

Condensed Consolidated Statements of Changes in Equity

(in thousands, except share data)

(unaudited)

 
  Common
Shares
Outstanding
  Common
Stock
  Treasury
Stock
  Additional
Paid-in
Capital
  Accumulated
Other
Comprehensive
Income
  Retained
Earnings/
(Accumulated
deficit)
  Total
Stockholders'
Equity
  Redeemable
Noncontrolling
Interest
  Total
Comprehensive
Income (Loss)
 

Balance, December 31, 2010

    75,490,209   $ 726   $   $ 504,480   $ 20   $ (55,970 ) $ 449,256   $ 144,346        
                                         

Comprehensive income (loss):

                                                       
 

Net income (loss)

                        20,119     20,119     3,256   $ 23,375  
 

Defined Benefit Plans

                    195         195         195  
 

Foreign currency translation

                    160         160         160  
                                       

Total comprehensive income (loss)

                    355     20,119     20,474     3,256   $ 23,730  

Capital contributions

                                4,038        

Capital withdrawals

                                (40,761 )      

Consolidation of RCG Linkem II LLC

                                              3,470        

Restricted stock awards issued

    405,580                                    

Common stock issuance upon acquisition (see Note 2)

    40,850,133     409         155,639             156,048            

Purchase of treasury stock

    (499,136 )   (5 )   (1,901 )                     (1,906 )            

Amortization of share based compensation

                14,086             14,086            
                                         

Balance, June 30, 2011

    116,246,786   $ 1,130   $ (1,901 ) $ 674,205   $ 375   $ (35,851 ) $ 637,958   $ 114,349        
                                         

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 
  Six Months Ended
June 30,
 
 
  2011   2010  
 
  (dollars in thousands)
 

Cash flows from operating activities:

             
 

Net income (loss)

  $ 23,375   $ (28,669 )
 

Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:

             
     

Bargain purchase gain

    (22,244 )    
     

Depreciation and amortization

    4,069     4,884  
     

Share-based compensation

    14,086     9,310  
     

Net loss on disposal of fixed assets

        266  
     

Purchases of securities owned, at fair value

    (5,053,676 )   (666,553 )
     

Proceeds from sales of securities owned, at fair value

    4,834,296     409,108  
     

Proceeds from the sale of securities sold, not yet purchased, at fair value

    2,485,115     306,842  
     

Payments to cover securities sold, not yet purchased, at fair value

    (2,435,760 )   (295,263 )
     

Net (gains) losses on securities, derivatives and other investments

    (13,509 )   (1,975 )
     

Consolidated Funds:

             
       

Purchases of securities owned, at fair value

    (245,778 )   (212,811 )
       

Proceeds from sales of securities owned, at fair value

    248,297     202,007  
       

Purchases of other investments

    (11,101 )   (18,634 )
       

Proceeds from sales of other investments

    87,963     117,873  
       

Net realized and unrealized (gains) losses on investments and other transactions

    (5,373 )   (15,578 )
     

(Increase) decrease in operating assets:

             
       

Cash acquired upon acquisition (see Note 2)

    117,496      
       

Cash collateral pledged

    (41 )    
       

Securities owned, at fair value, held at broker dealer

    (73,150 )   82,450  
       

Receivable from brokers

    64,704     (11,697 )
       

Fees receivable

    9,246     5,325  
       

Due from related parties

    (136 )   259  
       

Other assets

    (8,765 )   5,404  
       

Consolidated Funds:

             
           

Cash and cash equivalents

    6,421     (6,089 )
           

Other assets

    449     99  
     

Increase (decrease) in operating liabilities:

             
       

Securities sold, not yet purchased, at fair value, held at broker dealer

    28,189     11,727  
       

Payable to brokers

    154,035     101,469  
       

Compensation payable

    (52,799 )   (51,711 )
       

Fees payable

    (3,338 )   (3,840 )
       

Due to related parties

    (6,630 )   (800 )
       

Accounts payable, accrued expenses and other liabilites

    3,339     (20,775 )
       

Consolidated Funds:

             
           

Accounts payable, accrued expenses and other liabilities

    (1,165 )   661  
           
             

Net cash provided by / (used in) operating activities

    147,615     (76,711 )
           

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Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)

 
  Six Months Ended
June 30,
 
 
  2011   2010  
 
  (dollars in thousands)
 

Cash flows from investing activities:

             
 

Securities purchased under agreements to resell

    20,423      
 

Purchases of other investments

    (40,650 )   (3,164 )
 

Proceeds from sales of other investments

    39,567     5,686  
 

Purchase of fixed assets

    (4,263 )   (172 )
           
     

Net cash provided by / (used in) investing activities

    15,077     2,350  
           

Cash flows from financing activities:

             
 

Securities sold under agreements to repurchase

    (22,726 )   28,640  
 

Repayments on short-term borrowings and other debt

    (25,608 )   (25,000 )
 

Borrowings on short-term borrowings and other debt

    493      
 

Capital withdrawals to non-controlling interests

    (2,009 )    
 

Consolidated Funds:

             
   

Capital contributions by non-controlling interests in Consolidated Funds

    4,038     2,646  
   

Capital withdrawals to non-controlling interests in Consolidated Funds

    (43,059 )   (63,942 )
           
     

Net cash (used in) / provided by financing activities

    (88,871 )   (57,656 )
           

Change in cash and cash equivalents

    73,821     (132,017 )

Cash and cash equivalents at beginning of year

    36,354     147,367  
           

Cash and cash equivalents at end of period

  $ 110,175   $ 15,350  
           

Supplemental non-cash information:

             

Deconsolidation of CHRP GP (see Note 3b)

  $   $ 1,712  
           

Net assets of consolidated entity

  $ 3,470   $  
           

Net settlement of cash collateral pledged with repayments on the line of credit

  $   $ 6,745  
           

Purchase of treasury stock upon close of acquisition (see Note 15)

  $ 1,901   $  
           

Common stock issuance upon close of acquisition (see Note 2)

  $ 156,048   $  
           

Net assets acquired upon acquisition (net of cash)

  $ 58,486   $  
           

Non-compete agreements acquired

  $ 2,310   $  
           

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Business

        Cowen Group, Inc., a Delaware corporation, was formed on June 1, 2009 in connection with the Transaction Agreement and Agreement and Plan of Merger ("Transaction Agreement"), dated as of June 3, 2009, by and among Cowen Holdings, Inc. ("Cowen Holdings," formerly Cowen Group, Inc.), Lexington Merger Corp., Ramius LLC ("Ramius," formerly Park Exchange LLC) and RCG Holdings LLC ("RCG," formerly Ramius LLC).

        Cowen Group, Inc. is a diversified financial services firm and, together with its consolidated subsidiaries (collectively, "Cowen Group" or the "Company"), provides alternative investment management, investment banking, research, market-making and sales and trading services through its two business segments: alternative investment management and broker-dealer. The alternative investment management segment includes hedge funds, replication products, mutual funds, managed futures funds, fund of funds, real estate, healthcare royalty funds, cash management services and mortgage advisory services, offered primarily under the Ramius name. The broker-dealer segment offers industry-focused investment banking services for growth-oriented companies, including advisory and global credit markets origination and domain knowledge-driven research, and a sales and trading platform for institutional investors, primarily under the Cowen name and an ETF market-making business, both domestically and internationally.

2. Acquisition

        The acquisition of LaBranche & Co Inc. ("LaBranche") by the Company was consummated pursuant to the terms of the Agreement and Plan of Merger ("Merger Agreement"), dated as of February 16, 2011, after the market close on June 28, 2011. LaBranche Capital, LLC (LCAP), which was renamed "Cowen Capital LLC" following consummation of the acquisition, was a wholly owned subsidiary of LaBranche and is now a wholly-owned subsidiary of the Company, is a registered broker-dealer and Financial Industry Regulatory Authority ("FINRA") member firm that operates as a market-maker in Exchange Traded Funds ("ETFs"), engages in hedging activities in options, ETFs, structured notes, foreign currency securities and futures related to its market-making operations and also conducts principal trading activities in these securities. Prior to the acquisition, LaBranche discontinued certain operations in its market-making segment, including upstairs options market-making on various exchanges and electronic market-making in the International Securities Exchange. As of the close of market on June 28, 2011, LaBranche stock was delisted and no longer trades on the New York Stock Exchange.

        Under the terms of the Merger Agreement, each outstanding share of LaBranche was converted into 0.9980 shares of Cowen Class A common stock (the "Exchange Ratio"). The consideration received by LaBranche's shareholders was valued at approximately $156 million in the aggregate, based on the closing price of Cowen Class A common stock on the NASDAQ Global Select Market of $3.82 on June 28, 2011. This is based on 40,931,997 shares of LaBranche stock that were outstanding on the date of the completion of the acquisition.

        The acquisition was accounted for under the acquisition method of accounting in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). In this case, the acquisition was accounted for as an acquisition by Cowen of LaBranche. As such, results of operations for LaBranche are included in the accompanying condensed consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their estimated fair values. The fair value of Cowen shares issued to LaBranche shareholders was the

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)


purchase consideration for the acquisition. Based on the June 28, 2011 preliminary purchase price allocation, the fair value of the net identifiable assets acquired and liabilities assumed amounted to $175.9 million, (excluding $2.3 million non-compete agreements acquired) exceeding the fair value of the preliminary purchase price of $156 million. As a result, the Company recognized a preliminary, nonrecurring bargain purchase gain of approximately $22.2 million in the second quarter of 2011, which is included in other income in the condensed consolidated statements of operations for the three and six month periods ended June 30, 2011. The Company's share price has traded below its book value for a substantial part of the last 52 weeks, and as the preliminary purchase consideration (the Exchange Ratio) was determined based on the stock price of Cowen on June 28, 2011, the purchase price allocation based on the fair value of LaBranche's net assets at acquisition date reflected in these condensed consolidated financial statements has resulted in a bargain purchase gain.

        The Company is currently in the process of finalizing the valuation for certain acquired assets of LaBranche; therefore, the fair value measurements at June 28, 2011 and the gain on acquisition of business are preliminary and subject to further adjustment. The allocation of the purchase price to the net assets acquired will be finalized as necessary, up to one year after the acquisition closing date, as information becomes available. The following table summarizes the preliminary purchase price allocation of net tangible and intangible assets acquired as of June 28, 2011:

 
  (dollars in thousands)  
 

Cash and cash equivalents

  $ 117,496  
 

Cash collateral pledged

    1,127  
 

Securities owned, at fair value

    221,855  
 

Other investments

    2,569  
 

Receivable from brokers

    93,754  
 

Fixed assets, net

    8,804  
 

Intangibles

    3,010  
 

Other assets

    4,897  
 

Securities sold, not yet purchased, at fair value

    (175,391 )
 

Payable to brokers

    (81,536 )
 

Compensation payable

    (3,521 )
 

Fees payable

    (969 )
 

Unfavorable lease

    (3,388 )
 

Accounts payable, accrued expenses and other liabilities

    (12,725 )
       

Total net assets acquired

  $ 175,982  
       
 

Non-compete agreements acquired

    2,310  
 

Goodwill/(Bargain purchase gain) on transaction

    (22,244 )(1)
       

Total purchase price

  $ 156,048  
       

(1)
Represents the preliminary bargain purchase gain on the acquisition.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)

        The Company believes that all of the acquired receivables and contractual amounts receivable as reflected above in the preliminary allocation of the purchase price are recorded at fair value and are expected to be collected in full.

        The Company recognized approximately $0.6 million and $2.3 million of acquisition-related costs, including legal, accounting, and valuation services for the three months and six months ended June 30, 2011, respectively. These costs are included in professional, advisory and other fees and other expenses in the condensed consolidated statements of operations.

        As of June 30, 2011, the estimated fair value of the Company's intangibles, as acquired through the acquisition, is $3 million. In addition, non-compete agreements for the amount of $2.3 million, were negotiated as part of the acquisition, which have been recognized separately from the acquisition of assets and liabilities assumed in accordance U.S. GAAP. The total non-compete agreements acquired of $2.5 million, have been included within Intangible assets, net in the condensed consolidation statements of financial condition. The allocation of the intangibles is as follows:

 
  Estimated
Intangible Assets
Acquired
  Estimated
average remaining
useful lives
 
  (in thousands)
  (years)

Intangible asset class

         

Exchange memberships

  $ 240   indefinite

Covenants to not compete

    1,950   1 or 2

Covenants with limiting conditions

    580   10

Intellectual property

    2,550   3
         
 

Total intangible assets

  $ 5,320    
         

        Amortization expense for the three and six months ended June 30, 2011, respectively, is immaterial. The estimated amortization expense related to these intangible assets in future years is as follows:

 
  (dollars in thousands)  

2011

  $ 997  

2012

    1,883  

2013

    1,341  

2014

    483  

2015

    58  

Thereafter

    318  
       

  $ 5,080  
       

        Included in the accompanying condensed consolidated statements of operations for the three months and six months ended June 30, 2011 are revenues of $0.2 million and a net income of $0.2 million related to LaBranche's results of operations for the period from June 29, 2011 through June 30, 2011.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)

        The following unaudited supplemental pro forma information presents condensed consolidated financial results for the six month periods as if the acquisition was completed as of January 1, 2010. 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 acquisition been completed on January 1, 2010, nor does it purport to be indicative of any future results.

