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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 March 31, 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 May 9, 2011 there were 75,668,292 shares of the registrant's common stock outstanding.


Table of Contents


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

    54  
 

3. Quantitative and Qualitative Disclosures About Market Risk

    82  
 

4. Controls and Procedures

    83  

PART II. OTHER INFORMATION

       
 

1. Legal Proceedings

    84  
 

1A. Risk Factors

    85  
 

2. Unregistered Sales of Equity Securities and Use of Proceeds

    86  
 

3. Defaults Upon Senior Securities

    86  
 

4. (Removed and Reserved)

    86  
 

5. Other Information

    86  
 

6. Exhibits

    86  

SIGNATURES

    87  

EXHIBIT INDEX

    88  
 

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 ended March 31, 2011 and 2010. The Consolidated Financial Statements as of December 31, 2010 were audited.

3


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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 March 31, 2011   As of December 31, 2010  

Assets

             
 

Cash and cash equivalents

  $ 26,251   $ 36,354  
 

Cash collateral pledged

    8,652     8,633  
 

Securities owned, at fair value

    507,472     474,095  
 

Securities purchased under agreements to resell

    72,120     97,755  
 

Other investments

    42,795     40,320  
 

Receivable from brokers

    53,094     95,937  
 

Fees receivable

    33,170     31,688  
 

Due from related parties (see Note 17)

    10,529     16,370  
 

Fixed assets, net of accumulated depreciation and amortization of $19,084 and $17,764, respectively

    37,814     36,591  
 

Goodwill

    27,179     27,179  
 

Intangible assets, net of accumulated amortization of $8,884 and $8,146, respectively

    12,016     12,754  
 

Other assets

    25,808     19,456  
 

Consolidated Funds

             
 

Cash and cash equivalents

    2,048     7,210  
 

Securities owned, at fair value

    7,471     8,722  
 

Other investments, at fair value

    283,389     333,374  
 

Other assets

    758     732  
           
     

Total Assets

  $ 1,150,566   $ 1,247,170  
           

Liabilities and Stockholders' Equity

             
 

Securities sold, not yet purchased, at fair value

  $ 185,118   $ 197,916  
 

Securities sold under agreements to repurchase

    155,672     192,165  
 

Payable to brokers

    118,924     85,655  
 

Compensation payable

    18,286     76,204  
 

Short-term borrowings and other debt

    30,272     31,733  
 

Fees payable (see Note 17)

    8,131     8,797  
 

Due to related parties (see Note 17)

    7,381     9,187  
 

Accounts payable, accrued expenses and other liabilities

    44,945     42,267  
 

Consolidated Funds

             
 

Capital withdrawals payable

    6,490     7,817  
 

Accounts payable, accrued expenses and other liabilities

    757     1,827  
           
     

Total Liabilities

    575,976     653,568  
           

Commitments and Contingencies (see Note 12)

             

Redeemable non-controlling interests

    117,967     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, 75,616,399 and 75,490,209 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively (including 1,345,985 and 1,554,124 restricted shares, respectively)

    726     726  
 

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

         
 

Additional paid-in capital

    511,628     504,480  
 

(Accumulated deficit) retained earnings

    (55,888 )   (55,970 )
 

Accumulated other comprehensive income

    157     20  
           
   

Total Stockholders' Equity

    456,623     449,256  
           
     

Total Liabilities and Stockholders' Equity

  $ 1,150,566   $ 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
March 31,
 
 
  2011   2010  

Revenues

             
 

Investment banking

  $ 14,682   $ 6,005  
 

Brokerage

    27,591     29,575  
 

Management fees

    11,164     9,270  
 

Incentive income

    4,381     2,093  
 

Interest and dividends

    4,559     804  
 

Reimbursement from affiliates

    1,009     1,742  
 

Other revenues

    690     622  
 

Consolidated Funds

             
   

Interest and dividends

    169     5,781  
   

Other

        366  
           
     

Total revenues

    64,245     56,258  

Expenses

             
 

Employee compensation and benefits

    45,087     43,433  
 

Floor brokerage and trade execution

    4,110     5,028  
 

Interest and dividends

    2,609     446  
 

Professional, advisory and other fees

    7,140     2,388  
 

Service fees

    3,612     3,812  
 

Communications

    2,893     3,302  
 

Occupancy and equipment

    5,122     5,629  
 

Depreciation and amortization

    2,058     2,494  
 

Client services and business development

    4,677     4,164  
 

Other

    4,295     7,386  
 

Consolidated Funds

             
   

Interest and dividends

    46     1,568  
   

Professional, advisory and other fees

    460     678  
   

Floor brokerage and trade execution

        709  
   

Other

    122     204  
           
     

Total expenses

    82,231     81,241  

Other income (loss)

             
 

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

    17,283     1,524  
 

Consolidated Funds:

             
   

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

    2,343     19,218  
   

Net realized and unrealized gains (losses) on derivatives

    (441 )   (220 )
   

Net gains (losses) on foreign currency transactions

    (156 )   (725 )
           
     

Total other income

    19,029     19,797  
           
     

Income (loss) before income taxes

    1,043     (5,186 )
           

Income tax expense (benefit)

    163     (266 )
           
     

Net income (loss)

    880     (4,920 )
 

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

    798     8,056  
           
     

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

  $ 82   $ (12,976 )
           

Weighted average common shares outstanding:

             
 

Basic

    74,160     72,509  
 

Diluted

    76,083     72,509  

Earnings (loss) per share:

             
 

Basic

  $ 0.00   $ (0.18 )
           
 

Diluted

  $ 0.00   $ (0.18 )
           

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
  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)

                    82     82     798   $ 880  
 

Defined Benefit Plans

                97         97         97  
 

Foreign currency translation

                40         40         40  
                                   

Total comprehensive income (loss)

                137     82     219     798   $ 1,017  

Capital contributions

                            3,504        

Capital withdrawals

                            (30,681 )      

Restricted stock awards issued

    126,190                                

Amortization of share based compensation

            7,148             7,148            
                                     

Balance, March 31, 2011

    75,616,399   $ 726   $ 511,628   $ 157   $ (55,888 ) $ 456,623   $ 117,967        
                                     

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)

 
  Three Months Ended
March 31,
 
 
  2011   2010  
 
  (dollars in thousands)
 

Cash flows from operating activities:

             
 

Net income (loss)

  $ 880   $ (4,920 )
 

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

             
     

Depreciation and amortization

    2,058     2,494  
     

Share-based compensation

    7,148     4,210  
     

Net loss on disposal of fixed assets

        264  
     

Purchases of securities owned, at fair value

    (3,709,677 )   (123,057 )
     

Proceeds from sales of securities owned, at fair value

    3,693,913     72,719  
     

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

    1,276,363     36,626  
     

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

    (1,275,464 )   (17,641 )
     

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

    (16,200 )   (1,297 )
     

Consolidated Funds:

             
       

Purchases of securities owned, at fair value

    (148,429 )   (52,535 )
       

Proceeds from sales of securities owned, at fair value

    149,665     43,904  
       

Purchases of other investments

    (8,100 )   (13,039 )
       

Proceeds from sales of other investments

    58,982     69,481  
       

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

    (883 )   (21,227 )
     

(Increase) decrease in operating assets:

             
       

Cash collateral pledged

    (19 )    
       

Securities owned, at fair value, held at broker dealer

    (11,835 )   (37,710 )
       

Receivable from brokers

    42,843     (29,852 )
       

Fees receivable

    (1,482 )   6,417  
       

Due from related parties

    5,841     4,292  
       

Other assets

    (6,312 )   (1,475 )
       

Consolidated Funds:

             
           

