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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 September 30, 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 November 11, 2010 there were 75,449,213 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

    54  
 

3. Quantitative and Qualitative Disclosures About Market Risk

    88  
 

4. Controls and Procedures

    88  

PART II. OTHER INFORMATION

       
 

1. Legal Proceedings

    89  
 

1A. Risk Factors

    90  
 

2. Unregistered Sales of Equity Securities and Use of Proceeds

    90  
 

3. Defaults Upon Senior Securities

    90  
 

4. (Removed and Reserved)

    90  
 

5. Other Information

    90  
 

6. Exhibits

    90  

SIGNATURES

    91  

EXHIBIT INDEX

    92  
 

Exhibit 10.1

       
 

Exhibit 10.2

       
 

Exhibit 10.3

       
 

Exhibit 31.1

       
 

Exhibit 31.2

       
 

Exhibit 32

       

2


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Special Note Regarding Forward-Looking Statements

        We have made statements in this Quarterly Report on Form 10-Q (including in "Management's Discussion and Analysis of Financial Condition and Results of Operations") that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking terms such as "may," "might," "will," "would," "could," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "possible," "potential," "intend," "seek" or "continue," the negative of these terms and other comparable terminology or similar expressions. In addition, our management may make forward-looking statements to analysts, representatives of the media and others. These forward-looking statements represent only the Company's beliefs regarding future events (many of which, by their nature, are inherently uncertain and beyond our control) and are predictions only, based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. In particular, you should consider the risks contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 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 and nine months ended September 30, 2010 and 2009. The Consolidated Financial Statements as of December 31, 2009 were audited.

3


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PART I. FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements


Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(unaudited)

 
  As of
September 30,
2010
  As of
December 31,
2009
 

Assets

             
 

Cash and cash equivalents

  $ 27,585   $ 147,367  
 

Cash collateral pledged

    1,882     7,246  
 

Securities owned, at fair value

    593,239     54,153  
 

Securities purchased under agreement to resell

    180,903      
 

Other investments

    38,417     28,490  
 

Receivable from brokers

    52,902     32,525  
 

Fees receivable

    19,991     22,446  
 

Due from related parties (see Note 17)

    12,523     14,860  
 

Fixed assets, net of accumulated depreciation and amortization of $25,861 and $16,449, respectively

    29,764     32,603  
 

Goodwill

    27,179     27,179  
 

Intangible assets, net of accumulated amortization of $7,235 and $4,506, respectively

    13,664     16,394  
 

Other assets

    21,145     24,199  
 

Consolidated Funds

             
 

Cash and cash equivalents

    4,421     625  
 

Securities owned, at fair value

    9,836      
 

Other investments, at fair value

    349,586     550,407  
 

Other assets

    696     947  
           
     

Total Assets

  $ 1,383,733   $ 959,441  
           

Liabilities and Stockholders' Equity

             
 

Securities sold, not yet purchased, at fair value

  $ 306,174   $ 14,812  
 

Securities sold under agreement to repurchase

    259,454      
 

Payable to brokers

    103,731     3,817  
 

Compensation payable

    40,920     80,923  
 

Note payable and short-term borrowings

    18,000     49,746  
 

Fees payable (see Note 17)

    2,196     5,387  
 

Due to related parties (see Note 17)

    8,324     8,103  
 

Accounts payable, accrued expenses and other liabilities

    44,588     65,599  
 

Consolidated Funds

             
 

Capital withdrawals payable

        26,312  
 

Accounts payable, accrued expenses and other liabilities

    2,358     392  
           
     

Total Liabilities

    785,745     255,091  
           

Commitments and Contingencies (see Note 12)

             

Redeemable non-controlling interests

    156,743     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, 75,423,866 and 74,743,163 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively (including 1,554,124 and 2,554,182 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

    501,158     483,872  
 

Accumulated deficit

    (60,081 )   (10,553 )
 

Accumulated other comprehensive loss

    (558 )   (520 )
           
   

Total stockholders' equity

    441,245     473,525  
           
     

Total Liabilities and Stockholders' Equity

  $ 1,383,733   $ 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
September 30,
  Nine Months Ended
September 30,
 
 
  2010   2009   2010   2009  

Revenues

                         
 

Investment banking

  $ 7,199   $   $ 23,142   $  
 

Brokerage

    26,020         85,389      
 

Management fees

    8,278     8,974     26,429     31,408  
 

Incentive income

    2,672     177     4,666     177  
 

Interest and dividends

    4,270     47     7,054     225  
 

Reimbursement from affiliates

    1,380     2,342     4,864     7,832  
 

Other

    622     577     1,642     2,265  
 

Consolidated Funds

                         
   

Interest and dividends

    1,764     4,319     10,510     12,186  
   

Other

    (3 )   26     384     126  
                   
     

Total revenues

    52,202     16,462     164,080     54,219  

Expenses

                         
 

Employee compensation and benefits

    47,994     22,083     130,005     50,869  
 

Floor brokerage and trade execution

    3,664         12,637      
 

Interest and dividends

    1,299     435     2,366     1,122  
 

Professional, advisory and other fees

    3,258     3,993     8,519     12,022  
 

Service fees

    3,783     470     12,359     1,611  
 

Communications

    3,584     228     10,198     755  
 

Occupancy and equipment

    5,609     2,446     17,559     7,519  
 

Depreciation and amortization

    2,212     1,129     7,096     3,563  
 

Client services and business development

    2,885     1,537     11,316     4,850  
 

Other

    4,712     1,375     15,529     6,628  
 

Consolidated Funds

                         
   

Interest and dividends

    109     2,286     1,499     6,917  
   

Professional, advisory and other fees

    843     2,552     2,352     4,259  
   

Stock loan fees

    6         1,000      
   

Other

    287     473     753     655  
                   
     

Total expenses

    80,245     39,007     233,188     100,770  

Other income (loss)

                         
 

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

    8,810     1,274     9,983     (2,702 )
 

Consolidated Funds

                         
   

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

    8,220     26,891     19,225     59,178  
   

Net realized and unrealized gains (losses) on derivatives

    (1,312 )   (5,972 )   (813 )   (30,870 )
   

Net gains (losses) on foreign currency transactions

    (702 )   (1,563 )   (650 )   (3,040 )
                   
     

Total other income (loss)

    15,016     20,630     27,745     22,566  
                   
     

Income (loss) before income taxes

    (13,027 )   (1,915 )   (41,363 )   (23,985 )
                   

Income tax expense (benefit)

    299     (5,929 )   632     (5,978 )
                   
     

Net income (loss)

    (13,326 )   4,014     (41,995 )   (18,007 )
 

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

    (2,029 )   (9,899 )   (7,533 )   (13,888 )
                   
     

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

  $ (15,355 ) $ (5,885 ) $ (49,528 ) $ (31,895 )
                   

Weighted average common shares outstanding:

                         
 

Basic

    73,385     37,537     72,866     37,537  
 

Diluted

    73,385     37,537     72,866     37,537  

Earnings (loss) per share:

                         
 

Basic

  $ (0.21 ) $ (0.16 ) $ (0.68 ) $ (0.85 )
                   
 

Diluted

  $ (0.21 ) $ (0.16 ) $ (0.68 ) $ (0.85 )
                   

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
  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)

                    (49,528 )   (49,528 )   7,533   $ (41,995 )
 

Defined Benefit Plans

                79         79         79  
 

Foreign currency translation

                (117 )       (117 )       (117 )
                                   

