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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, 2010

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 o   Non-accelerated filer ý
(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 12, 2010 there were 74,656,513 shares of the registrant's common stock outstanding.


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TABLE OF CONTENTS

Item No.
  Page No.  

PART I. FINANCIAL INFORMATION

       
 

1. Unaudited Condensed Consolidated Financial Statements

    4  
   

Condensed Consolidated Statements of Financial Condition

    4  
   

Condensed Consolidated Statements of Operations

    5  
   

Condensed Consolidated Statements of Changes in Equity

    6  
   

Condensed Consolidated Statements of Cash Flows

    7  
   

Notes to Condensed Consolidated Financial Statements

    9  
 

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

    49  
 

3. Quantitative and Qualitative Disclosures About Market Risk

    78  
 

4. Controls and Procedures

    78  

PART II. OTHER INFORMATION

       
 

1. Legal Proceedings

    79  
 

1A. Risk Factors

    80  
 

2. Unregistered Sales of Equity Securities and Use of Proceeds

    81  
 

3. Defaults Upon Senior Securities

    81  
 

4. (Removed and Reserved)

    81  
 

5. Other Information

    81  
 

6. Exhibits

    82  

SIGNATURES

   
83
 

EXHIBIT INDEX

   
84
 
 

Exhibit 10.1

       
 

Exhibit 31.1

       
 

Exhibit 31.2

       
 

Exhibit 32

       

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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, 2009.

        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, 2010 and 2009. The Consolidated Financial Statements as of December 31, 2009 were audited.

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PART I. FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements


Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(unaudited)

 
  As of March 31,
2010
  As of December 31,
2009
 

Assets

             
 

Cash and cash equivalents

  $ 12,855   $ 147,367  
 

Cash collateral pledged

    501     7,246  
 

Securities owned, at fair value

    141,960     54,153  
 

Other investments

    25,376     28,490  
 

Receivable from brokers

    62,377     32,525  
 

Fees receivable

    16,029     22,446  
 

Due from related parties (see Note 16)

    10,568     14,860  
 

Fixed assets, net of accumulated depreciation and amortization of $18,033 and $16,449, respectively

    30,822     32,603  
 

Goodwill

    27,179     27,179  
 

Intangible assets, net of accumulated amortization of $5,416 and $4,506, respectively

    15,484     16,394  
 

Other assets

    25,674     24,199  
 

Consolidated Funds

             
 

Cash and cash equivalents

    1,031     625  
 

Securities owned, at fair value

    8,628      
 

Other investments, at fair value

    515,195     550,407  
 

Other assets

    1,431     947  
           
     

Total Assets

  $ 895,110   $ 959,441  
           

Liabilities and Stockholders' Equity

             
 

Securities sold, not yet purchased, at fair value

  $ 58,298   $ 14,812  
 

Payable to brokers

    28,523     3,817  
 

Compensation payable

    25,078     80,923  
 

Note payable and short-term borrowings

    18,000     49,746  
 

Fees payable (see Note 16)

    3,417     5,387  
 

Due to related parties (see Note 16)

    7,924     8,103  
 

Accounts payable, accrued expenses and other liabilities

    49,986     65,599  
 

Consolidated Funds

             
 

Capital withdrawals payable

    23,531     26,312  
 

Accounts payable, accrued expenses and other liabilities

    348     392  
           
     

Total Liabilities

    215,105     255,091  
           

Commitments and Contingencies (see Note 11)

             

Redeemable non-controlling interests

    215,400     230,825  
           

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, 74,743,163 shares issued and outstanding as of March 31, 2010 and December 31, 2009 (including 2,298,204 and 2,323,116 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

    488,082     483,872  
 

Accumulated deficit

    (23,529 )   (10,553 )
 

Accumulated other comprehensive loss

    (674 )   (520 )
           
   

Total stockholders' equity

    464,605     473,525  
           
     

Total Liabilities and Stockholders' Equity

  $ 895,110   $ 959,441  
           

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,
 
 
  2010   2009  

Revenues

             
 

Investment banking

  $ 6,005   $  
 

Brokerage

    29,575      
 

Management fees

    9,270     11,511  
 

Incentive income

    2,093      
 

Interest and dividends

    804     91  
 

Reimbursement from affiliates

    1,742     3,394  
 

Other

    622     1,019  
 

Consolidated Funds

             
   

Interest and dividends

    5,781     4,626  
   

Other

    366     84  
           
       

Total revenues

    56,258     20,725  

Expenses

             
 

Employee compensation and benefits

    43,433     14,907  
 

Floor brokerage and trade execution

    5,028      
 

Interest and dividends

    446     349  
 

Professional, advisory and other fees

    2,388     1,402  
 

Service fees

    3,812     606  
 

Communications

    3,302     274  
 

Occupancy and equipment

    5,629     2,531  
 

Depreciation and amortization

    2,494     1,236  
 

Client services and business development

    4,164     1,485  
 

Other

    7,386     2,739  
 

Consolidated Funds

             
   

Interest and dividends

    1,568     2,410  
   

Professional, advisory and other fees

    678     840  
   

Floor brokerage and trade execution

    709      
   

Other

    204     127  
           
       

Total expenses

    81,241     28,906  

Other income (loss)

             
 

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

    1,524     259  
 

Consolidated Funds:

             
   

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

    19,218     12,667  
   

Net realized and unrealized gains (losses) on derivatives

    (220 )   (17,355 )
   

Net gains (losses) on foreign currency transactions

    (725 )   1,341  
           
       

Total other income (loss)

    19,797     (3,088 )
           
       

Income (loss) before income taxes

    (5,186 )   (11,269 )
           

Income tax expense (benefit)

    (266 )   (66 )
           
       

Net income (loss)

    (4,920 )   (11,203 )

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

    (8,056 )   2,404  
           
       

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

  $ (12,976 ) $ (8,799 )
           

Weighted average common shares outstanding:

             
 

Basic

    72,509     37,537  
 

Diluted

    72,509     37,537  

Earnings (loss) per share:

             
 

Basic

  $ (0.18 ) $ (0.23 )
           
 

Diluted

  $ (0.18 ) $ (0.23 )
           

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
Loss
  Retained
Earnings/
Accumulated
deficit
  Total
Stockholders'
Equity
  Redeemable
Noncontrolling
Interest
  Total
Comprehensive
Income (Loss)
 

Balance, December 31, 2009

    74,743,163   $ 726   $ 483,872   $ (520 ) $ (10,553 ) $ 473,525   $ 230,825        
                                   

Comprehensive income (loss):

                                                 
 

Net income (loss)

                    (12,976 )   (12,976 )   8,056     (4,920 )
 

Defined Benefit Plans

                87         87         87  
 

Foreign currency translation

                (241 )       (241 )       (241 )
                                   

Total comprehensive income

                (154 )   (12,976 )   (13,130 )   8,056     (5,074 )

Capital contributions

                            1,902        

Capital distributions

                            (23,671 )      

Deconsolidation of CHRP GP (see Note 2b)

                            (1,712 )      

Amortization of share based compensation

            4,210             4,210            
                                     

Balance, March 31, 2010

    74,743,163   $ 726   $ 488,082   $ (674 ) $ (23,529 ) $ 464,605   $ 215,400        
                                     

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,
 
 
  2010   2009  

Cash flows from operating activities:

             
 

Net income (loss)

  $ (4,920 ) $ (11,203 )
 

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

             
   

Depreciation and amortization

    2,494     1,236  
   

Share-based compensation

    4,210      
   

Net loss on disposal of fixed assets

    264      
   

Purchases of securities owned, at fair value

    (123,057 )   (56,709 )
   

Proceeds from sales of securities owned, at fair value

    72,719     60,049  
   

Proceeds from the sale of short investments

    36,626      
   

Payments to cover short investments

    (17,641 )    
   

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

    (1,297 )   (586 )
   

Consolidated Funds:

             
     

Purchases of securities owned, at fair value

    (52,535 )    
     

Proceeds from sales of securities owned, at fair value

    43,904      
     

Purchases of other investments

    (13,039 )   (1,015 )
     

Proceeds from sales of other investments

    69,481     35,824  
     

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

    (21,227 )   1,875  
   

(Increase) decrease in operating assets:

             
       

Securities owned, at fair value, held at broker dealer

    (37,710 )    
       

Receivable from brokers

    (29,852 )   14,287  
       

Fees receivable

    6,417     5,012  
       

Due from related parties

    4,292     6,325  
       

Other assets

    (1,475 )   (714 )
       

Consolidated Funds:

             
         

Cash and cash equivalents

    (406 )   (39 )
         

Other assets

    (725 )   153  
   

Increase (decrease) in operating liabilities:

             
       

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

    24,629      
       

Payable to brokers

    24,706      
       

Compensation payable

    (55,527 )   (27,772 )
       

Fees payable

    (1,970 )   (5,146 )
       

Due to related parties

    (179 )   1,662  
       

Accounts payable, accrued expenses and other liabilites

    (15,613 )   (3,854 )
       

Consolidated Funds:

             
         

Due to related parties

        (136 )
         

Accounts payable, accrued expenses and other liabilities

    (44 )   (63 )
           
           

Net cash (used in) / provided by operating activities

    (87,475 )   19,186  
           

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 (Continued)

(in thousands)

(unaudited)

 
  Three Months Ended
March 31,
 
 
  2010   2009  

(continued)

             

Cash flows from investing activities:

             
 

Purchases of other investments

    (958 )    
 

Proceeds from sales of other investments

    3,539     4,233  
 

Purchase of fixed assets

    (67 )   (195 )
           
           

Net cash provided by investing activities

    2,514     4,038  
           

Cash flows from financing activities:

             
 

Securities repurchased under agreement to sell

        (1,425 )
 

Repayments on the line of credit

    (25,001 )    
 

Capital withdrawals to members

        (12,664 )
 

Consolidated Funds:

             
   

Repayments on the line of credit

        (10,208 )
   

Capital contributions by non-controlling interests in Consolidated Funds

    1,902      
   

Capital withdrawals to non-controlling interests in Consolidated Funds

    (26,452 )   (21,991 )
           
           

Net cash used in financing activities

    (49,551 )   (46,288 )
           

Change in cash and cash equivalents

    (134,512 )   (23,064 )

Cash and cash equivalents at beginning of period

    147,367     46,677  
           

Cash and cash equivalents at end of period

  $ 12,855   $ 23,613  
           

Supplemental information

             
 

Cash paid during the period for interest

  $ 580   $ 18  
           
 

Cash paid during the period for taxes

  $ 138   $ 230  
           

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). For more information related to the acquisition, see Note 3.