Cash and cash equivalents

    5,162     (406 )
           

Other assets

    (26 )   (725 )
     

Increase (decrease) in operating liabilities:

             
       

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

    (5,644 )   24,629  
       

Payable to brokers

    33,269     24,706  
       

Compensation payable

    (57,821 )   (55,527 )
       

Fees payable

    (666 )   (1,970 )
       

Due to related parties

    (1,806 )   (179 )
       

Accounts payable, accrued expenses and other liabilites

    2,739     (15,613 )
       

Consolidated Funds:

             
           

Accounts payable, accrued expenses and other liabilities

    (1,070 )   (44 )
           
             

Net cash provided by / (used in) operating activities

    33,429     (87,475 )
           

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Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)

 
  Three Months Ended
March 31,
 
 
  2011   2010  
 
  (dollars in thousands)
 

Cash flows from investing activities:

             
 

Securities purchased under agreements to resell

    25,635      
 

Purchases of other investments

    (35,683 )   (958 )
 

Proceeds from sales of other investments

    35,577     3,539  
 

Purchase of fixed assets

    (2,543 )   (67 )
           
     

Net cash provided by / (used in) investing activities

    22,986     2,514  
           

Cash flows from financing activities:

             
 

Securities sold under agreements to repurchase

    (36,493 )    
 

Repayments on short-term borrowings and other debt

    (1,521 )   (25,001 )
 

Consolidated Funds:

             
   

Capital contributions by non-controlling interests in Consolidated Funds

    3,504     1,902  
   

Capital withdrawals to non-controlling interests in Consolidated Funds

    (32,008 )   (26,452 )
           
     

Net cash (used in) / provided by financing activities

    (66,518 )   (49,551 )
           

Change in cash and cash equivalents

    (10,103 )   (134,512 )

Cash and cash equivalents at beginning of year

    36,354     147,367  
           

Cash and cash equivalents at end of period

  $ 26,251   $ 12,855  
           

Supplemental non-cash information:

             
 

Deconsolidation of CHRP GP (See Note 2b)

  $   $ 1,712  
           
 

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

  $   $ 6,745  
           

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, and sales and trading services through its two business segments: alternative investment management and broker-dealer. The alternative investment management segment includes hedge, replication products, mutual funds, managed futures, funds fund of funds, real estate funds, healthcare royalty funds, and cash management services, offered primarily under the Ramius name. The broker-dealer segment offers industry focused investment banking 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.

2. Significant Accounting Policies

a.     Basis of presentation

        These unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America ("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 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 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)

2. 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. 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.

        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.

        As of March 31, 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").

        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 are met. Where the VIEs have qualified for the deferral, the analysis is based on previous

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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 March 31, 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 the 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 March 31, 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.

        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

11


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


$315.3 million and $1 million as of March 31, 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 March 31, 2011 was $256.9 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 consolidated statements of financial condition, respectively. The Consolidated Feeder Funds' maximum exposure to loss related to their respective Unconsolidated Master Funds at March 31, 2011 and December 31, 2010 was limited to their investment in their respective Unconsolidated Master Funds. See Note 4 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 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 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 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 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 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, Ramius Securities LLC ("Ramius Securities") and Cowen and Company, LLC ("Cowen and Company") 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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

c.     Use of estimates

        The preparation of the 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 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.

        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

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the consolidated financial statements. Certain of the Company's investments are relatively illiquid or thinly traded and may not be immediately liquidated on demand if needed. Fair values assigned to these investments may differ significantly from the fair values that would have been used had a ready market for the investments existed and such differences could be material.

        The Company primarily uses the "market approach" 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, 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, swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Derivative contracts are included within other assets or accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition. The Company's direct involvement with derivative financial instruments include credit default swaps, futures, equity swaps, options and warrants and rights which are included within securities owned, at fair value in the condensed consolidated statements of financial condition.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        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)

2. Significant Accounting Policies (Continued)

        See Note 4 and 5 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

        Transactions involving purchases of securities under agreements to resell are carried at their contract value which approximates fair value. As of March 31, 2011 and December 31, 2010, the fair value of the collateral received by the Company was $70.3 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 March 31, 2011 and December 31, 2010, the Company had pledged collateral in the amount of $170 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 periodically 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 values, and by requiring additional collateral to be promptly deposited with or returned to the Company when deemed necessary. The Company's securities purchased under agreements to resell and securities sold under agreements to repurchase were transacted pursuant to agreements with multiple counterparties at March 31, 2011 and December 31, 2010.

f.      Expenses

        Included within expenses in the first quarter of 2011 is $2.8 million in acquisition-related expenses such as legal, consulting and banking fees, associated with the proposed acquisition of LaBranche & Co Inc. and other reorganization charges within the alternative investment management business.

g.     Recently adopted accounting pronouncements

        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

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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 I and II 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 III), 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 III. 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 II or Level III. 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 III fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the guidance, excluding the reconciliation of Level III activity, with the issuance of its March 31, 2010 financial statements. In addition, the Company adopted the guidance related to the reconciliation of Level III 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 March 2010, the FASB issued accounting guidance that changes the accounting for credit derivatives embedded in beneficial interests in securitized financial assets. The new guidance eliminates the scope exception for embedded credit derivatives, unless they are created solely by subordination of one financial instrument to another. Bifurcation and separate recognition may be required for certain beneficial interests that are currently not accounted for at fair value through earnings. The adoption of this accounting guidance on July 1, 2010 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 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

17


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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 is not expected to 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 is not expected to have a material impact on the Company's condensed consolidated financial statements.

h.     Future adoption of accounting pronouncements

        As of March 31, 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.

3. Cash collateral pledged

        As of March 31, 2011 and December 31, 2010, cash collateral pledged in the amount of $8.6 million, respectively, primarily relates to a letter of credit issued to the landlord of the Company's premises in New York City (see Note 13). Also included in cash collateral pledged as of March 31, 2011 and December 31, 2010 is $0.5 million, respectively, relating to an agreement that the Company has with Société Générale to cover the costs of litigation matters included in the agreement.

4. 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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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Investments of Operating Entities and Consolidated Funds

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

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

U.S. Government securities(a)

  $ 78,892   $ 143,247  

Common stocks

    153,715     116,215  

Restricted common stock

    5,000     5,000  

Corporate bonds(b)

    244,028     191,702  

Options

    22,061     14,349  

Warrants and rights

    2,902     2,334  

Mutual funds

    874     1,248  
           

  $ 507,472   $ 474,095  
           

(a)
As of March 31, 2011, maturities ranged from February 2016 to November 2021 and interest rates ranged between 2.13% 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 March 31, 2011, maturities ranged from April 2011 to January 2068 and interest rates ranged between 1.75% and 13.5%. 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. The Company's long exposure to futures, equity swap and credit default swap derivative contracts, at fair value, as of March 31, 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 March 31, 2011 and December 31, 2010 of $0.6 million, respectively, is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition.

        The Company may transact in a variety of derivative instruments primarily for trading purposes with each instruments' primary risk exposure being interest rate, credit, foreign exchange, equity or commodity risk.