Total comprehensive income (loss)

                (38 )   (49,528 )   (49,566 )   7,533   $ (42,033 )

Capital contributions

                            5,602        

Capital withdrawals

                            (85,912 )      

Consolidation of Replication Ltd (see Note 2b)

                            408        

Deconsolidation of CHRP GP (see Note 2b)

                            (1,713 )      

Restricted stock awards issued

    680,703                                

Amortization of share based compensation

            17,286             17,286            
                                     

Balance, September 30, 2010

    75,423,866   $ 726   $ 501,158   $ (558 ) $ (60,081 ) $ 441,245   $ 156,743        
                                     

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)

 
  Nine Months Ended
September 30,
 
 
  2010   2009  
 
  (dollars in thousands)
 

Cash flows from operating activities:

             
 

Net loss

  $ (41,995 ) $ (18,007 )
 

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

             
   

Depreciation and amortization

    7,096     3,563  
   

Share-based compensation

    17,286      
   

Net loss on disposal of fixed assets

    267     202  
   

Purchases of securities owned, at fair value

    (1,963,890 )   (81,892 )
   

Proceeds from sales of securities owned, at fair value

    1,352,942     95,711  
   

Proceeds from the sale of short investments

    1,170,810      
   

Payments to cover short investments

    (911,040 )    
   

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

    (12,305 )   (2,335 )
   

Consolidated Funds:

             
     

Purchases of securities owned, at fair value

    (302,406 )    
     

Proceeds from sales of securities owned, at fair value

    292,548      
     

Purchases of other investments

    (23,693 )   (2,181 )
     

Proceeds from sales of other investments

    252,930     73,237  
     

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

    (22,452 )   (31,560 )
   

(Increase) decrease in operating assets:

             
       

Cash collateral pledged

    (1,381 )   202  
       

Securities owned, at fair value, held at broker dealer

    74,384     (6,619 )
       

Receivable from brokers

    (20,377 )   9,097  
       

Fees receivable

    2,455     7,212  
       

Due from related parties

    2,337     5,575  
       

Other assets

    3,054     496  
       

Consolidated Funds:

             
         

Cash and cash equivalents

    948     (1,030 )
         

Other assets

    134     (606 )
   

Increase (decrease) in operating liabilities:

           
       

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

    36,584      
       

Payable to brokers

    99,914      
       

Compensation payable

    (39,693 )   (12,061 )
       

Fees payable

    (3,208 )   (5,909 )
       

Due to related parties

    221     (1,773 )
       

Accounts payable, accrued expenses and other liabilites

    (21,011 )   2,790  
       

Consolidated Funds:

             
         

Due to related parties

        (136 )
         

Accounts payable, accrued expenses and other liabilities

    1,966     (18 )
           
           

Net cash (used in) / provided by operating activities

  $ (47,575 ) $ 33,958  
           

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Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)

 
  Nine Months Ended
September 30,
 
 
  2010   2009  
 
  (dollars in thousands)
 

Cash flows from investing activities:

             
 

Securities purchased under agreement to resell

    (180,903 )    
 

Purchases of other investments

    (207,021 )   (215 )
 

Proceeds from sales of other investments

    199,940     6,527  
 

Purchase of fixed assets

    (1,794 )   (312 )
 

Sale of fixed assets

        130  
           
     

Net cash (used in) / provided by investing activities

    (189,778 )   6,130  
           

Cash flows from financing activities:

             
 

Securities sold under agreement to repurchase

    259,454     (1,425 )
 

Repayments on the line of credit

    (25,001 )   (202 )
 

Capital withdrawals to members

        (16,941 )
 

Capital contributions from non-controlling interests in Ramius operating entities

        541  
 

Consolidated Funds;

             
   

Repayments on the line of credit

        (10,207 )
   

Capital contributions by non-controlling interests in Consolidated Funds

    5,603     490  
   

Capital withdrawals to non-controlling interests in Consolidated Funds

    (122,485 )   (53,149 )
           
     

Net cash used in financing activities

    117,571     (80,893 )
           

Change in cash and cash equivalents

    (119,782 )   (40,806 )

Cash and cash equivalents at beginning of period

    147,367     46,677  
           

Cash and cash equivalents at end of period

  $ 27,585   $ 5,871  
           

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 funds, healthcare royalty funds, cash management and commodity trading funds, offered primarily under the Ramius name. The broker-dealer segment offers industry focused investment banking for growth-oriented companies including advisory and global credit markets origination and domain knowledge-driven research and a sales and trading platform for institutional investors, primarily under the Cowen name.

2. Significant Accounting Policies

a.     Basis of presentation

        These 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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


November 2, 2009, the results of operations of Cowen Holdings are included in the results of 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.

        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 or investment manager. RTS Global 3x Fund LP ("RTS Global 3x") was first consolidated in the first quarter of 2010, when it commenced operations. Ramius Alternative Replication Fund Ltd ("Replication Ltd") was first consolidated as of April 1, 2010, when the Company first invested into the fund, which commenced operations in October 2009, resulted in a substantial ownership interest in the fund.

        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.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        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.

        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.

        As at September 30, 2010 the Company consolidates the following funds (the "Consolidated Funds"); Ramius Enterprise LP ("Enterprise LP"), Ramius Multi-Strategy FOF LP ("Multi-Strat FOF"), Ramius Vintage Multi-Strategy FOF LP ("Vintage LP"), Ramius Levered Multi-Strategy FOF LP ("Levered FOF"), Replication Ltd and RTS Global 3x.

c.     Valuation of investments and derivative contracts

        The FASB accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1   Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;

Level 2

 

Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and

Level 3

 

Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little, if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this category requires significant management judgment or estimation.

        Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Company. The Company considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk of that instrument.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        The Company and its operating company subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investments is generally estimated based on proprietary models developed by the Company, which include discounted cash flow analyses, public market comparables, and other techniques and may be based, at least in part, on independently sourced market information. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates used, and, in some cases, the ability to execute, timing of, and estimated proceeds from expected financings. Significant judgment and estimation goes into the selection of an appropriate valuation methodology as well as the assumptions used in these models, and the timing and actual values realized with respect to investments could be materially different from values derived based on the use of those estimates. The valuation methodologies applied impact the reported value of the Company's investments and the investments held by the Consolidated Funds in the 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,

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Derivative contracts are included within other assets or accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition.

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

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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, including equity method investments, and fair value measurements.

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

        Transactions involving purchases of securities under agreements to resell are carried at their contract value which approximates fair value. As of September 30, 2010, the fair value of the collateral received by the Company was $175.7 million.

        Transactions involving the sale of securities under agreements to repurchase are carried at their contract value and are accounted for as collateralized financings. In connection with these financings, as of September 30, 2010, the Company had pledged collateral in the amount $279.6 million, which is included in securities owned, at fair value in the consolidated statements of financial condition.

        Collateral is valued periodically and the Company and its counterparties may adjust the collateral or require additional collateral to be deposited when appropriate. Collateral held by counterparties may be sold or rehypothecated by such counterparties, subject to certain limitations sometimes imposed by the Company. Collateralized repurchase agreements may result in credit exposure in the event the counterparties to the transactions are unable to fill their contractual obligations. The Company minimizes the credit risk associated with this activity by monitoring credit exposure and collateral values, and by requiring additional collateral to be promptly deposited with or returned to the Company when deemed necessary. The Company's securities purchased under agreements to resell and securities sold under agreements to repurchase were transacted pursuant to agreements with multiple counterparties at September 30, 2010.

e.     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

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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.

f.      Future adoption of accounting pronouncements

        As of September 30, 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 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 consolidated statements of operations for periods subsequent to the date of acquisition, and not for the three months and nine months ended September 30, 2009. The assets acquired and liabilities assumed were recorded at their fair value as at the acquisition date.