        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 funds, fund of funds, real estate, healthcare royalty funds and cash management services, offered primarily under the Ramius name. The broker-dealer segment offers industry focused investment banking services for growth-oriented companies, 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 consolidated financial statements include the accounts of the Company, its operating and other 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 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.

        In the opinion of management these unaudited 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, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007, included in the Form 10-K of Cowen Group as filed with the SEC on March 25, 2010. 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 business combination between Ramius and Cowen Holdings was accounted for as an acquisition by Ramius of Cowen Holdings. As a result, the historical financial statements of Ramius have become the historical financial statements of the Company.

        The assets and liabilities of Cowen Holdings were recorded at their respective fair values, as of November 2, 2009, and combined with those of Ramius. The financial statements of the Company that include periods after November 2, 2009 reflect such fair values and were not restated retroactively to reflect the historical financial position or results of operations of Cowen Holdings. For periods after November 2, 2009, the results of operations of Cowen Holdings are included in the results of

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

operations of the Company. Stockholders' equity has been retroactively restated to include the 37,536,826 shares of Class A common stock issued to RCG at the consummation of the Transactions (as defined in Note 3) as the issued capital for all periods prior to the Transactions.

        The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to US GAAP as described below (the "Consolidated Funds"). Consequently, the Company's consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as non-controlling interests in consolidated subsidiaries in the accompanying consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.

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 interest entity ("VOE") or a variable interest entity ("VIE") under US GAAP.

        Voting Interest 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 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. RTS Global 3x Fund LP ("RTS 3x") was first consolidated in the first quarter of 2010, when it commenced operations.

        VIEs are entities that lack one or more of the characteristics of a VOE. Any enterprise having a controlling financial interest in a VIE is considered that VIE's primary beneficiary. In accordance with FASB accounting standards, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Prior to the adoption of the revised accounting guidance for VIEs (as discussed in note 2d) the primary beneficiary of a VIE is defined as the enterprise that has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. Subsequent to the adoption of the revised accounting guidance for VIEs the primary beneficiary of a VIE is the enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and which has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

        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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        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 managing member of this entity, and beginning with the first quarter of 2010, no longer consolidates this entity. The Company now accounts for its investment in the CHRP GP under the equity method of accounting.

c.
Valuation of investments and derivative contracts

        The Financial Accounting Standards Board's ("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 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

11


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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 on the consolidated statements of financial condition.

        Other investments—Other investments measured at fair value consist primarily of portfolio funds and real estate investments, which are valued as follows:

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

13


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        See Note 4 for further information regarding the Company's investments and fair value measurements.

d.
Recently adopted accounting pronouncements

        In June 2009, the FASB issued a new accounting standard which revises the accounting for VIEs by introducing a new consolidation model. This new standard changes the approach to determining the primary beneficiary of a VIE and requires companies to more frequently assess whether they must consolidate VIEs. The new model identifies two primary characteristics of a controlling financial interest: (1) the power to direct significant activities of the VIE, and (2) the obligation to absorb losses of and/or provide rights to receive benefits from the VIE that are potentially significant to the VIE. In February 2010, the FASB finalized an Accounting Standards Update ("ASU") which defers the requirements of this standard for certain interests in investment funds and certain similar entities. Therefore the adoption of this new standard on January 1, 2010 did not have a material impact on the Company's financial position, results of operations or cash flows, as substantially all of the entities in which it holds variable interests qualify for the scope deferral under the ASU.

        In June 2009, the FASB issued amended guidance on accounting for transfers of financial assets. The amendments were issued to improve the information that a reporting entity provides in its financial statements about a transfer of financial assets, the effects of a transfer on its financial statements, and a transferor's continuing involvement, if any, in transferred financial assets. The amendments eliminate the concept of qualifying special purpose entities from US GAAP. These entities will now be evaluated for consolidation in accordance with the applicable consolidation criteria. The amendments are effective for reporting periods beginning on or after November 15, 2009. The adoption of this new standard on January 1, 2010 did not have a material impact on the Company's financial position, results of operations or cash flows.

        In January 2010, the FASB issued a new accounting standard that provides amended disclosure requirements related to fair value measurements. This standard is effective for financial statements issued for reporting periods beginning after December 15, 2009 for certain disclosures and for reporting periods beginning after December 15, 2010 for other disclosures. Since these amended principles require only additional disclosures concerning fair value measurements, adoption will and has not affected the Company's financial condition, results of operations or cash flows.

e.
Future adoption of accounting pronouncements

        As of March 31, 2010, none of the changes to the Codification issued by the FASB that are not yet effective are expected to have an impact on the Company's financial position or results of operations.

3. Acquisition

        On November 2, 2009, the transactions contemplated by the Transaction Agreement (the "Transactions"), were consummated including (1) the merger of Lexington Merger Corp. with and into

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Acquisition (Continued)


Cowen Holdings, pursuant to which each outstanding share of common stock of Cowen Holdings was converted into one share of Class A common stock of the Company and (2) the transfer by RCG (which prior to the consummation of the Transactions operated the Ramius business) of substantially all of its assets and liabilities to Park Exchange LLC in exchange for the Company's issuance to RCG of 37,536,826 shares of Class A common stock of the Company. Following the consummation of the Transactions, each of Park Exchange LLC and Cowen Holdings became wholly owned subsidiaries of the Company, and Park Exchange LLC was renamed Ramius LLC.

        The Transactions were accounted for under the acquisition method in accordance with US GAAP. Accordingly, the Transactions were accounted for as an acquisition by Ramius of Cowen Holdings. As such, results of operations for Cowen Holdings are included in the accompanying consolidated statements of operations since the date of acquisition, and the assets acquired and liabilities assumed were recorded at their fair value as at the acquisition date.

        Included in the accompanying consolidated statements of operations for the three months ended March 31, 2010 are revenues of $38.1 million and a net loss of $15.2 million related to Cowen Holdings. The following table provides unaudited supplemental pro forma financial information for the three months ended March 31, 2009 as if the Transactions had occurred as of the beginning of that period:

 
  Three Months Ended
March 31, 2009
 
 
  (in thousands, except
per share data)

 
 
  (unaudited)
 

Pro forma total revenues

  $ 64,458  

Pro forma net loss

    (20,394 )

Pro forma net loss attributable to Cowen Group, Inc. stockholders

    (18,410 )

Pro forma net loss per share:

       
 

Basic

  $ (0.33 )
 

Diluted

  $ (0.33 )

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

        As of March 31, 2010 and December 31, 2009, securities owned consisted of the following, at fair value:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

U.S. Government securities*

  $ 14,003   $  

Common stocks

    51,206     11,439  

Restricted common stock

    5,058      

Corporate bonds*

    64,489     38,327  

Options

    5,300     1,312  

Warrants and rights

    587     1,356  

Mutual Funds

    1,317     1,719  
           

  $ 141,960   $ 54,153  
           

*
At March 31, 2010, maturities ranged from April 2010 to December 2012 and interest rates ranged between 0.04% and 12.00%. At December 31, 2009, maturities ranged from April 2010 to December 2012 and interest rates ranged between 0.04% and 12.00%.

Other investments

        As of March 31, 2010 and December 31, 2009, other investments consisted of the following:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

(1) Portfolio Funds, at fair value

  $ 17,022   $ 20,683  

(2) Real estate investments, at fair value

    1,108     1,077  

(3) Equity method investments

    6,933     6,521  

(4) Lehman claims, at fair value

    313     209  
           

  $ 25,376   $ 28,490  
           

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The Portfolio Funds as of March 31, 2010 and December 31, 2009, included the following:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Tapestry Investment Co PCC Ltd

  $ 1,505   $ 2,669  

Cowen Healthcare Royalty Partners, L.P. 

    14,144     17,009  

Ramius Global Credit Fund LP

    801      

Ramius Value and Opportunity Fund LP

    298     639  

RCG Special Opportunities Fund, Ltd

    165     321  

Other affiliated funds

    109     45  
           

  $ 17,022   $ 20,683  
           

        Real estate investments at March 31, 2010 and December 31, 2009 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 $0.3 million and $0.2 million, respectively, and real estate debt investments held by the Company of $0.8 million and $0.9 million, respectively.

17


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        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 fund's 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. As the Company does not possess unilateral control over any of these entities, the presumption of consolidation has been overcome pursuant to current accounting standards and the Company accounts for these investments under the equity method of accounting. Also included in equity method investments is the investment in CHRP GP (see note 2b). The following table summarizes equity method investments held by the Company:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

RCG Longview Debt Fund IV Management, LLC

  $ 1,944   $ 1,651  

Cowen Healthcare Royalty GP, LLC*

    1,153      

RCG Longview Partners, LLC

    1,365     1,565  

RCG Urban American, LLC

    675     605  

Urban American Real Estate Fund II, L.P. 