        Pursuant to the various derivatives transactions discussed above, the Company is required to post collateral for its obligations or potential obligations. As of March 31, 2011 and December 31, 2010, respectively, collateral consisting of $3.2 million, respectively, is included in receivable from brokers on the condensed consolidated statements of financial condition. As of March 31, 2011 and December 31, 2010 all derivative contracts were with major financial institutions.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Other investments

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

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

(1) Portfolio Funds, at fair value

  $ 31,653   $ 29,391  

(2) Real estate investments, at fair value

    2,102     1,882  

(3) Equity method investments

    8,539     8,734  

(4) Lehman claims, at fair value

    501     313  
           

  $ 42,795   $ 40,320  
           

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

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

Tapestry Investment Co PCC Ltd(a)

  $ 283   $ 565  

Cowen Healthcare Royalty Partners(b)(*)

    15,164     14,769  

Cowen Healthcare Royalty Partners II(b)(*)

    431     143  

Ramius Global Credit Fund LP(c)(*)

    13,147     11,733  

Ramius Alternative Replication Ltd(d)(*)

    877     866  

Ramius Enhanced Replication Fund LLC(e)(*)

    561      

Other affiliated funds(f)(*)

    1,190     1,315  
           

  $ 31,653   $ 29,391  
           

*
These portfolio funds are affiliates of the Company

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

    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 and Cowen Healthcare Royalty Partners II in Note 12.

(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.

(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 one year soft lock (4% penalty).

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

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

(f)
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 March 31, 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 $1.4 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

21


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

of accounting. Also included in equity method investments is the investment in CHRP GP (see Note 2). The following table summarizes equity method investments held by the Company:

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

RCG Longview Debt Fund IV Management, LLC

  $ 989   $ 2,009  

Cowen Healthcare Royalty GP, LLC

    1,231     1,176  

Cowen Healthcare Royalty GP II, LLC

    22     8  

RCG Longview Partners, LLC

    2,347     2,203  

RCG Longview Louisiana Manager, LLC

    193     186  

RCG Urban American, LLC

    1,026     889  

RCG Urban American Management, LLC

    627     359  

RCG Longview Equity Management, LLC

    331     499  

Urban American Real Estate Fund II, L.P. 

    1,095     833  

RCG Kennedy House, LLC

    330     259  

Other

    348     313  
           

  $ 8,539   $ 8,734  
           

        As of March 31, 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 $0.4 million for the three months ended March 31, 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 ended March 31, 2011 and 2010.

        For the period ended March 31, 2011 certain single equity method investments held by the Company have exceeded the 20% threshold for the income test. As such, the Company is required to present summarized income statement information for these significant investees for current and the

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


comparative prior year-to-date interim periods. The summarized income statement information for individually significant investees presented in aggregate below is as follows:

 
  For the three
months ended
March 31, 2011
  For the three
months ended
March 31, 2010
 
 
  ($ in thousands)
 

Revenues

  $ 2,116   $ 2,094  

Expenses

    (1,381 )   (1,559 )

Net realized and unrealized gains (losses)

    364     (122 )
           

Net Income

  $ 1,099   $ 413  
           

        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 $1.0 million, which the Company believes will represent an unsecured claim against LBIE. This does not include the additional 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 fair value of the Total Net Equity Claim at an approximately 52% discount at March 31, 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 Lehman 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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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

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

U.S. Government securities(a)

  $ 75,455   $ 100,559  

Common stocks

    90,710     88,580  

Corporate bonds(b)

    8,829     2,615  

Options

    10,124     6,162  
           

  $ 185,118   $ 197,916  
           

(a)
As of March 31, 2011, maturities ranged from February 2016 to November 2040 and interest rates ranged between 2.625% and 4.25%. 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 March 31, 2011, maturities ranged from June 2013 to December 2049 and interest rates ranged between 3.25% and 7.75%. 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 March 31, 2011:

 
  As of March 31,
2011
 
 
  (dollars in thousands)
 

Securities purchased under agreements to resell

       

Agreements with Barclays Inc bearing interest of -0.05% - 0.14% due on April 1, 2011 to April 14, 2011

  $ 72,120  
       

Securities sold under agreements to repurchase

       

Agreements with Royal Bank of Canada bearing interest of 1.415% - 1.58125% due on April 21, 2011 to January 31, 2012

    55,102  

Agreements with Barclays Inc bearing interest of 0.18% - 1.45375% due on April 1, 2011 to May 9, 2011

    100,570  
       

  $ 155,672  
       

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. 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  
       

b.     Consolidated Funds

Securities owned, at fair value

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

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

Government sponsored securities*

  $ 6,562   $ 7,682  

Commercial paper**

    909      

Corporate bond***

        1,040  
           

  $ 7,471   $ 8,722  
           

*
As of March 31, 2011, maturities ranged from April 2011 to February 2013 and interest rates ranged between 0.50% and 1.735%. 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 April 1, 2011.

***
The maturity was January 2011 with interest rate of 0.42%.

25


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Other investments, at fair value

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

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

(1) Portfolio Funds

  $ 276,196   $ 327,131  

(2) Lehman claims

    7,193     6,243  
           

  $ 283,389   $ 333,374  
           

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

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

Investments of Enterprise LP

  $ 227,457   $ 257,246  

Investments of consolidated fund of funds investment companies

    48,739     69,885  
           

  $ 276,196   $ 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, LP. The consolidated investments in Portfolio Funds recorded in other investments on the condensed consolidated statements of financial condition include Enterprise LP's investment of $227 million and $257 million in Enterprise Master as of March 31, 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 12 for unfunded commitments of Enterprise Master.

26


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The investments of consolidated fund of funds investment companies of $48.7 million and $70 million at March 31, 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. Levered FOF's and Multi-Strat FOF's investment objectives are to invest discrete pools of their capital on a leveraged basis among portfolio managers that invest through Portfolio Funds, forming a multi-strategy, diversified investment portfolio designed to achieve returns with low to moderate volatility. 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 pursuant to 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 March 31, 2011 and December 31, 2010:

 
   
  As of March 31, 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   $   $ 15,054   $   $   $ 15,054 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy             13,471         13,471 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     635                 635 (b)

Independently Advised Portfolio Funds*

  Futures & Global Macro                 15,753     15,753 (c)

Externally Managed Portfolio Funds

  Credit-Based     510                 510 (b)

Externally Managed Portfolio Funds

  Event Driven     2,666                 2,666 (d)

Externally Managed Portfolio Funds

  Hedged Equity     44                 44 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     547                 547 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     59                 59 (g)
                           

      $ 4,461   $ 15,054   $ 13,471   $ 15,753   $ 48,739  
                           

27


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. 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 2% as of March 31, 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 fund will be received as underlying investments are liquidated. The remaining amount of the investments in this category is in a side pocket or suspended with undetermined payout dates.

(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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

(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 March 31, 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 $9.0 million as of March 31, 2011. 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. 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 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, 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, the court filings also indicate that Barclays plc has submitted a substantial claim against LBI relating to an asset purchase agreement entered into by Barclays plc with LBIE near the time of the SIPC liquidation proceeding 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

29


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


Company's customer claims, management has estimated recovery with respect to the Company's LBI exposure at 54% or $2.9 million as of March 31, 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 March 31, 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 March 31, 2011 or December 31, 2010.