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Acquisition (Continued)

        The following table provides unaudited supplemental pro forma financial information for the three months and nine months ended September 30, 2009 as if the Transactions had occurred as of the beginning of that period:

 
  Three Months Ended
September 30, 2009
  Nine Months Ended
September 30, 2009
 
 
  (in thousands, except per share data)
(unaudited)

 

Pro forma total revenues

  $ 64,626   $ 195,901  

Pro forma net loss

    (11,876 )   (50,185 )

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

    (21,828 )   (63,432 )

Pro forma net loss per share:

             
 

Basic

  $ (0.40 ) $ (1.15 )
 

Diluted

  $ (0.40 ) $ (1.15 )

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.

        As of September 30, 2010 and December 31, 2009, securities owned consisted of the following, at fair value:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

U.S. Government securities(a)

  $ 274,587   $  

Common stocks

    80,040     11,439  

Restricted common stock

    5,000      

Convertible bond(b)

    2,975      

Corporate bonds(c)

    217,007     38,327  

Options

    12,080     1,312  

Warrants and rights

    314     1,356  

Mutual Funds

    1,236     1,719  
           

  $ 593,239   $ 54,153  
           

(a)
At September 30, 2010, maturities ranged from October 2010 to November 2024 and interest rates ranged between 0.11% and 8.75%.

(b)
At September 30, 2010, the maturity of this bond was July 2015 with an interest rate of 3.5%.

(c)
At September 30, 2010, maturities ranged from October 2010 to December 2020 and interest rates ranged between 3.5% and 13.5%. At December 31, 2009, maturities ranged from January 2010 to January 2013 and interest rates ranged between 0.27% and 10.00%.

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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 Company's direct involvement with derivative financial instruments includes credit default swaps, futures, equity swaps, options and warrants and rights. The Company's long exposure to futures and equity swap derivative contracts, at fair value, at September 30, 2010 of $1.5 million is included in other assets in the accompanying consolidated statement of financial condition. The Company's short exposure to futures and equity swap derivative contracts, at fair value, at September 30, 2010 of $1.1 million is included in accounts payable, accrued expenses and other liabilities in the accompanying consolidated statement of financial condition.

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

        Pursuant to the various derivatives transactions discussed above, the Company is required to post collateral for its obligations or potential obligations. At September 30, 2010 collateral consisting of $1.8 million is included in receivable from brokers on the consolidated statement of financial condition. As of September 30, 2010 all derivative contracts were with major financial institutions.

Other investments

        As of September 30, 2010 and December 31, 2009, other investments consisted of the following:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

(1) Portfolio Funds, at fair value

  $ 29,120   $ 20,683  

(2) Real estate investments, at fair value

    1,239     1,077  

(3) Equity method investments

    7,745     6,521  

(4) Lehman claims, at fair value

    313     209  
           

  $ 38,417   $ 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 September 30, 2010 and December 31, 2009, included the following:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Tapestry Investment Co PCC Ltd

  $ 1,072   $ 2,669  

Cowen Healthcare Royalty Partners, L.P. 

    15,142     17,009  

Ramius Global Credit Fund LP

    11,651      

Ramius Value and Opportunity Fund LP

    332     639  

RCG Special Opportunities Fund, Ltd

    158     321  

Other affiliated funds

    765     45  
           

  $ 29,120   $ 20,683  
           

        Real estate investments at September 30, 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 $0.4 million and $0.2 million, respectively, and real estate debt investments held by the Company of $0.8 million and $0.9 million, respectively.

        Equity method investments include investments held by the Company in several operating companies whose responsibilities primarily include the day to day management of a number of real estate funds, including the portfolio management and administrative services related to the acquisition, disposition, and active monitoring of the real estate 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

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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 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 September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

RCG Longview Debt Fund IV Management, LLC

  $ 1,477   $ 1,651  

Cowen Healthcare Royalty GP, LLC*

    1,235      

RCG Longview Partners, LLC

    1,976     1,565  

RCG Urban American, LLC

    819     605  

Urban American Real Estate Fund II, L.P. 

    753     409  

RCG Longview Louisiana Manager, LLC

    219     400  

RCG Longview Equity Management, LLC

    434     1,360  

RCG Kennedy House, LLC

    236     222  

Other

    596     309  
           

  $ 7,745   $ 6,521  
           

*
See Note 2b

        As of September 30, 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 losses in the investee including reflecting its share of the clawback obligation in the amount of $6.2 million. All such amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.

        The Company's income (loss) from equity method investments was $1.5 million and $1.2 million for the three months ended September 30, 2010 and 2009, respectively, and $2.4 million and $(3.1) million for the nine months ended September 30, 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.

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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 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 record the fair value of the Total Net Equity Claim at an approximately 80% discount at December 31, 2009 and a 70% discount at September 30, 2010, which represents management's best estimate at the respective dates of the value that ultimately may be recovered with respect to the Total Net Equity Claim (the "Estimated Recoverable Lehman Claim"). The Estimated Recoverable Lehman Claim was recorded at estimated fair value considering a number of factors including the status of the assets under U.K. insolvency laws and the trading levels of Lehman unsecured debt. In determining the estimated value of the Total Net Equity Claim, the Company was required to use considerable judgment and is based on the facts currently available. As additional information on the LBIE proceeding becomes available, the Company may need to adjust the valuation of the Estimated Recoverable Lehman Claim. The actual loss that may ultimately be incurred by the Company with respect to the pending LBIE claim is not known and could be materially different from the estimated value assigned by the Company.

Securities sold, not yet purchased, at fair value

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

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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)

        As of September 30, 2010 and December 31, 2009, securities sold, not yet purchased, consisted of the following, at fair value:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

U.S. Government securities(a)

  $ 235,574   $  

Common stocks

    65,588     14,307  

Corporate bonds(b)

    1,419      

Options

    3,593     505  
           

  $ 306,174   $ 14,812  
           

(a)
At September 30, 2010, maturities ranged from August 2015 to February 2025 and interest rates ranged between 1.25% and 7.65%.

(b)
At September 30, 2010, maturities ranged from October 2017 to April 2026 and interest rates ranged between 1.25% and 4%.

b.     Consolidated Funds

Securities owned, at fair value

        Securities owned held by the Consolidated Funds are comprised of:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Government sponsored securities*

  $ 6,650   $  

Corporate bonds*

    3,186        
           

  $ 9,836   $  
           

*
At September 30, 2010, maturities range from October 2010 to March 2012 and interest rates ranging between 0.35% and 4.88%.