    490     409  

RCG Longview Louisiana Manager, LLC

    341     400  

RCG Longview Equity Management, LLC

    298     1,360  

RCG Kennedy House, LLC

    258     222  

Other

    409     309  
           

  $ 6,933   $ 6,521  
           

*
See Note 2b

        As of March 31, 2010, 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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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 $0.4 million and $0.6 million for the three months ended March 31, 2010 and 2009, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations.

        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. 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 fair value the Total Net Equity Claim at an approximately 80% discount at December 31, 2009 and a 70% discount at March 31, 2010, which represents management's best estimate at the respective dates of 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 of the date of the 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. Securities sold, not yet

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


purchased, at fair value, were $58.3 million and $14.8 at March 31, 2010 and December 31, 2009, respectively.

b.
Consolidated Funds

Securities owned, at fair value

        Securities owned held by the Consolidated Funds are comprised of:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

U.S. Government securities*

  $ 7,438   $  

Corporate bonds*

    1,190      
           

  $ 8,628   $  
           

*
Maturities in 2010 range from April 2010 to April 2011 and interest rates ranging between 0.00% and 4.88%. Investments are United States based. The corporate bonds cover the healthcare, mortgage and utility industries.

Other investments, at fair value

        Other investments held by the Consolidated Funds are comprised of:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

(1) Portfolio Funds

  $ 501,229   $ 546,526  

(2) Lehman Claims

    13,966     3,881  
           

  $ 515,195   $ 550,407  
           

        At March 31, 2010 and December 31, 2009, investments in Portfolio Funds, at fair value, included the following:

 
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Investments of Enterprise LP

  $ 412,294   $ 449,160  

Investments of consolidated fund of funds investment companies

    88,935     97,366  
           

  $ 501,229   $ 546,526  
           

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        Ramius Enterprise LP ("Enterprise LP") operated under a "master—feeder" structure with Ramius Enterprise Master Fund Ltd ("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 includes Enterprise LP's investment of $412.3 million and $449.2 million in Enterprise Master as of March 31, 2010 and December 31, 2009, respectively. Enterprise LP can redeem from or contribute to its investment in Enterprise Master on a monthly basis at the decision of the Company with no prior notice as cash is needed at Enterprise LP. There are no unfunded commitments at Enterprise LP. See Note 11 for unfunded commitments of Enterprise Master. Enterprise Master utilizes certain strategies including 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 has broad investment powers and maximum flexibility in seeking to achieve its investment objective. It may invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. See Note 5 for further information on the underlying investments of Enterprise Master.

        The investments of consolidated fund of funds investment companies of $88.9 million and $97.4 million at March 31, 2010 and December 31, 2009, respectively, include the investments of Ramius Levered Multi-Strategy FOF LP ("Levered FOF"), Ramius Multi-Strategy FOF LP ("Multi-Strat FOF") and Ramius Vintage Multi-Strategy FOF LP ("Vintage FOF"), all of which are investment companies managed by Ramius Alternative Solutions LLC and RTS 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 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 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 3x.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The following is a summary of the investments held by the four consolidated fund of funds, at fair value, as of March 31, 2010 and December 31, 2009:

 
   
  March 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  
 
  Strategy   Fair Value   Fair Value   Fair Value   Fair Value   Fair Value  
 
   
   
  (dollars in thousands)
   
   
 

Ramius Multi-Strategy Master FOF LP*

  Multi-Strategy   $   $ 34,536   $   $   $ 34,536 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy             40,255         40,255 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     726                 726 (b)

Externally Managed Portfolio Funds

  Credit-Based     639                 639 (b)

Externally Managed Portfolio Funds

  Futures & Global Macro                 9,354     9,354 (c)

Externally Managed Portfolio Funds

  Event Driven     2,815                 2,815 (d)

Externally Managed Portfolio Funds

  Hedged Equity     29                 29 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     528                 528 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     53                 53 (g)

Externally Managed Portfolio Funds

  Other                      
                           

      $ 4,790   $ 34,536   $ 40,255   $ 9,354   $ 88,935  
                           

22


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


 
   
  December 31, 2009  
 
   
  Ramius Levered
Multi-Strategy
FOF LP
  Ramius
Multi-Strategy
FOF LP
  Ramius Vintage
Multi-Strategy
FOF LP
  Total  
 
  Strategy   Fair Value   Fair Value   Fair Value   Fair Value  
 
   
   
  (dollars in thousands)
   
 

Ramius Multi-Strategy Master FOF LP*

  Multi-Strategy   $   $ 43,939   $   $ 43,939 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy             47,371     47,371 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     783             783 (b)

Externally Managed Portfolio Funds

  Credit-Based     1,894             1,894 (b)

Externally Managed Portfolio Funds

  Event Driven     2,787             2,787 (d)

Externally Managed Portfolio Funds

  Hedged Equity     28             28 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     497             497 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     56             56 (g)

Externally Managed Portfolio Funds

  Other     11             11  
                       

      $ 6,056   $ 43,939   $ 47,371   $ 97,366  
                       

*
These Portfolio Funds are affiliates of the Company.


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

23


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

(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. Of this balance, 43% has annual redemption policies subject to a 90-day redemption notification period. 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 funds, 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 funds) 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 funds 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 9% 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. As of December 31, 2009, the investee fund manager has side-pocketed the Company's investment.

(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 December 31, 2009, the investment manager has gated the Company's investment.

        With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master consists of $24.3 million. 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.

24


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        In addition, Lehman Brothers, Inc. ("LBI") was a prime broker to Enterprise Master and it holds cash balances of $5.3 million. 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 recent 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 Company's customer claims, management has estimated recovery with respect to the Company's LBI exposure at 47%, 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 at March 31, 2010 and December 31, 2009, the Company identified Consolidated Funds that had interests in an issuer of investments, for which the Company's pro-rata share exceeds 5% of the Consolidated Funds' net assets (on an aggregated basis). The following table presents such interests which represent the aggregate of (i) the gross amount of exposure that Consolidated Funds have through their investments held directly and (ii) the gross amount of exposure held indirectly through their investments in any unconsolidated master funds:

 
  As of March 31, 2010  
 
  Shares/ Principal
Amount
  Fair Value  
 
  (amounts in thousands)
 

U.S. Treasury notes, 0.87% - 8.75%,
due February 2012 - August 2020, including futures

  $ 77,342   $ 81,354  

U.S. Treasury notes, 1.00% - 3.625%,
due December 2011 - February 2020, including futures

    111,710     (111,342 )

25


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

 

 
  As of December 31, 2009  
 
  Shares/ Principal
Amount
  Fair Value  
 
  (amounts in thousands)
 

Harvest Energy Trust 7.875% October 2011

     $ 3,415      $ 3,441  

Harvest Energy Trust 6.40% - 7.5% October 2012 - May 2015

  C$ 29,202      $ 28,169  

Burlington Northern Sante Fe (common stock shares)

    358      $ 35,314  

U.S. Treasury notes, 0.75% - 8.75%, due September 2011 - August 2020, including futures

     $ 181,230      $ 185,220  

U.S. Treasury notes, 1.375% - 3.625%, due April 2012 - November 2019, including futures

     $ 83,090      $ (82,034 )

        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, 2010 and December 31, 2009:

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

Securities owned

                         
 

US Government securities

  $ 14,003   $   $   $ 14,003  
 

Common stocks

    50,866     6     334     51,206  
 

Restricted common stock

            5,058     5,058  
 

Corporate bonds

        64,489         64,489  
 

Options

    5,300             5,300  
 

Warrants and rights

            587     587  
 

Mutual Funds

    1,317             1,317  

Other investments

                         
 

Portfolio Funds(a)

    1,504     1,111     14,407     17,022  
 

Real estate investments

            1,108     1,108  
 

Lehman claim

            313     313  

Other assets

                         
 

Derivative contracts

    87             87  
                   

  $ 73,077   $ 65,606   $ 21,807   $ 160,490  
                   

26


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

 

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

Securities sold, not yet purchased

                         
 

Common stocks

  $ 55,930   $   $   $ 55,930  
 

Options

    2,368             2,368  
                   

  $ 58,298   $   $   $ 58,298  
                   

 

 
  Assets at Fair Value as of December 31, 2009  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned

                         
 

Common stocks

  $ 11,081   $ 24   $ 334   $ 11,439  
 

Corporate bonds

        38,327         38,327  
 

Options

    1,312             1,312  
 

Warrants and rights

        1,356         1,356  
 

Mutual funds

    1,719             1,719  

Other investments

                         
 

Portfolio Funds(a)

    2,669     644     17,370     20,683  
 

Real estate investments

            1,077     1,077  
 

Lehman claim

            209     209  
                   

  $ 16,781   $ 40,351   $ 18,990   $ 76,122  
                   

 

 
  Liabilities at Fair Value as of December 31, 2009  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities sold, not yet purchased

                         
 

Common stocks

  $ 14,307   $   $   $ 14,307  
 

Options

    505             505  
                   

  $ 14,812   $   $   $ 14,812  
                   

27


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

Securities owned

                         
 

Corporate Bonds

  $ 1,190   $   $   $ 1,190  
 

US Government securities

    7,438             7,438  

Other investments

                         
 

Portfolio Funds(a)

        412,294     88,935     501,229  
 

Lehman claims

            13,966     13,966  
                   

  $ 8,628   $ 412,294   $ 102,901   $ 523,823  
                   

 

 
  Assets at Fair Value as of December 31, 2009  
 
  Level 1   Level 2   Level 3   Total  
 
   
  (dollars in thousands)
   
 

Other investments

                         
 

Portfolio Funds(a)

  $   $ 449,160   $ 97,366   $ 546,526  
 

Lehman claims

            3,881     3,881  
                   

  $   $ 449,160   $ 101,247   $ 550,407  
                   

(a)
Based on its analysis of the nature and risks of these investments, the Company has determined that presenting them as a single class is appropriate.