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 March 31, 2011 and December 31, 2010:

 
  March 31, 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

  $ 2,482   $   $ 10,123   $  

Corporate bonds

    2,049         1,997      

Over-the-counter foreign currency call option

                (63 )

Preferred stock

    410         410      

Private debt

    66         59      

Private equity

    179         173      

Restricted stock

    3,148         3,148      

Rights

    2,250         2,115      

Trade claims

    128         128      

Warrants

    69         55      
                   

  $ 10,781   $   $ 18,208   $ (63 )
                   

30


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

Asset swaps

  $   $ 5  

Currency forwards

    (34 )   (36 )
           

  $ (34 ) $ (31 )
           

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

624 Art Holdings, LLC*

  Artwork   $ 98   $ 98  

QREX, LLC*

  Life Settlements          

Q Capital Strategies, LLC*

  Life Settlements     111     111  

RCG Longview Equity Fund, LP*

  Real Estate     11,336     10,120  

RCG Longview II, LP*

  Real Estate     1,713     1,835  

RCG Longview Debt Fund IV, LP*

  Real Estate     18,452     12,628  

RCG Longview, LP*

  Real Estate     404     383  

RCG Soundview, LLC*

  Real Estate     3,385     2,542  

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

  Real Estate     3,397     3,207  

RCG International Sarl*

  Multi-Strategy     9,090     9,463  

Ramius Navigation Fund Ltd*

  Multi-Strategy     12,238     24,972  

RCG Special Opportunities Fund, Ltd*

  Multi-Strategy     94,816     97,845  

Ramius Credit Opportunities Fund Ltd*

  Distressed     260     300  

RCG Endeavour, LLC*

  Multi-Strategy     75     87  

RCG Energy, LLC *

  Energy     20,243     18,850  

RCG Renergys, LLC*

  Energy     2     2  

Other Private Investments

  Various     15,274     15,189  

Real Estate Investments

  Real Estate     16,763     25,662  
               

      $ 207,657   $ 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

31


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. 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 March 31, 2011 and December 31, 2010:

 
   
  March 31, 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   $ 832   $   $ 1,354   $  

Tapestry Pooled Account II, LLC*

    Hedged Equity         1,146         3,544  

Tapestry Pooled Account V, LLC*

    Credit-Based     1,308     1,396     1,416     1,512  

Externally Managed Funds

    Credit-Based     1,333     784     6,653     803  

Externally Managed Funds

    Event Driven     4,880     6,306     6,491     6,802  

Externally Managed Funds

    Fixed Income Arbitrage     85         83      

Externally Managed Funds

    Hedged Equity     2,659     914     4,386     3,055  

Externally Managed Funds

    Multi Strategy     1,577     1,581     7,785     4,292  

Externally Managed Funds

    Global Macro     844         2,053     679  

Externally Managed Funds

    Opportunistic Equity         931         1,677  

Externally Managed Funds

    Managed Futures             2,430      
                         

        $ 13,518   $ 13,058   $ 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)

4. 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 March 31, 2011:

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

Bond future

  $ 5   $ (2 )

Commodity call option

    118     (5 )

Cash

    15,705     17,139  

Currency option

    476     191  

Commodity forward

    (183 )   32  

Commodity future

    554     935  

Currency forward

    194     (63 )

Currency future

    924     1,230  

Index future

    318     130  

Interest rate future

    (13 )   (5 )
           

  $ 18,098   $ 19,582  
           

5. 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 March 31, 2011 and December 31, 2010:

 
  Assets at Fair Value as of March 31, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
   
  (dollars in thousands)
   
 

Securities owned and derivatives

                         
 

US Government securities

  $ 78,892   $   $   $ 78,892  
 

Common stocks

    150,558     2,667     490     153,715  
 

Restricted common stock

            5,000     5,000  
 

Corporate bonds

        244,028         244,028  
 

Futures

    154             154  
 

Equity swaps

        2         2  
 

Credit default swaps

        300         300  
 

Options

    21,977     84         22,061  
 

Warrants and rights

            2,902     2,902  
 

Mutual funds

    874             874  

Other investments

                         
 

Portfolio Funds

    285     13,708     17,660     31,653  
 

Real estate investments

            2,102     2,102  
 

Lehman claim

            501     501  
                   

  $ 252,740   $ 260,789   $ 28,655   $ 542,184  
                   

33


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

 

 
  Liabilities at Fair Value as of March 31, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

                         
 

US Government securities

  $ 75,455   $   $   $ 75,455  
 

Common stocks

    90,309         401     90,710  
 

Corporate bonds

        8,829         8,829  
 

Equity swaps—short exposure

        207         207  
 

Futures

    373             373  
 

Options

    10,124             10,124  
                   

  $ 176,261   $ 9,036   $ 401   $ 185,698  
                   

 

 
  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  
                   

34


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

 
  Assets at Fair Value as of March 31, 2011  
 
  Level 1   Level 2   Level 3   Total  
 
   
  (dollars in thousands)
   
 

Securities owned

                         
 

US Government securities

  $ 6,562   $   $   $ 6,562  
 

Commercial paper

    909             909  

Other investments

                         
 

Portfolio Funds

        15,753     260,443     276,196  
 

Lehman claims

            7,193     7,193  
                   

  $ 7,471   $ 15,753   $ 267,636   $ 290,860  
                   

 

 
  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   $ 311,242   $ 342,096  
                   

        The following table includes a rollforward of the amounts for the three months ended March 31, 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
  Warrants
and Rights
  Portfolio
Funds
  Real
estate
  Lehman
claim
  Portfolio
Funds
  Lehman
claim
 
 
  (dollars in thousands)
 

Balance at December 31, 2010

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

Purchases/covers

        (152 )           64     34,251     96         1      

Sales/short buys

        416                 (34,142 )   (5 )       (52,624 )    

Transfers in (out)

                                           

Realized gains (losses)

        152                 96             1,533      

Unrealized gains (losses)

    156     (15 )           861     374     129     188     291     950  
                                           

Balance at March 31, 2011

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

Balance at December 31, 2009

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

Transfers in (out)

                1,356         (2,866 )                

Purchases

            5,000             134     44         13,039      

Sales

                (402 )       (803 )   (53 )       (24,205 )    

Realized gains (losses)

                                104     2,398      

Unrealized gains (losses)

            58     (367 )       572     40         337     10,085  
                                           

Balance at March 31, 2010

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

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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. 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 March 31, 2011 and December 31, 2010, receivable from brokers was $53.1 million and $95.9 million, respectively. Payable to brokers was $118.9 million and $85.7 million as of March 31, 2011 and December 31, 2010.

7. Goodwill

        At least annually, and more frequently if warranted, we assess 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 judgement 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 ended March 31, 2011.

8. 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
March 31,
2011
  As of
December 31,
2010
 
 
  (dollars in thousands)
 

Redeemable non-controlling interests in consolidated subsidiaries

             

Operating Companies

  $ 475   $ 1,009  

Consolidated Funds

    117,492     143,337  
           

  $ 117,967   $ 144,346  
           

 

 
  For Three Months
Ended
March 31,
 
 
  2011   2010  
 
  (dollars in thousands)
 

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

             

Operating Companies

  $ (475 ) $  

Consolidated Funds

    (323 )   (8,056 )
           

  $ (798 ) $ (8,056 )
           

36


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9. 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 and the 2007 Equity and Incentive Plan and the Cowen Group, Inc. and the 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 March 31, 2011, there were approximately 0.8 million shares available for future issuance under the Equity Plans. On January 1, 2011, 928,590 additional shares representing 7.5% of the Company's outstanding shares of stock, less shares available under the 2010 plan were added to the shares available under the 2010 Equity and Incentive 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 $5.7 million and $2.7 million for the three months ended March 31, 2011 and 2010, respectively. The income tax effect recognized for the Equity Plans was a benefit of $2.6 million and $1.1 million for the three months ended March 31, 2011 and 2010, respectively.

        In relation to awards under the RCG Grants, the Company recognized expense of $1.5 million, respectively, for the three months ended March 31, 2011 and 2010. The income tax effect recognized for the RCG Grants was a benefit of $0.6 million, respectively, for the three months ended March 31, 2011 and 2010, respectively.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Stock Options

        The following table summarizes the Company's stock option activity for the three months ended March 31, 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

    (24,419 )   16.00              
                         

Balance outstanding at March 31, 2011

    869,013   $ 12.96     3.28   $  
                   

Options exercisable at March 31, 2011

    719,010   $ 14.84     2.64   $  
                   

(1)
Based on the Company's closing stock price of $4.69 on December 31, 2010 and $4.01 on March 31, 2011.