Other investments, at fair value

        Other investments held by the Consolidated Funds are comprised of:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

(1) Portfolio Funds

  $ 343,677   $ 546,526  

(2) Lehman Claims

    5,909     3,881  
           

  $ 349,586   $ 550,407  
           

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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)

        At September 30, 2010 and December 31, 2009, investments in Portfolio Funds, at fair value, included the following:

 
  As of September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Investments of Enterprise LP

  $ 270,192   $ 449,160  

Investments of Replication Ltd

    2,002      

Investments of consolidated fund of funds investment companies

    71,483     97,366  
           

  $ 343,677   $ 546,526  
           

        Enterprise LP operates 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 $270.2 million and $449.2 million in Enterprise Master as of September 30, 2010 and December 31, 2009, respectively. On May 12, 2010, the Company announced its intention to close Enterprise Master. Prior to this announcement, strategies utilized by Enterprise Master included merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capital structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages, structured credit investments, investments in mortgage backed securities and other structured finance products, investments in real estate and real property interests, structured private placements and other relative value strategies. Enterprise Master has broad investment powers and maximum flexibility in seeking to achieve its investment objective. Enterprise Master may invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. Enterprise Master has been selling, and will continue to sell, its positions and return capital to its investors. There are no unfunded commitments at Enterprise LP. See Note 12 for unfunded commitments of Enterprise Master. See Note 5 for further information on the underlying investments of Enterprise Master.

        Replication Ltd operates under a "master—feeder" structure with Ramius Alternative Replication Master Fund Ltd. ("Replication Master"), whereby Replication Master's shareholders are Replication Ltd and Ramius Enhanced Replication Fund LLC. The consolidated investments in Portfolio Funds recorded in other investments on the condensed consolidated statements of financial condition includes Replication Ltd's investment of $2 million in Replication Master as of September 30, 2010. Replication Ltd can redeem from or contribute to its investment in Replication Master on a monthly basis at the decision of the investment manager with no prior notice as cash is needed at Replication Ltd. There

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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)

are no unfunded commitments at Replication Ltd. Replication Master's investment objective is to seek to replicate a specific, actively managed hypothetical portfolio by investing its capital in liquid market instruments. Generally, Replication Master expects the trading to be performed on a monthly basis. However, Replication Master is not restricted in terms of the number of trades or frequency of trades that it makes, particularly in cases of abnormal market movements where trading may occur more frequently. Replication Master may invest in exchange traded funds, futures, options, or any other variety of financial instruments or derivative instrument that the investment manager feels is appropriate within the parameters of Replication Ltd.'s offering documentation. See Note 5 for further information on the underlying investments of Replication Master.

        The investments of consolidated fund of funds investment companies of $71.5 million and $97.4 million at September 30, 2010 and December 31, 2009, respectively, include the investments of Levered FOF, Multi-Strat FOF and Vintage FOF, all of which are investment companies managed by Ramius Alternative Solutions LLC as well as RTS Global 3x which is managed by Ramius Trading Strategies LLC. Levered FOF's and Multi-Strat FOF's investment objectives are to invest discrete pools of their capital on a leveraged basis among portfolio managers that invest through Portfolio Funds, forming a multi-strategy, diversified investment portfolio designed to achieve returns with low to moderate volatility. Vintage FOF's investment objective is to allocate its capital among portfolio managers that invest through investment pools or managed accounts thereby forming concentrated investments in high conviction managers designed to achieve attractive risk adjusted returns with moderate relative volatility. RTS Global 3x's investment objective is to achieve attractive investment returns on a risk-adjusted basis that are non-correlated with the traditional equity and bond markets by investing substantially all of its capital pursuant to managed futures and global macro-based investment strategies. RTS Global 3x seeks to achieve its objective through a multi-advisor investment approach by allocating its capital among third-party trading advisors that are unaffiliated with RTS Global 3x. However, unlike a traditional "fund of funds" that invests with advisors through entities controlled by third-parties, RTS Global 3x will allocate its capital among a number of different trading accounts organized and managed by the General Partner.

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)

        The following is a summary of the investments held by the four consolidated fund of funds, at fair value, as of September 30, 2010 and December 31, 2009:

 
   
  September 30, 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   $   $ 31,152   $   $   $ 31,152 (a)

Ramius Vintage Multi-Strategy Master FOF LP*

  Multi-Strategy             26,667         26,667 (a)

Tapestry Pooled Account V LLC*

  Credit-Based     642                 642 (b)

Independently Advised Accounts*

  Futures & Global Macro                 9,139     9,139 (c)

Externally Managed Portfolio Funds

  Credit-Based     572                 572 (b)

Externally Managed Portfolio Funds

  Event Driven     2,708                 2,708 (d)

Externally Managed Portfolio Funds

  Hedged Equity     35                 35 (e)

Externally Managed Portfolio Funds

  Multi-Strategy     511                 511 (f)

Externally Managed Portfolio Funds

  Fixed Income Arbitrage     57                 57 (g)
                           

      $ 4,525   $ 31,152   $ 26,667   $ 9,139   $ 71,483  
                           

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)

 

 
   
  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.

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

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

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

(d)
The Event Driven strategy is generally implemented through various combinations and permutations of merger arbitrage, restructuring and distressed instruments. Approximately 4% as of September 30, 2010 and 9% as of December 31, 2009 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 September 30, 2010, the investee fund manager has side-pocketed investments.

(f)
The Multi-Strategy investment objective is to invest discrete pools of its capital among portfolio managers that invest through investment funds, forming multi-strategy, diversified investment portfolios designed to achieve non-market

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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)

(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 September 30, 2010, the investment manager has gated investments.

        With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master consists of $24.3 million. Included in this claim were assets with a value of $9.5 million, at the time LBIE entered administration, that were returned to Enterprise Master and its affiliated funds in June 2010. Enterprise Master and its affiliated funds sold the returned assets, for an aggregate $10.7 million, and distributed this amount to Enterprise Master's investors in July 2010. As a result, the remaining Net Equity Claim for Enterprise Master is $14.8 million. Enterprise Master is valuing this claim at $7.4 million as of September 30, 2010. The estimated final recoverable amount by Enterprise Master may differ from the actual recoverable amount of the pending LBIE and LBI claims, and the differences may be material.

        As a result of Enterprise Master and certain of the funds managed by the Company having assets they held at LBIE frozen in their LBIE prime brokerage account and the degree of uncertainty as to the status of those assets and the process and prospects of the return of those assets, Enterprise Master and the funds managed by the Company decided that only the investors who were invested at the time of the Administration should participate in any profit or loss relating to the Estimated Recoverable Lehman Claim. As a result, Enterprise Master and certain of the funds managed by the Company with assets held at LBIE granted a 100% participation in the Estimated Recoverable Lehman Claims to Special Purpose Vehicles (the "SPVs" or "Lehman Segregated Funds") incorporated under the laws of the Cayman Islands on September 29, 2008, whose shares were distributed to each of their investor funds. Fully redeeming investors of Enterprise LP will not be paid out on the balance invested in the SPV until the claim with LBIE is settled and assets are returned by LBIE.

        In addition, Lehman Brothers, Inc. ("LBI") was a prime broker to Enterprise Master and 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 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

26


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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)


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.