        The following table includes a rollforward of the amounts for the three months ended March 31, 2010 and December 31, 2009, for financial instruments classified within level 3. The classification of a

28


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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
stock
  Restricted
common
stock
  Warrants
and
Rights
  Portfolio
Funds
  Real
estate
  Lehman
claim
  Portfolio
Funds
  Lehman
claim
 

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  
                                   

Balance at December 31, 2008

 
$

 
$

 
$

 
$

1,970
 
$

1,605
 
$

209
 
$

157,513
 
$

3,881
 

Transfers in (out)

                                 

Purchases

                            1,015      

Sales

                            (34,929 )    

Realized gains (losses)

                (220 )           602      

Unrealized gains (losses)

                2     (103 )       (933 )    
                                   

Balance at March 31, 2009

  $   $   $   $ 1,752   $ 1,502   $ 209   $ 123,268   $ 3,881  
                                   

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

        There were no significant transfers between Level 1 and Level 2 assets and liabilities for the three months ended March 31, 2010.

29


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds

        As discussed in Note 4, 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 at March 31, 2010 and December 31, 2009:

 
  March 31, 2010   December 31, 2009  
 
  Securities
owned
  Securities
sold, but not yet
purchased
  Securities
owned
  Securities
sold, but not yet
purchased
 
 
  (dollars in thousands)
 

Bank debt

  $ 1,948   $   $ 1,646   $  

Commercial mortgage backed securities

            2,723      

Common stock

    194,251     (73,917 )   182,447     (47,151 )

Convertible debt

    119,207     (3,290 )   123,060      

Corporate bonds

    124,713     (1,515 )   181,402     (1,541 )

Exchange traded funds

    1,772     (11,349 )       (5,549 )

Foreign government debt

    5,794     (5,833 )   10,374     (10,660 )

Loans

    878         812      

Options—put

    2,246     (1,284 )   6,052     (84 )

Options—call

    3,406     (2,441 )   2,335     (3,048 )

OTC fx call option

    1         5     (1 )

Preferred stock

    2,898     (622 )   4,558     (198 )

Private equity

    132         107      

Restricted stock

    8,127         6,172      

Rights

    1,832         1,950      

Trade claims

    128         128      

US Treasury Notes

    123,168     (153,132 )   185,118     (82,004 )

Warrants

    10,040         6,831      
                   

  $ 600,541   $ (253,383 ) $ 715,720   $ (150,236 )
                   

30


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)

Description
  As of March 31,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Asset swaps

  $ 152   $ 295  

Credit default swaps—protection purchased

    (429 )   (574 )

Credit default swaps—protection sold

    424     432  

Currency forwards

    (225 )   691  

Equity swaps—long exposure

    21     (1,001 )

Futures

    (115 )   (822 )

Interest rate call swaption—long exposure

    13     105  

Interest rate call swaption—short exposure

        (127 )

Interest rate swaps—long exposure

        40  

Total return swap

    903     2,123  
           

  $ 744   $ 1,162  
           

 
   
  March 31, 2010   December 31, 2009  
 
  Strategy   Fair Value  
 
   
  (dollars in thousands)
 

624 Art Holdings, LLC*

  Artwork   $ 926   $ 2,091  

QREX, LLC*

  Life Settlements         1,278  

Q Capital Strategies, LLC*

  Life Settlements     667     779  

RCG Longview Equity Fund, LP*

  Real Estate     9,240     9,036  

RCG Longview II, LP*

  Real Estate     2,238     2,261  

RCG Longview Debt Fund IV, LP*

  Real Estate     6,777     6,807  

RCG Longview, LP*

  Real Estate     237     272  

RCG Soundview, LLC*

  Real Estate     3,294     3,859  

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

  Real Estate     2,961     2,961  

RCG International Sarl*

  Multi-Strategy     6,718     7,096  

Portside Growth & Opportunity Fund*

  Multi-Strategy     8,373     9,753  

RCG Special Opportunities Fund, Ltd*

  Multi-Strategy     106,420     110,279  

Ramius Credit Opportunities Fund Ltd*

  Distressed     341     717  

RCG Endeavour, LLC*

  Multi-Strategy     99     149  

RCG Energy, LLC*

  Energy     22,101     23,063  

RCG Renergys, LLC*

  Energy     3     3  

Other Private Investments

  Various     14,786     16,059  

Real Estate Investments

  Real Estate     20,839     21,364  
               

      $ 206,020   $ 217,827  
               

*
These Portfolio Funds are affiliates of the Company.

31


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)

        As discussed in Note 4, Multi-Strat FOF 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 exceed the net investment which Multi-Strat FOF and Vintage FOF have recorded. The following table presents summarized investment information for the underlying Portfolio Funds held by Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP, at fair value, as of March 31, 2010 and December 31, 2009:

 
   
  March 31, 2010   December 31, 2009  
 
  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 Hedged Equity FOF LP*

  Hedged Equity   $ 1,471   $   $ 6,725   $  

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi Strategy     2,444         5,394      

Tapestry Pooled Account II, LLC*

  Hedged Equity         4,405         5,643  

Tapestry Pooled Account V, LLC*

  Credit-Based     1,495     1,596     1,612     1,721  

Externally Managed Funds

  Credit-Based     6,270     984     4,084     1,158  

Externally Managed Funds

  Event Driven     8,705     9,770     9,117     13,912  

Externally Managed Funds

  Fixed Income Arbitrage     76         81      

Externally Managed Funds

  Hedged Equity     6,838     4,749     5,461     5,453  

Externally Managed Funds

  Multi Strategy     7,779     7,988     11,564     14,647  

Externally Managed Funds

  Other             47      

Externally Managed Funds

  Global Macro     3,008     3,231     2,081     5,321  

Externally Managed Funds

  Opportunistic Equity         2,967         2,825  

Externally Managed Funds

  Managed Futures     2,332     1,236     2,256     1,276  
                       

      $ 40,418   $ 36,926   $ 48,422   $ 51,956  
                       

*
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 (See Note 4) which primarily concentrate around futures and global

32


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Underlying Investments of Unconsolidated Funds Held by Consolidated Funds (Continued)

macro strategies. The following table presents summarized investment information for the underlying Portfolio Funds held by RTS Global 3X, at fair value, as of March 31, 2010:

 
  As of March 31, 2010  
 
  (dollars in thousands)
 

Bond Futures

  $ 5  

Commodity Forward

    169  

Commodity Future

    837  

Currency Forward

    270  

Currency Future

    296  

Energy Future

    6  

Index Future

    261  

Interest Rate Future

    25  
       

  $ 1,869  
       

6. Goodwill

        Goodwill is reviewed for possible impairment at least annually or more frequently if events or circumstances indicate a possible impairment. There were no additions to goodwill and no impairment losses during three months ended March 31, 2010.

33


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Redeemable non-controlling interests in consolidated subsidiaries

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

 
  As of March 31,   As of December 31,  
 
  2010   2009  
 
  (dollars in thousands)
 

Non-controlling interests in consolidated subsidiaries

             

Operating Companies(a)

  $   $ 1,713  

Consolidated Funds

    215,400     229,112  
           

  $ 215,400   $ 230,825  
           

(a)
See Note 2b


 
  Three Months
Ended March 31,
 
 
  2010   2009  
 
  (dollars in
thousands)

 

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

             

Operating Companies

  $   $ 421  

Consolidated Funds

    (8,056 )   1,983  
           

  $ (8,056 ) $ 2,404  
           

8. 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's previously established 2006 Equity and Incentive Plan and 2007 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 10,225,000 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, 2010, there were approximately 0.1 million shares available for future issuance under the Equity Plans.

        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"). 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.

34


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        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 and the RCG grants, the Company recognized expense of $2.7 million and $1.5 million, respectively, for the three months ended March 31, 2010. The income tax effect recognized for the Equity Plans and the RCG Grants was a benefit of $1.1 million and $0.6 million, respectively, for the three months ended March 31, 2010.

        There were no stock options granted or exercised during the three months ended March 31, 2010 and 2009. The following table summarizes the Company's stock option activity for the three months ended March 31, 2010:

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

Balance outstanding at December 31, 2009

    892,782   $ 15.06              

Options granted

                     

Options acquired

                     

Options exercised

                     

Options forfeited

                     

Options expired

    (21,879 )   16.00              
                         

Balance outstanding at March 31, 2010

    870,903   $ 15.04     3.60   $  
                   

Options exercisable at March 31, 2010

    809,570   $ 14.97     3.60   $  
                   

(1)
Based on the Company's closing stock price of $5.66 on March 31, 2010.

        As of March 31, 2010, the unrecognized compensation expense related to the Company's grant of stock options was immaterial.

        The following table summarizes the Company's restricted shares and restricted stock units granted to employees activity for the three months ended March 31, 2010:

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

Balance outstanding at December 31, 2009

    2,554,182   $ 6.90  

Granted

    3,848,499     4.89  

Vested

    (24,912 )   7.55  

Forfeited

    (39,268 )   4.89  
             

Balance outstanding at March 31, 2010

    6,338,501   $ 5.69  
             

35


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        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, 2010, there was $23.9 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted share units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted share units granted to employees is expected to be recognized over a weighted-average period of 2.0 years.