        As of March 31, 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 three months ended March 31, 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

    5,859,530     4.28  

Vested

    (321,057 )   4.22  

Cancelled

    (7,735 )   4.31  

Forfeited

    (253,356 )   5.16  
             

Balance outstanding at March 31, 2011

    11,065,403   $ 4.84  
             

        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 March 31, 2011, there was $34.8 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees.

38


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 1.53 years.

RCG Grants

        The following table summarizes the Company's RCG Grants activity for the three months ended March 31, 2011:

 
  Nonvested
RCG Grants
  Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2010

    2,638,078   $ 7.30  

Granted

         

Vested

         

Forfeited

    (21,055 )(*)   7.30  
             

Balance outstanding at March 31, 2011

    2,617,023   $ 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 March 31, 2011 there was $9.3 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 1.58 years.

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

        There were no restricted stock units awarded during the three months ended March 31, 2011. Vested awards of 73,480 were delivered to non-employee members of the Company's Board of Directors during the three months ended March 31, 2011. As of March 31, 2011 there were 24,574 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors.

39


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Defined Benefit Plans

        The following amounts relate to the defined benefit plans in aggregate for the three months ended March 31, 2011 and 2010.

 
  For Three Months
Ended
March 31,
 
 
  2011   2010  
 
  (dollars in thousands)
 

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

             

Service cost

  $   $  

Interest cost

    72     79  

Expected return on plan assets

    (71 )   (73 )

Amortization of (loss)/gain

         

Amortization of prior service cost

    5     5  

Effect of settlement

    (13 )    
           

Net periodic benefit cost

  $ (7 ) $ 11  
           

        In April 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.

11. 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 extraordinary 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. A reliable estimate of an annual effective tax rate could not be calculated due to the variability in the estimated annual effective tax rates that would result across a range of likely scenarios of income before tax and of permanent differences. The Company will reexamine its methodology in the second quarter of 2011, and use the annual method if reliable estimates can be calculated. Based on these methodologies, the Company's effective income tax rate was 15.60% and 5.13% for the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011, the extraordinary items whose tax impact were recorded discretely were primarily related to tax provisions of the Company's foreign subsidiaries.

        For the period March 31, 2011, the effective tax rate differs from the statutory rate of 35% primarily due to an increase in the Company's valuation allowance, stock compensation and other non-deductible expenses

40


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

11. Income Taxes (Continued)

        For the period March 31, 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 March 31, 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. Management does not except that 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 $3.4 million at March 31, 2011. Determining the tax liability that would arise if these earnings were remitted is not practicable.

12. 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 $3.6 million, and $3.9 million, for the three months ended March 31, 2011 and 2010, respectively.

        As of March 31, 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

  $ 2,713   $ 10,565   $ 11,402  

2012

    3,301     10,594     14,522  

2013

    3,301     6,446     14,126  

2014

    1,517     6,223     12,275  

2015

    1,051     3,206     9,833  

Thereafter

    77     139     61,230  
               

  $ 11,960   $ 37,173   $ 123,388  
               

(a)
Equipment Leases include the Company's commitments relating to operating and capital leases. See note 13 for further information on capital lease minimum payments.

41


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Commitments and Contingencies (Continued)

        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 March 31, 2011, the clawback obligations were $6.2 million which was recorded within accounts payable, accrued expenses and other liabilities. (See Note 17 "Related Party Transactions").

        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 March 31, 2011, the Company had unfunded commitments of $8.3 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. In addition, the Company has committed to invest $40.8 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 March 31, 2011, the Company has funded $19.7 million towards these commitments.

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 March 31, 2011 where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. As of March 31, 2011 and December 31, 2010, the total amounts reserved were $0.5 million and $1.5 million respectively. 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

42


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Commitments and Contingencies (Continued)


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 March 31, 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 March 31, 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, 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 eventual outcome, the timing of ultimate resolution or estimate a range of eventual 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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Short-Term Borrowings and other debt

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

 
  As of March 31,
2011
  As of December 31,
2010
 
 
  (in thousands)
 

Line of credit

  $ 23,000   $ 24,000  

Notes payable

    875     1,396  

Capital lease obligations

    6,397     6,337  
           

  $ 30,272   $ 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 $50.0 million aggregate loan commitment amount available. The first borrowing under this line occurred on June 30, 2009. As of March 31, 2011 and December 31, 2010, the Company had borrowings of $23.0 million and $24.0 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 is to mature on September 29, 2011. 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 March 31, 2011 and during the period from June 3, 2009 to March 31, 2011 the Company was in compliance with these covenants. The Company's investment in Enterprise Master through the Enterprise Fund has been pledged as collateral under the line of credit.

        On January 31, 2011, in accordance with the terms of the collateralized revolving credit agreement, the Company remitted $1 million to HVB AG, reducing its revolving line of credit balance.

        Interest incurred on the Company's lines of credit was $0.2 million and $0.1 million for the three months ended March 31, 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 March 31, 2011, the outstanding balance on these combined notes payable was $0.9 million. Interest expense for the three months ended March 31, 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% to 6.36%. No payments have been made on these leases during the three months ended March 31, 2011.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        As of March 31, 2011 the Company also has five additional irrevocable letters of credit, for which there is cash 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, 2011, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease and (iii) $82,000, which expires on May 12, 2011, 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 and (iv) $6.7 million which supports 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%, expiring December 12, 2011.

        To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of March 31, 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 March 31, 2011, are as follows:

 
  Capital Lease
Obligation
  Short Term
Borrowings
 
 
  (in thousands)
 

2011

  $ 1,393   $ 23,875  

2012

    1,541      

2013

    1,541      

2014

    1,371      

2015

    1,051      

Thereafter

    77      
           

Subtotal

    6,974     23,875  

Less: Amount representing interest(a)

    (577 )    
           

Total

  $ 6,397   $ 23,875  
           

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

14. Earnings Per Share

        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 March 31, 2011, there were 75,616,399 shares outstanding, of which 1,345,985 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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Earnings Per Share (Continued)


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 loss per common share for the three months ended March 31, 2011, as their inclusion would have been anti-dilutive.

        The computation of earnings per share is as follows:

 
  For the Three Months
Ended March 31,
 
 
  2011   2010  
 
  (dollars in thousands,
except per share data)

 
 

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

  $ 82   $ (12,976 )
           

Shares for basic and diluted calculations:

             
 

Average shares used in basic computation

    74,160     72,509  
 

Stock options

         
 

Restricted stock

    1,923      
           
 

Average shares used in diluted computation

    76,083     72,509  
           

Earnings (loss) per share:

             
 

Basic

  $ 0.00   $ (0.18 )
 

Diluted

  $ 0.00   $ (0.18 )

15. 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). 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) and (iii) excludes certain other acquisition-related and/or reorganization expenses (2011 only). In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)


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 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 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)

15. 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 March 31, 2011  
 
   
   
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Broker-Dealer   Total
Economic
Income/(loss)
  Funds
Consolidation
  Other
Adjustments
  GAAP  
 
   
   
   
  (dollars in thousands)
   
 

Revenues

                                     
 

Investment banking

  $   $ 14,682   $ 14,682   $   $   $ 14,682  
 

Brokerage

    63     27,528     27,591             27,591  
 

Management fees

    14,047         14,047     (514 )   (2,369 )(a)   11,164  
 

Incentive income

    5,163         5,163         (782 )(a)   4,381  
 

Investment Income

    17,458     (249 )   17,209         (17,209 )(c)    
 