 
  For the six months
ended June 30,
 
 
  2011   2010  
 
  (in thousands)
 

Revenues

  $ 124,245   $ 111,986  

Net Income

    1,129     (56,929 )

Net Income per common share

             
 

Basic

    0.01     (0.50 )
 

Diluted

    0.01     (0.50 )

3. Significant Accounting Policies

a.     Basis of presentation

        These unaudited condensed consolidated financial statements and related notes have been prepared in accordance with US GAAP and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") related to interim financial statements. Results for interim periods should not be considered indicative of results for any other interim period or for the full year. These financial statements should be read in conjunction with the audited condensed consolidated financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009, and 2008, included in the Form 10-K of Cowen Group as filed with the SEC on March 14, 2011. The financial information contained herein is unaudited; however, management believes all adjustments have been made that are necessary for a fair presentation of the results for the interim periods. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in these condensed consolidated financial statements, as further discussed below, 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. Funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to US GAAP as described below. Consequently, the Company's condensed 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 accompanying condensed consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

b.     Principles of consolidation

        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. VOEs are consolidated in accordance with Financial Accounting Standards Board ("FASB") accounting standards.

        Under FASB accounting standards, the usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the Company consolidates VOEs in which it owns a majority of the entity's voting shares or units. FASB accounting standards also provide that a general partner of a limited partnership (or a managing member, in the case of a limited liability company) is presumed to control the partnership, and thus should consolidate it, unless a simple majority of the limited partners has the right to remove the general partner without cause or to terminate the partnership. In accordance with these standards, the Company presently consolidates five funds deemed to be VOEs for which it acts as the general partner and investment manager.

        As of June 30, 2011 the Company consolidates the following funds (the "Consolidated Funds"): Ramius Enterprise LP ("Enterprise LP"), Ramius Multi-Strategy FOF LP ("Multi-Strat FOF"), Ramius Vintage Multi-Strategy FOF LP ("Vintage LP"), Ramius Levered Multi-Strategy FOF LP ("Levered FOF"), and RTS Global 3x Fund LP ("RTS Global 3x").

        In addition, RCG Linkem II LLC was consolidated when it first commenced operations during the second quarter of 2011. The Company determined that it exercises control over RCG Linkem II LLC as it acts as a managing member of this entity.

        Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with FASB accounting standards, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the new FASB 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 have a controlling financial interest in the VIE and thus is required to consolidate it.

        However, the FASB has deferred the application of the new consolidation model for VIEs that meet the following conditions; (a) the entity has all the attributes of an investment company as defined under AICPA Audit and Accounting Guide, Investment Companies, or does not have all the attributes of an investment company but is an entity for which it is acceptable based on industry practice to apply measurement principles that are consistent with the AICPA Audit and Accounting Guide, Investment Companies, (b) the reporting entity does not have explicit or implicit obligations to fund any losses of the entity that could potentially be significant to the entity, and (c) the entity is not a securitization entity, asset-backed financing entity or an entity that was formerly considered a qualifying special-purpose entity. The Company's involvement with its funds is such that all three of the above conditions

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


are met. Where the VIEs have qualified for the deferral, the analysis is based on previous consolidation rules. These rules require an analysis to (a) determine whether an entity in which the Company holds a variable interest is a variable interest entity and (b) whether the Company's involvement, through holding interests directly or indirectly in the entity or contractually through other variable interests (e.g., management and performance related fees), would be expected to absorb a majority of the VIE's expected losses, receive a majority of the VIEs expected residual returns, or both. If this condition is met, the Company is considered to have a controlling financial interest in the VIE and thus is required to consolidate it. Under both guidelines, the Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a variable interest entity and reconsiders that conclusion continuously.

        The Company determines whether it is the primary beneficiary of a VIE by performing a qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, terms of any contracts between the Company and the VIE, which interests create or absorb variability, related party relationships and the design of the VIE. As of June 30, 2011, the Company does not consolidate any VIEs.

        The Company has determined that it no longer exercises control over Cowen Healthcare Royalty GP, LLC (the "CHRP GP") as it no longer acts as a managing member of this entity, and beginning with the first quarter of 2010, no longer consolidates this entity. The Company now accounts for its investment in the CHRP GP under the equity method of accounting.

        As at June 30, 2011, the Company holds a variable interest in Ramius Enterprise Master Fund Ltd ("Enterprise Master"), Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP (the "Unconsolidated Master Funds") through three of its Consolidated Funds: Enterprise LP, Multi-Strat FOF and Vintage FOF (the "Consolidated Feeder Funds"), respectively. Investment companies like the Consolidated Feeder Funds, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under FASB accounting standards, 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 any of the 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 the 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.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

        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 $296 million and $1.9 million as of June 30, 2011 and $383.3 million and $26.7 million as of December 31, 2010, respectively. In addition, the maximum exposure relating to these variable interest entities as of June 30, 2011 was $236.7 million, all of which is in other investments, at fair value and as of December 31, 2010 was $307.8 million, of which $307.2 million is included in other investments, at fair value and $0.6 million is included in due from related parties in the Company's condensed consolidated statements of financial condition, respectively. The Consolidated Feeder Funds' maximum exposure to loss related to their respective Unconsolidated Master Funds at June 30, 2011 and December 31, 2010 was limited to their investments in their respective Unconsolidated Master Funds. See Note 5 for further information regarding the Company's investments.

        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 condensed consolidated statements of financial condition. The Company's equity in earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the condensed consolidated statements of operations.

        The Company evaluates for impairment its equity method investments 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 when the loss in value is deemed other than temporary.

        Cost Method Investments—When the Company does not have a controlling financial interest and does not exert significant influence over an entity's operating and financial policies, but has an investment in private equity for which market quotations are not readily available and is not otherwise accounted for at fair value, the Company accounts for its investment in accordance with the cost method of accounting.

        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 all other debt and marketable equity securities which are bought and held principally for the purpose of selling them in the near term as trading securities in accordance with FASB accounting standards, 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 condensed consolidated statements of operations.

        Retention of Specialized Accounting—The Consolidated Funds are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these funds pursuant to FASB accounting standards. The Consolidated Funds report their investments on the condensed consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected as a component of operations. Accordingly, the accompanying condensed 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"), Cowen Capital LLC, Cowen International Trading Limited,

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


Cowen and Company (Asia) Limited ("CCAL"), and Cowen Structured Products Hong Kong Limited, and apply the specialized industry accounting for brokers and dealers in securities also prescribed under FASB accounting standards. The Company also has retained this specialized accounting in consolidation.

c.     Use of estimates

        The preparation of the condensed consolidated financial statements in conformity with 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 condensed 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.     Valuation of investments and derivative contracts

        The FASB accounting standards establish 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.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

        The Company and its operating company 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 analyses, 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 condensed 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" valuation technique to value its financial instruments measured at fair value. In determining an instrument's placement within the hierarchy, the Company separates 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.

        Securities—Securities whose values are based on quoted market prices in active markets for identical assets, and are therefore classified in level 1 of the fair value hierarchy, include active listed equities, certain U.S. government and sovereign obligations, ETF's 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 there is a limited market, consisting primarily of convertible debt, corporate debt and loans, are stated at fair value. The estimated fair values assigned by management are determined in good faith and are based on available information considering, among other things, 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. Such positions that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources which are supported by observable inputs are classified within level 2. As level 2 investments include positions that are not 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,

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Futures and equity swap derivative contracts are included within other assets on the condensed consolidated statements of financial condition and all other derivatives are included within securities owned, at fair value on the condensed consolidated statements of financial condition.

        Other investments—Other investments consist primarily of portfolio funds, real estate investments and equity method investments, which are valued as follows:

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

        See Note 5 and 6 for further information regarding the Company's investments, including equity method investments, and fair value measurements.

e.     Securities purchased under agreements to resell and securities sold under agreements to repurchase

        The Company uses securities purchased under agreements to resell and securities sold under agreements to repurchase ("Repurchase Agreements") as part of its liquidity management activities and to support its trading and risk management activities. In particular, securities purchased and sold under Repurchase Agreements are used for short-term liquidity purposes. As of June 30, 2011, Repurchase Agreements are secured predominantly by liquid corporate credit and/or government-issued securities. The use of Repurchase Agreements will fluctuate with the Company's need to fund short term credit or obtain competitive short term credit financing. The Company's securities purchased under agreements to resell and securities sold under agreements to repurchase were transacted pursuant to agreements with multiple counterparties as of June 30, 2011 and December 31, 2010.

        Transactions involving purchases of securities under agreements to resell are carried at their contract value which approximates fair value. As of June 30, 2011 and December 31, 2010, the fair value of the collateral received by the Company was $76 million and $95.5 million, respectively.

        Transactions involving the sale of securities under agreements to repurchase are carried at their contract value and are accounted for as collateralized financings. In connection with these financings, as of June 30, 2011 and December 31, 2010, the Company had pledged collateral in the amount of $163.1 million and $207.4 million, respectively, which is included in securities owned, at fair value in the condensed consolidated statements of financial condition.

        Collateral is valued daily and the Company and its counterparties may adjust the collateral or require additional collateral to be deposited when appropriate. Collateral held by counterparties may be sold or re-hypothecated by such counterparties, subject to certain limitations sometimes imposed by the Company. Collateralized Repurchase Agreements may result in credit exposure in the event the counterparties to the transactions are unable to fill their contractual obligations. The Company minimizes the credit risk associated with this activity by monitoring credit exposure and collateral

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


values, and by requiring additional collateral to be promptly deposited with or returned to the Company when deemed necessary.

f.      Deferred rent

        Deferred rent primarily consists of step rent, allowances from landlords and fair valuing our leases property in accordance with GAAP in relation to business combinations related to our leases properties. 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 us 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. We record 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 our leases acquired through business combinations are quantified by comparing the current fair value of the leases space to current rental payments. Deferred rent, included in a accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition, for the years ended June 30, 2011 and December 31, 2010 is $18.9 million and $15.1 million, respectively.

g.     Expenses

        Included within expenses for the three and six month ended June 30, 2011 is $0.7 million and $3.5 million, respectively, in acquisition-related expenses such as legal, consulting and banking fees, associated with the acquisition of LaBranche and other reorganization charges within the alternative investment management business.

h.     Recently adopted accounting pronouncements

        In June 2011, the FASB issued guidance which eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance requires consecutive presentation of the statement of operation and other comprehensive income and present reclassification adjustments on the face of the financial statement from other comprehensive income to net income. This guidance helps financial statement users better understand the causes of an entity's change in financial position and results of operations. The guidance is effective retrospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

        In May 2011, the FASB issued guidance that changes the wording used to describe many of the requirements of GAAP for measuring the fair value and for disclosing information about fair value measurements. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. Certain of the amendments could change how the fair value measurement guidance is applied including provisions related to highest and best use and valuation premise for

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


nonfinancial assets, application to financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk, premiums or discounts in fair value measurement, fair value of an instrument classified in a reporting entity's shareholders' equity, and additional disclosure requirements about fair value measurements. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

        In April 2011, the FASB issued guidance to improve the accounting for Repurchase Agreements (repos) and other agreements by modifying the criteria for determining when the transactions would be accounted for as financings (secured borrowings/lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). Specifically, the guidance removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by the transferee. In accordance with the new guidance, the contractual rights and obligations determine effective control and there does not need to be a requirement to assess the ability to exercise those rights. The guidance is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

        In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. The guidance requires additional disclosure on transfers in and out of Levels 1 and 2 fair value measurements in the fair value hierarchy and the reasons for such transfers. In addition, for fair value measurements using significant unobservable inputs (Level 3), the reconciliation of beginning and ending balances shall be presented on a gross basis, with separate disclosure of gross purchases, sales, issuances and settlements and transfers in and transfers out of Level 3. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. In addition, an entity is required to provide further disclosures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level 2 or Level 3. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the guidance, excluding the reconciliation of Level 3 activity, with the issuance of its March 31, 2010 financial statements. In addition, the Company first adopted the guidance related to the reconciliation of Level 3 activity in its March 31, 2011 condensed consolidation financial statements. As the guidance is limited to enhanced disclosures, adoption did not have a material impact on the Company's condensed consolidated financial statements.