        The following table summarizes the Company's RCG Grants activity for the three months ended March 31, 2010:

 
  Nonvested
RCG Grants
  Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2009

    2,859,426   $ 7.30  

Granted

    1,515     5.55  

Vested

         

Forfeited

    (20,016 )   7.30  
             

Balance outstanding at March 31, 2010

    2,840,925   $ 7.30  
             

        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, 2010 there was $15.7 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 2.58 years.

        As of March 31, 2010, there were 129,135 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors. During the three months ended March 31, 2010, the Company awarded 101,259 restricted stock units to its non-employee Board members, which were immediately vested and expensed upon grant.

9. Defined Benefit Plans

        The following amounts relate to the defined benefit plans in aggregate for the three months ended March 31, 2010 and 2009.

36


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9. Defined Benefit Plans (Continued)

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

 
  Three Months
Ended
March 31,
 
 
  2010   2009  
 
  (dollars in
thousands)

 

Service cost

  $   $  

Interest cost

    79     84  

Expected return on plan assets

    (73 )   (80 )

Amortization of (loss) / gain

        1  

Amortization of prior service cost

    5     5  
           

Net periodic benefit cost

  $ 11   $ 10  
           

        During the three months ended March 31, 2010, the Company made no contributions to its defined benefit plans. The amount to be contributed to these plans in 2010 will be determined in the second quarter.

10. 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 the United Kingdom, Germany, Japan, Hong Kong, and China. The Company's effective income tax rate was 5.13% and 0.58% for the three months ended March 31, 2010 and 2009, respectively. The Company used the discrete method in calculating its effective tax for the first quarter of 2010. 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 2010, and use the annual method if reliable estimates can be calculated.

        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.

        For the period March 31, 2009, the effective tax rate differed from the statutory rate of 35% primarily because the Company was taxed as a partnership that was only subject to New York City Unincorporated Business Tax.

        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

37


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Income Taxes (Continued)


actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2010, 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, 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. There are no ongoing income tax audits by any taxing authority, except an enterprise tax audit (based on profits) by the Chinese Tax Authority. This audit covers tax years 2005-2008, and the Company recorded a tax provision against the anticipated assessment from the audit as of March 31, 2010, which was not material. The Company believes the audit will be completed in the second quarter of 2010 and does not expect that the final assessment by the Chinese tax authorities will be materially different than the amount already accrued.

11. Commitments and Contingencies

        The Company has entered into non-cancellable leases for office space and equipment. These leases contain escalation clauses for operating expenses and real estate taxes. The Company records rent expense on a straight-line basis over the lease term, including any rent holiday periods. Rent expense for the three months ended March 31, 2010 and 2009, was $3.9 million and $2.2 million, respectively. At March 31, 2010, future minimum annual lease payments for the Company was as follows:

 
  Minimum Lease Payments  
 
  Equipment Leases   Facility Leases  
 
  (in thousands)
 

Remainder of 2010

  $ 8,097   $ 13,653  

2011

    6,140     17,222  

2012

    3,506     16,426  

2013

    1,760     14,921  

2014

    146     10,667  

Thereafter

        59,998  
           

  $ 19,649   $ 132,887  
           

        The Company entered into agreements to sublease certain of the premises for which the lease commitments are included in the above table. These subleases expire in May 2010. During the three months ended March 31, 2010 and 2009, the Company recorded sublease income related to these leases of $0.5 million and $0.5 million, respectively.

        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, 2010, 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 $42.0 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 Cowen Healthcare Royalty GP, LLC, the general partner of the CHRP Funds. This commitment is expected to be called over a two to three year period. The Company will make its

38


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

11. Commitments and Contingencies (Continued)


pro-rata investment in the CHRP Funds along with the other limited partners. Through March 31, 2010, the Company has funded $15.5 million towards these commitments.

        In connection with Cowen Holdings's 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's 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's 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 Company is involved in a number of legal and regulatory matters that arise from time to time in connection with the conduct of its businesses. The Company estimates potential losses that may arise out of these matters and records a reserve and takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in accordance with FASB accounting standards. 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. 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, 2010. 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.

        Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses will not have a material adverse effect on the Company's consolidated financial condition or cash flows. However, 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 extent to which Cowen Holdings is indemnified by SG.

        Various claims against the Company may exist in the ordinary course of business. Management of the Company does not believe that any such matter will have a material adverse effect on the Company's consolidated statements of financial condition, condensed consolidated statements of operations or condensed consolidated statements of cash flows.

39


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Note Payable and Short-Term Borrowings

        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, with a $7.0 million letter of credit sub-limit. The first borrowing under this line occurred on June 30, 2009. As of March 31, 2010 and December 31, 2009, the Company had borrowings of $18 million and $43.0 million, respectively, under the line of credit portion and $6.7 million at December 31, 2009 under the letter of credit portion. At the Company's election and discretion, borrowings under this collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (a) 0.5% plus the greater of (1) the lender's prime rate, (2) the overnight federal funds rate plus 0.5% and (3) the LIBOR rate plus 1.0% or (b) the LIBOR rate plus 2.75%. 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. For letters of credit, the Company will pay a fee on the stated amount of the letter of credit at a rate equal to 2.75%. The 2009 collateralized revolving credit agreement was to mature on November 2, 2009 but was extended; $25 million was extended through January 4, 2010 and $25 million was extended through September 29, 2011. All terms of the extended collateralized revolving credit agreement remain the same except the following: at the Company's election and discretion, borrowings under the extended 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%. For letters of credit, the Company will pay a fee on the stated amount of the letter of credit at a rate equal to 3.5%. 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, 2010 and during the period from June 3, 2009 to March 31, 2010, the Company was in compliance with these covenants.

        On January 4, 2010, in accordance with the terms of the collateralized revolving credit agreement, the Company remitted $25 million to HVB AG, reducing its revolving line of credit balance.

        Interest incurred on the Company's lines of credit (in combination with all previous lines of credit) for the three months ended March 31, 2010 and 2009 were $0.1 million and $0.3 million, respectively.

        Cash collateral pledged at December 31, 2009, on the condensed consolidated statements of financial condition, represents collateral that was required to be posted for obligations or potential obligations under the letter of credit discussed above pursuant to the lease agreement for the Company's premises in New York City. This collateral was released with the terms of the extended collateralized revolving credit agreement. The Company's investment in Enterprise Master through Enterprise LP has been pledged as collateral under the line of credit portion of the revolving credit agreement discussed above.

        The Company also has two additional irrevocable letters of credit, the first of which is for $100,000, which expires on July 26, 2010, supporting workers' compensation insurance with Safety National Casualty Corporation, and the second of which is for $57,000, which expires on November 14, 2010, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease. To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. Each of these letters of credit provides for automatic annual renewals, at the Company's option, on their

40


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Note Payable and Short-Term Borrowings (Continued)


expiration dates. As of March 31, 2010 and December 31, 2009, there were no amounts due related to these letters of credit.

13. 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, 2010, there were 74,743,163 shares outstanding, of which 2,298,204 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 129,135 fully vested, unissued restricted stock units in its calculation of basic earnings per share.

        Diluted earnings per common share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive nonvested restricted stock and stock options. The Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted shares and unexercised stock options. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares 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 shares. The tax benefit is the amount resulting from a tax deduction for compensation in excess of compensation expense recognized for financial statement reporting purposes. Stock options, restricted shares, and restricted share units outstanding were not included in the computation of diluted net loss per common share for the three months ended March 31, 2010, as their inclusion would have been anti-dilutive. There were no restricted shares, restricted share units, or stock options outstanding during the three months ended March 31, 2009.

        In calculating earnings per share for the periods prior to the November 2, 2009 transaction date, the net earnings (loss) amounts represent the results for the former Ramius, and the shares outstanding

41


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Earnings Per Share (Continued)


represents the number of shares received by the former Ramius in the Transactions. The computation of earnings per share is as follows:

 
  For the Three Months
Ended March 31,
 
 
  2010   2009  
 
  (in thousands, except
per share data)

 

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

  $ (12,976 ) $ (8,799 )
           

Shares for basic and diluted calculations:

             
 

Average shares used in basic computation

    72,509     37,537  
 

Stock options

         
 

Restricted shares

         
           
 

Average shares used in diluted computation

    72,509     37,537  
           

Earnings (loss) per share:

             
 

Basic

  $ (0.18 ) $ (0.23 )
 

Diluted

  $ (0.18 ) $ (0.23 )

14. Segment Reporting

        The Company conducts its operations through two segments: the alternative investment management segment and the broker-dealer segment (subsequent to the Transactions). 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.

        The chief operating decision maker uses Economic Income to assess the performance of the segments and make operating decisions for the segments. Economic Income is a pre-tax measure that (i) presents the segments' results of operations without the impact resulting from the consolidation of any of the Consolidated Funds and (ii) excludes goodwill impairment, and (iii) excludes the reorganization expenses for the Transactions and one-time equity awards made in connection with the Transactions.

        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. 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.