Interest and dividends

                    4,559 (c)   4,559  
 

Reimbursement from affiliates

                (159 )   1,168 (b)   1,009  
 

Other revenue

    1,252     (198 )   1,054         (364 )(c)   690  
 

Consolidated Funds revenues

                169         169  
                           
     

Total revenues

    37,983     41,763     79,746     (504 )   (14,997 )   64,245  

Expenses

                                     
 

Employee compensation and benefits

    17,708     25,029     42,737         2,350     45,087  
 

Interest and dividends

    56     161     217         2,392 (c)   2,609  
 

Non-compensation expenses—Fixed

    6,994     14,593     21,587         (21,587 )(c)    
 

Non-compensation expenses—Variable

    2,096     6,852     8,948         (8,948 )(c)(d)    
 

Non-compensation expenses

                    33,907 (c)(d)   33,907  
 

Reimbursement from affiliates

    (1,169 )       (1,169 )       1,169 (b)    
 

Consolidated Funds expenses

                628           628  
                           
     

Total expenses

    25,685     46,635     72,320     628     9,283     82,231  

Other income (loss)

                                     
 

Net gain (loss) on securities, derivatives and other investments

                    17,283 (c)   17,283  
 

Consolidated Funds net gains (losses)

                1,455     291     1,746  
                           
     

Total other income (loss)

                1,455     17,574     19,029  
                           
     

Income (loss) before income taxes and non-controlling interests

    12,298     (4,872 )   7,426     323     (6,706 )   1,043  
                           

Income taxes expense / (benefit)

                      163 (b)   163  
                           
     

Economic Income (Loss) / Net income (loss) before non-controlling interests

    12,298     (4,872 )   7,426     323     (6,869 )   880  
 

(Income) loss attributable to redeemable non-controlling interests

    (475 )       (475 )   (323 )       (798 )
                           
     

Economic Income (Loss) / Net Income (loss) attributable to Cowen Group stockholders

  $ 11,823   $ (4,872 ) $ 6,951   $   $ (6,869 ) $ 82  
                           

 

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

 
  Three Months Ended March 31, 2010  
 
   
   
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Broker-Dealer   Total
Economic
Income/(loss)
  Funds
Consolidation
  Other
Adjustments
  GAAP  
 
  (dollars in thousands)
 

Revenues

                                     
 

Investment banking

  $   $ 6,005   $ 6,005   $   $   $ 6,005  
 

Brokerage

        29,575     29,575             29,575  
 

Management fees

    12,587     28     12,615     (895 )   (2,450 )(a)   9,270  
 

Incentive income

    1,982         1,982         111   (a)   2,093  
 

Investment Income

    11,192     229     11,421         (11,421 )(c)    
 

Interest and dividends

                    804   (c)   804  
 

Reimbursement from affiliates

                (145 )   1,887   (b)   1,742  
 

Other revenue

    (51 )   124     73         549   (c)   622  
 

Consolidated Funds revenues

                6,147         6,147  
                           
   

Total revenues

    25,710     35,961     61,671     5,107     (10,520 )   56,258  

Expenses

                                     
 

Employee compensation and benefits

    16,184     25,136     41,320         2,113     43,433  
 

Interest and dividends

    116         116         330   (c)   446  
 

Non-compensation expenses—Fixed

    8,452     16,013     24,465         (24,465 )(c)    
 

Non-compensation expenses—Variable

    331     8,455     8,786         (8,786 )(c)(d)    
 

Non-compensation expenses

                    34,203   (c)(d)   34,203  
 

Reimbursement from affiliates

    (1,887 )       (1,887 )       1,887   (b)    
 

Consolidated Funds expenses

                3,159           3,159  
                           
   

Total expenses

    23,196     49,604     72,800     3,159     5,282     81,241  

Other income (loss)

                                     
 

Net gain (loss) on securities, derivatives and other investments

                    1,524   (c)   1,524  
 

Consolidated Funds net gains (losses)

                6,108     12,165     18,273  
                           
   

Total other income (loss)

                6,108     13,689     19,797  
                           
   

Income (loss) before income taxes and non-controlling interests

    2,514     (13,643 )   (11,129 )   8,056     (2,113 )   (5,186 )
                           

Income taxes expense / (benefit)

                      (266 )(b)   (266 )
                           
   

Economic Income (Loss) / Net income (loss) before non-controlling interests

    2,514     (13,643 )   (11,129 )   8,056     (1,847 )   (4,920 )
 

(Income) loss attributable to redeemable non-controlling interests

                (8,056 )       (8,056 )
                           
   

Economic Income (Loss) / Net Income (loss) attributable to Cowen Group stockholders

  $ 2,514   $ (13,643 ) $ (11,129 ) $   $ (1,847 ) $ (12,976 )
                           

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

        The following is a summary of the adjustments made to US GAAP net income (loss) for the segment to arrive at Economic Income:

        Funds Consolidation:    The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income. Adjustments to reconcile to US GAAP net income include elimination of incentive income and management fees earned from the Consolidated Funds and addition of fund expenses excluding management fees paid, fund revenues and investment income (loss).

        For the three months ended March 31, 2011 and 2010, there was no one fund or other customer which represented more than 10% of the Company's total revenues.

16. Regulatory Requirements

        As a registered broker-dealer, Cowen and Company, LLC ("Cowen and Company") is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of minimum net capital. Under the alternative method permitted by the Rule, Cowen and Company's minimum net capital requirement, as defined, is $1.0 million. Cowen and Company is not permitted to withdraw equity if certain minimum net capital requirements are not met. As of March 31, 2011, Cowen and Company had total net capital of approximately $39.9 million, which was approximately $38.9 million in excess of its minimum net capital requirement of $1.0 million.

        Cowen and Company is exempt from the provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 as their activities are limited to those set forth in the conditions for exemption appearing in paragraph (k)(2)(ii) of the Rule.

        Proprietary accounts of introducing brokers ("PAIB") held at the clearing broker are considered allowable assets for net capital purposes, pursuant to agreements between Cowen and Company and the clearing broker, which require, among other things, that the clearing broker performs computations for PAIB and segregates certain balances on behalf of Cowen and Company, if applicable.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Regulatory Requirements (Continued)

        Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the Financial Services Authority ("FSA") of the UK. Financial Resources, as defined, must exceed the total Financial Resources requirement of the FSA. At March 31, 2011, Ramius UK's Financial Resources of $4.3 million exceeded its minimum requirement of $0.6 million by $3.7 million. At March 31, 2011, CIL's Financial Resources of $4.0 million exceeded its minimum requirement of $2.2 million by $1.8 million.

        Cowen Latitude Advisors Limited ("CLAL") is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources, as defined, must exceed the Total Financial Resources requirement of the SFC. At March 31, 2011, CLAL's Financial Resources of $1.0 million exceeded the minimum requirement of $0.1 million by $0.9 million.

17. Related Party Transactions

        The Company acts as managing member, general partner and/or investment manager to the Ramius managed funds, Cowen Healthcare Royalty Management, LLC ("CHRP Management"), and the CHRP Funds, and certain managed accounts. Management fees and incentive income are primarily earned from affiliated entities. Fees receivable primarily represents the management fees and incentive income owed to the Company from these related funds and certain affiliated managed accounts. As of March 31, 2011, approximately $13.7 million included in fees receivable are earned from external parties and the associated revenues are recorded in investment banking revenues in the condensed consolidated statements of operations.

        The Company may, at its discretion, waive certain of the fees charged to the funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated investment fund. For the three months ended March 31, 2011 and 2010, the Company reimbursed the funds that it manages $0.4 million and $0.8 million, respectively, which were recorded net in management fees and incentive income in the consolidated statements of operations. At March 31, 2011 and December 31, 2010, related amounts still payable were $2.4 million and $2.3 million, respectively, and were reflected in fees payable in the condensed consolidated statements of financial condition.