        In April 2010, the FASB issued guidance on the accounting for stock awards to employees of a foreign operation or employees whose pay is denominated in a currency other than the one in which the equity security trades. The guidance clarifies that share-based payment awards with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trade shall not be considered to contain a condition that is not a market, performance, or service condition. Such an award shall not be classified as a liability if it otherwise qualifies for equity classification. The guidance is effective for fiscal years and interim periods ending after December 15, 2010. The Company makes share-based payment awards to employees in foreign operations. The

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


guidance did not have a material impact on the Company's condensed consolidated financial statements.

        In December 2010, the FASB issued enhanced guidance on when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. The updated guidance modifies existing requirements under step one of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires step two to be performed if it is more likely than not that a goodwill impairment exists. The guidance is effective for interim and annual reporting periods beginning after December 15, 2010. As the Company's reporting units do not currently have zero or negative carrying values, adoption did not have a material impact on the Company's condensed consolidated financial statements.

        In December 2010, the FASB issued guidance on disclosures around business combinations for public entities that present comparative financial statements. The guidance specifies that an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. As the guidance is limited to disclosures, adoption did not have a material impact on the Company's condensed consolidated financial statements.

i.      Future adoption of accounting pronouncements

        As of June 30, 2011, none of the changes to the Codification issued by the FASB that are not yet effective are expected to have a material impact on the Company's financial position or results of operations.

4. Cash collateral pledged

        As of June 30, 2011 and December 31, 2010, cash collateral pledged in the amount of $9.8 million and $8.6 million, respectively, primarily relates to a) a bond held as collateral on a letter of credit and b) a letter of credit issued to the landlord of the Company's premises in New York City (see Note 14). Also included in cash collateral pledged as of June 30, 2011 and December 31, 2010 is $0.5 million, relating to an agreement that the Company has with Société Générale to cover the costs of litigation matters included in the agreement.

5. Investments of Operating Entities and Consolidated Funds

a.     Operating Entities

Securities owned, at fair value

        Securities owned are held by the Company and considered held for trading and carried at fair value. 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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

        As of June 30, 2011 and December 31, 2010, securities owned consisted of the following, at fair value:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

US Government securities(a)

  $ 162,410   $ 143,247  

Common stocks

    207,841     116,215  

Restricted common stock

    5,000     5,000  

Convertible bonds(b)

    27,222      

Corporate bonds(c)

    316,126     191,702  

Exchange traded funds

    218,135      

Options

    45,409     14,349  

Warrants and rights

    3,411     2,334  

Mutual funds

    870     1,248  
           

  $ 986,424   $ 474,095  
           

(a)
As of June 30, 2011, maturities ranged from June 2013 to February 2041 and interest rates ranged between 0.38% and 8%. As of December 31, 2010, maturities ranged from November 2019 to February 2026 and interest rates ranged between 3.38% and 8%.

(b)
As of June 30, 2011, the maturity was April 2015 with interest rate of 5.50%.

(c)
As of June 30, 2011, maturities ranged from December 2011 to February 2041 and interest rates ranged between 0.38% and 13.50%. At December 31, 2010, maturities ranged from May 2011 to August 2039 and interest rates ranged between 1.4% and 13%.

        The Company's direct involvement with derivative financial instruments includes credit default swaps, futures, equity swaps, options and warrants and rights. Open equity in futures transactions are recorded as receivables from and payables to broker-dealers or clearing brokers as applicable. The Company's derivatives trading activities exposes us to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, foreign currency movements and changes in the liquidity of markets. The Company's long exposure to futures, equity swap and credit default swap derivative contracts, at fair value, as of June 30, 2011 and December 31, 2010 of $0.5 million and $0.4 million, respectively, is included in other assets in the accompanying condensed consolidated statements of financial condition. The Company's short exposure to futures and equity swap derivative contracts, at fair value, as of June 30, 2011 and December 31, 2010 of $0.8 million and $0.6 million, respectively, is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition. The gains/(losses) related to derivatives trading activities for the three months and six months ended June 30, 2011 were not material. The gains/(losses) on derivative contracts are included in other income in the condensed consolidated statements of operations.

        Pursuant to the various derivatives transactions discussed above, the Company is required to post collateral for its obligations or potential obligations. As of June 30, 2011 and December 31, 2010, collateral consisting of $15.8 and $3.2 million, respectively, is included in receivable from brokers on

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

the condensed consolidated statements of financial condition. As of June 30, 2011 and December 31, 2010 all derivative contracts were with multiple major financial institutions.

Other investments

        As of June 30, 2011 and December 31, 2010, other investments consisted of the following:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

(1) Portfolio Funds, at fair value

  $ 32,645   $ 29,391  

(2) Real estate investments, at fair value

    2,289     1,882  

(3) Equity method investments

    13,607     8,734  

(4) Lehman claims, at fair value

    501     313  
           

  $ 49,042   $ 40,320  
           

        The Portfolio Funds, at fair value as of June 30, 2011 and December 31, 2010, included the following:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

Tapestry Investment Co PCC Ltd(a)

  $ 284   $ 565  

Cowen Healthcare Royalty Partners(b)(*)

    14,618     14,769  

Cowen Healthcare Royalty Partners II(b)(*)

    279     143  

Ramius Global Credit Fund LP(c)(*)

    13,739     11,733  

Ramius Alternative Replication Ltd(d)(*)

    864     866  

Ramius Enhanced Replication Fund LLC(e)(*)

    553      

Starboard Value and Opportunity Fund LP(f)(*)

    323      

Other private investment(g)

    1,313      

Other affiliated funds(h)(*)

    672     1,315  
           

  $ 32,645   $ 29,391  
           

*
These portfolio funds are affiliates of the Company

The Company has no unfunded commitments regarding the portfolio funds, at fair value held by the Company except as noted for Cowen Healthcare Royalty Partners, Cowen Healthcare Royalty Partners II and Starboard Value and Opportunity Fund LP in Note 13.

(a)
Tapestry Investment Co PCC Ltd is in the process of liquidating and redemptions will be made periodically by the investment managers' decision based on cash available.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

(b)
Cowen Healthcare Royalty Partners and Cowen Healthcare Royalty Partners II are private equity funds and therefore redemptions will be paid out at the investment manager's discretion.

(c)
Ramius Global Credit Fund LP has a quarterly redemption policy with 60 day notice period and a one year soft lock (4% penalty).

(d)
Ramius Alternative Replication Ltd has monthly redemption policies with a seven day notice period.

(e)
Ramius Enhanced Replication Fund LLC has monthly redemption policies with a seven day notice period.

(f)
Starboard Value and Opportunity Fund LP has quarterly redemption policies, after a one-year anniversary of the contribution, with thirty days notice period.

(g)
Other private investment represents the Company's closed end investment in an Italian Wi-Fi company.

(h)
The majority of these funds are real estate fund affiliates of the Company or are managed by the Company and the investors can redeem from these funds when cash is available.

        Real estate investments as of June 30, 2011 and December 31, 2010 are carried at fair value and include real estate equity investments held by RCG RE Manager, LLC ("RE Manager"), a real estate operating subsidiary of the Company, of $1.5 million and $1.1 million, respectively, and real estate debt investments held by the Company of $0.8 million, respectively.

        Equity method investments include investments held by the Company in several operating companies whose responsibilities 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 30% to 55%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in three of these entities: RCG Longview Debt Fund IV Management, LLC, RCG Longview Debt Fund IV Partners, LLC and RCG Longview Partners II, LLC. The operating agreements that govern the management of day-to-day operations and affairs of each of these three entities stipulate 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 three entities require 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 that is not protective in nature. As the Company does not possess unilateral 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 is the investment in a) CHRP GP (see Note 3), b) an investment in the Chicago Board Options Exchange CBOE (Chicago Board Options

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

Exchange) Stock Exchange LLC representing a 9.7% stake in the exchange service provider and c)Starboard Value LP (and certain related parties) which serves as an operating company whose responsibilities primarily include the day to day management (including portfolio management) of a deep value small cap hedge fund and related managed accounts. The following table summarizes equity method investments held by the Company:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

RCG Longview Debt Fund IV Management, LLC

  $ 1,172   $ 2,009  

Cowen Healthcare Royalty GP, LLC

    1,206     1,176  

Cowen Healthcare Royalty GP II, LLC

    21     8  

Chicago Board Options Exchange

    2,545      

Starboard Value LP

    2,266      

RCG Longview Partners, LLC

    1,560     2,203  

RCG Longview Louisiana Manager, LLC

    650     186  

RCG Urban American, LLC

    1,100     889  

RCG Urban American Management, LLC

    798     359  

RCG Longview Equity Management, LLC

    349     499  

Urban American Real Estate Fund II, L.P. 

    1,279     833  

RCG Kennedy House, LLC

    315     259  

Other

    346     313  
           

  $ 13,607   $ 8,734  
           

        As of June 30, 2011, 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. 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. All such amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.

        The Company's income (loss) from equity method investments was $1.2 million and $0.5 million for the three months ended June 30, 2011 and 2010, respectively, and was $2.4 million and $1 million for the six months ended June 30, 2011 and 2010, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations. In addition, the Company recorded no impairment charges in relation to its equity method investments for the three months and six months ended June 30, 2011 and 2010.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

        Lehman Brothers International (Europe) ("LBIE"), through certain affiliates, was a prime broker to the Company, and the Company held cash and cash equivalent balances with LBIE. On September 15, 2008, LBIE was placed into administration (the "Administration") in the United Kingdom and, as a result, the assets held by the Company in its LBIE accounts were frozen at LBIE. The status and ultimate resolution of the assets under LBIE's Administration proceedings is uncertain. The assets of the Company at LBIE at the time of Administration (the "Total Net Equity Claim") consist of $1 million, which the Company believes will represent an unsecured claim against LBIE. This does not include claims held by the Company against LBIE through its investment in Enterprise Master discussed in Note 4b. There can be no assurance that the Total Net Equity Claim value, as determined by the Company, will be accepted by the Administrators, nor does the Company know the manner and timing in which such claim will be satisfied and the ultimate value that will be received.

        Given the great degree of uncertainty as to the status of the assets held at LBIE and the process and prospects of the return of those assets, the Company has decided to record the estimated fair value of the Total Net Equity Claim at an approximately 52% discount at June 30, 2011 and a 70% discount at December 31, 2010, which represents management's best estimate at the respective dates of the value that ultimately may be recovered with respect to the Total Net Equity Claim (the "Estimated Recoverable Lehman Claim"). The Estimated Recoverable Lehman Claim was recorded at estimated fair value considering a number of factors including the status of the assets under U.K. insolvency laws and the trading levels of LBIE unsecured debt. In determining the estimated value of the Total Net Equity Claim, the Company was required to use considerable judgment and is based on the facts currently available. As additional information on the LBIE proceeding becomes available, the Company may need to adjust the valuation of the Estimated Recoverable Lehman Claim. The actual loss that may ultimately be incurred by the Company with respect to the pending LBIE claim is not known and could be materially different from the estimated value assigned by the Company.

Securities sold, not yet purchased, at fair value

        Securities sold, not yet purchased, represent obligations of the Company to deliver a specified security at a contracted price and, thereby, create a liability to purchase that security in the market at prevailing prices. The Company's liability for securities to be delivered is measured at their fair value as of the date of the condensed 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, may exceed the amount reflected in the condensed 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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)


limitations. As of June 30, 2011 and December 31, 2010, securities sold, not yet purchased, consisted of the following, at fair value:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

U.S. Government securities(a)

  $ 119,127   $ 100,559  

Common stocks

    140,459     88,580  

Corporate bonds(b)

    69,562     2,615  

Exchange traded funds

    97,769      

Options

    15,344     6,162  
           

  $ 442,261   $ 197,916  
           

(a)
As of June 30, 2011, maturities ranged from May 2014 to January 2040 and interest rates ranged between 0.75% and 7.415%. As of December 31, 2010, maturities ranged from December 2015 to August 2026 and interest rates ranged between 2.13% and 6.75%.

(b)
As of June 30, 2011, maturities ranged from September 2011 to June 2031 and interest rates ranged between 0.50% and 10%. As of December 31, 2010, maturities ranged from June 2013 to December 2025 and interest rates ranged between 2.25% and 3.75%.

Securities purchased under agreements to resell and securities sold under agreements to repurchase

        The following table represents the Company's securities purchased under agreements to resell and securities sold under agreements to repurchase as of June 30, 2011and December 31, 2010:

 
  As of June 30,
2011
 
 
  (dollars in thousands)
 

Securities purchased under agreements to resell

       

Agreements with Barclays Inc bearing interest of (0.3)% - 0.08% due on July 1, 2011*

  $ 77,333  
       

Securities sold under agreements to repurchase

       

Agreements with Royal Bank of Canada bearing interest of 1.52625% - 1.58125% due on January 31, 2012 to June 25, 2012

    49,450  

Agreements with Barclays Inc bearing interest of (0.02)% - 0.12% due on July 1, 2011*

    119,989  
       

  $ 169,439  
       

*
The repurchase date is open and the agreement can be terminated by either party at any time. The agreement continues on a day-to-day basis.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

 

 
  As of December 31,
2010
 
 
  (dollars in thousands)
 

Securities purchased under agreements to resell

       

Agreements with Barclays Capital Inc bearing interest of 0.07% - 0.14% due on January 3, 2011

  $ 97,755  
       

Securities sold under agreements to repurchase

       

Agreements with Royal Bank of Canada bearing interest of 1.415% due on February 22, 2011 to September 1, 2011

    48,532  

Agreements with Barclays Capital Inc bearing interest of 0.18%-1.50% due on January 7, 2011 to June 6, 2011

    143,633  
       

  $ 192,165  
       

        During the second quarter of 2011, the Company acquired a Luxembourg reinsurance company from a third party through a wholly-owned local subsidiary, which, upon acquisition, recorded deferred assets and subsequently deferred tax benefits. The purchase price of the reinsurance company totaled EUR 208.3 million (USD $294.4 million). The acquisition was not accounted for as a business combination as after separation from the transferor, the reinsurance company does not contain all of the inputs and processes necessary for it to continue to conduct normal operations including the ability to sustain a revenue stream by providing as outputs to customers. This is discussed in more detail in the Income Taxes footnote.

b.     Consolidated Funds

Securities owned, at fair value

        As of June 30, 2011 and December 31, 2010 securities owned, at fair value, held by the Consolidated Funds are comprised of:

 
  As of June 30,   As of December 31,  
 
  2011   2010  
 
  (dollars in thousands)
 

Government sponsored securities*

  $ 4,064   $ 7,682  

Commercial paper**

    1,726      

Corporate bond***

    401     1,040  
           

  $ 6,191   $ 8,722  
           

*
As of June 30, 2011, maturities ranged from March 2012 to May 2013 and interest rates ranged between 0.35% and 1.74%. As of December 31, 2010, maturities ranged from January 2011 to December 2012 and interest rates ranged between 0.35% and 4.88%.

**
Commercial paper was purchased at a discount and matures on July 1, 2011.

***
As of June 30, 2011, the maturity was April 2012 with interest rate of 0.60%. As of December 31, 2010, the maturity was January 2011 with interest rate of 0.42%.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

Other investments, at fair value

        As of June 30, 2011 and December 31, 2010 other investments, at fair value, held by the Consolidated Funds are comprised of:

 
  As of June 30,   As of December 31,  
 
  2011   2010  
 
  (dollars in thousands)
 

(1) Portfolio Funds

  $ 254,578   $ 327,131  

(2) Lehman claims

    7,320     6,243  
           

  $ 261,898   $ 333,374  
           

        As of June 30, 2011 and December 31, 2010, investments in Portfolio Funds, at fair value, included the following:

 
  As of June 30,   As of December 31,  
Description
  2011   2010  
 
  (dollars in thousands)
 

Investments of Enterprise LP

  $ 215,457   $ 257,246  

Investments of consolidated fund of funds investment companies

    39,121     69,885  
           

  $ 254,578   $ 327,131  
           

        Enterprise LP operates under a "master-feeder" structure with Enterprise Master, whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate Fund, L.P. The consolidated investments in Portfolio Funds recorded in other investments on the condensed consolidated statements of financial condition include Enterprise LP's investment of $215 million and $257 million in Enterprise Master as of June 30, 2011 and December 31, 2010, 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. Enterprise Master has been selling, and will continue to sell, its positions and return capital to its investors. There are no unfunded commitments at Enterprise LP. See Note 13 for unfunded commitments of Enterprise Master.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

        The investments of consolidated fund of funds investment companies of $39.1 million and $70 million at June 30, 2011 and December 31, 2010, respectively, include the investments of Levered FOF, Multi-Strat FOF and Vintage FOF, all of which are investment companies managed by Ramius Alternative Solutions LLC, as well as RTS Global 3x, which is managed by Ramius Trading Strategies LLC. Multi-Strat FOF's investment objectives is to invest discrete pools of their capital among portfolio managers that invest through Portfolio Funds, forming a multi-strategy, diversified investment portfolio designed to achieve returns with low to moderate volatility. Levered FOF had a similar strategy, but on a levered basis, prior to the fund winding down. Levered FOF is no longer levered. Vintage FOF's investment objective is to allocate its capital among portfolio managers that invest through investment pools or managed accounts thereby forming concentrated investments in high conviction managers designed to achieve attractive risk adjusted returns with moderate relative volatility. RTS Global 3x's investment objective is to achieve attractive investment returns on a risk-adjusted basis that are non-correlated with the traditional equity and bond markets by investing substantially all of its capital in managed futures and global macro-based investment strategies. RTS Global 3x seeks to achieve its objective through a multi-advisor investment approach by allocating its capital among third-party trading advisors that are unaffiliated with RTS Global 3x. However, unlike a traditional "fund of funds" that invests with advisors through entities controlled by third-parties, RTS Global 3x will allocate its capital among a number of different trading accounts organized and managed by the general partner.

        The following is a summary of the investments held by the four consolidated fund of funds, at fair value, as of June 30, 2011 and December 31, 2010:

 
   
  As of June 30, 2011  
 
   
  Ramius Levered
Multi-Strategy
FOF LP
  Ramius
Multi-Strategy
FOF LP
  Ramius Vintage
Multi-Strategy
FOF LP
  RTS Global 3x
Fund LP
  Total  
Description
  Strategy   Fair Value   Fair Value   Fair Value   Fair Value   Fair Value  
 
   
  (dollars in thousands)
 

Ramius Multi-Strategy Master FOF LP*

  Multi-Strategy   $   $ 9,576   $   $   $ 9,576 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy               10,724         10,724 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     635                 635 (b)

Independently Advised Portfolio Funds*

  Futures & Global Macro                 14,990     14,990 (c)

Externally Managed Portfolio Funds

  Credit-Based     427                 427 (b)

Externally Managed Portfolio Funds

  Event Driven     2,129                 2,129 (d)

Externally Managed Portfolio Funds

  Hedged Equity     35                 35 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     547                 547 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     58                 58 (g)
                           

      $ 3,831   $ 9,576   $ 10,724   $ 14,990   $ 39,121  
                           

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

 
   
  As of December 31, 2010  
 
   
  Ramius Levered
Multi-Strategy
FOF LP
  Ramius
Multi-Strategy
FOF LP
  Ramius Vintage
Multi-Strategy
FOF LP
  RTS Global 3x
Fund LP
  Total  
Description
  Strategy   Fair Value   Fair Value   Fair Value   Fair Value   Fair Value  
 
   
  (dollars in thousands)
 

Ramius Multi-Strategy Master FOF LP*

  Multi-Strategy   $   $ 28,633   $   $   $ 28,633 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy               20,722         20,722 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     687                 687 (b)

Independently Advised Portfolio Funds*

  Futures & Global Macro                 15,889     15,889 (c)

Externally Managed Portfolio Funds

  Credit-Based     522                 522 (b)

Externally Managed Portfolio Funds

  Event Driven     2,800                 2,800 (d)

Externally Managed Portfolio Funds

  Hedged Equity     39                 39 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     535                 535 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     58                 58 (g)
                           

      $ 4,641   $ 28,633   $ 20,722   $ 15,889   $ 69,885  
                           

*
These Portfolio Funds are affiliates of the Company.

The Company has no unfunded commitments regarding investments held by the four consolidated funds.

(a)
Investments held in affiliated master funds can be redeemed on a monthly basis with no advance notice.

(b)
The Credit-Based strategy aims to generate returns via positions in the credit sensitive sphere of the fixed income markets. The strategy generally involves the purchase of corporate bonds with hedging of the interest exposure. The investments held in Tapestry Pooled Account V LLC, a related fund, are held solely in a credit based fund which the fund's manager has placed in a side-pocket. The remaining amount of the investments within this category represents an investment in a fund that is in the process of liquidating. Distributions from this fund will be received as underlying investments are liquidated.

(c)
The futures and global macro strategy is made up of several portfolio accounts, each of which will be advised independently by a professional commodity trading advisor implementing primarily managed futures or global macro-based investment strategies. The trading advisors (through their respective portfolio accounts) will trade independently of each other and, as a group, will employ a wide variety of systematic, relative value and discretionary trading programs in the global currency, fixed income, commodities and equity futures markets. In implementing their trading programs, the trading advisors will trade primarily in the futures and forward markets (as well as in related options). Although certain trading advisors may be permitted to use total return swaps and trade other financial instruments from time to time on an interim basis, the primary focus will be on the futures and forward markets. Redemption frequency of these portfolio accounts are monthly (and intra-monthly for a $10,000 fee) and the notification period for redemptions is 5 business days (or 3 business days for intra-month).

(d)
The Event Driven strategy is generally implemented through various combinations and permutations of merger arbitrage, restructuring and distressed instruments. Approximately 1.3% as of June 30, 2011 and 3% as of December 31, 2010 of the investments in this category represent investments in a fund that is in the process of liquidating. Distributions from this

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

(e)
The Hedged Equity strategy focuses on equity strategies with some directional market exposure. The strategy attempts to profit from market efficiencies and direction. The investee fund manager has side-pocketed investments.

(f)
The Multi-Strategy investment objective is to invest discrete pools of its capital among portfolio managers that invest through investment funds, forming multi-strategy, diversified investment portfolios designed to achieve non-market directional returns with low relative volatility. The investments in this category represent investments in a fund that is in the process of liquidating. Distributions from this fund will be received as underlying investments are liquidated.

(g)
The Fixed Income Arbitrage strategy seeks to achieve long term capital appreciation by employing a variety of strategies to generate returns without significant exposure to credit spread, interest rate changes or duration. As of June 30, 2011, the investment manager has gated investments.

        With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master consists of $24.3 million. Included in this claim were assets with a value of $9.5 million, at the time LBIE entered administration, that were returned to Enterprise Master and its affiliated funds in June 2010. Enterprise Master and its affiliated funds sold the returned assets, for an aggregate $10.7 million, and distributed this amount to Enterprise Master's investors in July 2010. As a result, the remaining Net Equity Claim for Enterprise Master is $14.8 million. Enterprise Master is valuing this claim at $9.2 million as of June 30, 2011. Of this amount, $7.3 million was attributable to Enterprise LP based on its ownership percentage in Enterprise Master at the time of the Administration. As discussed in Note 4a, the Company has an additional $1 million claim against LBIE as a result of certain cash and cash equivalent balances held at LBIE. LBI claim was valued at 56% which represented the present value of the mid-point between what the Company believed were reasonable estimates of the low-side and high-side potential recovery rates with respect to its LBI exposure. LBIE claims were valued as follows: (a) the trust assets that the Company was informed were within the control of LBIE and were expected to be returned in the relatively near term were valued at market less a 1% discount that corresponds to the fee to be charged under the Claim Resolution Agreement ("CRA"), (b) the trust assets that are not within the control of LBIE and are not believed to be held through LBI were valued at 56% with respect to US denominated Assets and 48% with respect to foreign denominated Assets, which represented the Company's estimate of potential recovery rates (c) the remaining unsecured claims against LBIE were valued at 48%, which represented the Company's estimate of potential recovery rates with respect to this exposure using available market quotes. The estimated final recoverable amount by Enterprise Master may differ from the actual recoverable amount of the pending LBIE and LBI claims, and the differences may be material.

        As a result of Enterprise Master and certain of the funds managed by the Company having assets they held at LBIE frozen in their LBIE prime brokerage account and the degree of uncertainty as to the status of those assets and the process and prospects of the return of those assets, Enterprise Master and the funds managed by the Company decided that only the investors who were invested at the time of the Administration should participate in any profit or loss relating to the Estimated Recoverable Lehman Claim. As a result, Enterprise Master and certain of the funds managed by the Company with assets held at LBIE granted a 100% participation in the Estimated Recoverable Lehman Claims to Special Purpose Vehicles (the "SPVs" or "Lehman Segregated Funds") incorporated under the laws of

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)


the Cayman Islands on September 29, 2008, whose shares were distributed to each of their investor funds. Fully redeeming investors of Enterprise LP will not be paid out on the balance invested in the SPV until the claim with LBIE is settled and assets are returned by LBIE.

        In addition to Enterprise Master's claims against LBIE, Lehman Brothers, Inc. ("LBI") was a prime broker to Enterprise Master and Enterprise Master holds cash balances of $5.3 million at LBI. On September 19, 2008, LBI was placed in a Securities Investor Protection Corporation ("SIPC") liquidation proceeding after the filing for bankruptcy of its parent Lehman Brothers Holdings, Inc. The status of the assets under LBI's bankruptcy proceedings has not been determined. The amount that will ultimately be recovered from LBI will depend on the amount of assets available in the fund of customer property to be established by the trustee appointed under the Securities Investor Protection Act (the "SIPA Trustee") as approved by the bankruptcy court as well as the total amount of customer claims that seek recovery from the fund of customer property. Based on court filings by the SIPA Trustee, the total amount of customer claims exceeds the assets that are likely to be in the fund of customer property. In addition, while there has been an initial ruling with respect to the claims asserted by Barclays plc against LBI relating to an asset purchase agreement entered into by Barclays plc with LBIE near the time of the SIPC liquidation proceeding, there is still uncertainty regarding the ultimate resolution of these claims that could affect the amount of assets that are included in the fund of customer property. As a result of these uncertainties and the timing of any distributions from LBI in respect of the Company's customer claims, management has estimated recovery with respect to the Company's LBI exposure at 56% or $3 million as of June 30, 2011, which represents the present value of the mid point between what management believes are reasonable estimates of the low side and high side potential recovery rates with respect to the Company's LBI exposure. The estimated recoverable amount by the Company may differ from the actual recoverable amount of the pending LBI claim, and the differences may be material.

Indirect Concentration of the Underlying Investments Held by Consolidated Funds

        From time to time, through its investments in the Consolidated Funds, the Company may indirectly maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Consolidated Funds' net assets (on an aggregated basis). Based on information that is available to the Company as of June 30, 2011 and December 31, 2010, the Company identified Consolidated Funds that had interests in an issuer for which the Company's pro-rata share exceeds 5% of the Consolidated Funds' net assets (on an aggregated basis). There were no indirect concentrations that exceed 5% of the Consolidated Funds' net assets held by the Company as of June 30, 2011 or December 31, 2010.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

Underlying Investments of Unconsolidated Funds Held by Consolidated Funds

Enterprise Master

        Enterprise LP's investment in Enterprise Master is equal to Enterprise LP's proportional 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. The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master as of June 30, 2011 and December 31, 2010:

 
  June 30, 2011   December 31, 2010  
Description
  Securities
owned
  Securities
sold, but not yet
purchased
  Securities
owned
  Securities
sold, but not yet
purchased
 
 
  (dollars in thousands)
 

Common stock

  $ 2,172   $   $ 10,123   $  

Corporate bonds

    2,161         1,997      

Over-the-counter foreign currency call option

                (63 )

Preferred stock

    1,160         410      

Private debt

    66         59      

Private equity

    200         173      

Restricted stock

    309         3,148      

Rights

    2,311         2,115      

Trade claims

    128         128      

Warrants

    36         55      
                   

  $ 8,543   $   $ 18,208   $ (63 )
                   

Description
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

Asset swaps

  $ 2   $ 5  

Currency forwards

    (212 )   (36 )
           

  $ (210 ) $ (31 )
           

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

 
   
  As of
June 30, 2011
  As of
December 31, 2010
 
Description
  Strategy   Fair Value  
 
   
  (dollars in thousands)
 

624 Art Holdings, LLC*

  Artwork   $ 43   $ 98  

Q Capital Strategies, LLC*

  Life Settlements         111  

RCG Longview Equity Fund, LP*

  Real Estate     15,002     10,120  

RCG Longview II, LP*

  Real Estate     1,476     1,835  

RCG Longview Debt Fund IV, LP*

  Real Estate     16,765     12,628  

RCG Longview, LP*

  Real Estate     269     383  

RCG Soundview, LLC*

  Real Estate     2,574     2,542  

RCG Urban American Real Estate Fund, L.P.*

  Real Estate     3,176     3,207  

RCG International Sarl*

  Multi-Strategy     9,442     9,463  

Ramius Navigation Fund Ltd*

  Multi-Strategy     9,800     24,972  

RCG Special Opportunities Fund, Ltd*

  Multi-Strategy     97,585     97,845  

Ramius Credit Opportunities Fund Ltd*

  Distressed     260     300  

RCG Endeavour, LLC*

  Multi-Strategy     92     87  

RCG Energy, LLC *

  Energy     20,538     18,850  

RCG Renergys, LLC*

  Energy     2     2  

Other Private Investments

  Various     17,624     15,189  

Real Estate Investments

  Real Estate     16,965     25,662  
               

      $ 211,613   $ 223,294  
               

*
These Portfolio Funds are affiliates of the Company.

        Multi-Strat FOF's and Vintage FOF's investments in their respective master funds are equal to their proportional share of their master fund's net assets; as a result, the investments in Portfolio Funds of the master funds reflected below may exceed the net investment which Multi-Strat FOF and Vintage FOF have recorded. The following table presents summarized investment information for the

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

underlying Portfolio Funds held by Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP, at estimated fair value, as of June 30, 2011 and December 31, 2010:

 
   
  June 30, 2011   December 31, 2010  
Description
  Strategy   Ramius
Multi-Strategy
Master FOF LP
  Ramius Vintage
Multi-Strategy
Master FOF LP
  Ramius
Multi-Strategy
Master FOF LP
  Ramius Vintage
Multi-Strategy
Master FOF LP
 
 
   
  (dollars in thousands)
 

Ramius Vintage Multi-Strategy Master FOF LP*

    Multi Strategy   $ 667   $   $ 1,354   $  

Tapestry Pooled Account II, LLC*

    Hedged Equity         885         3,544  

Tapestry Pooled Account V, LLC*

    Credit-Based     1,308     1,397     1,416     1,512  

Externally Managed Funds

    Credit-Based     47     657     6,653     803  

Externally Managed Funds

    Event Driven     4,359     5,497     6,491     6,802  

Externally Managed Funds

    Fixed Income Arbitrage     83         83      

Externally Managed Funds

    Hedged Equity     1,255     878     4,386     3,055  

Externally Managed Funds

    Multi Strategy     1,541     1,533     7,785     4,292  

Externally Managed Funds

    Global Macro     567         2,053     679  

Externally Managed Funds

    Opportunistic Equity                 1,677  

Externally Managed Funds

    Managed Futures             2,430      
                         

        $ 9,827   $ 10,847   $ 32,651   $ 22,364  
                         

*
These Portfolio Funds are affiliates of the Company.

        RTS Global 3x, which commenced operations in March 2010, invests over half of its equity in six externally managed portfolio funds which primarily concentrate on futures and global macro strategies. The following table presents the summarized investment information, which is primarily receivable/

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Investments of Operating Entities and Consolidated Funds (Continued)

(payable) on derivatives, for the underlying Portfolio Funds held by RTS Global 3X, at fair value, as of June 30, 2011 and December 31, 2010:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (dollars in thousands)
 

Bond future

  $ 11   $ (2 )

Commodity call option

    337     (5 )

Cash

        17,139  

Currency option

    1,211     191  

Commodity forward

    (262 )   32  

Commodity future

    (297 )   935  

Currency forward

    (27 )   (63 )

Currency future

    79     1,230  

Index future

    79     130  

Interest rate future

    57     (5 )
           

  $ 1,188   $ 19,582  
           

6. Fair Value Measurements for Operating Entities and Consolidated Funds

        The following table presents the financial instruments recorded at fair value on the condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of June 30, 2011 and December 31, 2010:

 
  Assets at Fair Value as of June 30, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
   
  (dollars in thousands)
   
 

Securities owned and derivatives

                         
 

US Government securities

  $ 162,410   $   $   $ 162,410  
 

Common stocks

    205,419     1,469     953     207,841  
 

Restricted common stock

            5,000     5,000  
 

Convertible bonds

        27,222         27,222  
 

Corporate bonds

    1,588     314,538         316,126  
 

Exchange-traded Funds

    218,135             218,135  
 

Futures

    551             551  
 

Equity swaps

        2         2  
 

Options

    32,267     13,019     123     45,409  
 

Warrants and rights

            3,411     3,411  
 

Mutual funds

    870             870  

Other investments

                         
 

Portfolio Funds

    286     14,615     17,744     32,645  
 

Real estate investments

            2,289     2,289  
 

Lehman claim

            501     501  
                   

  $ 621,526   $ 370,865   $ 30,021   $ 1,022,412  
                   

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)

 

 
  Liabilities at Fair Value as of June 30, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

                         
 

US Government securities

  $ 118,892   $ 235   $   $ 119,127  
 

Common stocks

    140,457     2         140,459  
 

Corporate bonds

        69,562         69,562  
 

Exchange-traded Funds

    97,769             97,769  
 

Futures

    119             119  
 

Equity swaps—short exposure

        758         758  
 

Options

    15,174     170         15,344  
                   

  $ 372,411   $ 70,727   $   $ 443,138  
                   

 

 
  Assets at Fair Value as of December 31, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned and derivatives

                         
 

US Government securities

  $ 143,247   $   $   $ 143,247  
 

Common stocks

    115,875     6     334     116,215  
 

Restricted common stock

            5,000     5,000  
 

Corporate bonds

        191,702         191,702  
 

Futures

    442             442  
 

Options

    14,234     115         14,349  
 

Warrants and rights

    357         1,977     2,334  
 

Mutual funds

    1,248             1,248  

Other investments

                         
 

Portfolio Funds

    566     11,744     17,081     29,391  
 

Real estate investments

            1,882     1,882  
 

Lehman claim

            313     313  
                   

  $ 275,969   $ 203,567   $ 26,587   $ 506,123  
                   

 

 
  Liabilities at Fair Value as of December 31, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

                         
 

US Government securities

  $ 100,559   $   $   $ 100,559  
 

Common stocks

    88,580             88,580  
 

Corporate bonds

        2,615         2,615  
 

Equity swaps—short exposure

        245         245  
 

Futures

    334             334  
 

Options

    6,162             6,162  
                   

  $ 195,635   $ 2,860   $   $ 198,495  
                   

39


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)

 
  Assets at Fair Value as of June 30, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned

                         
 

US Government securities

  $ 4,064   $   $   $ 4,064  
 

Commercial paper

        1,726         1,726  
 

Corporate bonds

        401         401  

Other investments

                         
 

Portfolio Funds

        14,990     239,588     254,578  
 

Lehman claims

            7,320     7,320  
                   

  $ 4,064   $ 17,117   $ 246,908   $ 268,089  
                   

 

 
  Assets at Fair Value as of December 31, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned

                         
 

US Government securities

  $ 7,682   $   $   $ 7,682  
 

Corporate bonds

        1,040         1,040  

Other investments

                         
 

Portfolio Funds

        15,889     311,242     327,131  
 

Lehman claims

            6,243     6,243  
                   

  $ 7,682   $ 16,929   $ 317,485   $ 342,096  
                   

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Fair Value Measurements for Operating Entities and Consolidated Funds (Continued)

        The following table includes a rollforward of the amounts for the three and six months ended June 30, 2011 and 2010 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.

 
  Operating Entities   Consolidated Funds  
 
  Common stocks,
owned
  Common stocks,
sold not yet
purchased
  Restricted
Common Stock
  Corporate
Bonds
  Options   Warrants
and Rights
  Portfolio
Funds
  Real
estate
  Lehman
claim
  Portfolio
Funds
  Lehman
claim
 
 
  (dollars in thousands)
 

Balance at March 31, 2011

  $ 490   $ 401   $ 5,000   $   $   $ 2,902   $ 17,660   $ 2,102   $ 501   $ 260,443   $ 7,193  

Transfers in

                                             

Transfers out

                                             

Purchases/(covers)

    659     (826 )                   2,322     141              

(Sales)/short buys

    (409 )   417                 (48 )   (2,587 )           (28,300 )    

Realized gains (losses)

        (7 )               48     11             843      

Unrealized gains (losses)

    213     15             123     509     338     46         6,602     127  
                                               

Balance at June 30, 2011

  $ 953   $   $ 5,000   $   $ 123   $ 3,411   $ 17,744   $ 2,289   $ 501   $ 239,588   $ 7,320  
                                               

Balance at March 31, 2010

  $ 334   $   $ 5,058   $   $   $ 587   $ 14,407   $ 1,108   $ 313   $ 88,935   $ 13,966  

Transfers in

                                             

Transfers out

                                             

Purchases

    2,000             1,215             1,966     70         4,013      

Sales

    (2,000 )                       (483 )           (6,085 )    

Realized gains (losses)

                                        (11 )    

Unrealized gains (losses)

            (58 )   118     971     (183 )   318     (19 )       (2,117 )   616  
                                               

Balance at June 30, 2010

  $ 334   $   $ 5,000   $ 1,333   $ 971   $ 404   $ 16,208   $ 1,159   $ 313   $ 84,735   $ 14,582  
                                               

Balance at December 31, 2010

  $ 334   $   $ 5,000   $   $   $ 1,977   $ 17,081   $ 1,882   $ 313   $ 311,242   $ 6,243  

Transfers in

                                             

Transfers out

                                             

Purchases/(covers)

    659     (978 )               65     36,573     237         1      

(Sales)/short buys

    (409 )   833                 (48 )   (36,729 )   (5 )       (80,924 )    

Realized gains (losses)

        145                 48     107             2,376      

Unrealized gains (losses)

    369                 123     1,369     712     175     188     6,893     1,077  
                                               

Balance at June 30, 2011

  $ 953   $   $ 5,000   $   $ 123   $ 3,411   $ 17,744   $ 2,289   $ 501   $ 239,588   $ 7,320  
                                               

Balance at December 31, 2009

  $ 334   $   $   $   $   $   $ 17,370   $ 1,077   $ 209   $ 97,366   $ 3,881  

Transfers in

                        1,356 (a)                    

Transfers out

                            (2,866 )(b)                

Purchases

            5,000     1,215     7,000         2,100     114         17,052      

Sales

                    (7,000 )   (402 )   (1,286 )   (53 )       (30,290 )    

Realized gains (losses)

                                        2,387      

Unrealized gains (losses)

                118     971     (550 )   890     21     104     (1,780 )   10,701  
                                               

Balance at June 30, 2010

  $ 334   $   $ 5,000   $ 1,333   $ 971   $ 404   $ 16,208   $ 1,159   $ 313   $ 84,735   $ 14,582  
                                               

(a)
Changes in the observability of inputs used in the valuation of such assets

(b)
Deconsolidation of CHRP GP (See Note 3b)

        All realized and unrealized gains (losses) in the table above are reflected in other income (loss) in the accompanying condensed consolidated statements of operations.

        There were no significant transfers between Level 1 and Level 2 assets and liabilities for the three months and six months ended June 30, 2011 and June 30, 2010, respectively.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Receivables from and Payable to Brokers

        Receivable from and payable to brokers includes cash held at the clearing brokers, amounts receivable or payable for unsettled transactions, monies borrowed and proceeds for 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 Company's prime broker agreements, these balances are presented net (assets less liabilities) across balances with the same broker. As of June 30, 2011 and December 31, 2010, receivable from brokers was $125 million and $95.9 million, respectively. Payable to brokers was $321.2 million and $85.7 million as of June 30, 2011 and December 31, 2010.

8. Goodwill

        At least annually, and more frequently if warranted, the Company assesses whether the goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value. 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. There were no additions or impairment losses to goodwill during the three months and six months ended June 30, 2011.

9. Redeemable non-controlling interests in consolidated subsidiaries

        Redeemable non-controlling interests in consolidated subsidiaries and the related net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries are comprised as follows:

 
  As of
June 30, 2011
  As of
December 31, 2010
 
 
  (dollars in thousands)
 

Redeemable non-controlling interests in consolidated subsidiaries

             

Operating Companies

  $ 940   $ 1,009  

Consolidated Funds

    113,409     143,337  
           

  $ 114,349   $ 144,346  
           

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2011   2010   2011   2010  
 
  (dollars in thousands)
  (dollars in thousands)
 

(Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries

                         

Operating Companies

  $ (1,465 ) $   $ (1,940 ) $  

Consolidated Funds

    (993 )   2,552     (1,316 )   (5,504 )
                   

  $ (2,458 ) $ 2,552   $ (3,256 ) $ (5,504 )
                   

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Share-Based Compensation and Employee Ownership Plans

Share-based compensation plans in place after the Transactions

        The Company issues share based compensation under Cowen Holdings' previously established 2006 Equity and Incentive Plan, the 2007 Equity and Incentive Plan 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 and other equity based awards to the Company's employees, consultants and directors for up to 17,725,000 shares of common stock. 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. As of June 30, 2011, there were approximately 0.8 million shares available for future issuance under the Equity Plans. On January 1, 2011, 0.9 million additional shares representing 7.5% of the Company's outstanding shares of stock, less shares available under the 2010 Equity and Incentive Plan were added to the shares available under that plan.

        In addition to the Equity Plans, certain employees of the Company were issued RCG membership interests by RCG, a related party of the Company, in connection with the Transactions (the "RCG Grants"). Substantially all of the assets owned by RCG consist of shares of common stock of the Company. Accordingly, upon withdrawal of capital from RCG, members receive either distributions in kind of shares of common stock of the Company, or the proceeds from the sale of shares of the Company's common stock attributable to their capital accounts. The RCG Grants are subject to a service condition and vest to each employee over a period of approximately three years. Any RCG Grants forfeited are redistributed to the remaining stakeholders in RCG, which includes both employees and non-employees. The RCG Grants represent awards to employees of the Company by a related party, as compensation for services provided to the Company. As such, the expense related to these grants is included in the compensation expense of the Company, with a corresponding credit to stockholders equity.

        The Company measures compensation cost for share based awards according to the fair value 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 expense of $4.9 million and $3 million for the three months ended June 30, 2011 and 2010, respectively, and $10.6 million and $5.7 million for the six months ended June 30, 2011 and 2010, respectively. The income tax effect recognized for the Equity Plans was a benefit of $2.4 million and $1.5 million for the three months ended June 30, 2011 and 2010, respectively, and $5.1 million and $2.6 million for the six months ended June 30, 2011 and 2010, respectively.

        In relation to awards under the RCG Grants, the Company recognized expense of $1.5 million and $2.1 million, respectively, for the three months ended June 30, 2011 and 2010 and $2.9 million and $3.6 million for the six months ended June 30, 2011 and 2010, respectively. The income tax effect recognized for the RCG Grants was a benefit of $0.6 million and $0.8 million, respectively, for the three months ended June 30, 2011 and 2010, respectively, and $1.1 million and $1.4 million for the six months ended June 30, 2011 and 2010, respectively.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Share-Based Compensation and Employee Ownership Plans (Continued)

Stock Options

        The following table summarizes the Company's stock option activity for the six months ended June 30, 2011:

 
  Shares
Subject to
Option
  Weighted
Average
Exercise
Price/Share
  Weighted
Average
Remaining
Term
  Aggregate
Intrinsic
Value(1)
 
 
   
   
  (in years)
  (dollars in
thousands)

 

Balance outstanding at December 31, 2010

    893,432   $ 13.04     3.50        

Options granted

                       

Options acquired

                     

Options exercised

                     

Options forfeited

                     

Options expired

    (27,004 )   16.00              
                         

Balance outstanding at June 30, 2011

    866,428   $ 12.95     3.03   $  
                   

Options exercisable at June 30, 2011

    716,425   $ 14.83     2.39   $  
                   

(1)
Based on the Company's closing stock price of $4.69 on December 31, 2010 and $3.76 on June 30, 2011.

        As of June 30, 2011, there was $0.2 million of unrecognized compensation expense related to the Company's grant of stock options.

Restricted Shares and Restricted Stock Units Granted to Employees

        The following table summarizes the Company's restricted share and restricted stock unit activity for the six months ended June 30, 2011:

 
  Nonvested
Restricted Shares
and Restricted
Stock Units
  Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2010

    5,788,021     5.39  

Granted

    6,014,437     4.28  

Vested

    (824,050 )   4.11  

Cancelled

    (7,735 )   4.31  

Forfeited

    (379,815 )   4.91  
             

Balance outstanding at June 30, 2011

    10,590,858   $ 4.87  
             

        The fair value of restricted stock 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 June 30, 2011, there was $30.6 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Share-Based Compensation and Employee Ownership Plans (Continued)


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 1.36 years.

RCG Grants

        The following table summarizes the Company's RCG Grants activity for the six months ended June 30, 2011:

 
  Nonvested
RCG Grants
  Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2010

    2,638,078   $ 7.30  

Granted

         

Vested

         

Forfeited

    (42,139 )(*)   7.30  
             

Balance outstanding at June 30, 2011

    2,595,939   $ 7.30  
             

(*)
Forfeitures of non vested RCG Grants are also reallocated to other interests within RCG Holdings, LLC.

        The fair value of the RCG Grants was determined based on the number of the Company's shares underlying the RCG membership interest and the quoted price of the Company's common stock on the date of the Transactions.

        As of June 30, 2011 there was $7.8 million of unrecognized compensation expense related to the Company's RCG Grants. Unrecognized compensation expense related to RCG Grants is expected to be recognized over a weighted-average period of 1.33 years.

Restricted Shares and Restricted Stock Units Granted to Non-employee Board Members

        There were no restricted stock units awarded during the three months and six months ended June 30, 2011. Vested awards of 73,480 were delivered to non-employee members of the Company's Board of Directors during the six months ended June 30, 2011. As of June 30, 2011 there were 24,574 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

11. Defined Benefit Plans

        The following amounts relate to the defined benefit plans in aggregate for the three months and six months ended June 30, 2011 and 2010.

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2011   2010   2011   2010  
 
  (dollars in thousands)
  (dollars in thousands)
 

Components of net periodic benefit cost included in employee compensation and benefits

                         
 

Service cost

  $   $   $   $  
 

Interest cost

    66     79     138     158  
 

Expected return on plan assets

    (65 )   (74 )   (136 )   (147 )
 

Amortization of (loss) / gain

                 
 

Amortization of prior service cost

    5     5     10     11  
 

Effect of settlement

    (18 )       (31 )    
                   
 

Net periodic benefit cost

  $ (12 ) $ 10   $ (19 ) $ 22  
                   

        In July 2011, the Company contributed $0.6 million to its defined benefit plan. The amount to be contributed to this plan in 2011 will be determined in the fourth quarter.

12. 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 stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone 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 are United Kingdom, Germany, Luxembourg, Gibraltar, Japan, Hong Kong, and China.

        The Company calculated its U.S. tax provision using the estimated annual effective tax rate methodology. The tax expense or benefit caused by an unusual or infrequent item is recorded in the quarter in which it occurs. The Company used the discrete methodology to calculate its income tax provision for its foreign subsidiaries. Based on these methodologies, the Company's effective income tax rate was (318.59)% and (1.18)% for the six months ended June 30, 2011 and 2010, respectively. During the six months ended June 30, 2011, the unusual or infrequent items whose tax impact were recorded discretely were the benefit from the acquisition of a reinsurance company in Luxembourg, bargain purchase gain recorded as a result of the transaction with LaBranche and tax provisions of the Company's foreign subsidiaries.

        For the period June 30, 2011, the effective tax rate differs from the statutory rate of 35% primarily because of the recognition of deferred tax benefits that resulted from the acquisition of a Luxembourg reinsurance company with deferred tax liabilities; the non-taxable bargain purchase gain recorded as a result of the transaction with LaBranche; stock compensation; non-deductible syndication costs; and other non-deductible expenses, and an increase in the Company's valuation allowance. The

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Income Taxes (Continued)


Luxembourg reinsurance company, which carried deferred tax liabilities, was acquired by a consolidated subsidiary of the Company as part of a reinsurance service program and this subsidiary recorded a deferred tax benefit upon the acquisition of the reinsurance company pursuant to an Advance Tax Agreement.

        For the period June 30, 2010, the effective tax rate differs from the statutory rate of 35% primarily due to an increase in the Company's valuation allowance.

        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. As of June 30, 2011 the Company recorded a valuation allowance against substantially all of its net deferred tax assets.

        The Company is subject to examination by the United States Internal Revenue Service (IRS), the United Kingdom Inland Revenue Service and state and local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York. The Company is currently undergoing an audit by the IRS for tax years 2006 to 2009, which was automatically triggered by the Company's refund claims resulting from NOL carrybacks which exceeded Joint Committee thresholds. As such, the Company does not believe this audit will yield any significant adjustments.

        The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but repatriates the current earnings of its foreign subsidiaries to the United States to the extent such repatriation is permissible under local regulatory rules. The undistributed earnings of the Company's foreign subsidiaries totaled $25.1 million at June 30, 2011. Determining the tax liability that would arise if these earnings were remitted is not practicable.

13. Commitments and Contingencies

        The Company has entered into non-cancellable 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. Net rent expense was $3.3 million, and $4 million, for the three months ended June 30, 2011 and 2010, respectively, and was $6.9 million and $8 million for the six months ended June 30, 2011 and 2010, respectively.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)

        As of June 30, 2011, future minimum annual lease and service payments for the Company were as follows:

 
  Equipment
Leases(a)
  Service Payments   Facility Leases  
 
  (dollars in thousands)
 

2011

  $ 1,550   $ 8,627   $ 8,721  

2012

    3,301     10,910     16,566  

2013

    3,301     6,433     16,065  

2014

    1,548     5,765     14,188  

2015

    1,051     2,855     11,595  

Thereafter

    194     106     63,275  
               

  $ 10,945   $ 34,696   $ 130,410  
               

(a)
Equipment Leases include the Company's commitments relating to operating and capital leases. See note 14 for further information on capital lease minimum payments.

        For financial reporting purposes, the general partners have recorded a liability for potential clawback obligations to the limited partners of a real estate fund, 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 actual clawback liability, however, does not become realized until the end of a fund's life. The life of the real estate funds with a potential clawback obligation, including available contemplated extensions, are currently anticipated to expire at the end of 2013. Further extensions of such terms may be implemented under certain circumstances. As of June 30, 2011, the clawback obligations were $6.2 million which was recorded within accounts payable, accrued expenses and other liabilities. (See Note 18).

        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.

        As of June 30, 2011, the Company had unfunded commitments of $6.6 million pertaining to capital commitments in three real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time, subject to advance notice. The Company also has committed to invest $41 million to the funds managed by Cowen Healthcare Royalty Partners (the "CHRP Funds") as a limited partner of the CHRP Funds and also as a member of CHRP GP, the general partner of the CHRP Funds. This commitment is expected to be called over a two to five year period. The Company will make its pro-rata investment in the CHRP Funds along with the other limited partners. Through June 30, 2011, the Company has funded $19.5 million towards these commitments. In April 2011, the Company committed $15 million to Starboard Value and Opportunity Fund LP, which may increase or decrease over time with the performance of Starboard Value and Opportunity Fund LP. As of June 30, 2011 the Company's unfunded commitment to

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


Starboard Value and Opportunity Fund LP is $13.7 million. Such commitment can be called at any time, subject to advance notice.

Litigation

        We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions have been increasing. These risks include potential liability under federal securities and other laws in connection with securities offerings and other transactions, as well as advice and opinions we provide concerning strategic transactions. In addition, like most financial institutions, we are often the subject of claims made by current and former employees arising out of their employment or termination of employment with us. We are involved in a number of judicial, regulatory and arbitration matters arising in connection with our business including those described herein.

        Pursuant to ASC Topic 450, we review the need for any loss contingency reserves, and we have established reserves, as described below, for certain of these matters that we believe are adequate as of June 30, 2011 where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. These amounts are included within accounts payable, accrued expenses and other liabilities in the condensed 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.

        In connection with Cowen Holdings' previous IPO and separation from Société Générale ("SG") in 2006, Cowen Holdings entered into an indemnification agreement with SG under which (1) SG will indemnify, and will defend and hold harmless Cowen Holdings and each of the Cowen Holdings' subsidiaries from and against certain liabilities assumed or retained by SG; and (2) SG will indemnify Cowen Holdings for known, pending and threatened litigation (including the costs of such litigation) and certain known regulatory matters, in each case, that existed prior to the date of the Cowen Holdings' IPO to the extent the cost of such litigation results in payments in excess of the amount placed in escrow to fund such matters (the "Indemnification Agreement"). To the extent that the Company is indemnified by SG, indemnified legal expenses and liabilities will be paid out of escrow pursuant to an escrow agreement with SG. As of June 30, 2011 and December 31, 2010, the total amounts reserved in relation to the Indemnification Agreement were $0.5 million and $0.5 million respectively.

        Although there can be no assurances as to the ultimate outcome, the Company has established reserves for litigation and regulatory matters that it believes are adequate as of June 30, 2011. 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,

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


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.

        In view of the inherent difficulty of predicting the outcome of various claims against the Company, particularly where the matters are in early stages of discovery or claimants seek indeterminate damages, the Company cannot reasonably determine the possible outcome, the timing of ultimate resolution or estimate a range of possible loss, or impact related to each currently pending matter.

        Based on information currently available, the Company believes that the amount of reasonably possible losses will not have a material adverse effect on the Company's condensed consolidated statements of financial condition or cash flows. However, in light of the uncertainties involved in such proceedings, losses may be material to the Company's operating results in a future period, depending in part, on the operating results for such period and the size of the loss or liability imposed.

        There have been no material new developments in the Company's legal proceedings since the March 14, 2011 filing of its 2010 10-K, except as follows:

Adelphia Litigation

        On June 1, 2011, Société Générale, which was liable for any losses in the Adelphia litigation pursuant to the Indemnification Agreement by and between Cowen Group and Société Générale, entered into a settlement agreement with the Huff plaintiffs. On July 18, 2011, the SDNY so ordered the settlement stipulation and dismissal of Société Générale from the lawsuit. No settlement contribution was made by Cowen.

CardioNet Litigation

        On May 12, 2011, the Issuer-Defendants filed a demurrer, which was joined by the Underwriter-Defendants, including Cowen and Company. Plaintiffs filed an opposition on July 11, 2011. Cowen Group's reply is due August 1, 2011. The hearing on the demurrer is scheduled for September 2, 2011. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

China Sunergy

        On May 13, 2011, the SDNY issued its final order approving the Stipulation and Agreement of Settlement.

WorldSpace Litigation

        On June 29, 2011, the SDNY ordered that motions for summary judgment are due December 2, 2011. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)

LaBranche Litigation

        On May 2, 2011, counsel for the parties to the consolidated lawsuit reached an agreement in principle to settle the consolidated lawsuit reflected in a memorandum of understanding. In connection with the settlement, LaBranche and Cowen Group agreed to make certain additional disclosures in the Form S-4 filed in connection with the LaBranche transaction. The memorandum of understanding also contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will contain customary releases and will be subject to customary conditions, including approval by the Court. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness and adequacy of the settlement which, if finally approved by the Court, will resolve all of the claims that were or could have been brought in the actions being settled, including all claims relating to the acquisition, the Merger Agreement and any disclosure made in connection therewith. In addition, in connection with the settlement and as provided in the memorandum of understanding, the parties contemplate that plaintiffs' counsel will seek an award of attorneys' fees and expenses as part of the settlement.

        There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

Alphatec Litigation

        On April 18, 2011, the Underwriter Defendants filed a motion to dismiss the complaint as against the Underwriter Defendants. On June 6, 2011, Plaintiffs filed their opposition to the motion to dismiss. And on June 27, 2011, the Underwriter Defendants filed their reply. The hearing on the motion to dismiss is set for August 29, 2011. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

Lehman Brothers

        Given the additional market information available to Ramius, Ramius has decided to value its total net equity claim as follows: (i) the trust assets that we have been informed are within the control of LBIE and are expected to be distributed to us in the relatively near term are being valued at market less a 1% discount that corresponds to the fee that will be charged under the Claim Resolution Agreement for the return of trust assets, (ii) the trust assets that are not within the control of LBIE, but that Ramius believes are held by LBIE through Lehman Brothers, Inc. ("LBI"), are being valued at 56% which represents the present value of the mid-point between what Ramius believes are reasonable estimates of the low-side and high-side potential recovery rates with respect to its LBI exposure, (iii) Ramius's unsecured claims against LBIE are being valued at 48%, which represents Ramius's estimate of potential recovery rates with respect to this exposure and (iv) the trust assets that are not within the control of LBIE and are not believed to be held through LBI are being valued at 48%, which represents Ramius's estimate of potential recovery rates with respect to this exposure assuming that the trust assets are not available and become unsecured claims against LBIE.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)

        In addition to the matters described above, the following legal proceedings related to the business and operations of LaBranche prior to the Company's June 28, 2011 acquisition of LaBranche. These legal proceedings were disclosed in LaBranche's 2010 Form 10-K filed with the SEC on March 16, 2011, as amended on April 29, 2011, and updated, as applicable, in LaBranche's Form 10-Q for the first quarter of 2011, filed with the SEC on May 10, 2011, and below

In re NYSE Specialists Securities Litigation

        On or about October 16, 2003 through December 16, 2003, four purported class action lawsuits were filed in the United States District Court for the Southern District of New York by persons or entities who purchased and/or sold shares of stocks of NYSE listed companies, including Pirelli v. LaBranche & Co Inc., et al., No. 03 CV 8264, Marcus v. LaBranche & Co Inc., et al., No. 03 CV 8521, Empire v. LaBranche & Co Inc., et al., No. 03 CV 8935, and California Public Employees' Retirement System (CalPERS) v. New York Stock Exchange, Inc., et al., No. 03 CV 9968. On March 11, 2004, a fifth action asserting similar claims, Rosenbaum Partners, LP v. New York Stock Exchange, Inc., et al., No. 04 CV 2038, was also filed in the United States District Court for the Southern District of New York by an individual plaintiff who does not allege to represent a class.

        On May 27, 2004, the court consolidated these lawsuits under the caption In re NYSE Specialists Securities Litigation, No. CV 8264. The court named the following lead plaintiffs: CalPERS and Empire Programs, Inc.

        On September 15, 2004, plaintiffs filed a Consolidated Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty, alleging that they represent a class consisting of all public investors who purchased and/or sold shares of stock listed on the NYSE from October 17, 1998 to October 15, 2003. Plaintiffs allege that LaBranche & Co Inc., LaBranche & Co. LLC, Mr. LaBranche, other NYSE specialist firms, including Bear Wagner Specialists LLC, Fleet Specialist, Inc., SIG Specialists, Inc., Spear, Leeds & Kellogg Specialists LLC, Performance Specialist Group, LLC and Van der Moolen Specialists USA, LLC, and certain parents and affiliates of those firms, and the NYSE, violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by failing to disclose alleged improper specialist trading that was the subject of specialist trading investigations by the SEC and NYSE, improperly profiting on purchases and/or sales of NYSE listed securities, and breaching and/or aiding and abetting breaches of fiduciary duty. Section 20(a) control person claims also are alleged, including against LaBranche & Co Inc., LaBranche & Co. LLC and Mr. LaBranche. Plaintiffs seek unspecified money damages, restitution, forfeiture of fees, commissions and other compensation, equitable and/or injunctive relief, including an accounting and the imposition of a constructive trust and/or asset freeze on trading proceeds, and attorneys' fees and reimbursement of expenses.

        On December 12, 2005, motions to dismiss were granted in part and denied in part. The court dismissed plaintiffs' Section 10(b) and Section 20(a) claims against all defendants for conduct that occurred before January 1, 1999 and dismissed plaintiffs' breach of fiduciary duty claims against all defendants. The court also dismissed all claims against the NYSE and certain claims against certain parents and affiliates of specialists other than LaBranche & Co. LLC.

        On February 2, 2006, plaintiffs filed an Amended Consolidated Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty, adding Robert A. Martin as a plaintiff. This

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


complaint is otherwise identical to plaintiffs' Consolidated Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty.

        On February 23, 2006, LaBranche & Co Inc., LaBranche & Co. LLC, Mr. LaBranche and the other defendants in the case filed answers to plaintiffs' Amended Consolidated Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty, denying liability and asserting affirmative defenses.

        On February 22, 2007, the court removed Empire Programs, Inc. as co-lead plaintiff, leaving CalPERS as the sole lead plaintiff.

        On June 28, 2007, CalPERS moved for class certification of "all persons and entities who submitted orders (directly or through agents) to purchase or sell NYSE-listed securities between January 1, 1999 and October 15, 2003, which orders were listed on the specialists' display book and subsequently disadvantaged by defendants," and for the certification of CalPERS and Market Street Securities Inc. as class representatives.

        On September 18, 2007, the United States Court of Appeals for the Second Circuit reinstated certain of the claims against the NYSE that previously had been dismissed.

        On March 14, 2009, the court granted CalPERS' motion for class certification.

        On April 13, 2009, LaBranche & Co Inc., LaBranche & Co. LLC, Mr. LaBranche and the other specialist firm defendants and their affiliates filed a petition in the United States Court of Appeals for the Second Circuit, pursuant to Federal Rule of Civil Procedure 23(f), for permission to appeal the class certification order. On October 1, 2009, the Second Circuit denied the petition, and, on October 21, 2009, LaBranche & Co Inc., LaBranche & Co. LLC, Mr. LaBranche and the other specialist firm defendants and their affiliates filed a motion for reconsideration. On February 24, 2010, the Second Circuit denied this motion for reconsideration.

        On October 5, 2009, CalPERS and the NYSE informed the court that they had agreed to settle all claims against the NYSE.

        On or about March 31, 2010, CalPERS and the NYSE submitted a stipulation of settlement to the Court, not involving any money payment by the NYSE to CalPERS. On April 2, 2010, the Court approved this settlement, and, on April 6, 2010, the Court entered a final judgment dismissing CalPERS's claims against the NYSE with prejudice.

        The parties participated in non-binding mediation during May 2011 through early July 2011.

NYSE Regulation proceeding against LSP and former trader

        On June 11, 2010, NYSE Regulation, Inc.'s Division of Enforcement ("NYSE Regulation"), on behalf of NYSE Amex, LLC ("NYSE Amex") and NYSE Arca Equities, Inc. ("NYSE Arca"), commenced a proceeding against LSP and LSP's former head of options trading alleging, during the period from March 2005 through July 2007, violations of Regulation SHO Rule 203(b)(1), by allegedly effecting short sales of "threshold securities" without first locating shares to borrow, allegedly in improper reliance upon Regulation SHO's market maker exemption from locate requirements; Regulation SHO Rule 203(b)(3), by allegedly entering closing transactions that failed to properly close out fail-to-deliver

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


positions in the "threshold securities;" and Part 224 of the Federal Reserve Board Rules ("Regulation X"), by allegedly causing LSP's clearing firm to improperly extend LSP "good faith margin" as a market maker. NYSE Regulation also alleges, during the period from September 18, 2008 to October 8, 2008, violations of Section 12(k)(4) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's September 18, 2008 Emergency Order that banned the short selling of securities of financial services companies, by improperly relying on an exemption that would enable short sales of the common stock of financial services companies. NYSE Regulation also alleges, during both of these time periods, violations of AMEX Rule 320 and NYSE Arca Rule 6.18(b), by allegedly failing to supervise these trading activities to comply with the rules alleged to have been violated.

        On May 4, 2010, FINRA entered into an agreement to assume responsibility for the surveillance and enforcement functions of NYSE Euronext, including those of NYSE Amex and NYSE Arca, and FINRA replaced NYSE Regulation, Inc. as the Complainant in the proceeding against LSP and its former trader.

        On July 27, 2010, the Respondents filed a Joint Answer with NYSE Amex and NYSE Arca, denying all allegations and asserting defenses.

        On February 4, 2011, NYSE Arca filed a Notice of Discontinuance with respect its action against LSP and its former trader, and NYSE Amex continued the proceeding.

        Also on February 4, 2011, NYSE Amex filed an Amended Charge Memorandum against LSP and its former trader. The Amended Charge Memorandum withdrew the previous charge under Regulation X. On March 4, 2011, the Respondents filed a Joint Answer to the Amended Charge Memorandum, denying all allegations and asserting defenses.

        On March 30, 2011, FINRA and the Respondents reached an agreement in principal to settle the proceeding, subject to negotiation of a Stipulation and Consent to Penalty and approval by the FINRA Hearing Board.

        On May 26, 2011, FINRA and the Respondents entered into a Stipulation and Consent to Penalty to settle the matter without admitting or denying any of the allegations or findings. On June 24, 2011, the FINRA Hearing Board approved the settlement.

14. Short-Term Borrowings and other debt

        As of June 30, 2011 and December 31, 2010, short term borrowings and other debt of the Company were as follows:

 
  As of June 30,
2011
  As of December 31,
2010
 
 
  (in thousands)
 

Line of credit

  $   $ 24,000  

Notes payable

    761     1,396  

Capital lease obligations

    5,857     6,337  
           

  $ 6,618   $ 31,733  
           

        On June 3, 2009, the Company entered into a collateralized revolving credit agreement with HVB AG, as lender, administrative agent and issuing bank, providing for a revolving credit facility with a

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Short-Term Borrowings and other debt (Continued)


$50 million aggregate loan commitment amount available. The first borrowing under this line occurred on June 30, 2009. As of June 30, 2011 and December 31, 2010, the Company had borrowings of nil and $24 million, respectively. At the Company's election and discretion, borrowings under the 2009 collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (1) the lender's prime rate plus 1.5% or (2) the 1, 2 or 3 month LIBOR rate plus 3.5%. Due to the variable interest rate on these borrowings, their carrying values approximate fair value. The Company is required to pay a quarterly commitment fee on the undrawn portion of the revolving credit facility equal to 1.0% per annum of the undrawn amount. The 2009 collateralized revolving credit agreement was to mature on September 29, 2011. However, during 2011, the Company agreed to repay in full its obligations pursuant to the credit agreement and HVB AG agreed to terminate the credit agreement. On June 27, 2011, the Company fully repaid the then borrowing amount outstanding of $23 million and the credit agreement was terminated as of that date. The 2009 collateralized revolving credit agreement contained financial and other restrictive covenants that limited the Company's ability to incur additional debt and engage in other activities. As of June 30, 2011 and during the period from June 3, 2009 through June 27, 2011 the Company was in compliance with these covenants. The Company's investment in Enterprise Master through the Enterprise Fund had been pledged as collateral under the line of credit. Upon termination of the credit agreement on June 27, 2011, the Company's collateral pledge to HVB AG was released and the Company is no longer subject to the restrictive covenants contained in the credit agreement.

        Interest incurred on the Company's lines of credit was $0.2 million for the three months ended June 30, 2011 and 2010, respectively, and was $0.4 million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively.

        In November 2010, the Company borrowed $0.6 million and $1.5 million to fund insurance premium payments. These notes bear interest at 5.05% and 4.95%, respectively and are due in October of 2011. As of June 30, 2011, the outstanding balance on these combined notes payable was $0.4 million. Interest expense for the three months and six months ended June 30, 2011 was not significant.

        The Company entered into several capital leases for computer equipment during the fourth quarter of 2010. These leases amount to $6.3 million and are recorded in fixed assets and as capital lease obligations and have lease terms that range from 48 to 60 months and interest rates that range from 0.60% to 6.14%. As of June 30, 2011, the remaining balance on these capital leases was $5.9 million. Interest expense for the three months and six months ended June 30, 2011 was $0.1 million.

        As of June 30, 2011 the Company has six irrevocable letters of credit, for which there is cash or bond collateral pledged, including (i) $50,000, which expires on July 12, 2011, supporting workers' compensation insurance with Safety National Casualty Corporation, (ii) $57,000, which expires on May 12, 2012, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease and (iii) $82,000, which expires on May 12, 2012, supporting the Company's San Francisco office and (iv) $1.2 million which expires on August 31, 2011, supporting the Company's lease of additional office space in New York (v) $6.7 million, which expires December 12, 2011, supporting the lease of office space in New York which the Company pays a fee on the stated amount of the letter of credit at a rate equal to 0.5%, and (vi) $0.9 million which expires May 25, 2017, supporting the lease of additional office space in New York.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Short-Term Borrowings and other debt (Continued)

        To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of June 30, 2011 and December 31, 2010, there were no amounts due related to these letters of credit.

        Annual scheduled maturities of debt and minimum lease payments for capital lease obligation and short term borrowings and other debt outstanding at June 30, 2011, are as follows:

 
  Capital Lease
Obligation
  Short Term
Borrowings
 
 
  (in thousands)
 

2011

  $ 670   $ 391  

2012

    1,541     164  

2013

    1,541     164  

2014

    1,402     42  

2015

    1,051      

Thereafter

    194      
           

Subtotal

    6,399     761  

Less: Amount representing interest(a)

    (542 )    
           

Total

  $ 5,857   $ 761  
           

(a)
Amount necessary to reduce net minimum lease payments to present value calculated at the Company's implicit rate at lease inception.

15. Earnings Per Share and Stockholders' Equity

        The Company calculates its basic and diluted earnings per share in accordance with FASB accounting standards. Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. As of June 30, 2011, there were 116,246,786 shares outstanding, of which 1,110,836 are restricted. To the extent that outstanding restricted shares are unvested, they are excluded from the calculation of basic earnings per share. The Company has included 24,574 fully vested, unissued restricted stock units in its calculation of basic earnings per share.

        Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive nonvested restricted stock and stock options. The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted shares, restricted stock units and unexercised stock options. 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 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 was credited to additional paid-in capital assuming vesting and delivery of the restricted stock. 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 were not included in the computation of diluted net

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Earnings Per Share and Stockholders' Equity (Continued)


loss per common share for the three months and six months ended June 30, 2011, as their inclusion would have been anti-dilutive.

        The computation of earnings per share is as follows:

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2011   2010   2011   2010  
 
  (in thousands)
  (in thousands)
 

Net income (loss) attributable to Cowen Group, Inc. shareholders

  $ 20,037   $ (21,197 ) $ 20,119   $ (34,173 )
                   

Shares for basic and diluted calculations:

                         
 

Average shares used in basic computation

    76,330     72,693     75,600     72,601  
 

Stock options

                 
 

Restricted shares

    1,568         1,289      
                   
 

Average shares used in diluted computation

    77,898     72,693     76,889     72,601  
                   

Earnings (loss) per share:

                         
 

Basic

  $ 0.26   $ (0.29 ) $ 0.27   $ (0.47 )
 

Diluted

  $ 0.26   $ (0.29 ) $ 0.26   $ (0.47 )

        Treasury stock of $1.9 million as of June 30, 2011 resulted from the acquisition (see Note 2) of LaBranche as the Company held shares directly in LaBranche prior to the acquisition date and those shares were converted to Treasury stock at the acquisition date.

16. Segment Reporting

        The Company conducts its operations through two segments: the alternative investment management segment and the broker-dealer segment (subsequent to the November 2009 Ramius/Cowen transaction). The operations of LaBranche's market-making business following the Company's June 28, 2011 acquisition of LaBranche are included in the broker-dealer segment commencing June 29, 2011. 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, which management uses to evaluate the financial performance of and make operating decisions for the segment including determining appropriate compensation levels.

        In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated funds (both 2011 and 2010) (ii) excludes equity award expense related to the November 2009 Ramius/Cowen transaction (both 2011 and 2010) (iii) excludes certain other acquisition-related and/or reorganization expenses (2011 only) and (iv) excludes the bargain purchase gain which resulted from the LaBranche acquisition (see note 2). 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 GAAP purposes, these items are included in each of their

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)


respective line items. Economic Income 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. For 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 GAAP purposes is presented gross as part of revenue.

        As further stated below, one major difference between Economic Income and US GAAP net income is that Economic Income 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 condensed consolidated statements of operations. This pro rata share has no effect on the overall financial performance for the alternative investment management segment, as ultimately, this income or loss is not income or loss for the alternative investment management segment itself. Included in Economic Income 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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)

        The following tables set forth operating results for the Company's alternative investment management and broker-dealer segments and related adjustments necessary to reconcile the Company's Economic Income measure to arrive at the Company's consolidated net income (loss):

 
  Three Months Ended June 30, 2011  
 
   
   
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Broker-Dealer   Total
Economic
Income/(loss)
  Funds
Consolidation
  Other
Adjustments
  GAAP  
 
   
   
   
  (dollars in thousands)
   
 

Revenues

                                     
 

Investment banking

  $   $ 14,343   $ 14,343   $   $   $ 14,343  
 

Brokerage

    11     24,596     24,607             24,607  
 

Management fees

    15,539         15,539     (466 )   (3,216 )(a)   11,857  
 

Incentive income

    5,697         5,697         (5,022 )(a)   675  
 

Investment Income

    22,810     (110 )   22,700         (22,700 )(c)    
 

Interest and dividends

                    5,840 (c)   5,840  
 

Reimbursement from affiliates

                (8 )   989 (b)   981  
 

Other revenue

    (278 )   (203 )   (481 )       713 (c)   232  
 

Consolidated Funds revenues

      &nb