42


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. 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, 2010  
 
   
   
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Broker-Dealer   Total
Income
  Funds
Consolidation
  Other
Adjustments
  US 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 )   9,270  
 

Incentive income

    1,982         1,982         111     2,093  
 

Investment Income

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

Interest and dividends

                    804     804  
 

Reimbursement from affiliates

                (145 )   1,887     1,742  
 

Other Revenue

    (51 )   124     73         549     622  
 

Consolidated Funds

                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     446  
 

Non-compensation expenses

    8,783     24,468     33,251         952     34,203  
 

Reimbursement from affiliates

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

Consolidated Funds

                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     1,524  
 

Consolidated Funds

                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

                      (266 )   (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 non-controlling interests

   
   
   
   
(8,056

)
 
   
(8,056

)
   

Economic Income (Loss) / Net Income (loss) available to all Members

 
$

2,514
 
$

(13,643

)

$

(11,129

)

$

 
$

(1,847

)

$

(12,976

)
                           

43


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Segment Reporting (Continued)

 

 
  Three Months Ended March 31, 2009  
 
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Funds
Consolidation
  Other
Adjustments
  US GAAP  
 
  (dollars in thousands)
 

Revenues

                         
 

Investment banking

  $   $   $   $  
 

Brokerage

                 
 

Management fees

    14,596     (1,010 )   (2,075 )   11,511  
 

Incentive income

    (2,122 )       2,122      
 

Investment Income

    (620 )   1,061     (441 )    
 

Interest and dividends

            91     91  
 

Reimbursement from affiliates

        3,394         3,394  
 

Other Revenue

    359         660     1,019  
 

Consolidated Funds

        4,710         4,710  
                   
   

Total revenues

    12,213     8,155     357     20,725  

Expenses

                         
 

Employee compensation and benefits

    14,907             14,907  
 

Interest and dividends

    342         7     349  
 

Non-compensation expenses

    9,664         609     10,273  
 

Reimbursement from affiliates

    (3,414 )   3,414          
 

Consolidated Funds

        3,377         3,377  
                   
   

Total expenses

    21,499     6,791     616     28,906  

Other income (loss)

                         
 

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

            259     259  
 

Consolidated Funds

        (3,347 )       (3,347 )
                   
   

Total other income (loss)

        (3,347 )   259     (3,088 )
                   
   

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

   
(9,286

)
 
(1,983

)
 
   
(11,269

)
                   

Income taxes

            (66 )   (66 )
                   
   

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

    (9,286 )   (1,983 )   66     (11,203 )
 

(Income) loss attributable to non-controlling interests

   
421
   
1,983
   
   
2,404
 
 

Less: Special allocation to the Managing Member

   
   
   
   
 
   

Economic Income (Loss) / Net Income (loss) available to all Members

 
$

(8,865

)

$

 
$

66
 
$

(8,799

)
                   

44


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. 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 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).

        Substantially all of the Company's revenues are earned from the sponsored funds which the Company manages. For the three months ended March 31, 2010 and 2009, there was no one fund or other customer which represented more than 10% of the Company's total revenues.

15. Regulatory Requirements

        Ramius Securities LLC is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of minimum net capital. Ramius Securities LLC has elected to use the alternative method, permitted by the Rule, which requires that Ramius Securities LLC maintain net capital in an amount not less than $250,000. As of March 31, 2010, Ramius Securities LLC had net capital of $1.4 million, which was approximately $1.2 million in excess of its required minimum net capital requirement.

        In connection with the November 2, 2009 acquisition and subsequent firm-wide initiative to find efficiencies, the firm decided to consolidate the operations of its two wholly-owned registered broker/dealers, Ramius Securities LLC and Cowen and Company, LLC. During the first quarter 2010, many of the processes performed by Ramius Securities LLC were transferred to Cowen and Company, LLC. On April 8, 2010, Ramius Securities LLC filed Form BDW Uniform Request for Withdrawal From Broker-Dealer Registration.

        As a registered broker-dealer, Cowen and Company, LLC is also subject to the Rule. Under the alternative method permitted by the Rule, Cowen's minimum net capital requirement, as defined, is $1.0 million. The Company is not permitted to withdraw equity if certain minimum net capital

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Regulatory Requirements (Continued)


requirements are not met. As of March 31, 2010, Cowen and Company, LLC had total net capital of approximately $34.2 million, which was approximately $33.2 million in excess of its minimum net capital requirement of $1.0 million.

        Ramius Securities LLC and Cowen and Company, LLC are 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, LLC 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, LLC, if applicable.

        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, 2010, Ramius UK's Financial Resources of $1.6 million exceeded its minimum requirement of $0.4 million by $1.2 million. At March 31, 2010, CIL's Financial Resources of $4.7 million exceeded its minimum requirement of $2.5 million by $2.2 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, 2010, CLAL's Financial Resources of $0.3 million exceeded the minimum requirement of $0.02 million by $0.3 million.

16. 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 from related parties represents the management fees and incentive income owed to the Company from these related funds and certain affiliated managed accounts.

        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, 2010 and 2009, the Company reimbursed the funds that it manages $0.8 million and $1.4 million, respectively, which were recorded net in management fees and incentive income in the condensed consolidated statements of operations. At March 31, 2010 and December 31, 2009, related amounts still payable were $3.1 million and $2.7 million, respectively, and were reflected in fees payable in the condensed consolidated statements of financial condition.

        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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Related Party Transactions (Continued)


the accompanying condensed consolidated statement 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 condensed consolidated statements of operations and for the three months ended March 31, 2010 and 2009, equaled $0.3 million and $0.5 million, respectively. At March 31, 2010 and December 31, 2009, related amounts still payable were $0.3 million and $0.5 million, respectively, and were reflected in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.

        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 $2.3 million and $2.6 million as of March 31, 2010 and December 31, 2009, respectively. Of such amounts outstanding at March 31, 2010, $0.6 million will be paid in the remainder of 2010.

        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 statement of financial condition. As of March 31, 2010 and December 31, 2009, loans to employees of $2.2 million and $1.9 million, respectively, were included in due from related parties on the condensed consolidated statements of financial condition. For the three months ended March 31, 2010 and 2009, 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 $5.1 million and $5.0 million at March 31, 2010 and December 31, 2009, 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.

17. 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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

17. Guarantees (Continued)

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

        The Company indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the Company or its affiliates. The Company also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make significant payments under these arrangements and has not recorded any contingent liability in the consolidated financial statements for these indemnifications.

        The Company 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 consolidated financial statements for these indemnifications.

18. Subsequent Events

        On May 12, 2010, the Company announced its intention to close two of the funds it manages. In addition, redemptions in one of its funds triggered certain contractual rights of certain investors, which would have allowed them to withdraw their assets held in that fund upon 30 days notice. The investors have instead agreed to extend the time period pursuant to which the Company must return the bulk of its assets in the funds to the end of 2010. As of April 1, 2010, the investors had approximately $668 million invested in the Company's funds.

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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 (collectively, "Cowen Group" or the "Company"), provides alternative investment management, investment banking, research, and sales and trading services through its two business segments: Ramius LLC, its alternative investment management segment, and Cowen and Company, LLC its broker-dealer segment. Prior to the consummation of the transactions ("Transactions") on November 2, 2009, the Company conducted its operations through one reportable segment, the alternative investment management segment.

        Our alternative investment management business had approximately $7.9 billion of assets under management as of April 1, 2010. 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 and services include hedge funds, fund of funds, real estate, health care royalty funds and cash management services. Our institutional investors include pension funds, insurance companies, banks, foundations and endowments, wealth management organizations and family offices.

        Our hedge fund and fund of funds platforms have historically sought to deliver consistent, risk-adjusted returns throughout a market cycle (which we generally view as approximately three to five years). In these platforms, we seek positive performance with minimal correlation to directional market indices. Risk-adjusted returns refer to positive returns with lower volatility as compared to traditional asset classes such as equities.

        In February 2010, we announced plans to integrate senior management and certain aspects of the infrastructure of our hedge fund and fund of funds businesses to improve institutional efficiency and service. On March 1, 2010, we announced the formation of the Ramius Trading Strategies managed account platform.

        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 & defense, financial institutions, REITs and alternative energy sectors. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade equity and equity-linked securities, principally in our target sectors. We focus our investment banking efforts, principally equity and equity-linked capital raising and strategic advisory services, on small to mid-capitalization public companies as well as private companies.

        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.

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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 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

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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 has taken proactive steps to restructure aspects of its alternative investment management business towards clearly defined liquid strategies and longer term investments and to close certain products that have limited growth potential. Given the potential impact of currently known and expected redemptions on remaining clients that may negatively impact both portfolio liquidity and, potentially, performance going forward, management has decided that the Ramius Multi-Strategy and Ramius Enterprise funds will be closed. Investors will be presented with a variety of options in regards to the liquid portion of their investment in each fund, taking into consideration that not all investors have elected to redeem.

        Since over 50% of the current assets under management in Ramius Enterprise LP represents the Company's balance sheet, capital will be retained in the same securities or assets and actively managed by the existing investment professionals in substantially similar investment strategies.

        Additionally, redemptions in Ramius Multi-Strategy Fund triggered certain contractual rights held by affiliates of UniCredit S.p.A ("UniCredit"), which would have allowed them to withdraw their assets

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held in that Fund upon 30 days notice. Such affiliates of UniCredit have instead agreed, pursuant to the terms of a Modification Agreement, to extend the time period pursuant to which the Company must return the bulk of its investments in our funds, including a fund of funds managed account, to the end of 2010. In addition, the remaining 50% of UniCredit's Cowen Group shares that were not released from lock-up at the beginning of May will be released from the existing lock-up agreement. The Modification Agreement is described more detail below under "Item 5.01 Other Information."

        Due to the retention of both core trading positions and investment professionals as noted above, as well as the more liquid nature of the assets involved, we believe the process of returning capital to investors in the two existing multi-strategy funds should not have a negative effect on other investment products that we manage.

        The Company's institutional and private clients will continue to have access to a premier suite of products and solutions that encompass both liquid strategies like Ramius Value and Opportunity, our Global Credit Fund, our replication platform, and our new Ramius Trading Strategies managed account platform, as well as our longer term investment funds like our Real Estate funds and funds managed by Cowen Healthcare Royalty Partners.

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 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 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 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. As a result, the Company's results for the first quarter of 2010 reflect three months of combined operations, while the first quarter of 2009 GAAP results include three months of legacy Ramius operations only.

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.

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        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.

        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:

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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. Incentive income earned is typically between 10% and 20% for hedge funds and 10% for fund of funds, in each case, of the net profits earned for 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 consolidated funds and managed accounts for any period is based upon the net profits of those consolidated funds and managed accounts at the reporting date. Any incentive income recognized in a quarter's 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 many funds that the Company manages. These high-water marks require the funds to recover cumulative losses before the Company can begin to earn incentive income in 2010 and beyond.

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 & defense, financial institutions, REITs and alternative energy.

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Brokerage

        Brokerage revenue consists of commissions, principal transactions 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 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 who are currently paying. Interest income and expense includes premiums and discounts amortized and accreted on debt investments based on criteria determined by the Company using the effective yield method, which assumes the reinvestment of all interest payments. Dividends are recognized on the ex-dividend date.

Reimbursement from affiliates

        The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund, 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

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expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.

Other revenues

        The Company receives other revenues which are unrelated to its principal sources of revenue and which may vary from year to year. Historical sources of such other revenues primarily include certain placement fee income and rebate income earned from stock lending activities of the Company.

Expenses

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

        Prior to November 2009, Ramius, the accounting predecessor of the Company, operated as a limited liability company that was treated as a partnership and was not subject to U.S. federal or state income taxes. However, as a partnership, Ramius was subject to New York City unincorporated business tax, on its business and investment activities conducted in New York City. In 2010 and in the future, the Company will be subject to U.S. federal, state and city taxation as a corporation. The Company is also subject to foreign taxation on income it generates in certain countries.

        The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2010, the Company recorded a valuation allowance against substantially all of its net deferred tax assets.

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        As of March 31, 2010, the Company recorded tax receivables resulting from refund claims stemming from the carry back of net operating losses to the Company's 2006 and 2008 tax returns.

        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.

Assets Under Management and Fund Performance

        As of April 1, 2010, the Company had assets under management of $7,865 million, a 0.22% increase as compared to assets under management of $7,848 million as of January 1, 2010. The $17 million increase in assets under management during this period resulted from $71 million in net redemptions (including redemptions effective on April 1, 2010), that was more than offset by a $88 million performance-related increase in assets.

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        The following table is a breakout of total assets under management by platform as of April 1, 2010.

Platform
  Total Assets
under Management
  Primary Strategies
 
  (dollars in millions)
   

Hedge Funds

  $ 1,703 (1) Multi-Strategy

        Single Strategy

Fund of Funds

   
1,777

(2)

Multi-Strategy

        Single Strategy

        Customized Solutions

        Hedging Strategies

    555   Advisory

Real Estate(3)

   
1,628

(4)

Debt

        Equity

Ramius Trading Strategies

   
18
 

RTS Global 3X Fund LP

    6   RTS Global Fund LP

Cowen Healthcare Royalty Partners(5)

   
903

(4)

Royalty Interests

Other(6)

   
1,275
 

Cash Management

        Mortgage Advisory
         

Total

  $ 7,865    
         

(1)
This amount includes the Company's invested capital of approximately $256.2 million as of April 1, 2010.

(2)
This amount includes the Company's invested capital of approximately $32 million as of April 1, 2010.

(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.

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        The following table presents total assets under management by period:

 
  Year ended December 31,    
   
 
 
  January 1,
2010
  Three months
ended
April 1, 2010
 
 
  2007   2008   2009  

Beginning Assets under Management

  $ 9,592,135   $ 12,900,355   $ 9,765,230   $ 8,313,638   $ 7,847,712  

Net Subscriptions (Redemptions)

    2,601,939     (1,066,714 )   (1,780,117 )(2)   (465,926 )   (70,511 )

Net Performance(1)

    706,281     (2,068,411 )   328,525         87,949  
                       

Ending Assets under Management

  $ 12,900,355   $ 9,765,230   $ 8,313,638   $ 7,847,712   $ 7,865,150  
                       

(1)
Net performance is net of all management and incentive fees and includes the effect of any foreign exchange translation adjustments and leverage in certain funds.

(2)
Net redemptions for 2009 include $807 million of capital commitments to the CHRP Funds that were part of Cowen Holdings prior to the Transactions.

        The aggressive pursuit of risk assets by directional investors in the first quarter of 2010 stands in stark contrast to the beginning of 2009, when markets conditions were still unstable and investor liquidity issues not yet resolved. Building on recovery events of 2009, both real economic data and market sentiment were supportive of higher asset prices. Aided by the continuation of low interest rates and strong corporate earnings, both credit and equity markets turned in positive performance, with directional investments faring better than hedged strategies. Similarly, more aggressive sectors of the market offered the best performance, such as high yield, small cap stocks and emerging markets. Event-driven strategies also did well. The Company experienced positive results in all of its major investment products. Nonetheless, we believe in the value of holding appropriate hedging positions and are mindful of the amount of credit spread compression and equity appreciation that has already occurred. Managers are also mindful of developments in Europe, especially in Greece, that may have destabilizing effects on markets in the future.

        The table below sets forth performance information as of March 31, 2010, for the Company's funds with assets greater than $200 million as well as information with respect to the firm's largest single-strategy hedge fund and Ramius Trading Strategies funds. The performance reflected below is representative of the net return of the most recently issued full fee paying class of fund interests offered for the respective fund. The net returns are net of all management and incentive fees, and are calculated monthly based on the change in an investor's current month ending equity as a percentage of their prior month's ending equity, adjusted for the current month's subscriptions and redemptions. Such returns are compounded monthly in calculating the final net year to date return. Performance information for the CHRP Funds are not presented due to existing confidentiality provisions.

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        The following table presents fund performance for the three months ended March 31, 2010 and 2009:

 
   
   
  Performance for
three months
Ended March 31,
 
Platform
  Strategy   Largest Fund(1)   2010(2)   2009  

Hedge Funds

  Multi-Strategy   Ramius Multi-Strategy Fund Ltd     2.25 %   (0.70 )%

      (Inception Jan. 1, 1996)              

     

Ramius Enterprise LP

   
1.93

%
 
(0.87

)%

      (Inception Jan. 1, 2008)              

 

Single Strategy

 

Ramius Value and Opportunity

             

      Overseas Fund Ltd.     7.80 %   0.93 %

      (Inception Mar. 1, 2006)              

Fund of Funds

 

Managed Accounts

 

Activist Portfolio with Hedging Overlay

   
2.94

%
 
0.40

%

      (Inception Sept. 1, 2007)              

     

Low Volatility Multi-Strategy Fund

   
1.55

%
 
0.24

%

      (Inception Aug. 1, 2005)              

Real Estate

 

Debt

 

RCG Longview Debt Fund IV, L.P.

   
2.93

%(3)
 
(4.96

)%(3)

      (Inception Nov. 12, 2007)              

 

Equity

 

RCG Longview Equity Fund, L.P.

   
8.01

%(3)
 
(2.29

)%(3)

      (Inception Nov. 22, 2006)              

Ramius Trading Strategies

 

Commodity Advisory

 

RTS Global 3X Fund LP

   
5.99

%
 
n/a
 

      (Inception Mar 1, 2010)              

     

RTS Global Fund LP

   
1.95

%
 
n/a
 

      (Inception Mar 1, 2010)              

Other

 

Cash Management

       
0.67

%
 
0.00

%

(1)
Funds with assets under management greater than $200 million (excluding CHRP), the Company's largest single-strategy fund and the Ramius Trading Strategies funds. The inception date for a fund represents the initial date that the fund accepted capital from third party investors. As of April 1, 2010, the net assets of the funds presented above were $3.85 billion, or 48.98% of the total assets under management as of April 1, 2010 of $7.87 billion. These funds represent funds with net assets greater than $200 million (excluding CHRP), the Company's largest single-strategy hedge fund and the Ramius Trading Strategies funds. Excluded from the table above are funds with $4.02 billion, or 51.02% of total assets under management as of April 1, 2010. These include a total of 64 smaller individual funds and managed accounts, and the Cowen Healthcare Royalty Partners fund.

(2)
Performance does not reflect any increase in valuation for LBIE assets which have been segregated.

(3)
Returns for each year represent net internal rates of return to limited partners after management fees and incentive allocations, if any, and are computed on a year-to-year basis consistent with industry standards. Incentive allocations are computed based on a hypothetical liquidation of net assets of each fund as of the balance sheet date. Returns are calculated for the investors as a whole. The computation of such returns for an individual investor may vary from these returns based on different management fee and incentive arrangements and the timing of capital transactions. The hypothetical liquidation value may not reflect the ultimate value that may be realized from the real estate investments, particularly given the relatively long period of time that the real estate investments may be held under the terms of the real estate fund documents.

        The hedge funds and fund of funds listed above have perpetual high-water marks. These high-water marks require the funds to recover cumulative losses before the Company can begin to earn

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incentive income in 2010 and beyond on the assets that suffered losses in 2008. In order for the Company to earn an incentive fee from an investor who had participated fully in the 2008 loss, 2009 full year and 2010 first quarter gain, for each of the following hedge funds: Ramius Multi-Strategy Fund Ltd. and Ramius Enterprise LP, the funds would have to increase their respective net asset values by 23.07% and 29.08%, respectively, net of management fees. In order for the Company to earn an incentive fee from an investor who had participated fully in the 2008 loss, 2009 full year and 2010 first quarter gain, for the Low Volatility Multi-Strategy Fund, the fund would have to increase its respective net asset value by 12.26%, net of management fees. Since December 2009, the Activist Portfolio with Hedging Overlay fund has achieved returns in excess of its high-water mark threshold for an investor who had participated fully in the 2008 loss and the 2009 gain.

Results of Operations

        To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income of our alternative investment management and broker-dealer segments follows the discussion of our total consolidated GAAP results. Economic Income reflects, on a consistent basis for all periods presented in the Company's financial statements, income earned from the Company's funds and managed accounts and from its own invested capital. Economic Income excludes certain adjustments required under GAAP. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company—Segment Analysis and Economic Income," and Note 14 to the Company's condensed consolidated financial statements, appearing elsewhere in this Form 10-Q, for a reconciliation of Economic Income to total Company net income (loss).

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Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009

        The Company's first quarter of 2010 results reflect three months of combined operations while the first quarter of 2009 results reflect three months of legacy Ramius operations only.


Three Months Ended March 31, 2010 Compared with the Three Months Ended March 31, 2009
Consolidated Statements of Operations
(unaudited)

 
  Three Months Ended
March 31,
  Period to Period  
 
  2010   2009   $ Change   % Change  
 
  (dollars in thousands)
 

Revenues

                         
   

Investment banking

  $ 6,005   $   $ 6,005     NM  
   

Brokerage

    29,575         29,575     NM  
   

Management fees

    9,270     11,511     (2,241 )   (19.5 )%
   

Incentive income

    2,093         2,093     NM  
   

Interest and dividends

    804     91     713     783.5 %
   

Reimbursement from affiliates

    1,742     3,394     (1,652 )   (48.7 )%
   

Other Revenue

    622     1,019     (397 )   (39.0 )%
   

Consolidated Funds revenues

    6,147     4,710     1,437     30.5 %
                   
     

Total revenues

    56,258     20,725     35,533     171.4 %

Expenses

                         
   

Employee compensation and benefits

    43,433     14,907     28,526     191.4 %
   

Interest and dividends

    446     349     97     27.8 %
   

General, administrative and other expenses

    34,203     10,273     23,930     232.9 %
   

Consolidated Funds expenses

    3,159     3,377     (218 )   (6.5 )%
                   
     

Total expenses

    81,241     28,906     52,335     181.1 %

Other income (loss)

                         
   

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

    1,524     259     1,265     488.4 %
   

Consolidated Funds net gains (losses)

    18,273     (3,347 )   21,620     NM  
                   
     

Total other income (loss)

    19,797     (3,088 )   22,885     (741.1 )%
                   
     

Income (loss) before income taxes

    (5,186 )   (11,269 )   6,083     (54.0 )%
                   
 

Income taxes

    (266 )   (66 )   (200 )   303.0 %
                   
     

Net loss

    (4,920 )   (11,203 )   6,283     (56.1 )%
   

(Income) loss attributable to non-controlling interests

    (8,056 )   2,404     (10,460 )   NM  
                   
     

Net loss attributable to Cowen Group, Inc. stockholders

  $ (12,976 ) $ (8,799 ) $ (4,177 )   47.5 %
                   

Revenues

Investment Banking

        Investment banking revenues were $6.0 million for the three months ended March 31, 2010, representing the investment banking activity of Cowen Holdings for the quarter. There were no investment banking revenues for the three months ended March 31, 2009, as the historic results of operations only reflect the legacy Ramius business.

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Brokerage

        Brokerage revenues were $29.6 million for the three months ended March 31, 2010, representing the brokerage activity of Cowen Holdings for the quarter. There were no brokerage revenues for the three months ended March 31, 2009, as the historic results of operations only reflect the legacy Ramius business.

Management Fees

        Management fees decreased $2.2 million, or 20%, to $9.3 million for the three months ended March 31, 2010 compared with $11.5 million in the prior year quarter. The decrease was primarily due to the lower level of assets under management in the first quarter of 2010 relative to the same period last year as well as the impact of certain management fee reductions for certain affiliates of UniCredit which became effective in conjunction with the closing of the Transactions.

Incentive Income.

        Incentive income was $2.1 million for the three months ended March 31, 2010, compared to no incentive income for the prior year quarter. Incentive income earned in 2010 relates primarily to fees earned on one of our fund of funds products that surpassed its high water mark in December 2009 as well as fees earned on a portion of our Value and Opportunity fund. However, due to losses in 2008, many of our funds still have high-water marks such that Ramius will not earn incentive income with respect to the assets of the fund investors who suffered such losses in 2008 until these investors recover their losses.

Interest and Dividends

        Interest and dividends increased $0.7 million, or 784%, to $0.8 million for the three months ended March 31, 2010, compared with $0.1 million in the prior year quarter. The increase was primarily attributable to an increase in interest income resulting from an increase in investments in interest bearing assets in the first quarter of 2010 relative to the same period last year.

Reimbursements from Affiliates

        Reimbursements from affiliates decreased $1.7 million, or 49%, to $1.7 million for the three months ended March 31, 2010 compared with $3.4 million for the prior year quarter. The decrease was attributable to lower assets under management in the first quarter of 2010 compared to the same period last year as the Company generally limits such allocations based on a percentage of assets under management.

Other Revenue

        Other revenue decreased $0.4 million, or 39%, to $0.6 million for the three months ended March 31, 2010 compared with $1.0 million in the prior year quarter. The decrease was primarily due to a reduction in retail commissions earned in the first quarter of 2010 compared to the same period last year.

Consolidated Funds Revenues

        Consolidated Funds revenues increased $1.4 million, or 30.5%, to $6.1 million for the three months ended March 31, 2010 compared with $4.7 million in the prior year quarter. The increase was primarily attributable to fees earned in the first quarter of 2010 in the Enterprise Fund for waiving anti-dilution rights on specific warrants held that did not occur in the same period last year.

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Expenses

Employee Compensation and Benefits

        Employee compensation and benefits expenses increased $28.5 million, or 191%, to $43.4 million for the three months ended March 31, 2010 compared with $14.9 million in the prior year quarter. The increase was due to the impact of including three months of compensation and benefits expense associated with the legacy Cowen Holdings business, partially offset by lower accruals for incentive compensation and lower base salaries and benefit expense associated with a reduction in head count in 2010 compared to 2009 for the legacy Ramius business.

Interest and Dividends

        Interest and dividend expense remained substantially unchanged at $0.4 million for the three months ended March 31, 2010 compared to $0.3 million for the prior year quarter. Interest and dividends expense relates primarily to interest on our credit facility.

General, Administrative and Other Expenses

        General, administrative and other expenses increased $23.9 million, or 233%, to $34.2 million for the three months ended March 31, 2010 compared with $10.3 million in the prior year quarter. The increase was due to the impact of including three months of general, administrative and other expense associated with the legacy Cowen Holdings business.

Consolidated Funds Expenses

        Consolidated Funds expenses decreased $0.2 million, or 5.9%, to $3.2 million for the three months ended March 31, 2010 compared with $3.4 million in the prior year quarter. The decrease was attributable to a decrease in interest expense recognized by the Enterprise Fund due to a decrease in short holdings of interest bearing securities.

Other Income (Loss)

        Other income (loss) increased $22.9 million to income of $19.8 million for the three months ended March 31, 2010 compared to a loss of $3.1 million in the prior year quarter. The increase is a result of positive fund performance in the current year period versus negative performance in the prior year period as a result of the general unprecedented levels of market volatility, and liquidity constraints that persisted in the first quarter of 2009 and affected almost every asset class globally. As previously described, the Company invests its own capital primarily in the Enterprise Fund with any gains or losses from the Company's investment in the Enterprise Fund shown under Consolidated Funds for that period. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such funds, and the portion of those gains or losses that are attributable to other investors is allocated to a non-controlling interest.

Income Taxes

        Income tax benefit increased $0.2 million to $0.3 million for the three months ended March 31, 2010 from $0.1 million in the prior year quarter. The increase was caused by the recognition of state and local tax benefits related to prior years.

Income (Loss) Attributable to Non-controlling Interests

        Income attributable to non-controlling interests was $8.1 million for the three months ended March 31, 2010 compared with a loss of $2.4 million in the prior year quarter. The period over period change was the result of improved performance in certain of the Consolidated Funds.

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Segment Analysis and Economic Income (Loss)

Segments

        Prior to the consummation of the Transactions, the Company conducted its operations through one reportable segment, the alternative investment management segment, which provides management services to its hedge funds, fund of funds, real estate and other investment platforms. Following the combination of Ramius and Cowen Holdings, the Company conducts its operations through two segments: an alternative investment management segment and a broker-dealer segment. The Company's alternative investment management segment currently includes its hedge funds, fund of funds, real estate and other investment platforms businesses, as well as CHRP, which was a legacy Cowen operating business prior to the Transactions. The Company's broker-dealer segment currently includes its investment banking, brokerage and equity research businesses.

Economic Income (Loss)

        The performance measure used by the Company for each segment is Economic Income, which management uses to evaluate the financial performance of and make operating decisions for the firm as a whole and each segment. Accordingly, management assesses its business by analyzing the performance of each segment and believes that investors should review the same performance measure that it uses to analyze its segment and business performance. In addition, management believes that Economic Income is helpful to gain an understanding of its segment results of operations because it reflects such results on a consistent basis for all periods presented.

        Our Economic Income may not be comparable to similarly titled measures used by other companies. We use Economic Income as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. As a result of the adjustments made to arrive at Economic Income, Economic Income h