        During the first quarter of 2010, certain affiliated funds incurred a loss related to a trading error for which the Company determined, consistent with its internal policies, to bear the cost of correcting such error. This resulted in a loss of approximately $2.7 million for the Company. This amount is included in other expenses in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2010.

        Pursuant to the operating agreement for its subsidiary Ramius Alternative Solutions LLC, the Company is required to pay certain distribution fees on assets raised by third party distributors. Such distribution fees are reported as client services and business development in the consolidated statements of operations. These amounts equaled $0.4 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively. At March 31, 2011 and December 31, 2010, related amounts still payable were $0.1 million and $0.2 million, respectively, and were reflected in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

17. Related Party Transactions (Continued)

        As a result of a business combination in 2004, Ramius Alternative Solutions LLC acquired receivables of $9.6 million and assumed liabilities of a corresponding amount relating to various agreements with investors. Such amounts have been recorded in fees receivable and due to related parties, respectively, in the condensed consolidated statements of financial condition. The remaining balance yet to be paid was $1.6 million and $1.7 million as of March 31, 2011 and December 31, 2010, respectively. Of such amounts outstanding at March 31, 2011, $0.7 million will be paid in 2011.

        The Company may, on occasion, also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates and are included in receivable from affiliates in the condensed consolidated statements of financial condition. As of March 31, 2011 and December 31, 2010, loans to employees of $4.5 million and $4.7 million, respectively, were included in due from related parties on the condensed consolidated statements of financial condition. For the three months ended March 31, 2011 and 2010 interest charged for these loans and advances was immaterial. The remaining balance included in due from related parties primarily relates to amounts due to the Company from affiliated funds and real estate entities due to expenses paid on their behalf.

        Included in due to related parties is approximately $5.7 million and $6.5 million at March 31, 2011 and December 31, 2010, respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a hypothetical liquidation of the real estate funds as of the balance sheet date.

18. Guarantees

        FASB accounting standards require the Company to disclose information about its obligations under certain guarantee arrangements. Those standards define guarantees as contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changes in an underlying security (such as an interest or foreign exchange rate, security or commodity price, an index or the occurrence or nonoccurrence of a specified event) related to an asset, liability or equity security of a guaranteed party. Those standards also define guarantees as contracts that contingently require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an agreement as well as indirect guarantees of the indebtedness of others.

        In the normal course of its operations, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.

        The Company indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates. The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. The maximum potential amount of future payments that the Company could be required to make under these indemnifications

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Guarantees (Continued)


cannot be estimated. However, the Company believes that it is unlikely it will have to make significant payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

        The Company is a member of various securities exchanges. Under the standard membership agreements, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, management believes that the potential for the Company to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is recorded in the consolidated statements of financial condition for these arrangements.

        The Company also provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the condensed consolidated financial statements for these indemnifications.

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

        This discussion contains forward-looking statements, which involve numerous risks and uncertainties, including, but not limited to, those described in the section titled "Risk Factors" in Item 1A of our Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes of Cowen Group, Inc. included elsewhere in this quarterly report. Actual results may differ materially from those contained in any forward-looking statements.

Overview

        Cowen Group, Inc. is a diversified financial services firm and, together with its consolidated subsidiaries provides alternative investment management, investment banking, research, 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 funds, healthcare royalty funds, and cash management services, offered primarily under the Ramius name. The broker-dealer segment offers industry focused investment banking for growth-oriented companies including advisory and global capital markets origination and domain knowledge-driven research and a sales and trading platform for institutional investors, primarily under the Cowen name.

        Our alternative investment management business had approximately $9.7 billion of assets under management as of April 1, 2011. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the Investment Advisers Act since 1997. Our alternative investment management products, solutions and services include hedge funds, replication products, mutual funds, managed futures funds, fund of funds, real estate, healthcare royalty funds, and cash management services. Our institutional investors include pension funds, insurance companies, banks, foundations and endowments, wealth management organizations and family offices.

        Throughout 2010, our alternative investment management business underwent important changes designed to better serve our institutional clientele. For example, we integrated senior management and certain aspects of the infrastructure of our hedge fund and fund of funds businesses to improve institutional efficiency and service and we expanded our alternative investment management business with the formation of the Ramius Trading Strategies managed account platform. Additionally, in the letter half of the year we launched our first mutual fund, the Ramius Dynamic Replication Fund. The fund focuses on hedge fund replication that provides investors the opportunity to access market exposures typically characterized by investments in hedge funds, but with the daily liquidity of a mutual fund.

        Our broker-dealer businesses include research, brokerage and investment banking services to companies and institutional investor clients primarily in the healthcare, technology, media and telecommunications, consumer, aerospace and defense, industrials, REITs and alternative energy sectors. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade securities, principally in our target sectors. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies.

        In 2010, we expanded our investment banking product offerings to include credit and fixed income, including public and private debt placements, exchange offers, consent solicitations and tender offers. We also added origination and distribution capabilities for convertible securities. In addition, we have enhanced our presence in the PIPE and registered direct market by adding personnel. With the addition of these capital markets capabilities we also established a unified capital markets group which will allow us to be even more effective in providing cohesive solutions for our clients.

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        Success in our business is highly dependent on human capital; accordingly, compensation and benefits comprise the largest component of our expenses, and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to provide the highest quality of service and guidance to our clients.

Certain Factors Impacting Our Business

        Our alternative investment management business and results of operations are impacted by the following factors:

        Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is characterized by many factors, including a stable

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geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor confidence. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation, interest rates, exchange rate volatility, unfavorable global asset allocation trends, outbreaks of hostilities or other geopolitical instability, corporate, political or other scandals that reduce investor confidence in the capital markets, or a combination of these or other factors. Our businesses and profitability have been and may continue to be adversely affected by market conditions in many ways, including the following:

        Our businesses, by their nature, do not produce predictable earnings. Our results in any period can be materially affected by conditions in global financial markets and economic conditions generally. We are also subject to various legal and regulatory actions that impact our business and financial results.

Recent Developments

        The Company agreed to spin-off its Value and Opportunity business, which focuses on investing in deep value situations and using shareholder activism to generate superior returns, into a stand-alone and independent business that will be managed by Starboard Value LP ("Starboard"). The Company completed the separation on April 1, 2011. The Company maintains a significant minority interest in Starboard. The condensed consolidated financial results of Cowen Group, Inc. as of March 31, 2011, include 100% of the results of Starboard. The Company has recorded an expense amounting to a percentage of net income of Starboard which is included in other expenses in the condensed consolidated statement of operations. This amount is due to the majority members of Starboard pursuant to the spin-off agreement.

        During February 2011, the Company and LaBranche & Co Inc. ("LaBranche") announced a definitive merger agreement under which the Company has agreed to acquire LaBranche, a market-maker in options, exchange traded funds and futures on various exchanges domestically and internationally. Under the terms of the merger agreement and subject to the satisfaction or waiver of certain closing conditions, the Company will acquire LaBranche in a stock-for-stock merger transaction valued, as of the signing date, at approximately $192.8 million. LaBranche shareholders will receive upon closing of 0.9980 shares of the Company's Class A common stock for each outstanding share of

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LaBranche common stock. The total Company shares to be issued to LaBranche shareholders will represent approximately 35.1% of the combined company and 33.8% on a fully diluted basis. On March 31, 2011, the Company filed a Registration Statement on Form S-4 in connection with LaBranche transaction.

Basis of presentation

        The unaudited condensed consolidated financial statements of the Company appearing elsewhere in this Form 10-Q include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in the condensed consolidated financial statements, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting.