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 September 30, 2010 and December 31, 2009, the Company identified Consolidated Funds that had interests in an issuer for which the Company's pro-rata share exceeds 5% of the Consolidated Funds' net assets (on an aggregated basis). There were no indirect concentrations held by the Company at September 30, 2010. The following table presents such interests, at December 31, 2009, 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 December 31, 2009  
 
  Shares/ Principal
Amount
(in local currency)
  Fair Value  
 
  (amounts in thousands)
 

Harvest Energy Trust 7.875% October 2011

     $ 3,415   $ 3,441  

Harvest Energy Trust 6.4% - 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 )

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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 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 September 30, 2010 and December 31, 2009:

 
  Assets at Fair Value as of September 30, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned and derivatives

                         
 

US Government securities

  $ 274,587   $   $   $ 274,587  
 

Common stocks

    78,208     1,498     334     80,040  
 

Restricted common stock

            5,000     5,000  
 

Convertible bonds

        2,975         2,975  
 

Corporate bonds

        217,007         217,007  
 

Futures

    1,221             1,221  
 

Equity swaps

        271         271  
 

Credit default swaps

        17         17  
 

Options

    11,023         1,058     12,081  
 

Warrants and rights

            314     314  
 

Mutual Funds

    1,236             1,236  

Other investments

                       
 

Portfolio Funds

    1,074     11,993     16,053     29,120  
 

Real estate investments

            1,239     1,239  
 

Lehman claim

            313     313  
                   

  $ 367,349   $ 233,761   $ 24,311   $ 625,421  
                   

 

 
  Liabilities at Fair Value as of September 30, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

                         
 

US Government securities

  $ (235,574 ) $   $   $ (235,574 )
 

Common stocks

    (65,588 )           (65,588 )
 

Corporate bonds

        (1,419 )       (1,419 )
 

Futures

    (572 )   (330 )       (902 )
 

Equity swaps

        (164 )       (164 )
 

Options

    (3,593 )           (3,593 )
                   

  $ (305,327 ) $ (1,913 ) $   $ (307,240 )
                   

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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)

 
  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

    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 )
                   

 
  Assets at Fair Value as of September 30, 2010  
 
  Level 1   Level 2   Level 3   Total  
 
  (dollars in thousands)
 

Securities owned

                         
 

US Government securities

  $ 6,650   $   $   $ 6,650  
 

Government sponsored securities

    2,433             2,433  
 

Corporate bonds

        754         754  

Other investments

                       
 

Portfolio Funds

        2,002     341,675     343,677  
 

Lehman claims

            5,909     5,909  
                   

  $ 9,083   $ 2,756   $ 347,584   $ 359,423  
                   

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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)

 

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

Other investments

                         
 

Portfolio Funds

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

Lehman claims

            3,881     3,881  
                   

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

        The following table includes a rollforward of the amounts for the three months and nine months ended September 30, 2010 and September 30, 2009, for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.

 
  Operating Entities   Consolidated Funds  
 
  Common
stock
  Restricted
common stock
  Corporate
Bonds
  Options   Warrants and
Rights
  Portfolio
Funds
  Real
estate
  Lehman
claim
  Portfolio
Funds
  Lehman
claim
 

Balance at June 30, 2010

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

Transfers in (out)

                                    382,004 (a)    

Purchases

                3,897         193,763     75         3,633      

Sales

            (1,634 )   (4,042 )       (194,177 )   (47 )       (135,649 )   (8,547 )

Realized gains (losses)

            419     145         820             755      

Unrealized gains (losses)

            (118 )   87     (90 )   (561 )   52         6,197     (126 )
                                           

Balance at September 30, 2010

  $ 334   $ 5,000   $   $ 1,058   $ 314   $ 16,053   $ 1,239   $ 313   $ 341,675   $ 5,909  
                                           

Balance at June 30, 2009

  $   $   $   $   $   $ 1,818   $ 1,587   $ 209   $ 125,372   $ 3,881  

Transfers in (out)

                                         

Purchases

                                    1,166      

Sales

                        (1,458 )           (32,019 )    

Realized gains (losses)

                                    3,595      

Unrealized gains (losses)

                        4     (104 )       (438 )    
                                           

Balance at September 30, 2009

  $   $   $   $   $   $ 364   $ 1,483   $ 209   $ 97,676   $ 3,881  
                                           

Balance at December 31, 2009

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

Transfers in (out)

                    1,356     (2,866 )           382,004 (a)    

Purchases

        5,000     1,215     10,897         195,863     189         20,685      

Sales

            (1,634 )   (11,042 )   (402 )   (195,463 )   (100 )       (165,939 )   (8,547 )

Realized gains (losses)

            419     145           820             3,142      

Unrealized gains (losses)

                1,058     (640 )   329     73     104     4,417     10,575  
                                           

Balance at September 30, 2010

  $ 334   $ 5,000   $   $ 1,058   $ 314   $ 16,053   $ 1,239   $ 313   $ 341,675   $ 5,909  
                                           

Balance at December 31, 2008

  $   $   $   $   $   $ 1,970   $ 1,605   $ 209   $ 157,513   $ 3,881  

Transfers in (out)

                                         

Purchases

                              132         2,181      

Sales

                        (1,678 )           (70,350 )    

Realized gains (losses)

                                    4,367      

Unrealized gains (losses)

                        72     (254 )       3,965      
                                           

Balance at September 30, 2009

  $   $   $   $   $   $ 364   $ 1,483   $ 209   $ 97,676   $ 3,881  
                                           

(a)
Due to the change in strategy and composition of positions held in Enterprise Master fund, the investment in the Master fund by Enterprise LP has changed during the three months ended September 30, 2010 from a level 2 to a level 3 asset (See Note 4).

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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)

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

        There were no significant transfers between Level 1 and Level 2 assets and liabilities for the three months and nine months ended September 30, 2010.

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 September 30, 2010 and December 31, 2009:

 
  September 30, 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

  $   $   $ 1,646   $  

Commercial mortgage backed securities

            2,723      

Common stock

    17,232     (2,207 )   182,447     (47,151 )

Convertible debt

    712         123,060      

Corporate bonds

    7,594         181,402     (1,541 )

Exchange traded funds

        (1,264 )       (5,549 )

Foreign government debt

            10,374     (10,660 )

Loans

            812      

Options—put

    14     (16 )   6,052     (84 )

Options—call

    54     (44 )   2,335     (3,048 )

Over-the-counter foreign currency call option

        (116 )   5     (1 )

Preferred stock

    2,433         4,558     (198 )

Private debt

    63              

Private equity

            107      

Restricted stock

    3,148         6,172      

Rights

    2,143         1,950      

Trade claims

    128         128      

US Treasury Notes

    8,205     (7,784 )   185,118     (82,004 )

Warrants

    87         6,831      
                   

  $ 41,813   $ (11,431 ) $ 715,720   $ (150,236 )
                   

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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 September 30,
2010
  As of December 31,
2009
 
 
  (dollars in thousands)
 

Asset swaps

  $ 2   $ 295  

Credit default swaps—protection purchased

    (4 )   (574 )

Credit default swaps—protection sold

        432  

Currency forwards

    (13 )   691  

Equity swaps—long exposure

        (1,001 )

Futures

    63     (822 )

Interest rate call swaption—long exposure

        105  

Interest rate call swaption—short exposure

        (127 )

Interest rate swaps—long exposure

        40  

Total return swap

        2,123  
           

  $ 48   $ 1,162  
           

 
   
  September 30, 2010   December 31, 2009  
 
  Strategy   Fair Value  
 
   
  (dollars in thousands)
 

624 Art Holdings, LLC*

    Artwork   $ 98   $ 2,091  

QREX, LLC*

    Life Settlements         1,278  

Q Capital Strategies, LLC*

    Life Settlements     111     779  

RCG Longview Equity Fund, LP*

    Real Estate     9,752     9,036  

RCG Longview II, LP*

    Real Estate     2,331     2,261  

RCG Longview Debt Fund IV, LP*

    Real Estate     11,794     6,807  

RCG Longview, LP*

    Real Estate     343     272  

RCG Soundview, LLC*

    Real Estate     3,080     3,859  

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

    Real Estate     3,207     2,961  

RCG International Sarl*

    Multi-Strategy     8,665     7,096  

Ramius Navigation Fund Ltd*

    Multi-Strategy     50,325      

Portside Growth & Opportunity Fund*

    Multi-Strategy         9,753  

RCG Special Opportunities Fund, Ltd*

    Multi-Strategy     101,888     110,279  

Ramius Credit Opportunities Fund Ltd*

    Distressed     259     717  

RCG Endeavour, LLC*

    Multi-Strategy     96     149  

RCG Energy, LLC*

    Energy     16,512     23,063  

RCG Renergys, LLC*

    Energy     3     3  

Other Private Investments

    Various     16,010     16,059  

Real Estate Investments

    Real Estate     20,935     21,364  
                 

        $ 245,409   $ 217,827  
                 

*
These Portfolio Funds are affiliates of the Company.

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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 may 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 estimated fair value, as of September 30, 2010 and December 31, 2009:

 
   
  September 30, 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   $   $   $ 6,725   $  

Ramius Vintage Multi-Strategy Master FOF LP*

    Multi Strategy     1,632         5,394      

Tapestry Pooled Account II, LLC*

    Hedged Equity         3,396         5,642  

Tapestry Pooled Account V, LLC*

    Credit-Based     1,322     1,412     1,612     1,720  

Externally Managed Funds

    Credit-Based     6,445     880     4,084     1,158  

Externally Managed Funds

    Event Driven     8,192     6,611     9,117     13,912  

Externally Managed Funds

    Fixed Income Arbitrage     82         81      

Externally Managed Funds

    Hedged Equity     6,603     4,879     5,461     5,453  

Externally Managed Funds

    Multi Strategy     7,686     4,605     11,564     14,647  

Externally Managed Funds

    Other             47      

Externally Managed Funds

    Global Macro     2,089     2,016     2,081     5,321  

Externally Managed Funds

    Opportunistic Equity         2,318         2,825  

Externally Managed Funds

    Managed Futures     2,376         2,256     1,278  
                         

        $ 36,427   $ 26,117   $ 48,422   $ 51,956  
                         

*
These Portfolio Funds are affiliates of the Company.

33


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)

        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 macro strategies. The following table presents the summarized investment information, which is primarily receivable/(payable) on derivatives, for the underlying Portfolio Funds held by RTS Global 3X, at fair value, as of September 30, 2010:

 
  As of
September 30,
2010
 
 
  (dollars in
thousands)

 

Bond Futures

  $ (3 )

Commodity Forward

    (92 )

Commodity Future

    1,401  

Currency Forward

    218  

Currency Future

    452  

Index Future

    86  

Interest Rate Future

    67  
       

  $ 2,129  
       

        As discussed in Note 4, Replication Ltd's investment in Replication Master is equal to Replication Ltd's proportional share of Replication Master's net assets; as a result, the investment balances of Replication Master reflected below may exceed the net investment which Replication Ltd has recorded. Summarized investment information for the underlying investments and derivatives held by Replication Master, at fair value, at September 30, 2010 are comprised of exchange traded funds of which $2.6 million are held long and $0.3 million are held short.

6. Payable to Brokers

        Payable to brokers includes amounts payable for unsettled transactions, monies borrowed and proceeds for short sales (including commissions and fees related to securities transactions) equal to the fair value of securities sold, not yet purchased, which are restricted until the Company purchases the securities sold short. Pursuant to the Company's prime broker agreements, these balances are presented net (assets less liabilities) across balances with the same broker. Payable to brokers was $103.7 million and $3.8 million at September 30, 2010 and December 31, 2009, respectively.

7. Goodwill

        At least annually, and more frequently if warranted, we assess whether the goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value. Periodically estimating the fair value of a reporting unit requires significant judgement and often involves the use of significant estimates and assumptions. These estimates and assumptions could have

34


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Goodwill (Continued)


a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. There were no additions or impairment losses to goodwill during the three and nine months ended September 30, 2010.

8. 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
September 30,

  As of
December 31,

 
 
  2010   2009  
 
  (dollars in thousands)
 

Redeemable non-controlling interests in consolidated subsidiaries

             

Operating Companies(a)

  $   $ 1,713  

Consolidated Funds

    156,743     229,112  
           

  $ 156,743   $ 230,825  
           

(a)
See Note 2b

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  
 
  (dollars
in thousands)

  (dollars
in thousands)

 

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

                         

Operating Companies

  $   $ (32 ) $   $ (958 )

Consolidated Funds

    (2,029 )   (9,867 )   (7,533 )   (12,930 )
                   

  $ (2,029 ) $ (9,899 ) $ (7,533 ) $ (13,888 )
                   

9. Share-Based Compensation and Employee Ownership Plans

Share-based compensation plans in place after the Transactions

        The Company issues share-based compensation under Cowen Holdings' previously established 2006 Equity and Incentive Plan and 2007 Equity and Incentive Plan and the recently established Cowen Group, Inc. 2010 Equity and Incentive Plan with 7,500,000 shares available for issuance (collectively, the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units and other equity based awards to the Company's employees, consultants and directors for up to 17,725,000 shares of common stock. Stock options granted generally vest over two to five year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two to five year period. As of September 30, 2010, there were approximately 5.8 million shares available for future issuance under the Equity Plans. On

35


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


January 1, 2011, additional shares representing 7.5% of the Company's outstanding shares of stock, less shares available under the 2010 plan will be added to the shares available under the 2010 Equity and Incentive Plan.

        In addition to the Equity Plans, certain employees of the Company were issued RCG membership interests by RCG, a related party of the Company, in connection with the Transactions (the "RCG Grants"). 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.

        The Company measures compensation cost for share-based awards according to the fair value method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share-based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity Plans, the Company recognized expense of $6.5 million and $12.2 million, respectively, for the three months and nine months ended September 30, 2010. The income tax effect recognized for the Equity Plans was a benefit of $2.9 million and $5.5 million, respectively, for the three months and nine months ended September 30, 2010.

        In relation to awards under the RCG Grants, the Company recognized expense of $1.5 million and $5.1 million, respectively, for the three months and nine months ended September 30, 2010. The income tax effect recognized for the RCG Grants was a benefit of $0.5 million and $1.9 million, respectively, for the three months and nine months ended September 30, 2010.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The following table summarizes the Company's stock option activity for the nine months ended September 30, 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     3.81   $  

Options granted

    50,001     4.89              

Options acquired

                     

Options exercised

                     

Options forfeited

                     

Options expired

    (133,858 )   16.00              
                         

Balance outstanding at September 30, 2010

    808,925   $ 14.28     3.22   $  
                   

Options exercisable at September 30, 2010

    758,924   $ 14.90     3.12   $  
                   

(1)
Based on the Company's closing stock price of $3.29 on September 30, 2010.

        As of September 30, 2010, the unrecognized compensation expense related to the Company's grant of stock options was immaterial.

        The following table summarizes the Company's restricted share and restricted stock unit activity for the nine months ended September 30, 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

    5,121,461     4.73  

Vested

    (1,601,352 )   5.59  

Forfeited

    (538,413 )   5.28  
             

Balance outstanding at September 30, 2010

    5,535,878   $ 5.43  
             

        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 September 30, 2010, there was $20.5 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 1.9 years.

37


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

RCG Grants

        The following table summarizes the Company's RCG Grants activity for the nine months ended September 30, 2010:

 
  Nonvested
RCG Grants
  Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2009

    2,859,426   $ 7.30  

Granted

         

Vested

    (91,502 )    

Forfeited

    (129,846) (*)    
             

Balance outstanding at September 30, 2010

    2,638,078   $ 7.30  
             

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

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

        As of September 30, 2010 there was $12.3 million of unrecognized compensation expense related to the Company's RCG Grants. Unrecognized compensation expense related to RCG Grants is expected to be recognized over a weighted-average period of 2.08 years.

        There were no restricted stock units awarded and 16,866 vested awards were delivered to non-employee members of the Company's Board of Directors during the three months ended September 30, 2010. As of September 30, 2010, there were 98,054 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors.

10. Defined Benefit Plans

        The following amounts relate to the defined benefit plans in aggregate for the three months and nine months ended September 30, 2010 and 2009.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10. Defined Benefit Plans (Continued)

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

 
  Three Months
Ended
September 30,
  Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  
 
  (dollars
in thousands)

  (dollars
in thousands)

 

Service cost

  $   $   $   $  

Interest cost

    80     81     238     248  

Expected return on plan assets

    (75 )   (83 )   (222 )   (245 )

Amortization of (loss) / gain

                 

Amortization of prior service cost

    5     5     16     16  

Settlement

    (5 )   1     (5 )   28  
                   

Net periodic benefit cost

  $ 5   $ 4   $ 27   $ 47  
                   

        During the three months and nine months ended September 30, 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 fourth quarter.

11. Income Taxes

        The taxable results of the Company's U.S. operations are included in the consolidated income tax returns of Cowen Group, Inc. as well as stand-alone state and local tax returns. The Company has subsidiaries that are resident in foreign countries where tax filings have to be submitted on a stand-alone basis. These subsidiaries are subject to tax in their respective countries and the Company is responsible for and, thus, reports all taxes incurred by these subsidiaries. The countries where the Company owns subsidiaries are the United Kingdom, Germany, Japan, Hong Kong, and China.

        The Company calculated its U.S. tax provision using the estimated annual effective tax rate methodology. The tax expense or benefit caused by an extraordinary item is recorded in the quarter in which it occurs. The Company used the discrete methodology to calculate its income tax provision for its foreign subsidiaries. Based on these methodologies, the Company's effective income tax rate was (1.53)% and 24.92% for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010, the extraordinary items whose tax impact were recorded discretely were tax provisions of the Company's foreign subsidiaries and taxes resulting from prior period adjustments.

        For the period September 30, 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 September 30, 2009, the effective tax rate differed from the statutory rate of 35% primarily due to the fact that the Company was taxed as a partnership that was only subject to New York City unincorporated business tax and a deferred tax benefit associated with the purchase of a reinsurance Company in Luxembourg. Pursuant to an Advanced Tax agreement, upon these purchases, the local subsidiary generated deferred tax assets that fully offset the existing deferred tax liabilities.

39


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

11. Income Taxes (Continued)

        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 September 30, 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. The Company's subsidiary that operates in China concluded its audits for tax years 2005-2008, which resulted in immaterial tax assessments that the Company fully paid by the end of the third quarter of 2010.

12. 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. Net rent expense was $4.1 million and $2.0 million for the three months ended September 30, 2010 and 2009, respectively, and was $12 million and $6.5 million for the nine months ended September 30, 2010 and 2009, respectively.

        On August 20, 2010, the Company entered into an amendment to the Company's original lease for offices located at 1221 Avenue of Americas, New York, to surrender a portion of the office space. The Company is required to surrender one floor of the subleased premises no earlier than January 3, 2011 and no later than January 25, 2011. Additionally, the Company has the right to surrender another floor of the subleased premises on at least 60 days notice to the landlord. The Company currently intends to complete both surrenders during the first quarter of 2011.

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Commitments and Contingencies (Continued)

        On August 20, 2010, the Company entered into an amendment to the Company's original lease for offices located at 599 Lexington Avenue, New York, to lease approximately 18,500 square feet of additional office space through August 2022.

        At September 30, 2010, future minimum annual lease payments for the Company were as follows:

 
  Minimum Lease Payments  
 
  Equipment Leases   Facility Leases  
 
  (in thousands)
 

Remainder of 2010

  $ 3,893   $ 4,558  

2011

    14,386     18,202  

2012

    10,255     17,578  

2013

    6,942     16,112  

2014

    5,182     11,859  

Thereafter

    2,679     69,944  
           

  $ 43,337   $ 138,253 (a)
           

(a)
Though not reflected on this schedule, as of January 1, 2011, the minimum lease payments for the facility lease for the office space at 1221 Avenue of Americas will decrease by approximately $8.9 million as long as all the terms and conditions relating to the surrender of space as described above are met.

        The Company has entered into agreements to sublease certain of its premises. These subleases expired in May 2010. The Company recorded sublease income related to these leases of $0.5 million during the three months ended September 30, 2009 and $0.8 million and $1.4 million during the nine months ended September 30, 2010 and 2009, 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 September 30, 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 CHRP GP, the general partner of the CHRP Funds. This commitment is expected to be called over a two to five year period. The Company will make its pro-rata investment in the CHRP Funds along with the other limited partners. Through September 30, 2010, the Company has funded $17.9 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

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Commitments and Contingencies (Continued)

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 "Indemnification Agreement").

        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 September 30, 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 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.

13. 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 September 30, 2010 and December 31, 2009, the Company had borrowings of $18.0 million and $43.0 million, respectively, under the line of credit portion. The Company also has a letter of credit of $6.7 million at both September 30, 2010 and December 31, 2009. 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

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Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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; $25.0 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 September 30, 2010 and during the period from June 3, 2009 to September 30, 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) was $0.2 million and $0.4 million for the three months ended September 30, 2010 and 2009, respectively, and was $0.5 million and $1.1 million for the nine months ended September 30, 2010 and 2009, 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.

        As of September 30, 2010 the Company also has four additional irrevocable letters of credit, for which there is cash collateral pledged, including (i) $50,000, which expires on July 12, 2011, supporting workers' compensation insurance with Safety National Casualty Corporation, (ii) $57,000, which expires on May 12, 2011, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease and (iii) $82,000, which expires on May 12, 2011, supporting the Company's San Francisco office and (iv) $1.2 million, which expires on August 31, 2011, supporting the Company's lease of additional office space in New York. To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of September 30, 2010 and December 31, 2009, there were no amounts due related to these letters of credit.

14. Earnings Per Share

        The Company calculates its basic and diluted earnings per share in accordance with FASB accounting standards. Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. As of September 30, 2010,

43


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Earnings Per Share (Continued)


there were 75,423,866 shares outstanding, of which 1,554,124 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 98,054 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 and nine months ended September 30, 2010, as their inclusion would have been anti-dilutive.

        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 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
September 30,
  For the Nine Months
Ended
September 30,
 
 
  2010   2009   2010   2009  
 
  (in thousands, except
per share data)

  (in thousands, except
per share data)

 

Net (loss) income attributable to Cowen

                         
 

Group, Inc. shareholders

  $ (15,355 ) $ (5,885 ) $ (49,528 ) $ (31,895 )
                   

Shares for basic and diluted calculations:

                         
 

Average shares used in basic computation

    73,385     37,537     72,866     37,537  
 

Stock options

                 
 

Restricted shares

                 
                   
 

Average shares used in diluted computation

    73,385     37,537     72,866     37,537  
                   

Earnings (loss) per share:

                         
 

Basic

  $ (0.21 ) $ (0.16 ) $ (0.68 ) $ (0.85 )
 

Diluted

  $ (0.21 ) $ (0.16 ) $ (0.68 ) $ (0.85 )

44


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. 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.

45


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

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

 
  Three Months Ended September 30, 2010  
 
   
   
   
  Adjustments    
 
 
  Alternative Investment
Management
  Broker-Dealer   Total
Income
  Funds
Consolidation
  Other
Adjustments
  US
GAAP
 
 
   
   
   
  (dollars in thousands)
   
 

Revenues

                                     
 

Investment banking

  $   $ 7,199   $ 7,199   $   $   $ 7,199  
 

Brokerage

        26,020     26,020             26,020  
 

Management fees

    11,548         11,548     (607 )   (2,663 )   8,278  
 

Incentive income

    1,784         1,784         888     2,672  
 

Investment Income

    14,428     (296 )   14,132         (14,132 )      
 

Interest and dividends

                    4,270     4,270  
 

Reimbursement from affiliates

                (98 )   1,478     1,380  
 

Other Revenue

    509     118     627         (5 )   622  
 

Consolidated Funds

                1,761         1,761  
                           
   

Total revenues

    28,269     33,041     61,310     1,056     (10,164 )   52,202  

Expenses

                                     
 

Employee compensation and benefits

    19,788     26,128     45,916         2,078     47,994  
 

Interest and dividends

    (52 )   298     246         1,053     1,299  
 

Non-compensation expenses—Fixed

    6,774     17,076     23,850         (23,850 )    
 

Non-compensation expenses—Variable

    980     4,743     5,723         (5,723 )    
 

Non-compensation expenses

                    29,707     29,707  
 

Reimbursement from affiliates

    (1,478 )       (1,478 )       1,478        
 

Consolidated Funds

                1,245         1,245  
                           
   

Total expenses

    26,012     48,245     74,257     1,245     4,743     80,245  

Other income (loss)

                                     
 

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

                    8,810     8,810  
 

Consolidated Funds

                2,218     3,988     6,206  
                           
   

Total other income (loss)

                2,218     12,798     15,016  
                           
   

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

   
2,257
   
(15,204

)
 
(12,947

)
 
2,029
   
(2,109

)
 
(13,027

)
                           

Income taxes

                      299     299  
                           
   

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

    2,257     (15,204 )   (12,947 )   2,029     (2,408 )   (13,326 )
 

Less: (Income) loss attributable to non-controlling interests

   
   
   
   
(2,029

)
 
   
(2,029

)
   

Economic Income (Loss) / Net Income (loss) available to Cowen Group Inc. stockholders

 
$

2,257
 
$

(15,204

)

$

(12,947

)

$

 
$

(2,408

)

$

(15,355

)
                           

46


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

 
  Three Months Ended September 30, 2009  
 
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Funds
Consolidation
  Other
Adjustments
  US
GAAP
 
 
  (dollars in thousands)
 

Revenues

                         
 

Investment banking

  $   $   $   $  
 

Brokerage

                 
 

Management fees

    12,035     (968 )   (2,093 )   8,974  
 

Incentive income

    (10 )       187     177  
 

Investment Income

    13,675         (13,675 )    
 

Interest and dividends

            47     47  
 

Reimbursement from affiliates

        (216 )   2,558     2,342  
 

Other Revenue

    63         514     577  
 

Consolidated Funds

        4,345         4,345  
                   
   

Total revenues

    25,763     3,161     (12,462 )   16,462  

Expenses

                         
 

Employee compensation and benefits

    21,830         253     22,083  
 

Interest and dividends

    430         5     435  
 

Non-compensation expenses—Fixed

    9,045         (9,045 )    
 

Non-compensation expenses—Variable

    721         (721 )    
 

Non-compensation expenses

            11,178     11,178  
 

Reimbursement from affiliates

    (2,558 )       2,558      
 

Consolidated Funds

        5,311         5,311  
                   
   

Total expenses

    29,468     5,311     4,228     39,007  

Other income (loss)

                         
 

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

            1,274     1,274  
 

Consolidated Funds

        9,728     9,628     19,356  
                   
   

Total other income (loss)

        9,728     10,902     20,630  
                   
   

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

   
(3,705

)
 
7,578
   
(5,788

)
 
(1,915

)
                   

Income taxes

        (2,289 )   (3,640 )   (5,929 )
                   
   

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

    (3,705 )   9,867     (2,148 )   4,014  
 

Less: (Income) loss attributable to non-controlling interests

   
(32

)
 
(9,867

)
 
   
(9,899

)
   

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

 
$

(3,737

)

$

 
$

(2,148

)

$

(5,885

)
                   

47


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

 
  Nine Months Ended September 30, 2010  
 
   
   
   
  Adjustments    
 
 
  Alternative
Investment
Management
  Broker-Dealer   Total
Income
  Funds
Consolidation
  Other
Adjustments
  US
GAAP
 
 
   
   
  (dollars in thousands)
 

Revenues

                                     
 

Investment banking

  $   $ 23,142   $ 23,142   $   $   $ 23,142  
 

Brokerage

        85,389     85,389             85,389  
 

Management fees

    36,322         36,322     (2,301 )   (7,592 )   26,429  
 

Incentive income

    3,316         3,316         1,350     4,666  
 

Investment Income

    23,270     (629 )   22,641         (22,641 )    
 

Interest and dividends

                    7,054     7,054  
 

Reimbursement from affiliates

                (398 )   5,262     4,864  
 

Other Revenue

    484     298     782         860     1,642  
 

Consolidated Funds

                10,894         10,894  
                           
   

Total revenues

    63,392     108,200     171,592     8,195     (15,707 )   164,080  

Expenses

                                     
 

Employee compensation and benefits

    43,286     79,828     123,114         6,891     130,005  
 

Interest and dividends

    182     532     714         1,652     2,366  
 

Non-compensation expenses—Fixed

    24,688     48,277     72,965         (72,965 )    
 

Non-compensation expenses—Variable

    1,667     20,399     22,066         (22,066 )    
 

Non-compensation expenses

                    95,213     95,213  
 

Reimbursement from affiliates

    (5,262 )       (5,262 )       5,262      
 

Consolidated Funds

                5,604         5,604  
                           
   

Total expenses

    64,561     149,036     213,597     5,604     13,987     233,188  

Other income (loss)

                                     
 

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

                    9,983     9,983  
 

Consolidated Funds

                4,942     12,820     17,762  
                           
   

Total other income (loss)

                4,942     22,803     27,745  
                           
   

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

   
(1,169

)
 
(40,836

)
 
(42,005

)
 
7,533
   
(6,891

)
 
(41,363

)
                           

Income taxes

                      632     632  
                           
   

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

    (1,169 )   (40,836 )   (42,005 )   7,533     (7,523 )   (41,995 )
 

Less: (Income) loss attributable to non-controlling interests

   
   
   
   
(7,533

)
 
   
(7,533

)
   

Economic Income (Loss) / Net Income (loss) available to Cowen Group Inc. stockholders

 
$

(1,169

)

$

(40,836

)

$

(42,005

)

$

 
$

(7,523

)

$

(49,528

)
                           

48


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

 
  Nine Months Ended September 30, 2009  
 
   
  Adjustments