        The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to generally accepted accounting principles as described below (the "Consolidated Funds"). 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 non-controlling interests in consolidated subsidiaries in the condensed consolidated financial statements appearing elsewhere in this Form 10-Q. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.

        The business combination between Ramius and Cowen Holdings was accounted for as an "acquisition" by Ramius of Cowen Holdings, as that term is used under accounting principles generally accepted in the United States of America ("GAAP") for accounting and financial reporting purposes. As a result, the historical financial statements of Ramius (the business of which was operated by RCG Holdings LLC, the Company's accounting predecessor, prior to the consummation of the Transactions) have become the historical financial statements of the Company.

Revenue recognition

        The Company's principal sources of revenue are derived from two segments: an alternative investment management segment and a broker-dealer segment as more fully described below.

        Our alternative investment management segment generates revenue through three principal sources: management fees, incentive income and investment income from our own capital.

        Our broker-dealer segment generates revenue through two principal sources: investment banking and brokerage.

Management fees

        The Company earns management fees from affiliated funds and certain managed accounts that it serves as the investment manager based on assets under management. The actual management fees received vary depending on distribution fees or fee splits paid to third parties either in connection with raising the assets or structuring the investment.

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        Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for capital inflows and redemptions. While some investors may have separately negotiated fees pursuant to side letter arrangements, in general the management fees are as follows:

Incentive income

        The Company earns incentive income based on net profits (as defined in the respective investment management agreements) of the Company's funds and certain managed accounts, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have carried forward from prior years. For the products we offer, incentive income earned is typically 20% for hedge funds and 10% for fund of funds (in certain cases in excess of a benchmark), in each case, of the net profits earned for

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the full year that are attributable to each fee-paying investor. Incentive income on real estate investments is earned in the year of a sale or realization of a private investment. Incentive income in the CHRP Funds is earned only after investors receive a full return of their capital plus a preferred return.

        In periods following a period of a net loss attributable to an investor, the Company does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a "high-water mark." The Company has elected to record incentive income revenue in accordance with "Method 2" of the Financial Accounting Standards Board ("FASB") accounting standards. Under Method 2, the incentive income from the Company's funds and managed accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive income recognized in a quarter's condensed consolidated statement of operations may be subject to reversal in a subsequent quarter as a result of subsequent negative investment performance prior to the conclusion of the fiscal year, when all contingencies have been resolved. As a result of negative investment performance in 2008, and in the case of certain real estate funds, in 2009, the Company entered 2010 with high-water marks in certain of its fund products. These high-water marks require the funds to recover cumulative losses before the Company could begin to earn incentive income in 2010 and beyond with respect to the investments of investors who previously suffered losses. In 2010, the Ramius Value and Opportunity Funds surpassed their high water marks and the Company began to earn incentive income again on these products.

        Carried interest is subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to the Company based on cumulative results. As such, the accrual for potential repayment of previously received carried interest, which is a component of accounts payable, accrued expenses and other liabilities, represents all amounts previously distributed to the Company, less an assumed tax liability, that would need to be repaid to certain real estate funds if these funds were to be liquidated based on the current fair value of the underlying funds' investments as of the reporting date. Generally, the actual clawback liability does not become realized until the end of a fund's life.

Investment Banking

        The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's target sectors of healthcare, technology, media and telecommunications, consumer, aerospace and defense, industrials, REITs and alternative energy.

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Brokerage

        Brokerage revenue consists of commissions, principal transactions, net and equity research fees.

Interest and dividends

        Interest and dividends are earned by the Company from various sources. The Company receives interest and dividends primarily from investments held by its Consolidated Funds and its brokerage balances from invested capital. Interest is recognized on an accrual basis and interest income is recognized on the debt of those issuers that is deemed collectible. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.

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Reimbursement from affiliates

        The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund, fund of funds and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, marketing, risk and technology expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the condensed consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.

Other revenues

        The Company receives other revenues which are unrelated to its principal sources of revenue and which may vary from year to year. Sources of such other revenues primarily include other fees earned from real estate entities and deferred gains from a sale of an asset.

Expenses

        The Company's expenses consist of compensation and benefits, interest expense and general, administrative and other expenses.

Income Taxes

        The taxable results of the Company's U.S. operations are subject to U.S. federal, state and city taxation as a corporation. The Company is also subject to foreign taxation on income it generates in certain countries.

        The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are

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actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2011, the Company recorded a valuation allowance against substantially all of its net deferred tax assets.

Redeemable Non-controlling Interests

        Redeemable non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. Due to the fact that the non-controlling interests are redeemable at the option of the holder they have been classified as temporary equity.

Assets Under Management and Fund Performance

        Assets under management refer to all of our alternative investment management products, solutions and services including hedge funds, replication products, mutual funds, managed futures funds, fund of funds, real estate, healthcare royalty funds, cash management services and mortgage advisory services. Assets under management also include the fair value of assets we manage pursuant to separately managed accounts, collateralized debt obligations for which we are the collateral manager, and, as indicated in the footnotes to the table below, proprietary assets which the Company has invested in these products. Also, as indicated, assets under management for certain products represent committed capital and certain products where the Company owns a portion of the general partners.

        As of April 1, 2011, the Company had assets under management of $9.7 billion, a 7.7% increase as compared to assets under management of $9.04 billion as of January 1, 2011. The $697 million increase in assets under management during the first quarter of 2011 resulted from $544 million in net subscriptions (including redemptions effective on February 1, March 1 and April 1, 2011, which included $95.8 million of assets returned to investors, as a result of closing the Ramius Multi-Strategy and Ramius Enterprise funds and the return of assets to UniCredit pursuant to the terms of Modification Agreement), and a $153 million performance-related increase in assets.

        The following table is a breakout of total assets under management by platform as of April 1, 2011.

 
  Total Assets under
Management
   
Platform
  April 1, 2011   January 1, 2011   Primary Strategies
 
  (dollars in millions)
   

Hedge Funds

  $ 1,397 (1) $ 1,385 (1) Multi-Strategy

              Single Strategy

Alternative Solutions(2)

   
2,007

(2)
 
1,750

(2)

Multi-Strategy

              Single Strategy

              Customized Solutions

              Hedging Strategies

    1,189     1,124   Commodity Trading

              Advisory

Real Estate(3)

   
1,628

(4)
 
1,628

(4)

Debt

              Equity

Cowen Healthcare Royalty Partners(5)

   
1,131

(4)
 
1,041

(4)

Royalty Interests

Other(6)

   
2,387
   
2,113
 

Cash Management

              Mortgage Advisory
             

Total

 
$

9,739
 
$

9,041
   
             

(1)
This amount includes the Company's invested capital of approximately $139 million and $154 million as of April 1, 2011 and January 1, 2011, respectively.

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(2)
This amount includes the Company's invested capital of approximately $22 million and $32 million (which includes the notional amount of one of the fund of funds products) as of April 1, 2011 and January 1, 2011, respectively.

(3)
The Company owns between 30% and 55% of the general partners of the real estate business. We do not possess unilateral control over any of these general partners.

(4)
This amount reflects committed capital.

(5)
The Company shares the management fees from the CHRP Funds equally with the founders of the CHRP Funds. In addition, the Company receives a share of the carried interests of the general partners of the CHRP Funds of between 33.3% and 40.2%.

(6)
The Company's cash management services business provides clients with investment guidelines for managing cash and establishes investment programs for managing their cash in separately managed accounts. The Company also provides mortgage advisory services where the Company manages collateralized debt obligations ("CDOs") held by investors and liquidates CDOs that were historically managed by others.

        The following table presents total assets under management by period: