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

FORM 10-Q

(Mark One)  

ý

 

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

For the quarterly period ended March 31,June 30, 2011

or

o

 

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

For the transition period from                    to                  

Commission File Number: 001-34516

Cowen Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 27-0423711
(I.R.S. Employer
Identification No.)

599 Lexington Avenue
New York, New York

(Address of Principal Executive Offices)

 

10022
(Zip Code)

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

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of May 9,August 8, 2011 there were 75,668,292116,291,426 shares of the registrant's common stock outstanding.


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TABLE OF CONTENTS

Item No.
 Page No. 

PART I. FINANCIAL INFORMATION

    
 

1. Unaudited Condensed Consolidated Financial Statements

  4 
  

Condensed Consolidated Statements of Financial Condition

  4 
  

Condensed Consolidated Statements of Operations

  5 
  

Condensed Consolidated Statements of Changes in Equity

  6 
  

Condensed Consolidated Statements of Cash Flows

  7 
  

Notes to Condensed Consolidated Financial Statements

  9 
 

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

  5468 
 

3. Quantitative and Qualitative Disclosures About Market Risk

  82108 
 

4. Controls and Procedures

  83109 

PART II. OTHER INFORMATION

    
 

1. Legal Proceedings

  84110 
 

1A. Risk Factors

  85113 
 

2. Unregistered Sales of Equity Securities and Use of Proceeds

  86118 
 

3. Defaults Upon Senior Securities

  86118 
 

4. (Removed and Reserved)

  86118 
 

5. Other Information

  86118 
 

6. Exhibits

  86118 

SIGNATURES

  87119 

EXHIBIT INDEX

  88120 
 

Exhibit 31.1

    
 

Exhibit 31.2

    
 

Exhibit 32

    

Table of Contents


Special Note Regarding Forward-Looking Statements

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

        Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update any of these forward-looking statements after the date of this filing to conform our prior statements to actual results or revised expectations.

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


Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.    Unaudited Condensed Consolidated Financial Statements


Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

(in thousands, except share and per share data)

(unaudited)



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

Assets

Assets

 

Assets

 

Cash and cash equivalents

 $26,251 $36,354 

Cash and cash equivalents

 $110,175 $36,354 

Cash collateral pledged

 8,652 8,633 

Cash collateral pledged

 9,801 8,633 

Securities owned, at fair value

 507,472 474,095 

Securities owned, at fair value

 986,424 474,095 

Securities purchased under agreements to resell

 72,120 97,755 

Securities purchased under agreements to resell

 77,332 97,755 

Other investments

 42,795 40,320 

Other investments

 49,042 40,320 

Receivable from brokers

 53,094 95,937 

Receivable from brokers

 124,987 95,937 

Fees receivable

 33,170 31,688 

Fees receivable

 22,442 31,688 

Due from related parties (see Note 17)

 10,529 16,370 

Due from related parties (see Note 18)

 19,975 16,370 

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

 37,814 36,591 

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

 47,064 36,591 

Goodwill

 27,179 27,179 

Goodwill

 27,179 27,179 

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

 12,016 12,754 

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

 16,598 12,754 

Other assets

 25,808 19,456 

Other assets

 33,277 19,456 

Consolidated Funds

 

Consolidated Funds

 

Cash and cash equivalents

 2,048 7,210 

Cash and cash equivalents

 789 7,210 

Securities owned, at fair value

 7,471 8,722 

Securities owned, at fair value

 6,191 8,722 

Other investments, at fair value

 283,389 333,374 

Other investments, at fair value

 261,898 333,374 

Other assets

 758 732 

Other assets

 283 732 
           
 

Total Assets

 $1,150,566 $1,247,170  

Total Assets

 $1,793,457 $1,247,170 
           

Liabilities and Stockholders' Equity

Liabilities and Stockholders' Equity

 

Liabilities and Stockholders' Equity

 

Securities sold, not yet purchased, at fair value

 $185,118 $197,916 

Securities sold, not yet purchased, at fair value

 $442,261 $197,916 

Securities sold under agreements to repurchase

 155,672 192,165 

Securities sold under agreements to repurchase

 169,439 192,165 

Payable to brokers

 118,924 85,655 

Payable to brokers

 321,226 85,655 

Compensation payable

 18,286 76,204 

Compensation payable

 26,731 76,204 

Short-term borrowings and other debt

 30,272 31,733 

Short-term borrowings and other debt

 6,618 31,733 

Fees payable (see Note 17)

 8,131 8,797 

Fees payable (see Note 18)

 6,428 8,797 

Due to related parties (see Note 17)

 7,381 9,187 

Due to related parties (see Note 18)

 2,557 9,187 

Accounts payable, accrued expenses and other liabilities

 44,945 42,267 

Accounts payable, accrued expenses and other liabilities

 61,718 42,267 

Consolidated Funds

 

Consolidated Funds

 

Capital withdrawals payable

 6,490 7,817 

Capital withdrawals payable

 3,510 7,817 

Accounts payable, accrued expenses and other liabilities

 757 1,827 

Accounts payable, accrued expenses and other liabilities

 662 1,827 
           
 

Total Liabilities

 575,976 653,568  

Total Liabilities

 1,041,150 653,568 
           

Commitments and Contingencies (see Note 12)

 

Commitments and Contingencies (see Note 13)

Commitments and Contingencies (see Note 13)

 

Redeemable non-controlling interests

Redeemable non-controlling interests

 117,967 144,346 

Redeemable non-controlling interests

 114,349 144,346 
           

Stockholders' equity

Stockholders' equity

 

Stockholders' equity

 

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

   

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

   

Class A common stock, par value $0.01 per share: 250,000,000 shares authorized, 75,616,399 and 75,490,209 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively (including 1,345,985 and 1,554,124 restricted shares, respectively)

 726 726 

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

 1,130 726 

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

   

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

   

Additional paid-in capital

 511,628 504,480 

Additional paid-in capital

 674,205 504,480 

(Accumulated deficit) retained earnings

 (55,888) (55,970)

(Accumulated deficit) retained earnings

 (35,851) (55,970)

Accumulated other comprehensive income

 157 20 

Accumulated other comprehensive income

 375 20 
     

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

 (1,901)  
 

Total Stockholders' Equity

 456,623 449,256       
      

Total Stockholders' Equity

 637,958 449,256 
 

Total Liabilities and Stockholders' Equity

 $1,150,566 $1,247,170       
      

Total Liabilities and Stockholders' Equity

 $1,793,457 $1,247,170 
     

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


Table of Contents


Cowen Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)



 Three Months Ended
March 31,
 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 


 2011 2010 
 2011 2010 2011 2010 

Revenues

Revenues

 

Revenues

 

Investment banking

 $14,682 $6,005 

Investment banking

 $14,343 $9,938 $29,025 $15,943 

Brokerage

 27,591 29,575 

Brokerage

 24,607 29,793 52,198 59,369 

Management fees

 11,164 9,270 

Management fees

 11,857 8,881 23,021 18,151 

Incentive income

 4,381 2,093 

Incentive income

 675 (100) 5,056 1,994 

Interest and dividends

 4,559 804 

Interest and dividends

 5,840 1,380 10,399 2,183 

Reimbursement from affiliates

 1,009 1,742 

Reimbursement from affiliates

 981 1,741 1,990 3,484 

Other revenues

 690 622 

Other revenues

 232 398 922 1,020 

Consolidated Funds

 

Consolidated Funds

 
 

Interest and dividends

 169 5,781  

Interest and dividends

 136 2,965 305 8,746 
 

Other

  366  

Other

 8 4 8 370 
               
 

Total revenues

 64,245 56,258  

Total revenues

 58,679 55,000 122,924 111,260 

Expenses

Expenses

 

Expenses

 

Employee compensation and benefits

 45,087 43,433 

Employee compensation and benefits

 43,575 38,547 88,662 81,980 

Floor brokerage and trade execution

 4,110 5,028 

Floor brokerage and trade execution

 3,685 3,945 7,795 8,973 

Interest and dividends

 2,609 446 

Interest and dividends

 3,115 621 5,724 1,067 

Professional, advisory and other fees

 7,140 2,388 

Professional, advisory and other fees

 10,398 2,879 17,538 5,267 

Service fees

 3,612 3,812 

Service fees

 4,366 4,034 7,978 7,853 

Communications

 2,893 3,302 

Communications

 4,342 3,153 7,235 6,454 

Occupancy and equipment

 5,122 5,629 

Occupancy and equipment

 4,991 5,845 10,113 11,474 

Depreciation and amortization

 2,058 2,494 

Depreciation and amortization

 2,011 2,390 4,069 4,884 

Client services and business development

 4,677 4,164 

Client services and business development

 4,132 4,379 8,809 8,544 

Other

 4,295 7,386 

Other

 (259) 4,710 4,034 12,092 

Consolidated Funds

 

Consolidated Funds

 
 

Interest and dividends

 46 1,568  

Interest and dividends

 40 (177) 87 1,390 
 

Professional, advisory and other fees

 460 678  

Professional, advisory and other fees

 613 831 1,073 1,509 
 

Floor brokerage and trade execution

  709  

Floor brokerage and trade execution

  285  994 
 

Other

 122 204  

Other

 219 243 341 447 
               
 

Total expenses

 82,231 81,241  

Total expenses

 81,228 71,685 163,458 152,928 

Other income (loss)

Other income (loss)

 

Other income (loss)

 

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

 17,283 1,524 

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

 76 249 17,358 1,774 

Consolidated Funds:

 

Bargain purchase gain

 22,244  22,244  
 

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

 2,343 19,218 

Consolidated Funds:

 
 

Net realized and unrealized gains (losses) on derivatives

 (441) (220) 

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

 4,971 (8,211) 7,314 11,006 
 

Net gains (losses) on foreign currency transactions

 (156) (725) 

Net realized and unrealized gains (losses) on derivatives

 (84) 720 (525) 500 
      

Net gains (losses) on foreign currency transactions

 (117) 777 (273) 52 
 

Total other income

 19,029 19,797           
      

Total other income

 27,090 (6,465) 46,118 13,332 
 

Income (loss) before income taxes

 1,043 (5,186)          
      

Income (loss) before income taxes

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

Income tax expense (benefit)

Income tax expense (benefit)

 163 (266)

Income tax expense (benefit)

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

Net income (loss)

 22,495 (23,749) 23,375 (28,669)
 

Net income (loss)

 880 (4,920)          

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

 798 8,056 

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

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

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

 $82 $(12,976) 

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

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

Weighted average common shares outstanding:

Weighted average common shares outstanding:

 

Weighted average common shares outstanding:

 

Basic

 74,160 72,509 

Basic

 76,330 72,693 75,600 72,601 

Diluted

 76,083 72,509 

Diluted

 77,898 72,693 76,889 72,601 

Earnings (loss) per share:

Earnings (loss) per share:

 

Earnings (loss) per share:

 

Basic

 $0.00 $(0.18)

Basic

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

Diluted

 $0.00 $(0.18)

Diluted

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

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


Table of Contents

Cowen Group, Inc.

Condensed Consolidated Statements of Changes in Equity

(in thousands, except share data)

(unaudited)



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

Balance, December 31, 2010

Balance, December 31, 2010

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

Balance, December 31, 2010

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

Comprehensive income (loss):

Comprehensive income (loss):

 

Comprehensive income (loss):

 

Net income (loss)

     82 82 798 $880 

Net income (loss)

      20,119 20,119 3,256 $23,375 

Defined Benefit Plans

    97  97  97 

Defined Benefit Plans

     195  195  195 

Foreign currency translation

    40  40  40 

Foreign currency translation

     160  160  160 
                                     

Total comprehensive income (loss)

Total comprehensive income (loss)

    137 82 219 798 $1,017 

Total comprehensive income (loss)

     355 20,119 20,474 3,256 $23,730 

Capital contributions

Capital contributions

       3,504   

Capital contributions

        4,038   

Capital withdrawals

Capital withdrawals

       (30,681)   

Capital withdrawals

        (40,761)   

Consolidation of RCG Linkem II LLC

Consolidation of RCG Linkem II LLC

               3,470   

Restricted stock awards issued

Restricted stock awards issued

 126,190         

Restricted stock awards issued

 405,580          

Common stock issuance upon acquisition (see Note 2)

Common stock issuance upon acquisition (see Note 2)

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

Purchase of treasury stock

Purchase of treasury stock

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

Amortization of share based compensation

Amortization of share based compensation

   7,148   7,148    

Amortization of share based compensation

    14,086   14,086    
                                     

Balance, March 31, 2011

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

Balance, June 30, 2011

Balance, June 30, 2011

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

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


Table of Contents


Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

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

Cash flows from operating activities:

       
 

Net income (loss)

 $880 $(4,920)
 

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

       
   

Depreciation and amortization

  2,058  2,494 
   

Share-based compensation

  7,148  4,210 
   

Net loss on disposal of fixed assets

    264 
   

Purchases of securities owned, at fair value

  (3,709,677) (123,057)
   

Proceeds from sales of securities owned, at fair value

  3,693,913  72,719 
   

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

  1,276,363  36,626 
   

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

  (1,275,464) (17,641)
   

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

  (16,200) (1,297)
   

Consolidated Funds:

       
    

Purchases of securities owned, at fair value

  (148,429) (52,535)
    

Proceeds from sales of securities owned, at fair value

  149,665  43,904 
    

Purchases of other investments

  (8,100) (13,039)
    

Proceeds from sales of other investments

  58,982  69,481 
    

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

  (883) (21,227)
   

(Increase) decrease in operating assets:

       
    

Cash collateral pledged

  (19)  
    

Securities owned, at fair value, held at broker dealer

  (11,835) (37,710)
    

Receivable from brokers

  42,843  (29,852)
    

Fees receivable

  (1,482) 6,417 
    

Due from related parties

  5,841  4,292 
    

Other assets

  (6,312) (1,475)
    

Consolidated Funds:

       
      

Cash and cash equivalents

  5,162  (406)
      

Other assets

  (26) (725)
   

Increase (decrease) in operating liabilities:

       
    

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

  (5,644) 24,629 
    

Payable to brokers

  33,269  24,706 
    

Compensation payable

  (57,821) (55,527)
    

Fees payable

  (666) (1,970)
    

Due to related parties

  (1,806) (179)
    

Accounts payable, accrued expenses and other liabilites

  2,739  (15,613)
    

Consolidated Funds:

       
      

Accounts payable, accrued expenses and other liabilities

  (1,070) (44)
      
       

Net cash provided by / (used in) operating activities

  33,429  (87,475)
      
 
 Six Months Ended
June 30,
 
 
 2011 2010 
 
 (dollars in thousands)
 

Cash flows from operating activities:

       
 

Net income (loss)

 $23,375 $(28,669)
 

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

       
   

Bargain purchase gain

  (22,244)  
   

Depreciation and amortization

  4,069  4,884 
   

Share-based compensation

  14,086  9,310 
   

Net loss on disposal of fixed assets

    266 
   

Purchases of securities owned, at fair value

  (5,053,676) (666,553)
   

Proceeds from sales of securities owned, at fair value

  4,834,296  409,108 
   

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

  2,485,115  306,842 
   

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

  (2,435,760) (295,263)
   

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

  (13,509) (1,975)
   

Consolidated Funds:

       
    

Purchases of securities owned, at fair value

  (245,778) (212,811)
    

Proceeds from sales of securities owned, at fair value

  248,297  202,007 
    

Purchases of other investments

  (11,101) (18,634)
    

Proceeds from sales of other investments

  87,963  117,873 
    

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

  (5,373) (15,578)
   

(Increase) decrease in operating assets:

       
    

Cash acquired upon acquisition (see Note 2)

  117,496   
    

Cash collateral pledged

  (41)  
    

Securities owned, at fair value, held at broker dealer

  (73,150) 82,450 
    

Receivable from brokers

  64,704  (11,697)
    

Fees receivable

  9,246  5,325 
    

Due from related parties

  (136) 259 
    

Other assets

  (8,765) 5,404 
    

Consolidated Funds:

       
      

Cash and cash equivalents

  6,421  (6,089)
      

Other assets

  449  99 
   

Increase (decrease) in operating liabilities:

       
    

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

  28,189  11,727 
    

Payable to brokers

  154,035  101,469 
    

Compensation payable

  (52,799) (51,711)
    

Fees payable

  (3,338) (3,840)
    

Due to related parties

  (6,630) (800)
    

Accounts payable, accrued expenses and other liabilites

  3,339  (20,775)
    

Consolidated Funds:

       
      

Accounts payable, accrued expenses and other liabilities

  (1,165) 661 
      
       

Net cash provided by / (used in) operating activities

  147,615  (76,711)
      

Table of Contents


Cowen Group, Inc.

Condensed Consolidated Statements of Cash Flows (Continued)

(in thousands)

(unaudited)



 Three Months Ended
March 31,
 
 Six Months Ended
June 30,
 


 2011 2010 
 2011 2010 


 (dollars in thousands)
 
 (dollars in thousands)
 

Cash flows from investing activities:

Cash flows from investing activities:

 

Cash flows from investing activities:

 

Securities purchased under agreements to resell

 25,635  

Securities purchased under agreements to resell

 20,423  

Purchases of other investments

 (35,683) (958)

Purchases of other investments

 (40,650) (3,164)

Proceeds from sales of other investments

 35,577 3,539 

Proceeds from sales of other investments

 39,567 5,686 

Purchase of fixed assets

 (2,543) (67)

Purchase of fixed assets

 (4,263) (172)
           
 

Net cash provided by / (used in) investing activities

 22,986 2,514  

Net cash provided by / (used in) investing activities

 15,077 2,350 
           

Cash flows from financing activities:

Cash flows from financing activities:

 

Cash flows from financing activities:

 

Securities sold under agreements to repurchase

 (36,493)  

Securities sold under agreements to repurchase

 (22,726) 28,640 

Repayments on short-term borrowings and other debt

 (1,521) (25,001)

Repayments on short-term borrowings and other debt

 (25,608) (25,000)

Consolidated Funds:

 

Borrowings on short-term borrowings and other debt

 493  
 

Capital contributions by non-controlling interests in Consolidated Funds

 3,504 1,902 

Capital withdrawals to non-controlling interests

 (2,009)  
 

Capital withdrawals to non-controlling interests in Consolidated Funds

 (32,008) (26,452)

Consolidated Funds:

 
      

Capital contributions by non-controlling interests in Consolidated Funds

 4,038 2,646 
 

Net cash (used in) / provided by financing activities

 (66,518) (49,551) 

Capital withdrawals to non-controlling interests in Consolidated Funds

 (43,059) (63,942)
           
 

Net cash (used in) / provided by financing activities

 (88,871) (57,656)
     

Change in cash and cash equivalents

Change in cash and cash equivalents

 (10,103) (134,512)

Change in cash and cash equivalents

 73,821 (132,017)

Cash and cash equivalents at beginning of year

Cash and cash equivalents at beginning of year

 36,354 147,367 

Cash and cash equivalents at beginning of year

 36,354 147,367 
           

Cash and cash equivalents at end of period

Cash and cash equivalents at end of period

 $26,251 $12,855 

Cash and cash equivalents at end of period

 $110,175 $15,350 
           

Supplemental non-cash information:

Supplemental non-cash information:

 

Supplemental non-cash information:

 

Deconsolidation of CHRP GP (see Note 3b)

Deconsolidation of CHRP GP (see Note 3b)

 $ $1,712 

Deconsolidation of CHRP GP (See Note 2b)

 $ $1,712       

Net assets of consolidated entity

Net assets of consolidated entity

 $3,470 $ 
           

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

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

 $ $6,745 

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

 $ $6,745       

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

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

 $1,901 $ 
           

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

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

 $156,048 $ 
     

Net assets acquired upon acquisition (net of cash)

Net assets acquired upon acquisition (net of cash)

 $58,486 $ 
     

Non-compete agreements acquired

Non-compete agreements acquired

 $2,310 $ 
     

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


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization and Business

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

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

2. Acquisition

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

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)


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

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

 
 (dollars in thousands) 
 

Cash and cash equivalents

 $117,496 
 

Cash collateral pledged

  1,127 
 

Securities owned, at fair value

  221,855 
 

Other investments

  2,569 
 

Receivable from brokers

  93,754 
 

Fixed assets, net

  8,804 
 

Intangibles

  3,010 
 

Other assets

  4,897 
 

Securities sold, not yet purchased, at fair value

  (175,391)
 

Payable to brokers

  (81,536)
 

Compensation payable

  (3,521)
 

Fees payable

  (969)
 

Unfavorable lease

  (3,388)
 

Accounts payable, accrued expenses and other liabilities

  (12,725)
    

Total net assets acquired

 $175,982 
    
 

Non-compete agreements acquired

  2,310 
 

Goodwill/(Bargain purchase gain) on transaction

  (22,244)(1)
    

Total purchase price

 $156,048 
    

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)

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

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

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

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

Intangible asset class

     

Exchange memberships

 $240 indefinite

Covenants to not compete

  1,950 1 or 2

Covenants with limiting conditions

  580 10

Intellectual property

  2,550 3
     
 

Total intangible assets

 $5,320  
     

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

 
 (dollars in thousands) 

2011

 $997 

2012

  1,883 

2013

  1,341 

2014

  483 

2015

  58 

Thereafter

  318 
    

 $5,080 
    

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Acquisition (Continued)

        The following unaudited supplemental pro forma information presents condensed consolidated financial results for the six month periods as if the acquisition was completed as of January 1, 2010. This supplemental pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company's results would have been had the acquisition been completed on January 1, 2010, nor does it purport to be indicative of any future results.

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

Revenues

 $124,245 $111,986 

Net Income

  1,129  (56,929)

Net Income per common share

       
 

Basic

  0.01  (0.50)
 

Diluted

  0.01  (0.50)

3. Significant Accounting Policies

a.     Basis of presentation

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2.3. Significant Accounting Policies (Continued)

b.     Principles of consolidation

        The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting operating entity ("VOE") or a variable interest entity ("VIE") under US GAAP.

        Voting Operating Entities—VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity's economic performance. VOEs are consolidated in accordance with Financial Accounting Standards Board ("FASB") accounting standards. In accordance with these standards, the Company presently consolidates five funds deemed to be VOEs for which it acts as the general partner and investment manager.

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

        As of March 31,June 30, 2011 the Company consolidates the following funds (the "Consolidated Funds"): Ramius Enterprise LP ("Enterprise LP"), Ramius Multi-Strategy FOF LP ("Multi-Strat FOF"), Ramius Vintage Multi-Strategy FOF LP ("Vintage LP"), Ramius Levered Multi-Strategy FOF LP ("Levered FOF"), and RTS Global 3x Fund LP ("RTS Global 3x").

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

        Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with FASB accounting standards, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the new FASB consolidation model for VIEs, an enterprise that (1) has the power to direct the activities of a VIE that most significantly impacts the VIE's economic performance, and (2) has an obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, is considered to have a controlling financial interest in the VIE and thus is required to consolidate it.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2.3. Significant Accounting Policies (Continued)


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

        The Company determines whether it is the primary beneficiary of a VIE by performing a qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, terms of any contracts between the Company and the VIE, which interests create or absorb variability, related party relationships and the design of the VIE. As of March 31,June 30, 2011, the Company does not consolidate any VIEs.

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

        As at March 31,June 30, 2011, the Company holds a variable interest in Ramius Enterprise Master Fund Ltd ("Enterprise Master"), Ramius Multi-Strategy Master FOF LP and Ramius Vintage Multi-Strategy Master FOF LP (the "Unconsolidated Master Funds") through three of its Consolidated Funds: Enterprise LP, Multi-Strat FOF and Vintage FOF (the "Consolidated Feeder Funds"), respectively. Investment companies like the Consolidated Feeder Funds, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under FASB accounting standards, are not subject to the consolidation provisions for their investments. Therefore, the Company has not consolidated the Unconsolidated Master Funds.

        In the ordinary course of business, the Company also sponsors various other entities that it has determined to be VIEs. These VIEs are primarily funds and real estate entities for which the Company serves as the general partner, managing member and/or investment manager with decision-making rights.

        The Company does not consolidate any of the funds or real estate entities that are VIEs as it has concluded that it is not the primary beneficiary in each instance. Fund investors are entitled to all of the economics of these VIEs with the exception of the management fee and incentive income, if any, earned by the Company. The Company's involvement with funds and real estate entities that are unconsolidated VIEs is limited to providing investment management services in exchange for management fees and incentive income. Although the Company may advance amounts and pay certain expenses on behalf of the funds and real estate entities that it considers to be VIEs, it does not provide, nor is it required to provide, any type of substantive financial support to these entities outside of regular investment management services.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

        The total assets and liabilities of the variable interest entities for which the Company has concluded that it holds a variable interest, but for which it is not the primary beneficiary, are


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


$315.3 $296 million and $1$1.9 million as of March 31,June 30, 2011 and $383.3 million and $26.7 million as of December 31, 2010, respectively. In addition, the maximum exposure relating to these variable interest entities as of March 31,June 30, 2011 was $256.9$236.7 million, all of which is in other investments, at fair value and as of December 31, 2010 was $307.8 million, of which $307.2 million is included in other investments, at fair value and $0.6 million is included in due from related parties in the Company's condensed consolidated statements of financial condition, respectively. The Consolidated Feeder Funds' maximum exposure to loss related to their respective Unconsolidated Master Funds at March 31,June 30, 2011 and December 31, 2010 was limited to their investmentinvestments in their respective Unconsolidated Master Funds. See Note 45 for further information regarding the Company's investments.

        Equity Method Investments—For operating entities over which the Company exercises significant influence but which do not meet the requirements for consolidation as outlined above, the Company uses the equity method of accounting. The Company's investments in equity method investees are recorded in other investments in the condensed consolidated statements of financial condition. The Company's equity in earnings or losses from equity method investees is included in net gains (losses) on securities, derivatives and other investments in the condensed consolidated statements of operations.

        The Company evaluates for impairment its equity method investments whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment when the loss in value is deemed other than temporary.

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

        Other—If the Company does not consolidate an entity, apply the equity method of accounting or account for an investment under the cost method, the Company accounts for all other debt and marketable equity securities which are bought and held principally for the purpose of selling them in the near term as trading securities in accordance with FASB accounting standards, at fair value with unrealized gains (losses) resulting from changes in fair value reflected within net gains (losses) on securities, derivatives and other investments in the condensed consolidated statements of operations.

        Retention of Specialized Accounting—The Consolidated Funds are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these funds pursuant to FASB accounting standards. The Consolidated Funds report their investments on the condensed consolidated statements of financial condition at their estimated fair value, with unrealized gains (losses) resulting from changes in fair value reflected as a component of operations. Accordingly, the accompanying condensed consolidated financial statements reflect different accounting policies for investments depending on whether or not they are held through a consolidated investment company. In addition, the Company's broker-dealer subsidiaries, Ramius Securities LLC ("Ramius Securities") and Cowen and Company, LLC ("Cowen and Company"), Cowen Capital LLC, Cowen International Trading Limited,


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


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


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

c.     Use of estimates

        The preparation of the condensed consolidated financial statements in conformity with GAAP requires the management of the Company to make estimates and assumptions that affect the fair value of securities and other investments, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, the accounting for goodwill and identifiable intangible assets and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

d.     Valuation of investments and derivative contracts

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

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

Level 2

 

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

Level 3

 

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

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


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)

        The Company and its operating company subsidiaries act as the manager for the Consolidated Funds. Both the Company and the Consolidated Funds hold certain investments which are valued by the Company, acting as the investment manager. The fair value of these investments is generally estimated based on proprietary models developed by the Company, which include discounted cash flow analyses, public market comparables, and other techniques and may be based, at least in part, on independently sourced market information. The material estimates and assumptions used in these models include the timing and expected amount of cash flows, the appropriateness of discount rates


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


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

        The Company primarily uses the "market approach" valuation technique to value its financial instruments measured at fair value. In determining an instrument's placement within the hierarchy, the Company separates the Company's financial instruments into three categories: securities, derivative contracts and other investments. To the extent applicable, each of these categories can further be divided between those held long or sold short.

        Securities—Securities whose values are based on quoted market prices in active markets for identical assets, and are therefore classified in level 1 of the fair value hierarchy, include active listed equities, certain U.S. government and sovereign obligations, ETF's and certain money market securities. The Company does not adjust the quoted price for such instruments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

        Certain positions for which there is a limited market, consisting primarily of convertible debt, corporate debt and loans, are stated at fair value. The estimated fair values assigned by management are determined in good faith and are based on available information considering, among other things, quotations provided by published pricing services, counterparties and other market participants, and pricing models using quoted inputs, and do not necessarily represent the amounts which might ultimately be realized. Such positions that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources which are supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability.

        Derivative contracts—Derivative contracts can be exchange-traded or privately negotiated over-the-counter ("OTC"). Exchange-traded derivatives, such as futures contracts and exchange traded option contracts, are typically classified within level 1 or level 2 of the fair value hierarchy depending on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Derivative contracts are included within other assets or accounts payable, accrued expenses and other liabilities on the consolidated statements of financial condition. The Company's direct involvement with derivative financial instruments include credit default swaps, futures, equity swaps, options and warrants and rights which are included within securities owned, at fair value in the condensed consolidated statements of financial condition.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2.3. Significant Accounting Policies (Continued)


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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)

        See Note 45 and 56 for further information regarding the Company's investments, including equity method investments, and fair value measurements.

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

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

Transactions involving purchases of securities under agreements to resell are carried at their contract value which approximates fair value. As of March 31,June 30, 2011 and December 31, 2010, the fair value of the collateral received by the Company was $70.3$76 million and $95.5 million, respectively.

        Transactions involving the sale of securities under agreements to repurchase are carried at their contract value and are accounted for as collateralized financings. In connection with these financings, as of March 31,June 30, 2011 and December 31, 2010, the Company had pledged collateral in the amount of $170$163.1 million and $207.4 million, respectively, which is included in securities owned, at fair value in the condensed consolidated statements of financial condition.

        Collateral is valued periodicallydaily and the Company and its counterparties may adjust the collateral or require additional collateral to be deposited when appropriate. Collateral held by counterparties may be sold or re-hypothecated by such counterparties, subject to certain limitations sometimes imposed by the Company. Collateralized repurchase agreementsRepurchase 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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


values, and by requiring additional collateral to be promptly deposited with or returned to the Company when deemed necessary. The Company's securities purchased under agreements

f.      Deferred rent

        Deferred rent primarily consists of step rent, allowances from landlords and fair valuing our leases property in accordance with GAAP in relation to resellbusiness combinations related to our leases properties. Step rent represents the difference between actual operating lease payments due and securities sold under agreementsstraight-line rent expense, which is recorded by the Company over the term of the lease, including the build-out period. This amount is recorded as deferred rent in the early years of the lease, when cash payments are generally lower than straight-line rent expense, and reduced in the later years of the lease when payments begin to repurchase were transacted pursuantexceed the straight-line expense. Landlord allowances are generally comprised of amounts received and/or promised to agreements with multiple counterparties at March 31,us by landlords and may be received in the form of cash or free rent. These allowances are part of the negotiated terms of the lease. We record a receivable from the landlord and a deferred rent liability when the allowances are earned. This deferred rent is amortized into income (through lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease, and the receivable is reduced as amounts are received from the landlord. Liabilities resulting from valuing our leases acquired through business combinations are quantified by comparing the current fair value of the leases space to current rental payments. Deferred rent, included in a accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition, for the years ended June 30, 2011 and December 31, 2010.2010 is $18.9 million and $15.1 million, respectively.

f.g.     Expenses

        Included within expenses infor the first quarter ofthree and six month ended June 30, 2011 is $2.8$0.7 million and $3.5 million, respectively, in acquisition-related expenses such as legal, consulting and banking fees, associated with the proposed acquisition of LaBranche & Co Inc. and other reorganization charges within the alternative investment management business.

g.h.     Recently adopted accounting pronouncements

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


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

        In April 2011, the FASB issued guidance to improve the accounting for repurchase agreementsRepurchase Agreements (repos) and other agreements by modifying the criteria for determining when the transactions would be accounted for as financings (secured borrowings/lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). Specifically, the guidance removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by the transferee. In accordance with


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


the new guidance, the contractual rights and obligations determine effective control and there does not need to be a requirement to assess the ability to exercise those rights. The guidance is effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. The Company is currently assessing the impact of this guidance on its condensed consolidated financial statements.

        In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. The guidance requires additional disclosure on transfers in and out of Levels I1 and II2 fair value measurements in the fair value hierarchy and the reasons for such transfers. In addition, for fair value measurements using significant unobservable inputs (Level III)3), the reconciliation of beginning and ending balances shall be presented on a gross basis, with separate disclosure of gross purchases, sales, issuances and settlements and transfers in and transfers out of Level III.3. The new guidance also requires enhanced disclosures on the fair value hierarchy to disaggregate disclosures by each class of assets and liabilities. In addition, an entity is required to provide further disclosures on valuation techniques and inputs used to measure fair value for fair value measurements that fall in either Level II2 or Level III.3. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level III3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010. The Company adopted the guidance, excluding the reconciliation of Level III3 activity, with the issuance of its March 31, 2010 financial statements. In addition, the Company first adopted the guidance related to the reconciliation of Level III3 activity in its March 31, 2011 condensed consolidation financial statements. As the guidance is limited to enhanced disclosures, adoption did not have a material impact on the Company's condensed consolidated financial statements.

        In March 2010, the FASB issued accounting guidance that changes the accounting for credit derivatives embedded in beneficial interests in securitized financial assets. The new guidance eliminates the scope exception for embedded credit derivatives, unless they are created solely by subordination of one financial instrument to another. Bifurcation and separate recognition may be required for certain beneficial interests that are currently not accounted for at fair value through earnings. The adoption of this accounting guidance on July 1, 2010 did not have a material impact on the Company's condensed consolidated financial statements.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Significant Accounting Policies (Continued)


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

        In December 2010, the FASB issued enhanced guidance on when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. The updated guidance modifies existing requirements under step one of the goodwill impairment test for reporting


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2. Significant Accounting Policies (Continued)


units with zero or negative carrying amounts and requires step two to be performed if it is more likely than not that a goodwill impairment exists. The guidance is effective for interim and annual reporting periods beginning after December 15, 2010. As the Company's reporting units do not currently have zero or negative carrying values, adoption isdid not expected to have a material impact on the Company's condensed consolidated financial statements.

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

h.i.      Future adoption of accounting pronouncements

        As of March 31,June 30, 2011, none of the changes to the Codification issued by the FASB that are not yet effective are expected to have a material impact on the Company's financial position or results of operations.

3.4. Cash collateral pledged

        As of March 31,June 30, 2011 and December 31, 2010, cash collateral pledged in the amount of $9.8 million and $8.6 million, respectively, primarily relates to a) a bond held as collateral on a letter of credit and b) a letter of credit issued to the landlord of the Company's premises in New York City (see Note 13)14). Also included in cash collateral pledged as of March 31,June 30, 2011 and December 31, 2010 is $0.5 million, respectively, relating to an agreement that the Company has with Société Générale to cover the costs of litigation matters included in the agreement.

4.5. Investments of Operating Entities and Consolidated Funds

a.     Operating Entities

Securities owned, at fair value

        Securities owned are held by the Company and considered held for trading and carried at fair value. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations.


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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


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

 (dollars in thousands)
  (dollars in thousands)
 

U.S. Government securities(a)

 $78,892 $143,247 

US Government securities(a)

 $162,410 $143,247 

Common stocks

 153,715 116,215  207,841 116,215 

Restricted common stock

 5,000 5,000  5,000 5,000 

Corporate bonds(b)

 244,028 191,702 

Convertible bonds(b)

 27,222  

Corporate bonds(c)

 316,126 191,702 

Exchange traded funds

 218,135  

Options

 22,061 14,349  45,409 14,349 

Warrants and rights

 2,902 2,334  3,411 2,334 

Mutual funds

 874 1,248  870 1,248 
          

 $507,472 $474,095  $986,424 $474,095 
          

(a)
As of March 31,June 30, 2011, maturities ranged from June 2013 to February 2016 to November 20212041 and interest rates ranged between 2.13%0.38% and 8%. As of December 31, 2010, maturities ranged from November 2019 to February 2026 and interest rates ranged between 3.38% and 8%.

(b)
As of March 31,June 30, 2011, the maturity was April 2015 with interest rate of 5.50%.

(c)
As of June 30, 2011, maturities ranged from AprilDecember 2011 to January 2068February 2041 and interest rates ranged between 1.75%0.38% and 13.5%13.50%. At December 31, 2010, maturities ranged from May 2011 to August 2039 and interest rates ranged between 1.4% and 13%.

        The Company's direct involvement with derivative financial instruments includes credit default swaps, futures, equity swaps, options and warrants and rights. Open equity in futures transactions are recorded as receivables from and payables to broker-dealers or clearing brokers as applicable. The Company's derivatives trading activities exposes us to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, foreign currency movements and changes in the liquidity of markets. The Company's long exposure to futures, equity swap and credit default swap derivative contracts, at fair value, as of March 31,June 30, 2011 and December 31, 2010 of $0.5 million and $0.4 million, respectively, is included in other assets in the accompanying condensed consolidated statements of financial condition. The Company's short exposure to futures and equity swap derivative contracts, at fair value, as of March 31,June 30, 2011 and December 31, 2010 of $0.8 million and $0.6 million, respectively, is included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition.

The Company may transactgains/(losses) related to derivatives trading activities for the three months and six months ended June 30, 2011 were not material. The gains/(losses) on derivative contracts are included in a varietyother income in the condensed consolidated statements of derivative instruments primarily for trading purposes with each instruments' primary risk exposure being interest rate, credit, foreign exchange, equity or commodity risk.operations.

        Pursuant to the various derivatives transactions discussed above, the Company is required to post collateral for its obligations or potential obligations. As of March 31,June 30, 2011 and December 31, 2010, respectively, collateral consisting of $15.8 and $3.2 million, respectively, is included in receivable from brokers on the condensed consolidated statements of financial condition. As of March 31, 2011 and December 31, 2010 all derivative contracts were with major financial institutions.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

Other investments

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


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

 (dollars in thousands)
  (dollars in thousands)
 

(1) Portfolio Funds, at fair value

 $31,653 $29,391  $32,645 $29,391 

(2) Real estate investments, at fair value

 2,102 1,882  2,289 1,882 

(3) Equity method investments

 8,539 8,734  13,607 8,734 

(4) Lehman claims, at fair value

 501 313  501 313 
          

 $42,795 $40,320  $49,042 $40,320 
          

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


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

 (dollars in thousands)
  (dollars in thousands)
 

Tapestry Investment Co PCC Ltd(a)

 $283 $565  $284 $565 

Cowen Healthcare Royalty Partners(b)(*)

 15,164 14,769  14,618 14,769 

Cowen Healthcare Royalty Partners II(b)(*)

 431 143  279 143 

Ramius Global Credit Fund LP(c)(*)

 13,147 11,733  13,739 11,733 

Ramius Alternative Replication Ltd(d)(*)

 877 866  864 866 

Ramius Enhanced Replication Fund LLC(e)(*)

 561   553  

Other affiliated funds(f)(*)

 1,190 1,315 

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

 323  

Other private investment(g)

 1,313  

Other affiliated funds(h)(*)

 672 1,315 
          

 $31,653 $29,391  $32,645 $29,391 
          

*
These portfolio funds are affiliates of the Company

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

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

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

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

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

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

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

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

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

        Real estate investments as of March 31,June 30, 2011 and December 31, 2010 are carried at fair value and include real estate equity investments held by RCG RE Manager, LLC ("RE Manager"), a real estate operating subsidiary of the Company, of $1.4$1.5 million and $1.1 million, respectively, and real estate debt investments held by the Company of $0.8 million, respectively.

        Equity method investments include investments held by the Company in several operating companies whose responsibilities primarily include the day to day management of a number of real estate funds, including the portfolio management and administrative services related to the acquisition, disposition, and active monitoring of the real estate funds' underlying debt and equity investments. The Company's ownership interests in these equity method investments range from 30% to 55%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in three of these entities: RCG Longview Debt Fund IV Management, LLC, RCG Longview Debt Fund IV Partners, LLC and RCG Longview Partners II, LLC. The operating agreements that govern the management of day-to-day operations and affairs of each of these three entities stipulate that certain decisions require support and approval from other members in addition to the support and approval of the Company. As a result, all operating decisions made in these three entities require the support of both the Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company that is not protective in nature. As the Company does not possess unilateral control over any of these entities, the presumption of consolidation has been overcome pursuant to current accounting standards and the Company accounts for these investments under the equity method of accounting. Also included in equity method investments is the investment in a) CHRP GP (see Note 3), b) an investment in the Chicago Board Options Exchange CBOE (Chicago Board Options


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Exchange) Stock Exchange LLC representing a 9.7% stake in the exchange service provider and c)Starboard Value LP (and certain related parties) which serves as an operating company whose responsibilities primarily include the day to day management (including portfolio management) of accounting. Also included in equity method investments is the investment in CHRP GP (see Note 2).a deep value small cap hedge fund and related managed accounts. The following table summarizes equity method investments held by the Company:


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

 (dollars in thousands)
  (dollars in thousands)
 

RCG Longview Debt Fund IV Management, LLC

 $989 $2,009  $1,172 $2,009 

Cowen Healthcare Royalty GP, LLC

 1,231 1,176  1,206 1,176 

Cowen Healthcare Royalty GP II, LLC

 22 8  21 8 

Chicago Board Options Exchange

 2,545  

Starboard Value LP

 2,266  

RCG Longview Partners, LLC

 2,347 2,203  1,560 2,203 

RCG Longview Louisiana Manager, LLC

 193 186  650 186 

RCG Urban American, LLC

 1,026 889  1,100 889 

RCG Urban American Management, LLC

 627 359  798 359 

RCG Longview Equity Management, LLC

 331 499  349 499 

Urban American Real Estate Fund II, L.P.

 1,095 833  1,279 833 

RCG Kennedy House, LLC

 330 259  315 259 

Other

 348 313  346 313 
          

 $8,539 $8,734  $13,607 $8,734 
          

        As of March 31,June 30, 2011, the Company's share of losses in its equity method investment in RCG Longview Partners II, LLC has exceeded the carrying amount recorded in this investee. RCG Longview Partners II, LLC, as general partner to a real estate fund, has reversed previously recorded incentive income allocations and has recorded a current clawback obligation to the limited partners in the fund. This obligation is due to a change in unrealized value of the fund on which there have previously been distributed carried interest realizations; however, the settlement of a potential obligation is not due until the end of the life of the respective fund. As the Company is obligated to return previous distributions it received from RCG Longview Partners II, LLC, it has continued to record its share of gains/losses in the investee including reflecting its share of the clawback obligation in the amount of $6.2 million. All such amounts are included in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.

        The Company's income (loss) from equity method investments was $1.2 million and $0.4$0.5 million for the three months ended March 31,June 30, 2011 and 2010, respectively, and was $2.4 million and $1 million for the six months ended June 30, 2011 and 2010, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations. In addition, the Company recorded no impairment charges in relation to its equity method investments for the three months and six months ended March 31,June 30, 2011 and 2010.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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

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

Revenues

 $2,116 $2,094 

Expenses

  (1,381) (1,559)

Net realized and unrealized gains (losses)

  364  (122)
      

Net Income

 $1,099 $413 
      

        Lehman Brothers International (Europe) ("LBIE"), through certain affiliates, was a prime broker to the Company, and the Company held cash and cash equivalent balances with LBIE. On September 15, 2008, LBIE was placed into administration (the "Administration") in the United Kingdom and, as a result, the assets held by the Company in its LBIE accounts were frozen at LBIE. The status and ultimate resolution of the assets under LBIE's Administration proceedings is uncertain. The assets of the Company at LBIE at the time of Administration (the "Total Net Equity Claim") consist of $1.0$1 million, which the Company believes will represent an unsecured claim against LBIE. This does not include the additional claims held by the Company against LBIE through its investment in Enterprise Master discussed in Note 4b. There can be no assurance that the Total Net Equity Claim value, as determined by the Company, will be accepted by the Administrators, nor does the Company know the manner and timing in which such claim will be satisfied and the ultimate value that will be received.

        Given the great degree of uncertainty as to the status of the assets held at LBIE and the process and prospects of the return of those assets, the Company has decided to record the estimated fair value of the Total Net Equity Claim at an approximately 52% discount at March 31,June 30, 2011 and a 70% discount at December 31, 2010, which represents management's best estimate at the respective dates of the value that ultimately may be recovered with respect to the Total Net Equity Claim (the "Estimated Recoverable Lehman Claim"). The Estimated Recoverable Lehman Claim was recorded at estimated fair value considering a number of factors including the status of the assets under U.K. insolvency laws and the trading levels of LehmanLBIE 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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


of the date of the condensed consolidated financial statements. However, these transactions result in off-balance sheet risk, as the Company's ultimate cost to satisfy the delivery of securities sold, not yet purchased, may exceed the amount reflected in the condensed consolidated statements of financial condition. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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


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

 (dollars in thousands)
  (dollars in thousands)
 

U.S. Government securities(a)

 $75,455 $100,559  $119,127 $100,559 

Common stocks

 90,710 88,580  140,459 88,580 

Corporate bonds(b)

 8,829 2,615  69,562 2,615 

Exchange traded funds

 97,769  

Options

 10,124 6,162  15,344 6,162 
          

 $185,118 $197,916  $442,261 $197,916 
          

(a)
As of March 31,June 30, 2011, maturities ranged from February 2016May 2014 to NovemberJanuary 2040 and interest rates ranged between 2.625%0.75% and 4.25%7.415%. As of December 31, 2010, maturities ranged from December 2015 to August 2026 and interest rates ranged between 2.13% and 6.75%.

(b)
As of March 31,June 30, 2011, maturities ranged from September 2011 to June 2013 to December 20492031 and interest rates ranged between 3.25%0.50% and 7.75%10%. As of December 31, 2010, maturities ranged from June 2013 to December 2025 and interest rates ranged between 2.25% and 3.75%.

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

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

 
 As of March 31,
2011
 
 
 (dollars in thousands)
 

Securities purchased under agreements to resell

    

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

 $72,120 
    

Securities sold under agreements to repurchase

    

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

  55,102 

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

  100,570 
    

 $155,672 
    
 
 As of June 30,
2011
 
 
 (dollars in thousands)
 

Securities purchased under agreements to resell

    

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

 $77,333 
    

Securities sold under agreements to repurchase

    

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

  49,450 

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

  119,989 
    

 $169,439 
    

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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



 As of December 31,
2010
  As of December 31,
2010
 

 (dollars in thousands)
  (dollars in thousands)
 

Securities purchased under agreements to resell

  

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

 $97,755  $97,755 
      

Securities sold under agreements to repurchase

  

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

 48,532  48,532 

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

 143,633 

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

 143,633 
      

 $192,165  $192,165 
      

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

b.     Consolidated Funds

Securities owned, at fair value

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

 As of June 30, As of December 31, 

 As of March 31,
2011
 As of December 31,
2010
  2011 2010 

 (dollars in thousands)
  (dollars in thousands)
 

Government sponsored securities*

 $6,562 $7,682  $4,064 $7,682 

Commercial paper**

 909   1,726  

Corporate bond***

  1,040  401 1,040 
          

 $7,471 $8,722  $6,191 $8,722 
          

*
As of March 31,June 30, 2011, maturities ranged from April 2011March 2012 to FebruaryMay 2013 and interest rates ranged between 0.50%0.35% and 1.735%1.74%. As of December 31, 2010, maturities ranged from January 2011 to December 2012 and interest rates ranged between 0.35% and 4.88%.

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

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Other investments, at fair value

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

 As of June 30, As of December 31, 

 As of March 31,
2011
 As of December 31,
2010
  2011 2010 

 (dollars in thousands)
  (dollars in thousands)
 

(1) Portfolio Funds

 $276,196 $327,131  $254,578 $327,131 

(2) Lehman claims

 7,193 6,243  7,320 6,243 
          

 $283,389 $333,374  $261,898 $333,374 
          

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

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

 (dollars in thousands)
  (dollars in thousands)
 

Investments of Enterprise LP

 $227,457 $257,246  $215,457 $257,246 

Investments of consolidated fund of funds investment companies

 48,739 69,885  39,121 69,885 
          

 $276,196 $327,131  $254,578 $327,131 
          

        Enterprise LP operates under a "master-feeder" structure with Enterprise Master, whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate LP.Fund, L.P. The consolidated investments in Portfolio Funds recorded in other investments on the condensed consolidated statements of financial condition include Enterprise LP's investment of $227$215 million and $257 million in Enterprise Master as of March 31,June 30, 2011 and December 31, 2010, respectively. On May 12, 2010, the Company announced its intention to close Enterprise Master. Prior to this announcement, strategies utilized by Enterprise Master included merger arbitrage and activist investing, investments in distressed securities, convertible hedging, capital structure arbitrage, equity market neutral, investments in private placements of convertible securities, proprietary mortgages, structured credit investments, investments in mortgage backed securities and other structured finance products, investments in real estate and real property interests, structured private placements and other relative value strategies. Enterprise Master had broad investment powers and maximum flexibility in seeking to achieve its investment objective. Enterprise Master was permitted to invest in equity securities, debt instruments, options, futures, swaps, credit default swaps and other derivatives. Enterprise Master has been selling, and will continue to sell, its positions and return capital to its investors. There are no unfunded commitments at Enterprise LP. See Note 1213 for unfunded commitments of Enterprise Master.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The investments of consolidated fund of funds investment companies of $48.7$39.1 million and $70 million at March 31,June 30, 2011 and December 31, 2010, respectively, include the investments of Levered FOF, Multi-Strat FOF and Vintage FOF, all of which are investment companies managed by Ramius Alternative Solutions LLC, as well as RTS Global 3x, which is managed by Ramius Trading Strategies LLC. Levered FOF's and Multi-Strat FOF's investment objectives areis 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. Levered FOF had a similar strategy, but on a levered basis, prior to the fund winding down. Levered FOF is no longer levered. Vintage FOF's investment objective is to allocate its capital among portfolio managers that invest through investment pools or managed accounts thereby forming concentrated investments in high conviction managers designed to achieve attractive risk adjusted returns with moderate relative volatility. RTS Global 3x's investment objective is to achieve attractive investment returns on a risk-adjusted basis that are non-correlated with the traditional equity and bond markets by investing substantially all of its capital pursuant toin managed futures and global macro-based investment strategies. RTS Global 3x seeks to achieve its objective through a multi-advisor investment approach by allocating its capital among third-party trading advisors that are unaffiliated with RTS Global 3x. However, unlike a traditional "fund of funds" that invests with advisors through entities controlled by third-parties, RTS Global 3x will allocate its capital among a number of different trading accounts organized and managed by the general partner.

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


  
 As of March 31, 2011   
 As of June 30, 2011 

  
 Ramius Levered
Multi-Strategy
FOF LP
 Ramius
Multi-Strategy
FOF LP
 Ramius Vintage
Multi-Strategy
FOF LP
 RTS Global 3x
Fund LP
 Total   
 Ramius Levered
Multi-Strategy
FOF LP
 Ramius
Multi-Strategy
FOF LP
 Ramius Vintage
Multi-Strategy
FOF LP
 RTS Global 3x
Fund LP
 Total 
Description
 Strategy Fair Value Fair Value Fair Value Fair Value Fair Value  Strategy Fair Value Fair Value Fair Value Fair Value Fair Value 

  
 (dollars in thousands)
   
 (dollars in thousands)
 

Ramius Multi-Strategy Master FOF LP*

 Multi-Strategy $ $15,054 $ $ $15,054(a) Multi-Strategy $ $9,576 $ $ $9,576(a)

Ramius Vintage Multi-Strategy Master FOF LP*

 Multi-Strategy   13,471  13,471(a) Multi-Strategy    10,724  10,724(a)

Tapestry Pooled Account V LLC*

 Credit-Based 635    635(b) Credit-Based 635    635(b)

Independently Advised Portfolio Funds*

 Futures & Global Macro    15,753 15,753(c) Futures & Global Macro    14,990 14,990(c)

Externally Managed Portfolio Funds

 Credit-Based 510    510(b) Credit-Based 427    427(b)

Externally Managed Portfolio Funds

 Event Driven 2,666    2,666(d) Event Driven 2,129    2,129(d)

Externally Managed Portfolio Funds

 Hedged Equity 44    44(e) Hedged Equity 35    35(e)

Externally Managed Portfolio Funds

 Multi-Strategy 547    547(f) Multi-Strategy 547    547(f)

Externally Managed Portfolio Funds

 Fixed Income Arbitrage 59    59(g) Fixed Income Arbitrage 58    58(g)
                      

   $4,461 $15,054 $13,471 $15,753 $48,739    $3,831 $9,576 $10,724 $14,990 $39,121 
                      

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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



  
 As of December 31, 2010   
 As of December 31, 2010 

  
 Ramius Levered
Multi-Strategy
FOF LP
 Ramius
Multi-Strategy
FOF LP
 Ramius Vintage
Multi-Strategy
FOF LP
 RTS Global 3x
Fund LP
 Total   
 Ramius Levered
Multi-Strategy
FOF LP
 Ramius
Multi-Strategy
FOF LP
 Ramius Vintage
Multi-Strategy
FOF LP
 RTS Global 3x
Fund LP
 Total 
Description
 Strategy Fair Value Fair Value Fair Value Fair Value Fair Value  Strategy Fair Value Fair Value Fair Value Fair Value Fair Value 

  
 (dollars in thousands)
   
 (dollars in thousands)
 

Ramius Multi-Strategy Master FOF LP*

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

Ramius Vintage Multi-Strategy Master FOF LP*

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

Tapestry Pooled Account V LLC*

 Credit-Based 687    687(b) Credit-Based 687    687(b)

Independently Advised Portfolio Funds*

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

Externally Managed Portfolio Funds

 Credit-Based 522    522(b) Credit-Based 522    522(b)

Externally Managed Portfolio Funds

 Event Driven 2,800    2,800(d) Event Driven 2,800    2,800(d)

Externally Managed Portfolio Funds

 Hedged Equity 39    39(e) Hedged Equity 39    39(e)

Externally Managed Portfolio Funds

 Multi-Strategy 535    535(f) Multi-Strategy 535    535(f)

Externally Managed Portfolio Funds

 Fixed Income Arbitrage 58    58(g) Fixed Income Arbitrage 58    58(g)
                      

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

*
These Portfolio Funds are affiliates of the Company.


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

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

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

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

(d)
The Event Driven strategy is generally implemented through various combinations and permutations of merger arbitrage, restructuring and distressed instruments. Approximately 2%1.3% as of March 31,June 30, 2011 and 3% as of December 31, 2010 of the investments in this category represent investments in a fund that is in the process of liquidating. Distributions from this

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

(g)
The Fixed Income Arbitrage strategy seeks to achieve long term capital appreciation by employing a variety of strategies to generate returns without significant exposure to credit spread, interest rate changes or duration. As of March 31,June 30, 2011, the investment manager has gated investments.

        With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master consists of $24.3 million. Included in this claim were assets with a value of $9.5 million, at the time LBIE entered administration, that were returned to Enterprise Master and its affiliated funds in June 2010. Enterprise Master and its affiliated funds sold the returned assets, for an aggregate $10.7 million, and distributed this amount to Enterprise Master's investors in July 2010. As a result, the remaining Net Equity Claim for Enterprise Master is $14.8 million. Enterprise Master is valuing this claim at $9.0$9.2 million as of March 31,June 30, 2011. Of this amount, $7.3 million was attributable to Enterprise LP based on its ownership percentage in Enterprise Master at the time of the Administration. As discussed in Note 4a, the Company has an additional $1 million claim against LBIE as a result of certain cash and cash equivalent balances held at LBIE. LBI claim was valued at 56% which represented the present value of the mid-point between what the Company believed were reasonable estimates of the low-side and high-side potential recovery rates with respect to its LBI exposure. LBIE claims were valued as follows: (a) the trust assets that the Company was informed were within the control of LBIE and were expected to be returned in the relatively near term were valued at market less a 1% discount that corresponds to the fee to be charged under the Claim Resolution Agreement ("CRA"), (b) the trust assets that are not within the control of LBIE and are not believed to be held through LBI were valued at 56% with respect to US denominated Assets and 48% with respect to foreign denominated Assets, which represented the Company's estimate of potential recovery rates (c) the remaining unsecured claims against LBIE were valued at 48%, which represented the Company's estimate of potential recovery rates with respect to this exposure using available market quotes. The estimated final recoverable amount by Enterprise Master may differ from the actual recoverable amount of the pending LBIE and LBI claims, and the differences may be material.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


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

        In addition to Enterprise Master's claims against LBIE, Lehman Brothers, Inc. ("LBI") was a prime broker to Enterprise Master and Enterprise Master holds cash balances of $5.3 million at LBI. On September 19, 2008, LBI was placed in a Securities Investor Protection Corporation ("SIPC") liquidation proceeding after the filing for bankruptcy of its parent Lehman Brothers Holdings, Inc. The status of the assets under LBI's bankruptcy proceedings has not been determined. The amount that will ultimately be recovered from LBI will depend on the amount of assets available in the fund of customer property to be established by the trustee appointed under the Securities Investor Protection Act (the "SIPA Trustee") as approved by the bankruptcy court as well as the total amount of customer claims that seek recovery from the fund of customer property. Based on court filings by the SIPA Trustee, the total amount of customer claims exceeds the assets that are likely to be in the fund of customer property. In addition, while there has been an initial ruling with respect to the court filings also indicate thatclaims asserted by 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, there is still uncertainty regarding the ultimate resolution of these claims that could affect the amount of assets that are included in the fund of customer property. As a result of these uncertainties and the timing of any distributions from LBI in respect of the


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


Company's customer claims, management has estimated recovery with respect to the Company's LBI exposure at 54%56% or $2.9$3 million as of March 31,June 30, 2011, which represents the present value of the mid point between what management believes are reasonable estimates of the low side and high side potential recovery rates with respect to the Company's LBI exposure. The estimated recoverable amount by the Company may differ from the actual recoverable amount of the pending LBI claim, and the differences may be material.

Indirect Concentration of the Underlying Investments Held by Consolidated Funds

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Underlying Investments of Unconsolidated Funds Held by Consolidated Funds

Enterprise Master

        Enterprise LP's investment in Enterprise Master is equal to Enterprise LP's proportional share of Enterprise Master's net assets; as a result, the investment balances of Enterprise Master reflected below may exceed the net investment which Enterprise LP has recorded. The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master as of March 31,June 30, 2011 and December 31, 2010:


 March 31, 2011 December 31, 2010  June 30, 2011 December 31, 2010 
Description
 Securities
owned
 Securities
sold, but not yet
purchased
 Securities
owned
 Securities
sold, but not yet
purchased
  Securities
owned
 Securities
sold, but not yet
purchased
 Securities
owned
 Securities
sold, but not yet
purchased
 

 (dollars in thousands)
  (dollars in thousands)
 

Common stock

 $2,482 $ $10,123 $  $2,172 $ $10,123 $ 

Corporate bonds

 2,049  1,997   2,161  1,997  

Over-the-counter foreign currency call option

    (63)    (63)

Preferred stock

 410  410   1,160  410  

Private debt

 66  59   66  59  

Private equity

 179  173   200  173  

Restricted stock

 3,148  3,148   309  3,148  

Rights

 2,250  2,115   2,311  2,115  

Trade claims

 128  128   128  128  

Warrants

 69  55   36  55  
                  

 $10,781 $ $18,208 $(63) $8,543 $ $18,208 $(63)
                  

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

Asset swaps

 $2 $5 

Currency forwards

  (212) (36)
      

 $(210)$(31)
      

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

Asset swaps

 $ $5 

Currency forwards

  (34) (36)
      

 $(34)$(31)
      


  
 As of
March 31, 2011
 As of
December 31, 2010
   
 As of
June 30, 2011
 As of
December 31, 2010
 
Description
 Strategy Fair Value  Strategy Fair Value 

  
 (dollars in thousands)
   
 (dollars in thousands)
 

624 Art Holdings, LLC*

 Artwork $98 $98  Artwork $43 $98 

QREX, LLC*

 Life Settlements   

Q Capital Strategies, LLC*

 Life Settlements 111 111  Life Settlements  111 

RCG Longview Equity Fund, LP*

 Real Estate 11,336 10,120  Real Estate 15,002 10,120 

RCG Longview II, LP*

 Real Estate 1,713 1,835  Real Estate 1,476 1,835 

RCG Longview Debt Fund IV, LP*

 Real Estate 18,452 12,628  Real Estate 16,765 12,628 

RCG Longview, LP*

 Real Estate 404 383  Real Estate 269 383 

RCG Soundview, LLC*

 Real Estate 3,385 2,542  Real Estate 2,574 2,542 

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

 Real Estate 3,397 3,207  Real Estate 3,176 3,207 

RCG International Sarl*

 Multi-Strategy 9,090 9,463  Multi-Strategy 9,442 9,463 

Ramius Navigation Fund Ltd*

 Multi-Strategy 12,238 24,972  Multi-Strategy 9,800 24,972 

RCG Special Opportunities Fund, Ltd*

 Multi-Strategy 94,816 97,845  Multi-Strategy 97,585 97,845 

Ramius Credit Opportunities Fund Ltd*

 Distressed 260 300  Distressed 260 300 

RCG Endeavour, LLC*

 Multi-Strategy 75 87  Multi-Strategy 92 87 

RCG Energy, LLC *

 Energy 20,243 18,850  Energy 20,538 18,850 

RCG Renergys, LLC*

 Energy 2 2  Energy 2 2 

Other Private Investments

 Various 15,274 15,189  Various 17,624 15,189 

Real Estate Investments

 Real Estate 16,763 25,662  Real Estate 16,965 25,662 
          

   $207,657 $223,294    $211,613 $223,294 
          

*
These Portfolio Funds are affiliates of the Company.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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


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

Ramius Vintage Multi-Strategy Master FOF LP*

 Multi Strategy $832 $ $1,354 $  Multi Strategy $667 $ $1,354 $ 

Tapestry Pooled Account II, LLC*

 Hedged Equity  1,146  3,544  Hedged Equity  885  3,544 

Tapestry Pooled Account V, LLC*

 Credit-Based 1,308 1,396 1,416 1,512  Credit-Based 1,308 1,397 1,416 1,512 

Externally Managed Funds

 Credit-Based 1,333 784 6,653 803  Credit-Based 47 657 6,653 803 

Externally Managed Funds

 Event Driven 4,880 6,306 6,491 6,802  Event Driven 4,359 5,497 6,491 6,802 

Externally Managed Funds

 Fixed Income Arbitrage 85  83   Fixed Income Arbitrage 83  83  

Externally Managed Funds

 Hedged Equity 2,659 914 4,386 3,055  Hedged Equity 1,255 878 4,386 3,055 

Externally Managed Funds

 Multi Strategy 1,577 1,581 7,785 4,292  Multi Strategy 1,541 1,533 7,785 4,292 

Externally Managed Funds

 Global Macro 844  2,053 679  Global Macro 567  2,053 679 

Externally Managed Funds

 Opportunistic Equity  931  1,677  Opportunistic Equity    1,677 

Externally Managed Funds

 Managed Futures   2,430   Managed Futures   2,430  
                  

   $13,518 $13,058 $32,651 $22,364    $9,827 $10,847 $32,651 $22,364 
                  

*
These Portfolio Funds are affiliates of the Company.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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


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

 (dollars in thousands)
  (dollars in thousands)
 

Bond future

 $5 $(2) $11 $(2)

Commodity call option

 118 (5) 337 (5)

Cash

 15,705 17,139   17,139 

Currency option

 476 191  1,211 191 

Commodity forward

 (183) 32  (262) 32 

Commodity future

 554 935  (297) 935 

Currency forward

 194 (63) (27) (63)

Currency future

 924 1,230  79 1,230 

Index future

 318 130  79 130 

Interest rate future

 (13) (5) 57 (5)
          

 $18,098 $19,582  $1,188 $19,582 
          

5.6. Fair Value Measurements for Operating Entities and Consolidated Funds

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



 Assets at Fair Value as of March 31, 2011 
 Assets at Fair Value as of June 30, 2011 


 Level 1 Level 2 Level 3 Total 
 Level 1 Level 2 Level 3 Total 


  
 (dollars in thousands)
  
 
  
 (dollars in thousands)
  
 

Securities owned and derivatives

Securities owned and derivatives

 

Securities owned and derivatives

 

US Government securities

 $162,410 $ $ $162,410 

US Government securities

 $78,892 $ $ $78,892 

Common stocks

 205,419 1,469 953 207,841 

Common stocks

 150,558 2,667 490 153,715 

Restricted common stock

   5,000 5,000 

Restricted common stock

   5,000 5,000 

Convertible bonds

  27,222  27,222 

Corporate bonds

  244,028  244,028 

Corporate bonds

 1,588 314,538  316,126 

Futures

 154   154 

Exchange-traded Funds

 218,135   218,135 

Equity swaps

  2  2 

Futures

 551   551 

Credit default swaps

  300  300 

Equity swaps

  2  2 

Options

 21,977 84  22,061 

Options

 32,267 13,019 123 45,409 

Warrants and rights

   2,902 2,902 

Warrants and rights

   3,411 3,411 

Mutual funds

 874   874 

Mutual funds

 870   870 

Other investments

Other investments

 

Other investments

         

Portfolio Funds

 285 13,708 17,660 31,653 

Portfolio Funds

 286 14,615 17,744 32,645 

Real estate investments

   2,102 2,102 

Real estate investments

   2,289 2,289 

Lehman claim

   501 501 

Lehman claim

   501 501 
                   

 $252,740 $260,789 $28,655 $542,184 

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

 

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

Securities sold, not yet purchased and derivatives

             
 

US Government securities

 $75,455 $ $ $75,455 
 

Common stocks

  90,309    401  90,710 
 

Corporate bonds

    8,829    8,829 
 

Equity swaps—short exposure

    207    207 
 

Futures

  373      373 
 

Options

  10,124      10,124 
          

 $176,261 $9,036 $401 $185,698 
          
 
 Liabilities at Fair Value as of June 30, 2011 
 
 Level 1 Level 2 Level 3 Total 
 
 (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

             
 

US Government securities

 $118,892 $235 $ $119,127 
 

Common stocks

  140,457  2    140,459 
 

Corporate bonds

    69,562    69,562 
 

Exchange-traded Funds

  97,769      97,769 
 

Futures

  119      119 
 

Equity swaps—short exposure

    758    758 
 

Options

  15,174  170    15,344 
          

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

 

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

Securities owned and derivatives

             
 

US Government securities

 $143,247 $ $ $143,247 
 

Common stocks

  115,875  6  334  116,215 
 

Restricted common stock

      5,000  5,000 
 

Corporate bonds

    191,702  �� 191,702 
 

Futures

  442      442 
 

Options

  14,234  115    14,349 
 

Warrants and rights

  357    1,977  2,334 
 

Mutual funds

  1,248      1,248 

Other investments

             
 

Portfolio Funds

  566  11,744  17,081  29,391 
 

Real estate investments

      1,882  1,882 
 

Lehman claim

      313  313 
          

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

 

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

Securities sold, not yet purchased and derivatives

             
 

US Government securities

 $100,559 $ $ $100,559 
 

Common stocks

  88,580      88,580 
 

Corporate bonds

    2,615    2,615 
 

Equity swaps—short exposure

    245    245 
 

Futures

  334      334 
 

Options

  6,162      6,162 
          

 $195,635 $2,860 $ $198,495 
          
 
 Liabilities at Fair Value as of December 31, 2010 
 
 Level 1 Level 2 Level 3 Total 
 
 (dollars in thousands)
 

Securities sold, not yet purchased and derivatives

             
 

US Government securities

 $100,559 $ $ $100,559 
 

Common stocks

  88,580      88,580 
 

Corporate bonds

    2,615    2,615 
 

Equity swaps—short exposure

    245    245 
 

Futures

  334      334 
 

Options

  6,162      6,162 
          

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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



 Assets at Fair Value as of March 31, 2011 
 Assets at Fair Value as of June 30, 2011 


 Level 1 Level 2 Level 3 Total 
 Level 1 Level 2 Level 3 Total 


  
 (dollars in thousands)
  
 
 (dollars in thousands)
 

Securities owned

Securities owned

 

Securities owned

 

US Government securities

 $4,064 $ $ $4,064 

US Government securities

 $6,562 $ $ $6,562 

Commercial paper

  1,726  1,726 

Commercial paper

 909   909 

Corporate bonds

  401  401 

Other investments

Other investments

 

Other investments

 

Portfolio Funds

  15,753 260,443 276,196 

Portfolio Funds

  14,990 239,588 254,578 

Lehman claims

   7,193 7,193 

Lehman claims

   7,320 7,320 
                   

 $7,471 $15,753 $267,636 $290,860 

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

 



 Assets at Fair Value as of December 31, 2010 
 Assets at Fair Value as of December 31, 2010 


 Level 1 Level 2 Level 3 Total 
 Level 1 Level 2 Level 3 Total 


  
 (dollars in thousands)
  
 
 (dollars in thousands)
 

Securities owned

Securities owned

 

Securities owned

 

US Government securities

 $7,682 $ $ $7,682 

US Government securities

 $7,682 $ $ $7,682 

Corporate bonds

  1,040  1,040 

Corporate bonds

  1,040  1,040 

Other investments

Other investments

 

Other investments

 

Portfolio Funds

  15,889 311,242 327,131 

Portfolio Funds

  15,889 311,242 327,131 

Lehman claims

   6,243 6,243 

Lehman claims

   6,243 6,243 
                   

 $7,682 $16,929 $311,242 $342,096 

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

        The following table includes a rollforward of the amounts for the three and six months ended March 31,June 30, 2011 and 2010 for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.


 Operating Entities Consolidated Funds  Operating Entities Consolidated Funds 

 Common
stocks,
owned
 Common stocks,
sold not yet
purchased
 Restricted
Common Stock
 Corporate
Bonds
 Warrants
and Rights
 Portfolio
Funds
 Real
estate
 Lehman
claim
 Portfolio
Funds
 Lehman
claim
  Common stocks,
owned
 Common stocks,
sold not yet
purchased
 Restricted
Common Stock
 Corporate
Bonds
 Options Warrants
and Rights
 Portfolio
Funds
 Real
estate
 Lehman
claim
 Portfolio
Funds
 Lehman
claim
 

 (dollars in thousands)
  (dollars in thousands)
 

Balance at December 31, 2010

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

Purchases/covers

  (152)   64 34,251 96  1  

Sales/short buys

  416    (34,142) (5)  (52,624)  

Transfers in (out)

            

Balance at March 31, 2011

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

Transfers in

            

Transfers out

            

Purchases/(covers)

 659 (826)     2,322 141    

(Sales)/short buys

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

Realized gains (losses)

  152    96   1,533    (7)    48 11   843  

Unrealized gains (losses)

 156 (15)   861 374 129 188 291 950  213 15   123 509 338 46  6,602 127 
                                            

Balance at March 31, 2011

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

Balance at June 30, 2011

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

Balance at December 31, 2009

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

Transfers in (out)

    1,356  (2,866)     

Balance at March 31, 2010

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

Transfers in

            

Transfers out

            

Purchases

   5,000   134 44  13,039   2,000   1,215   1,966 70  4,013  

Sales

    (402)  (803) (53)  (24,205)   (2,000)      (483)   (6,085)  

Realized gains (losses)

        104 2,398            (11)  

Unrealized gains (losses)

   58 (367)  572 40  337 10,085    (58) 118 971 (183) 318 (19)  (2,117) 616 
                                            

Balance at March 31, 2010

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

Balance at June 30, 2010

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

Balance at December 31, 2010

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

Transfers in

            

Transfers out

            

Purchases/(covers)

 659 (978)    65 36,573 237  1  

(Sales)/short buys

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

Realized gains (losses)

  145    48 107   2,376  

Unrealized gains (losses)

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

Balance at June 30, 2011

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

Balance at December 31, 2009

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

Transfers in

      1,356(a)      

Transfers out

       (2,866)(b)     

Purchases

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

Sales

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

Realized gains (losses)

          2,387  

Unrealized gains (losses)

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

Balance at June 30, 2010

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

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

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

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6.7. Receivables from and Payable to Brokers

        Receivable from and payable to brokers includes cash held at the clearing brokers, amounts receivable or payable for unsettled transactions, monies borrowed and proceeds for short sales (including commissions and fees related to securities transactions) equal to the fair value of securities sold, not yet purchased, which are restricted until the Company purchases the securities sold short. Pursuant to the Company's prime broker agreements, these balances are presented net (assets less liabilities) across balances with the same broker. As of March 31,June 30, 2011 and December 31, 2010, receivable from brokers was $53.1$125 million and $95.9 million, respectively. Payable to brokers was $118.9$321.2 million and $85.7 million as of March 31,June 30, 2011 and December 31, 2010.

7.8. Goodwill

        At least annually, and more frequently if warranted, we assessthe Company assesses whether the goodwill has been impaired by comparing the estimated fair value of each reporting unit with its estimated net book value. Periodically estimating the fair value of a reporting unit requires significant judgementjudgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. There were no additions or impairment losses to goodwill during the three months and six months ended March 31,June 30, 2011.

8.9. Redeemable non-controlling interests in consolidated subsidiaries

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


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

 (dollars in thousands)
  (dollars in thousands)
 

Redeemable non-controlling interests in consolidated subsidiaries

  

Operating Companies

 $475 $1,009  $940 $1,009 

Consolidated Funds

 117,492 143,337  113,409 143,337 
          

 $117,967 $144,346  $114,349 $144,346 
          



 For Three Months
Ended
March 31,
  Three Months Ended
June 30,
 Six Months Ended
June 30,
 

 2011 2010  2011 2010 2011 2010 

 (dollars in thousands)
  (dollars in thousands)
 (dollars in thousands)
 

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

  

Operating Companies

 $(475)$  $(1,465)$ $(1,940)$ 

Consolidated Funds

 (323) (8,056) (993) 2,552 (1,316) (5,504)
              

 $(798)$(8,056) $(2,458)$2,552 $(3,256)$(5,504)
              

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9.10. Share-Based Compensation and Employee Ownership Plans

Share-based compensation plans in place after the Transactions

        The Company issues share based compensation under Cowen Holdings' previously established 2006 Equity and Incentive Plan, and the 2007 Equity and Incentive Plan and the Cowen Group, Inc. and the 2010 Equity and Incentive Plan (collectively, the "Equity Plans"). The Equity Plans permit the grant of options, restricted shares, restricted stock units and other equity based awards to the Company's employees, consultants and directors for up to 17,725,000 shares of common stock. Stock options granted generally vest over two to five year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two to five year period. As of March 31,June 30, 2011, there were approximately 0.8 million shares available for future issuance under the Equity Plans. On January 1, 2011, 928,5900.9 million additional shares representing 7.5% of the Company's outstanding shares of stock, less shares available under the 2010 planEquity and Incentive Plan were added to the shares available under the 2010 Equity and Incentive Plan.that plan.

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

        The Company measures compensation cost for share based awards according to the fair value method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity Plans, the Company recognized expense of $5.7$4.9 million and $2.7$3 million for the three months ended March 31,June 30, 2011 and 2010, respectively, and $10.6 million and $5.7 million for the six months ended June 30, 2011 and 2010, respectively. The income tax effect recognized for the Equity Plans was a benefit of $2.6$2.4 million and $1.1$1.5 million for the three months ended March 31,June 30, 2011 and 2010, respectively, and $5.1 million and $2.6 million for the six months ended June 30, 2011 and 2010, respectively.

        In relation to awards under the RCG Grants, the Company recognized expense of $1.5 million and $2.1 million, respectively, for the three months ended March 31,June 30, 2011 and 2010.2010 and $2.9 million and $3.6 million for the six months ended June 30, 2011 and 2010, respectively. The income tax effect recognized for the RCG Grants was a benefit of $0.6 million and $0.8 million, respectively, for the three months ended March 31,June 30, 2011 and 2010, respectively, and $1.1 million and $1.4 million for the six months ended June 30, 2011 and 2010, respectively.


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

Stock Options

        The following table summarizes the Company's stock option activity for the threesix months ended March 31,June 30, 2011:


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

  
  
 (in years)
 (dollars in
thousands)

   
  
 (in years)
 (dollars in
thousands)

 

Balance outstanding at December 31, 2010

 893,432 $13.04 3.50    893,432 $13.04 3.50   

Options granted

                

Options acquired

              

Options exercised

              

Options forfeited

              

Options expired

 (24,419) 16.00      (27,004) 16.00     
          

Balance outstanding at March 31, 2011

 869,013 $12.96 3.28 $ 

Balance outstanding at June 30, 2011

 866,428 $12.95 3.03 $ 
                  

Options exercisable at March 31, 2011

 719,010 $14.84 2.64 $ 

Options exercisable at June 30, 2011

 716,425 $14.83 2.39 $ 
                  

(1)
Based on the Company's closing stock price of $4.69 on December 31, 2010 and $4.01$3.76 on March 31,June 30, 2011.

        As of March 31,June 30, 2011, there was $0.2 million of unrecognized compensation expense related to the Company's grant of stock options.

Restricted Shares and Restricted Stock Units Granted to Employees

        The following table summarizes the Company's restricted share and restricted stock unit activity for the threesix months ended March 31,June 30, 2011:


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

Balance outstanding at December 31, 2010

 5,788,021 5.39  5,788,021 5.39 

Granted

 5,859,530 4.28  6,014,437 4.28 

Vested

 (321,057) 4.22  (824,050) 4.11 

Cancelled

 (7,735) 4.31  (7,735) 4.31 

Forfeited

 (253,356) 5.16  (379,815) 4.91 
          

Balance outstanding at March 31, 2011

 11,065,403 $4.84 

Balance outstanding at June 30, 2011

 10,590,858 $4.87 
          

        The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.

        As of March 31,June 30, 2011, there was $34.8$30.6 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 1.531.36 years.

RCG Grants

        The following table summarizes the Company's RCG Grants activity for the threesix months ended March 31,June 30, 2011:


 Nonvested
RCG Grants
 Weighted-Average
Grant Date
Fair Value
  Nonvested
RCG Grants
 Weighted-Average
Grant Date
Fair Value
 

Balance outstanding at December 31, 2010

 2,638,078 $7.30  2,638,078 $7.30 

Granted

      

Vested

      

Forfeited

 (21,055)(*) 7.30  (42,139)(*) 7.30 
          

Balance outstanding at March 31, 2011

 2,617,023 $7.30 

Balance outstanding at June 30, 2011

 2,595,939 $7.30 
          

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

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

        As of March 31,June 30, 2011 there was $9.3$7.8 million of unrecognized compensation expense related to the Company's RCG Grants. Unrecognized compensation expense related to RCG Grants is expected to be recognized over a weighted-average period of 1.581.33 years.

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

        There were no restricted stock units awarded during the three months and six months ended March 31,June 30, 2011. Vested awards of 73,480 were delivered to non-employee members of the Company's Board of Directors during the threesix months ended March 31,June 30, 2011. As of March 31,June 30, 2011 there were 24,574 restricted stock units outstanding for awards to non-employee members of the Company's Board of Directors.


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

10.11. Defined Benefit Plans

        The following amounts relate to the defined benefit plans in aggregate for the three months and six months ended March 31,June 30, 2011 and 2010.

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

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

       

Service cost

 $ $ 

Interest cost

  72  79 

Expected return on plan assets

  (71) (73)

Amortization of (loss)/gain

     

Amortization of prior service cost

  5  5 

Effect of settlement

  (13)  
      

Net periodic benefit cost

 $(7)$11 
      
 
 Three Months Ended
June 30,
 Six Months Ended
June 30,
 
 
 2011 2010 2011 2010 
 
 (dollars in thousands)
 (dollars in thousands)
 

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

             
 

Service cost

 $ $ $ $ 
 

Interest cost

  66  79  138  158 
 

Expected return on plan assets

  (65) (74) (136) (147)
 

Amortization of (loss) / gain

         
 

Amortization of prior service cost

  5  5  10  11 
 

Effect of settlement

  (18)   (31)  
          
 

Net periodic benefit cost

 $(12)$10 $(19)$22 
          

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

11.12. Income Taxes

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

        The Company calculated its U.S. tax provision using the estimated annual effective tax rate methodology. The tax expense or benefit caused by an extraordinaryunusual or infrequent item is recorded in the quarter in which it occurs. The Company used the discrete methodology to calculate its income tax provision for its foreign subsidiaries. A reliable estimate of an annual effective tax rate could not be calculated due to the variability in the estimated annual effective tax rates that would result across a range of likely scenarios of income before tax and of permanent differences. The Company will reexamine its methodology in the second quarter of 2011, and use the annual method if reliable estimates can be calculated. Based on these methodologies, the Company's effective income tax rate was 15.60%(318.59)% and 5.13%(1.18)% for the threesix months ended March 31,June 30, 2011 and 2010, respectively. During the threesix months ended March 31,June 30, 2011, the extraordinaryunusual or infrequent items whose tax impact were recorded discretely were primarily related tothe benefit from the acquisition of a reinsurance company in Luxembourg, bargain purchase gain recorded as a result of the transaction with LaBranche and tax provisions of the Company's foreign subsidiaries.

        For the period March 31,June 30, 2011, the effective tax rate differs from the statutory rate of 35% primarily due tobecause of the recognition of deferred tax benefits that resulted from the acquisition of a Luxembourg reinsurance company with deferred tax liabilities; the non-taxable bargain purchase gain recorded as a result of the transaction with LaBranche; stock compensation; non-deductible syndication costs; and other non-deductible expenses, and an increase in the Company's valuation allowance, stock compensation and other non-deductible expensesallowance. The


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

11.12. Income Taxes (Continued)


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

        For the period March 31,June 30, 2010, the effective tax rate differs from the statutory rate of 35% primarily due to an increase in the Company's valuation allowance.

        The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31,June 30, 2011 the Company recorded a valuation allowance against substantially all of its net deferred tax assets.

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

        The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but repatriates the current earnings of its foreign subsidiaries to the United States to the extent such repatriation is permissible under local regulatory rules. The undistributed earnings of the Company's foreign subsidiaries totaled $3.4$25.1 million at March 31,June 30, 2011. Determining the tax liability that would arise if these earnings were remitted is not practicable.

12.13. Commitments and Contingencies

        The Company has entered into non-cancellable leases for office space and equipment. These leases contain rent escalation clauses. The Company records rent expense on a straight-line basis over the lease term, including any rent holiday periods. Net rent expense was $3.6$3.3 million, and $3.9$4 million, for the three months ended March 31,June 30, 2011 and 2010, respectively, and was $6.9 million and $8 million for the six months ended June 30, 2011 and 2010, respectively.

        As of March 31, 2011, future minimum annual lease and service payments for the Company were as follows:

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

2011

 $2,713 $10,565 $11,402 

2012

  3,301  10,594  14,522 

2013

  3,301  6,446  14,126 

2014

  1,517  6,223  12,275 

2015

  1,051  3,206  9,833 

Thereafter

  77  139  61,230 
        

 $11,960 $37,173 $123,388 
        

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

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12.13. Commitments and Contingencies (Continued)

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

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

2011

 $1,550 $8,627 $8,721 

2012

  3,301  10,910  16,566 

2013

  3,301  6,433  16,065 

2014

  1,548  5,765  14,188 

2015

  1,051  2,855  11,595 

Thereafter

  194  106  63,275 
        

 $10,945 $34,696 $130,410 
        

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

        For financial reporting purposes, the general partners have recorded a liability for potential clawback obligations to the limited partners of a real estate fund, due to changes in the unrealized value of the fund's remaining investments and where the fund's general partner has previously received carried interest distributions.

        The actual clawback liability, however, does not become realized until the end of a fund's life. The life of the real estate funds with a potential clawback obligation, including available contemplated extensions, are currently anticipated to expire at the end of 2013. Further extensions of such terms may be implemented under certain circumstances. As of March 31,June 30, 2011, the clawback obligations were $6.2 million which was recorded within accounts payable, accrued expenses and other liabilities. (See Note 17 "Related Party Transactions")18).

        The Company serves as the general partner/managing member and/or investment manager to various affiliated and sponsored funds. As such, the Company is contingently liable for obligations for those entities. These amounts are not included above as the Company believes that the assets in these funds are sufficient to discharge any liabilities.

        As of March 31,June 30, 2011, the Company had unfunded commitments of $8.3$6.6 million pertaining to capital commitments in three real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time, subject to advance notice. In addition, theThe Company also has committed to invest $40.8$41 million to the funds managed by Cowen Healthcare Royalty Partners (the "CHRP Funds") as a limited partner of the CHRP Funds and also as a member of CHRP GP, the general partner of the CHRP Funds. This commitment is expected to be called over a two to five year period. The Company will make its pro-rata investment in the CHRP Funds along with the other limited partners. Through March 31,June 30, 2011, the Company has funded $19.7$19.5 million towards these commitments. In April 2011, the Company committed $15 million to Starboard Value and Opportunity Fund LP, which may increase or decrease over time with the performance of Starboard Value and Opportunity Fund LP. As of June 30, 2011 the Company's unfunded commitment to


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


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

Litigation

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

        Pursuant to ASC Topic 450, we review the need for any loss contingency reserves, and we have established reserves, as described below, for certain of these matters that we believe are adequate as of March 31,June 30, 2011 where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. As of March 31, 2011 and December 31, 2010, the total amounts reserved were $0.5 million and $1.5 million respectively. These amounts are included within accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

12. Commitments and Contingencies (Continued)


litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters.

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

        Although there can be no assurances as to the ultimate outcome, the Company has established reserves for litigation and regulatory matters that it believes are adequate as of March 31,June 30, 2011. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements,


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters.

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

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

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

Adelphia Litigation

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

CardioNet Litigation

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

China Sunergy

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

WorldSpace Litigation

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)

LaBranche Litigation

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

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

Alphatec Litigation

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

Lehman Brothers

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)

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

In re NYSE Specialists Securities Litigation

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

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

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

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


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

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

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

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

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

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

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

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

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

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

NYSE Regulation proceeding against LSP and former trader

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Commitments and Contingencies (Continued)


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

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

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

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

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

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

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

14. Short-Term Borrowings and other debt

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


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

 (in thousands)
  (in thousands)
 

Line of credit

 $23,000 $24,000  $ $24,000 

Notes payable

 875 1,396  761 1,396 

Capital lease obligations

 6,397 6,337  5,857 6,337 
          

 $30,272 $31,733  $6,618 $31,733 
          

        On June 3, 2009, the Company entered into a collateralized revolving credit agreement with HVB AG, as lender, administrative agent and issuing bank, providing for a revolving credit facility with a $50.0


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


$50 million aggregate loan commitment amount available. The first borrowing under this line occurred on June 30, 2009. As of March 31,June 30, 2011 and December 31, 2010, the Company had borrowings of $23.0 millionnil and $24.0$24 million, respectively. At the Company's election and discretion, borrowings under the 2009 collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (1) the lender's prime rate plus 1.5% or (2) the 1, 2 or 3 month LIBOR rate plus 3.5%. Due to the variable interest rate on these borrowings, their carrying values approximate fair value. The Company is required to pay a quarterly commitment fee on the undrawn portion of the revolving credit facility equal to 1.0% per annum of the undrawn amount. The 2009 collateralized revolving credit agreement iswas to mature on September 29, 2011. However, during 2011, the Company agreed to repay in full its obligations pursuant to the credit agreement and HVB AG agreed to terminate the credit agreement. On June 27, 2011, the Company fully repaid the then borrowing amount outstanding of $23 million and the credit agreement was terminated as of that date. The 2009 collateralized revolving credit agreement contained financial and other restrictive covenants that limited the Company's ability to incur additional debt and engage in other activities. As of March 31,June 30, 2011 and during the period from June 3, 2009 to March 31,through June 27, 2011 the Company was in compliance with these covenants. The Company's investment in Enterprise Master through the Enterprise Fund hashad been pledged as collateral under the line of credit.

        On January 31, 2011, in accordance with the terms Upon termination of the collateralized revolving credit agreement on June 27, 2011, the Company remitted $1 millionCompany's collateral pledge to HVB AG reducing its revolving line ofwas released and the Company is no longer subject to the restrictive covenants contained in the credit balance.agreement.

        Interest incurred on the Company's lines of credit was $0.2 million and $0.1 million for the three months ended March 31,June 30, 2011 and 2010, respectively, and was $0.4 million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively.

        In November 2010, the Company borrowed $0.6 million and $1.5 million to fund insurance premium payments. These notes bear interest at 5.05% and 4.95%, respectively and are due in October of 2011. As of March 31,June 30, 2011, the outstanding balance on these combined notes payable was $0.9$0.4 million. Interest expense for the three months and six months ended March 31,June 30, 2011 was not significant.

        The Company entered into several capital leases for computer equipment during the fourth quarter of 2010. These leases amount to $6.3 million and are recorded in fixed assets and as capital lease obligations and have lease terms that range from 48 to 60 months and interest rates that range from 0%0.60% to 6.36%6.14%. No payments have been madeAs of June 30, 2011, the remaining balance on these capital leases duringwas $5.9 million. Interest expense for the three months and six months ended March 31, 2011.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13. Short-Term Borrowings and other debt (Continued)June 30, 2011 was $0.1 million.

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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

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

        Annual scheduled maturities of debt and minimum lease payments for capital lease obligation and short term borrowings and other debt outstanding at March 31,June 30, 2011, are as follows:


 Capital Lease
Obligation
 Short Term
Borrowings
  Capital Lease
Obligation
 Short Term
Borrowings
 

 (in thousands)
  (in thousands)
 

2011

 $1,393 $23,875  $670 $391 

2012

 1,541   1,541 164 

2013

 1,541   1,541 164 

2014

 1,371   1,402 42 

2015

 1,051   1,051  

Thereafter

 77   194  
          

Subtotal

 6,974 23,875  6,399 761 

Less: Amount representing interest(a)

 (577)   (542)  
          

Total

 $6,397 $23,875  $5,857 $761 
          

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

14.15. Earnings Per Share and Stockholders' Equity

        The Company calculates its basic and diluted earnings per share in accordance with FASB accounting standards. Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. As of March 31,June 30, 2011, there were 75,616,399116,246,786 shares outstanding, of which 1,345,9851,110,836 are restricted. To the extent that outstanding restricted shares are unvested, they are excluded from the calculation of basic earnings per share. The Company has included 24,574 fully vested, unissued restricted stock units in its calculation of basic earnings per share.

        Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive nonvested restricted stock and stock options. The


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

14. Earnings Per Share (Continued)


Company uses the treasury stock method to reflect the potential dilutive effect of the unvested restricted shares, restricted stock units and unexercised stock options. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and restricted stock units are assumed to have been delivered, and options are assumed to have been exercised, on the grant date. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the sum of (a) the amount of compensation cost attributed to future services and not yet recognized and (b) the amount of tax benefit that was credited to additional paid-in capital assuming vesting and delivery of the restricted stock. The tax benefit is the amount resulting from a tax deduction for compensation in excess of compensation expense recognized for financial statement reporting purposes. All outstanding stock options were not included in the computation of diluted net


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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


loss per common share for the three months and six months ended March 31,June 30, 2011, as their inclusion would have been anti-dilutive.

        The computation of earnings per share is as follows:



 For the Three Months
Ended March 31,
 
 Three Months Ended June 30, Six Months Ended June 30, 


 2011 2010 
 2011 2010 2011 2010 


 (dollars in thousands,
except per share data)

 
 (in thousands)
 (in thousands)
 

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

 $82 $(12,976)

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

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

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

Shares for basic and diluted calculations:

Shares for basic and diluted calculations:

 

Shares for basic and diluted calculations:

 

Average shares used in basic computation

 74,160 72,509 

Average shares used in basic computation

 76,330 72,693 75,600 72,601 

Stock options

   

Stock options

     

Restricted stock

 1,923  

Restricted shares

 1,568  1,289  
               

Average shares used in diluted computation

 76,083 72,509 

Average shares used in diluted computation

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

Earnings (loss) per share:

Earnings (loss) per share:

 

Earnings (loss) per share:

 

Basic

 $0.00 $(0.18)

Basic

 $0.26 $(0.29)$0.27 $(0.47)

Diluted

 $0.00 $(0.18)

Diluted

 $0.26 $(0.29)$0.26 $(0.47)

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

15.16. Segment Reporting

        The Company conducts its operations through two segments: the alternative investment management segment and the broker-dealer segment (subsequent to the November 2009 Ramius/Cowen transaction). The operations of LaBranche's market-making business following the Company's June 28, 2011 acquisition of LaBranche are included in the broker-dealer segment commencing June 29, 2011. These activities are conducted primarily in the United States and substantially all of its revenues are generated domestically. The performance measure for these segments is Economic Income, which management uses to evaluate the financial performance of and make operating decisions for the segment including determining appropriate compensation levels.

        In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated funds (both 2011 and 2010) (ii) excludes equity award expense related to the November 2009 Ramius/Cowen transaction (both 2011 and 2010) and (iii) excludes certain other acquisition-related and/or reorganization expenses (2011 only) and (iv) excludes the bargain purchase gain which resulted from the LaBranche acquisition (see note 2). In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)


its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For GAAP purposes, these items are included in each of their


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)


respective line items. Economic Income revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities. For GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for GAAP purposes is presented gross as part of revenue.

        As further stated below, one major difference between Economic Income and US GAAP net income is that Economic Income presents the segments' results of operations without the impact resulting from the full consolidation of any of the Consolidated Funds. Consolidation of these funds results in including in income the pro rata share of the income or loss attributable to other owners of such entities which is reflected in net income (loss) attributable to redeemable non-controlling interest in consolidated subsidiaries in the condensed consolidated statements of operations. This pro rata share has no effect on the overall financial performance for the Alternative Investment Managementalternative investment management segment, as ultimately, this income or loss is not income or loss for the Alternative Investment Managementalternative 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.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15.16. Segment Reporting (Continued)

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



 Three Months Ended March 31, 2011 
 Three Months Ended June 30, 2011 


  
  
  
 Adjustments  
 
  
  
  
 Adjustments  
 


 Alternative
Investment
Management
 Broker-Dealer Total
Economic
Income/(loss)
 Funds
Consolidation
 Other
Adjustments
 GAAP 
 Alternative
Investment
Management
 Broker-Dealer Total
Economic
Income/(loss)
 Funds
Consolidation
 Other
Adjustments
 GAAP 


  
  
  
 (dollars in thousands)
  
 
  
  
  
 (dollars in thousands)
  
 

Revenues

Revenues

 

Revenues

 

Investment banking

 $ $14,682 $14,682 $ $ $14,682 

Investment banking

 $ $14,343 $14,343 $ $ $14,343 

Brokerage

 63 27,528 27,591   27,591 

Brokerage

 11 24,596 24,607   24,607 

Management fees

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

Management fees

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

Incentive income

 5,163  5,163  (782)(a) 4,381 

Incentive income

 5,697  5,697  (5,022)(a) 675 

Investment Income

 17,458 (249) 17,209  (17,209)(c)  

Investment Income

 22,810 (110) 22,700  (22,700)(c)  

Interest and dividends

     4,559(c) 4,559 

Interest and dividends

     5,840(c) 5,840 

Reimbursement from affiliates

    (159) 1,168(b) 1,009 

Reimbursement from affiliates

    (8) 989(b) 981 

Other revenue

 1,252 (198) 1,054  (364)(c) 690 

Other revenue

 (278) (203) (481)  713(c) 232 

Consolidated Funds revenues

    169  169 

Consolidated Funds revenues

    144  144 
                           
 

Total revenues

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

Total revenues

 43,779 38,626 82,405 (330) (23,396) 58,679 

Expenses

Expenses

 

Expenses

 

Employee compensation and benefits

 17,708 25,029 42,737  2,350 45,087 

Employee compensation and benefits

 15,044 27,323 42,367  1,208 43,575 

Interest and dividends

 56 161 217  2,392(c) 2,609 

Interest and dividends

 49 169 218  2,897(c) 3,115 

Non-compensation expenses—Fixed

 6,994 14,593 21,587  (21,587)(c)  

Non-compensation expenses—Fixed

 8,724 17,552 26,276  (26,276)(c)  

Non-compensation expenses—Variable

 2,096 6,852 8,948  (8,948)(c)(d)  

Non-compensation expenses—Variable

 6,591 5,915 12,506  (12,506)(c)(d)  

Non-compensation expenses

     33,907(c)(d) 33,907 

Non-compensation expenses

     33,666(c)(d) 33,666 

Reimbursement from affiliates

 (1,169)  (1,169)  1,169(b)  

Reimbursement from affiliates

 (989)  (989)  989(b)  

Consolidated Funds expenses

    628   628 

Consolidated Funds expenses

    872  872 
                           
 

Total expenses

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

Total expenses

 29,419 50,959 80,378 872 (22) 81,228 

Other income (loss)

Other income (loss)

 

Other income (loss)

 

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

     17,283(c) 17,283 

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

     76(c) 76 

Consolidated Funds net gains (losses)

    1,455 291 1,746 

Bargain purchase gain

         22,244(e) 22,244 
             

Consolidated Funds net gains (losses)

    2,195 2,575 4,770 
 

Total other income (loss)

    1,455 17,574 19,029               
              

Total other income (loss)

    2,195 24,895 27,090 
 

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

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

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

 14,360 (12,333) 2,027 993 1,521 4,541 
             

Income taxes expense / (benefit)

Income taxes expense / (benefit)

      163(b) 163 

Income taxes expense / (benefit)

     (17,954)(b) (17,954)
                           
 

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

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

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

 14,360 (12,333) 2,027 993 19,475 22,495 

(Income) loss attributable to redeemable non-controlling interests

 (475)  (475) (323)  (798)

(Income) loss attributable to redeemable non-controlling interests

 (1,465)  (1,465) (993)  (2,458)
                           
 

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

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

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

 $12,895 $(12,333)$562 $ $19,475 $20,037 
                           

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)

 

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

Revenues

                   
 

Investment banking

 $ $9,938 $9,938 $ $ $9,938 
 

Brokerage

    29,793  29,793      29,793 
 

Management fees

  12,187  (27) 12,160  (799) (2,480)(a) 8,881 
 

Incentive income

  (450)   (450)   350(a) (100)
 

Investment Income

  (2,350) (562) (2,912)   2,912(c)  
 

Interest and dividends

          1,380(c) 1,380 
 

Reimbursement from affiliates

        (155) 1,896(b) 1,741 
 

Other revenue

  26  56  82    316(c) 398 
 

Consolidated Funds revenues

        2,969    2,969 
              
   

Total revenues

  9,413  39,198  48,611  2,015  4,374  55,000 

Expenses

                   
 

Employee compensation and benefits

  7,314  28,564  35,878    2,669  38,547 
 

Interest and dividends

  118  235  353    268(c) 621 
 

Non-compensation expenses—Fixed

  9,462  15,188  24,650    (24,650)(c)  
 

Non-compensation expenses—Variable

  356  7,200  7,556    (7,556)(c)(d)  
 

Non-compensation expenses

          31,335(c)(d) 31,335 
 

Reimbursement from affiliates

  (1,897)   (1,897)   1,897(b)  
 

Consolidated Funds expenses

        1,182     1,182 
              
   

Total expenses

  15,353  51,187  66,540  1,182  3,963  71,685 

Other income (loss)

                   
 

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

          249(c) 249 
 

Consolidated Funds net gains (losses)

        (3,385) (3,329) (6,714)
              
   

Total other income (loss)

        (3,385) (3,080) (6,465)
              
   

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

  (5,940) (11,989) (17,929) (2,552) (2,669) (23,150)
              

Income taxes expense / (benefit)

           599(b) 599 
              
   

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

  (5,940) (11,989) (17,929) (2,552) (3,268) (23,749)
 

(Income) loss attributable to redeemable non-controlling interests

        2,552    2,552 
              
   

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

 $(5,940)$(11,989)$(17,929)$ $(3,268)$(21,197)
              

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)


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

Revenues

                   
 

Investment banking

 $ $29,025 $29,025 $ $ $29,025 
 

Brokerage

  74  52,124  52,198      52,198 
 

Management fees

  29,586    29,586  (979) (5,586)(a) 23,021 
 

Incentive income

  10,860    10,860    (5,804)(a) 5,056 
 

Investment Income

  40,268  (359) 39,909    (39,909)(c)  
 

Interest and dividends

          10,399(c) 10,399 
 

Reimbursement from affiliates

        (168) 2,158(b) 1,990 
 

Other revenue

  974  (401) 573    349(c) 922 
 

Consolidated Funds revenues

        313    313 
              
   

Total revenues

  81,762  80,389  162,151  (834) 38,393  122,924 

Expenses

                   
 

Employee compensation and benefits

  32,752  52,352  85,104    3,558  88,662 
 

Interest and dividends

  105  330  435    5,289(c) 5,724 
 

Non-compensation expenses—Fixed

  15,718  32,145  47,863    (47,863)(c)  
 

Non-compensation expenses—Variable

  8,687  12,767  21,454    (21,454)(c)(d)  
 

Non-compensation expenses

          67,571(c)(d) 67,571 
 

Reimbursement from affiliates

  (2,158)   (2,158)   2,158(b)  
 

Consolidated Funds expenses

        1,501     1,501 
              
    

Total expenses

  55,104  97,594  152,698  1,501  9,259  163,458 

Other income (loss)

                   
 

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

          17,358(c) 17,358 
 

Bargain purchase gain

              22,244(e) 22,244 
 

Consolidated Funds net gains (losses)

        3,651  2,865  6,516 
              
   

Total other income (loss)

        3,651  42,467  46,118 
              
   

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

  26,658  (17,205) 9,453  1,316  (5,185) 5,584 
              

Income taxes expense / (benefit)

  
  
  
  
  
(17,791

)(b)
 
(17,791

)
              
   

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

  26,658  (17,205) 9,453  1,316  12,606  23,375 
 

(Income) loss attributable to redeemable non-controlling interests

  (1,940)   (1,940) (1,316)   (3,256)
              
   

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

 $24,718 $(17,205)$7,513 $ $12,606 $20,119 
              

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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15.16. Segment Reporting (Continued)



 Three Months Ended March 31, 2010 
 Six Months Ended June 30, 2010 


  
  
  
 Adjustments  
 
  
  
  
 Adjustments  
 


 Alternative
Investment
Management
 Broker-Dealer Total
Economic
Income/(loss)
 Funds
Consolidation
 Other
Adjustments
 GAAP 
 Alternative
Investment
Management
 Broker-Dealer Total
Economic
Income/(loss)
 Funds
Consolidation
 Other
Adjustments
 GAAP 


 (dollars in thousands)
 
 (dollars in thousands)
 

Revenues

Revenues

 

Revenues

 

Investment banking

 $ $6,005 $6,005 $ $ $6,005 

Investment banking

 $ $15,943 $15,943 $ $ $15,943 

Brokerage

  29,575 29,575   29,575 

Brokerage

  59,369 59,369   59,369 

Management fees

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

Management fees

 24,774  24,774 (1,694) (4,929)(a) 18,151 

Incentive income

 1,982  1,982  111  (a) 2,093 

Incentive income

 1,532  1,532  462  (a) 1,994 

Investment Income

 11,192 229 11,421  (11,421)(c)  

Investment Income

 8,842 (333) 8,509  (8,509)(c)  

Interest and dividends

     804  (c) 804 

Interest and dividends

     2,183  (c) 2,183 

Reimbursement from affiliates

    (145) 1,887  (b) 1,742 

Reimbursement from affiliates

    (300) 3,784  (b) 3,484 

Other revenue

 (51) 124 73  549  (c) 622 

Other revenue

 (25) 180 155  865  (c) 1,020 

Consolidated Funds revenues

    6,147  6,147 

Consolidated Funds revenues

     9,116  9,116 
                           
 

Total revenues

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

Total revenues

 35,123 75,159 110,282 7,122 (6,144) 111,260 

Expenses

Expenses

 

Expenses

 

Employee compensation and benefits

 16,184 25,136 41,320  2,113 43,433 

Employee compensation and benefits

 23,498 53,700 77,198  4,782 81,980 

Interest and dividends

 116  116  330  (c) 446 

Interest and dividends

 234 235 469  598  (c) 1,067 

Non-compensation expenses—Fixed

 8,452 16,013 24,465  (24,465)(c)  

Non-compensation expenses—Fixed

 17,914 31,201 49,115  (49,115)(c)  

Non-compensation expenses—Variable

 331 8,455 8,786  (8,786)(c)(d)  

Non-compensation expenses—Variable

 687 15,655 16,342  (16,342)(c)(d)  

Non-compensation expenses

     34,203  (c)(d) 34,203 

Non-compensation expenses

     65,541  (c)(d) 65,541 

Reimbursement from affiliates

 (1,887)  (1,887)  1,887  (b)  

Reimbursement from affiliates

 (3,784)  (3,784)  3,784  (b)  

Consolidated Funds expenses

    3,159   3,159 

Consolidated Funds expenses

    4,340   4,340 
                           
 

Total expenses

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

Total expenses

 38,549 100,791 139,340 4,340 9,248 152,928 

Other income (loss)

Other income (loss)

 

Other income (loss)

 

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

     1,524  (c) 1,524 

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

     1,774  (c) 1,774 

Consolidated Funds net gains (losses)

    6,108 12,165 18,273 

Consolidated Funds net gains (losses)

    2,722 8,836 11,558 
                           
 

Total other income (loss)

    6,108 13,689 19,797  

Total other income (loss)

    2,722 10,610 13,332 
                           
 

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

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

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

 (3,426) (25,632) (29,058) 5,504 (4,782) (28,336)
                           

Income taxes expense / (benefit)

Income taxes expense / (benefit)

      (266)(b) (266)

Income taxes expense / (benefit)

      333  (b) 333 
                           
 

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

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

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

 (3,426) (25,632) (29,058) 5,504 (5,115) (28,669)

(Income) loss attributable to redeemable non-controlling interests

    (8,056)  (8,056)

(Income) loss attributable to redeemable non-controlling interests

    (5,504)  (5,504)
                           
 

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

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

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

 $(3,426)$(25,632)$(29,058)$ $(5,115)$(34,173)
                           

Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

15. Segment Reporting (Continued)

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

        Funds Consolidation:    The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income. Adjustments to reconcile to US GAAP net income include elimination of incentive income and management fees earned from the Consolidated


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Segment Reporting (Continued)

Funds and addition of fund expenses excluding management fees paid, fund revenues and investment income (loss).

        For the three months and six months ended March 31,June 30, 2011 and 2010, there was no one fund or other customer which represented more than 10% of the Company's total revenues.

16.17. Regulatory Requirements

        As a registered broker-dealer, Cowen and Company LLC ("Cowen and Company") is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of minimum net capital. Under the alternative method permitted by the Rule, Cowen and Company's minimum net capital requirement, as defined, is $1.0$1 million. Cowen and Company is not permitted to withdraw equity if certain minimum net capital requirements are not met. As of March 31,June 30, 2011, Cowen and Company had total net capital of approximately $39.9$42.9 million, which was approximately $38.9$41.9 million in excess of its minimum net capital requirement of $1.0$1 million.

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

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


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

16. Regulatory Requirements (Continued)

        Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the Financial Services Authority ("FSA") of the UK. Financial Resources, as


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

17. Regulatory Requirements (Continued)


defined, must exceed the total Financial Resources requirement of the FSA. At March 31,June 30, 2011, Ramius UK's Financial Resources of $4.3 million exceeded its minimum requirement of $0.6 million by $3.7 million. At March 31,June 30, 2011, CIL's Financial Resources of $4.0$4.5 million exceeded its minimum requirement of $2.2$2.3 million by $1.8$2.2 million.

        CCAL (formerly known as Cowen Latitude Advisors Limited ("CLAL")Limited) is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources, as defined, must exceed the Total Financial Resources requirement of the SFC. At March 31,June 30, 2011, CLAL'sCCAL's Financial Resources of $1.0$0.9 million exceeded the minimum requirement of $0.1 million by $0.9$0.8 million.

        As a registered broker-dealer and FINRA member firm, Cowen Capital LLC (formerly known as LaBranche Capital, LLC) is subject to SEC Rule 15c3-1, as adopted and administered by the SEC and FINRA. Cowen Capital LLC is required to maintain minimum net capital, as defined, equivalent to the greater of $1 million or 2% of aggregate indebtedness, as defined. As of June 30, 2011, Cowen Capital, LLC's net capital, as defined, was $33.3 million, which exceeded minimum requirements by $32.3 million. Cowen Capital LLC's aggregate indebtedness to net capital ratio was 0.16 to 1.

        As a registered broker dealer in the United Kingdom, Cowen International Trading Limited ("CITL") (formerly known as LaBranche Structured Products Europe Limited) is subject to the capital adequacy and capital resources as managed and monitored in accordance with the regulatory capital requirements of the FSA in the United Kingdom. In calculating regulatory capital, CITL's capital consists wholly of Tier 1 capital. Tier 1 capital is the core measure of a company's financial strength from a regulator's point of view. It consists of the type of financial capital considered the most reliable and liquid, primarily Shareholder's Equity. As of June 30, 2011, Tier 1 capital, as defined, was $51.2 million which exceeded the total variable capital requirement by $28 million. This Tier 1 capital included a loan to Cowen Structured Holdings Inc. (formerly known as LaBranche Structured Holdings, Inc.) by CITL as of February 2011, in the aggregate principal amount of $11.9 million.

        As a registered corporation under the Hong Kong Securities and Futures Ordinance, Cowen Structured Products Hong Kong Limited ("CSPH") (formerly known as LaBranche Structured Products Hong Kong Limited) is subject to the capital requirements of the Hong Kong Securities and Futures (Financial Resources) Rules ("FRR"). The minimum paid-up share capital requirement is HKD 5,000,000 ($0.6 million at June 30, 2011) and the minimum liquid capital requirement is the higher of HKD 3,000,000 ($0.4 million at June 30, 2011) and the variable required liquid capital as defined in the FRR. The Company monitors its compliance with the requirements of the FRR on a daily basis. As of June 30, 2011, CSPH's liquid capital, as defined was $2.7 million, which exceeded its minimum requirements by $2.3 million.

17.18. Related Party Transactions

        The Company acts as managing member, general partner and/or investment manager to the Ramius managed funds, Cowen Healthcare Royalty Management, LLC ("CHRP Management"), and the CHRP Funds, and certain managed accounts. Management fees and incentive income are primarily earned from affiliated entities. Fees receivable primarily represents the management fees and incentive income owed to the Company from these related funds and certain affiliated managed accounts. As of March 31,


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Related Party Transactions (Continued)


June 30, 2011, approximately $13.7$8 million included in fees receivable are earned from external parties and the associated revenues are recorded in investment banking revenues in the condensed consolidated statements of operations.

        The Company may, at its discretion, waive certain of the fees charged to the funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated investment fund. For the three months ended March 31,June 30, 2011 and 2010, the Company reimbursed the funds that it manages $0.4$1 million and $0.8$0.5 million, respectively, and $1.4 million and $1.2 million for the six months ended June 30, 2011 and 2010, respectively, which were recorded net in management fees and incentive income in the condensed consolidated statements of operations. At March 31,June 30, 2011 and December 31, 2010, related amounts still payable were $2.4$3.3 million and $2.3 million, respectively, and were reflected in fees payable in the condensed consolidated statements of financial condition.

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

        Pursuant to the operating agreement for its subsidiary Ramius Alternative Solutions LLC, the Company is required to pay certain distribution fees on assets raised by third party distributors. Such distribution fees are reported as client services and business development in the condensed consolidated statements of operations. These amounts equaled $0.4$0.2 million and $0.3 million for the three months ended March 31,June 30, 2011 and 2010, respectively, and $0.6 million for the six months ended June 30, 2011 and 2010, respectively. At March 31,June 30, 2011 and December 31, 2010, related amounts still payable were $0.1 million and $0.2 million, respectively, and were reflected in accounts payable, accrued expenses and other liabilities in the condensed consolidated statements of financial condition.


Table of Contents


Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

17. Related Party Transactions (Continued)

        As a result of a business combination in 2004, Ramius Alternative Solutions LLC acquired receivables of $9.6 million and assumed liabilities of a corresponding amount relating to various agreements with investors. Such amounts have been recorded in fees receivable and due to related parties, respectively, in the condensed consolidated statements of financial condition. The remaining balance yet to be paid was $1.6$1.5 million and $1.7 million as of March 31,June 30, 2011 and December 31, 2010, respectively. Of such amounts outstanding at March 31,June 30, 2011, $0.7$0.4 million will be paid induring the second half of 2011.

        The Company may, on occasion, also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates and are included in receivabledue from affiliatesrelated parties in the condensed consolidated statements of financial condition. As of March 31,June 30, 2011 and December 31, 2010, loans to employees of $4.5$5.9 million and $4.7 million, respectively, were included in due from related parties on the condensed consolidated statements of financial condition. For the three months and six months ended March 31,June 30, 2011 and 2010 interest charged for these loans and advances was immaterial. The remaining balance included in due from related parties primarily relates to amounts due to the Company from affiliated funds and real estate entities due to expenses paid on their behalf.


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Related Party Transactions (Continued)

        In April 2011, the Company entered into a credit agreement with Starboard Value LP (see Note 5), whereby the Company can loan up to $3 million to Starboard Value LP at an interest rate of LIBOR plus 3.75% (payable quarterly) with a maturity of March 30, 2014. As of June 30, 2011 $2 million is included in other assets in the condensed consolidated statement of financial condition. For the three months and six months ended June 30, 2011, interest charged for this loan was immaterial.

        Included in due to related parties is approximately $5.7$1.1 million and $6.5 million at March 31,June 30, 2011 and December 31, 2010, respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a hypothetical liquidation of the real estate funds as of the balance sheet date.

18.19. Guarantees

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

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

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


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

18. Guarantees (Continued)


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

        The Company is a member of various securities exchanges. Under the standard membership agreements, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, management believes that the potential for the Company to be required to make payments under these arrangements is


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Cowen Group, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

19. Guarantees (Continued)


remote. Accordingly, no contingent liability is recorded in the condensed consolidated statements of financial condition for these arrangements.

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

20. Subsequent Events

        In July 2011, the Company approved a share repurchase program that authorizes the Company to purchase up to $20 million of Cowen Group's Class A common shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws.


Table of Contents

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

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

Overview

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

        Our alternative investment management business had approximately $9.7$10.7 billion of assets under management as of AprilJuly 1, 2011. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the Investment Advisers Act since 1997. Our alternative investment management products, solutions and services include hedge funds, replication products, mutual funds, managed futures funds, fund of funds, real estate, healthcare royalty funds, and cash management services and mortgage advisory services. Our institutional investors include pension funds, insurance companies, banks, foundations and endowments, wealth management organizations and family offices.

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

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

        In 2010, we expanded ourOur investment banking product offerings to include initial public offerings and equity follow-on transactions, credit and fixed income transactions, including public and private debt placements, exchange offers, consent solicitations and tender offers. We also addedoffer origination and distribution capabilities for convertible securities. In addition, we have recently enhanced our presence in the PIPE and registered direct market by adding personnel. With the addition of theseOur capital markets capabilities, we also establishedmanaged by a unified capital markets group, which will allowallows us to be even more effective in providingeffectively provide cohesive solutions for our investment banking clients.

        On June 28, 2011, the acquisition between the Company and LaBranche, a market-maker in ETFs on various exchanges domestically and internationally, was consummated pursuant to the terms of the Agreement and Plan of Merger ("Merger Agreement"), dated February 16, 2011. Under the terms of the Merger Agreement each outstanding share of LaBranche was converted into 0.9980 shares of Cowen Group Class A common stock (the "Exchange Ratio"). The consideration received by LaBranche's shareholders was valued at approximately $156.4 million in the aggregate, based on the


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closing stock price of Cowen Group Class A on the NASDAQ Global Select Market of $3.82 on June 28, 2011. This is based on 40,931,997 shares of LaBranche stock that were outstanding on that date of the completion of the acquisition.

        SuccessAs a result of the acquisition, the condensed consolidated financial results of the Company for the three and six months ended June 30, 2011, includes two days of LaBranche's operating results. These operating results of LaBranche are related to ETF market-making and are included in ourthe Company's broker-dealer segment.

        As previously disclosed, the Company spun-off its value and opportunity business is highly dependentwhich focuses on human capital; accordingly, compensationinvesting in deep value situations and using shareholder activism to generate superior returns, into a stand-alone and independent business managed by Starboard Value LP ("Starboard"). The Company completed the separation on April 1, 2011. The Company continues to maintain a significant investment in Starboard, and as of April 1, 2011, accounts for its investment in Starboard as an equity method investment.

        In the second quarter of 2011, the Company recorded deferred tax benefits comprisegenerated by a Luxembourg subsidiary. In the largest componentsame quarter, the Company acquired a reinsurance company in Luxembourg from a third party, as part of oura service program that provides reinsurance coverage to the Company against certain risks. The reinsurance company had deferred tax liabilities and upon its purchase, the deferred tax benefits referenced above fully offset these liabilities, resulting in the recognition of the deferred tax benefits. Also, the Company incurred acquisition-related legal fees and professional fees, as well as operational and administrative expenses and our performance is dependent upon our ability to attract, develop and retain highly skilled employees who are motivated and committed to providein the highest qualitysecond quarter of service and guidance to our clients.2011 as a result of these transaction.

Certain Factors Impacting Our Business

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


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


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

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

Recent Developments

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

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


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LaBranche common stock. The total Company shares to be issued to LaBranche shareholders will represent approximately 35.1% of the combined company and 33.8% on a fully diluted basis. On March 31,Recent developments

        In July 2011, the Company's Board of Directors approved a share repurchase program that authorizes the Company filedto purchase up to $20 million of Cowen Group's Class A common shares from time to time through a Registration Statementvariety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. The Company plans to begin repurchasing shares on Form S-4 in connection with LaBranche transaction.August 8th, 2011 when restrictions on repurchasing Company Stock are lifted.

Basis of presentation

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

        The Company serves as the managing member/general partner and/or investment manager to affiliated fund entities which it sponsors and manages. Certain of these funds in which the Company has a substantive, controlling general partner interest are consolidated with the Company pursuant to generally accepted accounting principles as described below (the "Consolidated Funds"). Consequently, the Company's condensed consolidated financial statements reflect the assets, liabilities, income and expenses of these funds on a gross basis. The ownership interests in these funds which are not owned by the Company are reflected as non-controlling interests in consolidated subsidiaries in the condensed consolidated financial statements appearing elsewhere in this Form 10-Q. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.

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

Revenue recognition

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

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

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

Management fees

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


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


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Incentive income

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


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

        In periods following a period of a net loss attributable to an investor, the Company does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a "high-water mark." The Company has elected to record incentive income revenue in accordance with "Method 2" of the Financial Accounting Standards Board ("FASB") accounting standards. Under Method 2, the incentive


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income from the Company's funds and managed accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive income recognized in a quarter's condensed consolidated statement of operations may be subject to reversal in a subsequent quarter as a result of subsequent negative investment performance prior to the conclusion of the fiscal year, when all contingencies have been resolved. As a result of negative investment performance in 2008, and in the case of certain real estate funds, in 2009, the Company entered 2010 with high-water marks in certain of its fund products. These high-water marks require the funds to recover cumulative losses before the Company could begin to earn incentive income in 2010 and beyond with respect to the investments of investors who previously suffered losses. In 2010, the RamiusStarboard Value and Opportunity Funds surpassed their high water marks and the Company began to earn incentive income again on these products.

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

Investment Banking

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


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Brokerage

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

Interest and dividends

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


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Reimbursement from affiliates

        The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund, fund of funds and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds'


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offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, marketing, risk and technology expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the condensed consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.

Other revenues

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

Expenses

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

Income Taxes

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


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


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actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31,June 30, 2011, the Company recorded a valuation allowance against substantially all of its net deferred tax assets.

Redeemable Non-controlling Interests

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

Assets Under Management and Fund Performance

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

        As of AprilJuly 1, 2011, the Company had assets under management of $9.7$10.7 billion, a 7.7%9.4% increase as compared to assets under management of $9.04$9.7 billion as of JanuaryApril 1, 2011. The $697$917 million increase in assets under management during the firstsecond quarter of 2011 resulted from $544$839 million in net subscriptions (including redemptions effective on February 1, March 1 and AprilJuly 1, 2011, which included $95.8$35.7 million of assets returned to investors, as a result of closing the Ramius Multi-Strategy and Ramius Enterprise funds and the return of assets to UniCredit pursuant to the terms of Modification Agreement), and a $153$78 million performance-related increase in assets.


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


 Total Assets under
Management
  
 Total Assets under
Management
  
Platform
 April 1, 2011 January 1, 2011 Primary Strategies July 1, 2011 April 1, 2011 Primary Strategies

 (dollars in millions)
  
 (dollars in millions)
  

Hedge Funds(3)

 $1,397(1)$1,385(1)Multi-Strategy $1,641(1)$1,397(1)Multi-Strategy

     Single Strategy     Single Strategy

Alternative Solutions(2)

 
2,007

(2)
 
1,750

(2)

Multi-Strategy

 
2,132
 
2,007
 

Multi-Strategy

     Single Strategy

     Customized Solutions     Single Strategy

     Hedging Strategies     Customized Solutions

 1,189 1,124 Commodity Trading     Hedging Strategies

     Advisory 1,343 1,189 Commodity Trading Advisory

Real Estate(3)

 
1,628

(4)
 
1,628

(4)

Debt

 
1,628

(4)
 
1,628

(4)

Debt

     Equity     Equity

Cowen Healthcare Royalty Partners(5)

 
1,131

(4)
 
1,041

(4)

Royalty Interests

 
1,251

(4)
 
1,131

(4)

Royalty Interests

Other(6)

 
2,387
 
2,113
 

Cash Management

 
2,660
 
2,387
 

Cash Management

     Mortgage Advisory     Mortgage Advisory
            

Total

 
$

9,739
 
$

9,041
   
$

10,655
 
$

9,739
  
            

(1)
This amount includes the Company's invested capital of approximately $139$137 million and $154$139 million as of July 1, 2011 and April 1, 2011, and January 1, 2011, respectively.


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(2)
This amount includes the Company's invested capital of approximately $22$44.8 million and $32$48.2 million (which includes the notional amount of one of the fund of funds products) as of AprilJuly 1, 2011 and JanuaryApril 1, 2011, respectively.

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

(4)
This amount reflects committed capital.

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

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

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        The following table presents total assets under management by period:


 Three Months Ended  
  
  
 

 Year ended December 31, 

  
 January 1, 2011  Six Months Ended Three Months Ended Year ended December 31, 

 April 1, 2011 2010 2009 2008  July 1, 2011 July 1, 2011 2010 2009 2008 

 (dollars in thousands)
  (dollars in thousands)
 

Beginning Assets under Management

 $9,041,446 $9,276,278 $8,313,638 $9,765,230 $12,900,355  $9,041,446 $9,738,764 $8,313,638 $9,765,230 $12,900,355 

Net Subscriptions (Redemptions)

 543,693 (234,832) 812,555 (1,780,117)(2) (1,066,714) 1,382,319(3) 838,626 812,555 (1,780,117)(2) (1,066,714)

Net Performance(1)

 153,625  150,085 328,525 (2,068,411) 231,459 77,834 150,085 328,525 (2,068,411)
                      

Ending Assets under Management

 $9,738,764 $9,041,446 $9,276,278 $8,313,638 $9,765,230  $10,655,224 $10,655,224 $9,276,278 $8,313,638 $9,765,230 
                      

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

(2)
Net subscriptions for 20112009 include $90$807 million of capital commitments to the CHRP Funds that were part of Cowen Holdings prior to the Transactions.

(3)
Net subscriptions for 2011 include $210 million of additional capital commitments to the CHRP Funds.

        The firstsecond quarter of 2011, as was marked by unanticipatedthe case in the year's first three months, featured a number of significant events ofthat affected global significance, includingmarkets and asset class performance. The first quarter witnessed the Japanese earthquake, tsunami, and nuclear plant crises, along with increasing turmoil throughout the Middle East and North Africa. Most major global markets gained traction lateCommodity prices were strong. Nonetheless, corporate credit and equities performed adequately. This was followed by a general sell-off in risk assets that began in earnest in May, continuing the "risk on, risk off" approach that has seemed to dominate investor activity throughout the year. Foremost among recent investor concerns were the deteriorating credit situation and sovereign solvency issues in Greece. This led to fears of contagion spreading to larger European countries such as Italy, as well as to the potential negative effects on bank balance sheets throughout Europe. Resolution remained elusive for European regulators and governments as the quarter ended. Middle East and North African unrest continued. China attempted to deal with concerns about a slowing economy and a domestic credit bubble. The U.S. had its own set of problems, including a lagging economy, the termination of quantitative easing (QE2) by the Federal Reserve, questions on the future strength of the U.S. Dollar, and the inability of Congress to put forth a credible solution to the nation's fiscal deficit as well as the standoff on raising the debt ceiling. In addition, Japan struggled to find its footing, both politically and economically, after the natural disasters earlier in the first quarteryear. Although high yield spreads finally widened after approaching all time lows in May, equity markets improved near the end of 2011, butJune despite these worrisome factors. Corporate balance sheets still remain strong, and industry experts look to a numberresumption of leading-performance countriesacquisition activity after a slowdown in 2010 faced an uphill battle. While investor sentiment continued to move toward a strengthening global economy, inflation concerns, driven by higherthe last two months of the quarter. Sharp downward breaks in commodity prices, were a tempering consideration. The move upwardespecially in June (double digit percentage declines in crude oil, was especially noteworthy. The US Dollar lost significant ground versuscotton and wheat) put additional pressure on investors. "Portfolio whiplash" became a common theme in the Euro and hit multi-year lows against the Yen on repatriation fears. Despite these pockets of turmoil, equity market volatility indices ground lowerfinancial media as the third quarter progressed. Similarly, concerns about the U.S. budget deficit and ongoing banking issues in Europe failed to deter fixed income investors. Credit markets remained strong, based on fund flows and demand for yield from both institutional and private investors in a near-zero base rate environment. Corporations responded with significant levels of debt issuance, especially in high yield. Further, global companies utilized their improved balance sheets and higher equity valuations to pursue attractive business targets, creating a robust merger and acquisition calendar.


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        Ramius investment vehicles began the year with positive results in each primary category except for active trading in the global macro and managed futures sectors, where global events noted above made market conditions especially challenging. Performance pressures were acute within the second quarter for macro and managed futures for reasons noted above. Credit had an outstanding quarter, and the small


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cap activist funds were only marginally negative, essentially preserving the strong gains of the first quarter. Investors in the multi-strategy funds received flattish returns, withhigher marks at quarter end; there is a focus on capital essentially being protected aspreservation alongside the opportunistic sale of assets continuein order to be liquidated andmake distributions made to investors. Thus far in 2011, the directly managed hedge funds have again exceeded the parameters of their individual mandates. Customized hedge fund of funds portfolios also had satisfactory results, while noting that those portfolios with overlay hedges would have lagged comparative returns for directional market indices.results. In addition, as stated in the first quarter report, longer-dated vehicles in areas such as real estate continue to experience strongerbenefit from firmer underlying investment valuations and increased liquidity, extending the recovery from the lows seen in 2009.

        The table below sets forth performance information as of March 31,June 30, 2011, for the Company's funds with assets greater than $200 million as well as information with respect to the firm's single-strategy hedge funds and RTS funds. The performance reflected below is representative of the net return of the most recently issued full fee paying class of fund interests offered for the respective fund. The net returns are net of all management and incentive fees, and are calculated monthly based on the change in an investor's current month ending equity as a percentage of their prior month's ending equity, adjusted for the current month's subscriptions and redemptions. Such returns are compounded monthly in calculating the final net year to date return. Performance information for the CHRP Funds is not presented due to existing confidentiality provisions.

        The following table presents fund performance for the three months and six months ended March 31,June 30, 2011 and 2010:


  
  
 Performance for
three months
Ended
March 31,
   
  
 Performance for
three months
Ended
June 30,
 Performance for
six months
Ended
June 30,
 
Platform
 Strategy Fund(1) 2011 2010  Strategy Fund(1) 2011 2010 2011 2010 

Hedge Funds

 Single Strategy Ramius Value and Opportunity Fund Ltd. 7.45% 7.80% Single Strategy Starboard Value and Opportunity Fund Ltd. (0.47)% (0.54)% 6.94% 7.17%

   (Inception Mar. 1, 2006)        (Inception Mar. 1, 2006)         

   Ramius Global Credit Fund LP 4.38%(4) 4.72%(4)   Ramius Global Credit Fund LP (Class B) 3.43%(4) 3.04%(4) 7.96%(4) 7.90%(4)

   (Inception Oct. 1, 2009)        (Inception Oct. 1, 2009)         

   Ramius Enterprise LP(5) 0.12%(2) 1.93%(2)   Ramius Enterprise LP(5) 2.92%(2) (1.48)%(2) 3.05%(2) 0.43%(2)

   (Inception Jan. 1, 2008)        (Inception Jan. 1, 2008)         

Alternative Solutions

 

Managed Accounts

 

Activist Portfolio with Hedging Overlay

 
0.27

%
 
2.94

%
 

Managed Accounts

 

Activist Portfolio with Hedging Overlay

 
(0.97

)%
 
(0.50

)%
 
(0.70

)%
 
2.43

%

   (Inception Sept. 1, 2007)        (Inception Sept. 1, 2007)         

 Global Macro/Managed Futures RTS Global Fund LP (3.05)% 1.95% Global Macro/Managed Futures RTS Global Fund LP (4.80)% (2.63)% (7.70)% 0.72%

   (Inception Mar. 1, 2010)        (Inception Mar. 1, 2010)         

   RTS Global 3X Fund LP (8.65)% 5.99%   RTS Global 3X Fund LP (13.94)% (6.42)% (21.38)% 0.44%

   (Inception Mar. 1, 2010)        (Inception Mar. 1, 2010)         

Real Estate

 

Debt

 

RCG Longview Debt Fund IV, L.P.(3)

 
2.82

%
 
2.93

%
 

Debt

 

RCG Longview Debt Fund IV, L.P.(3)

 
1.75

%
 
0.99

%
 
4.57

%
 
3.92

%

   (Inception Nov. 12, 2007)        (Inception Nov. 12, 2007)         

 Equity RCG Longview Equity Fund, L.P.(3) 6.11% 8.01% Equity RCG Longview Equity Fund, L.P.(3) 12.09% 5.27% 18.19% 13.28%

   (Inception Nov. 22, 2006)        (Inception Nov. 22, 2006)         

Other

 

Cash Management

   
0.19

%
 
0.67

%
 

Cash Management

   
(0.10

)%
 
0.19

%
 
0.09

%
 
0.87

%

(1)
Products included above represent funds and accounts with assets under management greater than $200 million (excluding CHRP and Ramius Multi- Strategy Fund Ltd), the Company's single-strategy funds and the Ramius Trading Strategies funds. Ramius Multi-Strategy Fund Ltd and Ramius Enterprise LP have been closed to new investors and we began winding down these funds in 2010. Ramius Enterprise LP has been included above as the firm maintains a substantial proprietary equity investment in this entity. The inception date for a fund or account representrepresents the initial date that the fund or account accepted capital from third party investors. As of AprilJuly 1, 2011, the net assets of the funds presented above were $3.87$4.13 billion, or 40%39% of the total assets under management as of AprilJuly 1, 2011 of $9.74$10.66 billion. Excluded from the table above are funds and managed accounts with $5.87$6.53 billion, or 60%61%, of total assets under management as of AprilJuly 1, 2011. These include a total of 63 smaller individual funds and managed accounts, the Ramius Multi-Strategy Fund Ltd and the Cowen Healthcare Royalty Partners funds.

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


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

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(4)
Performance reflects application of the fee terms applicable to the Class B interests, which is the class of interests offered by the Fund beginning on July 1, 2010. As a result, the 2010 data is pro forma applying the same fee terms applicable to the Class B interests.

(5)
See the "Certain Factors Impacting Our Business—Assets Under Management" section as it refers to the Multi-Strategy products' closings.

Invested Capital

        The Company invests a significant portion of its capital base to help drive returns and facilitate the growth of its alternative investment management and broker/dealer businesses. Management allocates capital to three primary categories: (i) trading strategies; (ii) merchant banking investments; and (iii) real estate investments. The Company makes strategic and opportunistic investments in varying capital structures across a diverse array of businesses, hedge funds and mutual funds. Much of the Company's trading strategy portfolio is invested along side the Company's alternative investment management clients and include investment strategies such as credit trading, event driven, macro trading, and enhanced cash management. Within its merchant banking investment strategy, management generally takes a long-term view that typically involves investing directly in public and private companies globally, private equity funds and along side its alternative investment management clients. The Company's real estate investment strategy focuses on making investments along side the Company's alternative investment management clients in Ramius managed funds such as the RCG Longview platform, as well as in direct investments in commercial real estate projects.

        At March 31,June 30, 2011, the Company's invested capital amounted to a net value $387.3$434.3 million (a long market value of $582.0$711.8 million, gross of $194.7$277.5 million of trading strategy leverage), representing approximately 85%68% of Cowen Group's stockholders' equity presented in accordance with GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen Group's stockholders' equity at March 31,June 30, 2011. The net values presented in the table below do not tie to Cowen Group's condensed consolidated statement of financial condition at March 31,June 30, 2011, because they are included in various line items of the condensed consolidated statement of financial condition, including "securities owned, at fair value", "other investments", "cash and cash equivalents", and "consolidated funds-securitiesfunds- securities owned, at fair value".


 Net Value % 
 dollars in millions
  
 
Strategy
Strategy
 Net Value %  

 ($ in millions)
  
 

Trading

Trading

 $214.3 47  $264.8 42%

Merchant Banking

Merchant Banking

 134.4 29  128.9 20%

Real Estate

Real Estate

 38.6 9  40.6 6%
          

Total

 434.3 68%

Total

 $387.3 85%     

Stockholder's Equity

 638.0 100%
          

Stockholders' Equity

 $456.0 100%
     

        The allocations shown in the table above will change over time.

Results of Operations

        To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income of our alternative investment management and broker-dealer segments follows the discussion of our total consolidated GAAP results. Economic Income reflects, on


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a consistent basis for all periods presented in the Company's condensed consolidated financial statements, income earned from the Company's funds and managed accounts and from its own invested capital. Economic Income excludes certain adjustments required under GAAP. See the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company—Segment Analysis and Economic Income," and Note 1516 to the Company's condensed


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consolidated financial statements, appearing elsewhere in this Form 10-Q, for a reconciliation of Economic Income to total Company net income (loss).

Three Months Ended March 31,June 30, 2011 Compared with the Three Months Ended March 31,June 30, 2010


Three Months Ended March 31,June 30, 2011 Compared with the Three Months Ended
March 31, June 30, 2010
Condensed Consolidated Statements of Operations
(unaudited)



 Three months ended March 31, Period to Period 
 Three Months Ended
June 30,
 Period to Period 


 2011 2010 $ Change % Change 
 2011 2010 $ Change % Change 


 (dollars in thousands)
 
 (dollars in thousands)
 

Revenues

Revenues

 

Revenues

 
 

Investment banking

 $14,682 $6,005 $8,677 144.5%

Investment banking

 $14,343 $9,938 $4,405 44.3%
 

Brokerage

 27,591 29,575 (1,984) (6.7)%

Brokerage

 24,607 29,793 (5,186) (17.4)%
 

Management fees

 11,164 9,270 1,894 20.4%

Management fees

 11,857 8,881 2,976 33.5%
 

Incentive income

 4,381 2,093 2,288 109.3%

Incentive income

 675 (100) 775 (775.0)%
 

Interest and dividends

 4,559 804 3,755 467.0%

Interest and dividends

 5,840 1,380 4,460 323.2%
 

Reimbursement from affiliates

 1,009 1,742 (733) (42.1)%

Reimbursement from affiliates

 981 1,741 (760) (43.7)%
 

Other revenue

 690 622 68 10.9%

Other revenue

 232 398 (166) (41.7)%
 

Consolidated Funds revenues

 169 6,147 (5,978) (97.3)%

Consolidated Funds revenues

 144 2,969 (2,825) (95.1)%
                   
 

Total revenues

 64,245 56,258 7,987 14.2% 

Total revenues

 58,679 55,000 3,679 6.69%

Expenses

Expenses

 

Expenses

 
 

Employee compensation and benefits

 45,087 43,433 1,695 3.9%

Employee compensation and benefits

 43,575 38,547 5,028 13.0%
 

Interest and dividends

 2,609 446 2,163 485.0%

Interest and dividends

 3,115 621 2,494 401.6%
 

General, administrative and other expenses

 33,907 34,203 (296) (0.9)%

General, administrative and other expenses

 33,666 31,335 2,331 7.4%
 

Consolidated Funds expenses

 628 3,159 (2,531) (80.1)%

Consolidated Funds expenses

 872 1,182 (310) (26.2)%
                   
 

Total expenses

 82,231 81,241 1,031 1.3% 

Total expenses

 81,228 71,685 9,543 13.3%

Other income (loss)

Other income (loss)

 

Other income (loss)

 
 

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

 17,283 1,524 15,759 NM 

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

 76 249 (173) 69.5%
 

Consolidated Funds net gains (losses)

 1,746 18,273 (16,527) (90.4)%

Bargain purchase gain

 22,244  22,244 NM 
         

Consolidated Funds net gains (losses)

 4,770 (6,714) 11,484 (171.0)%
 

Total other income (loss)

 19,029 19,797 (768) (3.9)%          
          

Total other income (loss)

 27,090 (6,465) 33,555 519.0%
 

Income (loss) before income taxes

 1,043 (5,186) 6,188 (120.3)%          
          

Income (loss) before income taxes

 4,541 (23,150) 27,691 (119.6)%
         

Income taxes expense (benefit)

Income taxes expense (benefit)

 163 (266) 429 (161.3)%

Income taxes expense (benefit)

 (17,954) 599 (18,553) (3097.3)%
                   
 

Net income (loss)

 880 (4,920) 5,759 (118.0)% 

Net income (loss)

 22,495 (23,749) 46,244 (194.7)%
 

Income (loss) attributable to redeemable non-controlling interests

 798 8,056 (7,299) (90.1)%

Income (loss) attributable to redeemable non-controlling interests

 2,458 (2,552) 5,010 (196.3)%
                   
 

Net income (loss) attributable to Cowen Group stockholders

 $82 $(12,976)$13,058 (100.6)% 

Net income (loss) attributable to Cowen Group stockholders

 $20,037 $(21,197)$41,234 (194.5)%
                   

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Revenues

Investment Banking

        Investment banking revenues were $14.7$14.3 million for the three months ended March 31,June 30, 2011, an increase of $8.7$4.4 million compared to $6$9.9 million for the prior year quarter. During the quarter ended March 31,June 30, 2011, the Company completed twelveeight underwriting transactions, two private capital raising transactions, and three strategic advisory transactions. During the quarter ended June 30, 2010, the Company completed eight underwriting transactions, one private capital raising transaction, two strategic advisory transactions, and one debt financing transaction. During the quarter ended March 31, 2010, the Company completed four underwriting transactions, one private capital raising transaction, fourthree strategic advisory transactions.

Brokerage

        Brokerage revenues were $27.6$24.6 million for three months ended March 31,June 30, 2011, a decrease of $2.0$5.2 million compared to $29.6$29.8 million for the prior year quarter. The decrease resulted primarily from decreased revenues related to our core customer facilitation related activities. Aggregate NYSE and NASDAQ trading volumes declined by 9%28% in the three months ended March 31,June 30, 2011 compared to the prior year quarter.

Management Fees

        Management fees increased $1.9$3 million to $11.2$11.9 million for the three months ended March 31,June 30, 2011 compared with $9.3$8.9 million for the prior year quarter. The increase was a result of an increase in management fees for our CHRP funds of $2.9$4.5 million, as a result of an increase in committed capital, which wasand an increase in management fees associated with our Global Credit fund of approx. $0.5 million. These increases were partially offset by a decrease in hedge fund management fees of $1.5$1.7 million as a result of returningcontinuing to return assets to investors infor the second half of 2010 and the first quarterhalf of 2011, as a resultwell as no longer charging management fees to certain affiliates of closing the Ramius Multi-Strategy Fund and the Enterprise Fund.UniCredit S.pA which became effective July 1, 2010.

Incentive Income

        Incentive income was $4.4$0.7 million for the three months ended March 31,June 30, 2011, compared to $2.1a loss of $0.1 million in the prior year quarter. The increase in incentive fees of $0.9 million was a result of an increase in performance primarily from the Value and Opportunity fund and Global Credit fund which resulted in an increase in incentive fees of $2.9 million and $0.9 million, respectively, partially offset by the decrease in performance of our alternative solutions business.business and a decrease in fees earned from our activist fund after the first quarter.

Interest and Dividends

        Interest and dividends increased $3.8$4.5 million to $4.6$5.8 million for the three months ended March 31,June 30, 2011, compared with $0.8$1.4 million in the prior year quarter. The increase was primarily attributable to an increase in interest income resulting from an increase in investments in interest bearing assets in the firstsecond quarter of 2011 relative to the same period last year.

Reimbursements from Affiliates

        Reimbursements from affiliates decreased $0.7 million to $1.0$1 million for the three months ended March 31,June 30, 2011 compared with $1.7 million for the prior year quarter. The decrease was attributable to a decrease in AUM associated with the funds for which the Company receives the majority of its reimbursements.

Other Revenue

        Other revenue remained constant at $0.6decreased $0.2 million to $0.2 million for the three months ended March 31,June 30, 2011, compared towith $0.4 million in the prior year quarter.


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Consolidated Funds Revenues

        Consolidated funds revenues decreased $5.9$2.9 million to $0.2$0.1 million for the three months ended March 31,June 30, 2011 compared with $6.1$3 million in the prior year quarter. The decrease was primarily attributable to a reduction in interest income from Enterprise Fund's long holdings of interest bearing securities, due to the fact that this fund has been closed and the focus has therefore been on selling positions and returning assets rather than producing investment returns.

Expenses

Employee Compensation and Benefits

        Employee compensation and benefits expenses increased $1.7$5 million to $45.1$43.6 million for the three months ended March 31,June 30, 2011 compared with $43.4$38.5 million in the prior year quarter. The increase was primarily relatedattributable to an increase in head count combined with additional stock compensation expense andoffset by a reduction of severance expense duringexpense. The compensation to revenue ratio was 73% for the three months ended March 31, 2011.June 30, 2011, compared to 70% for the prior year quarter. The increase in the compensation to revenue ratio was driven by the increase to the numerator of the equation as our compensation expense increased by 13%. Average headcount for the second quarter of 2011 has increased by 4% from the prior year quarter primarily due to the acquisition of LaBranche.

Interest and Dividends

        Interest and dividend expense increased $2.2 of$2.5 million to $2.6$3.1 million orfor the three months ended March 31,June 30, 2011 compared with $0.4$0.6 million in the prior year quarter. Interest and dividends expense relates to interest on our credit facility in addition to increased trading activity with respect to the Company's holdings.

General, Administrative and Other Expenses

        General, administrative and other expenses decreased $0.3increased $2.3 million to $33.9$33.6 million for the three months ended March 31,June 30, 2011 compared with $34.2$31.3 million in the prior year quarter. The decreaseincrease was primarily due to general efficiencies receivedprofessional fees incurred in relationconnection with the acquisition of a Luxembourg reinsurance company and transaction costs related to the November 2009 transactionLaBranche acquisition partially offset by increased professional, advisory and other fees.a reversal of an accrual pertaining to subordination agreements entered into by the general partners of two real estate funds with those funds lead investor.

Consolidated Funds Expenses

        Consolidated funds expenses decreased $2.6$0.3 million to $0.6$0.9 million for the three months ended March 31,June 30, 2011 compared with $3.2$1.2 million in the prior year quarter. The decrease was attributable to a decrease in interest expense recognized by the Enterprise Fund due to a decrease in short holdings of interest bearing securities, due to the fact that this fund has been closed and the focus has therefore been on selling positions and returning assets rather than producing investment returns.

Other Income (Loss)

        Other income (loss) decreased $0.8increased $33.6 million to $19income of $27.1 million for the three months ended March 31,June 30, 2011 compared to $19.8a loss of $6.5 million in the prior year quarter. The decreaseincrease primarily relates to recording a decrease$22.2 million bargain purchase gain in relation to the acquisition of LaBranche in June 2011. The increase is also related to the Consolidated Funds' performance due toof Enterprise Master. Regardless that Enterprise Master'sMaster is being closed, its performance in the three months ended March 31,June 30, 2011 decreasedincreased from that during the three months ended March 31,June 30, 2010 due to some significant sales. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for


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such funds, and the portion of those gains or losses that are attributable to other investors is allocated to a non-controlling interest.

Income Taxes

        Income tax expense amounted to an $18 million tax benefit for the three months ended June 30, 2011. This compares to a $0.6 million income tax benefit in the prior year quarter. The Company's tax benefit increased primarily because a consolidated subsidiary of the Company that, as part of a reinsurance service program, acquired Luxembourg reinsurance companies with deferred tax liabilities, recorded, pursuant to an Advance Tax Agreement, a deferred tax benefit upon the acquisition of these reinsurance companies.

Income (Loss) Attributable to Non-controlling Interests

        Income (loss) attributable to non-controlling interests was income of $2.5 million for the three months ended June 30, 2011 compared with a loss of $2.6 million in the prior year quarter. The period over period change was the result of an increase in performance in the Consolidated Funds and therefore higher allocations of income to non-controlling interest holders.


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Six Months Ended June 30, 2011 Compared with the Six Months Ended June 30, 2010

Six Months Ended June 30, 2011 Compared with the Six Months Ended June 30, 2010
Condensed Consolidated Statements of Operations
(unaudited)

 
 Six Months Ended June 30, Period to Period 
 
 2011 2010 $ Change % Change 
 
 (dollars in thousands)
 

Revenues

             
  

Investment banking

 $29,025 $15,943 $13,082  82.1%
  

Brokerage

  52,198  59,369  (7,171) (12.1)%
  

Management fees

  23,021  18,151  4,870  26.8%
  

Incentive income

  5,056  1,994  3,062  153.6%
  

Interest and dividends

  10,399  2,183  8,216  376.3%
  

Reimbursement from affiliates

  1,990  3,484  (1,494) (42.9)%
  

Other revenue

  922  1,020  (98) (9.6)%
  

Consolidated Funds revenues

  313  9,116  (8,803) (96.6)%
          
   

Total revenues

  122,924  111,260  11,664  10.5%

Expenses

             
  

Employee compensation and benefits

  88,662  81,980  6,682  8.2%
  

Interest and dividends

  5,724  1,067  4,657  436.5%
  

General, administrative and other expenses

  67,571  65,541  2,030  3.1%
  

Consolidated Funds expenses

  1,501  4,340  (2,839) (65.4)%
          
   

Total expenses

  163,458  152,928  10,530  6.9%

Other income (loss)

             
  

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

  17,358  1,774  15,584  878.5%
  

Bargain purchase gain

  22,244    22,244  NM 
  

Consolidated Funds net gains (losses)

  6,516  11,558  (5,042) (43.6)%
          
   

Total other income (loss)

  46,118  13,332  32,796  246.2%
          
   

Income (loss) before income taxes

  5,584  (28,336) 33,920  (119.7)%
          
 

Income taxes expense (benefit)

  (17,791) 333  (18,124) (5442.6)%
          
   

Net income (loss)

  23,375  (28,669) 52,044  (181.5)%
  

Income (loss) attributable to redeemable non-controlling interests

  3,256  5,504  (2,248) (40.8)%
          
   

Net income (loss) attributable to Cowen Group stockholders

 $20,119 $(34,173)$54,292  (158.9)%
          

Revenues

Investment Banking

        Investment banking revenues were $29 million for the six months ended June 30, 2011, an increase of $13.1 million compared to $15.9 million for the first six months of 2010. During the six months ended June 30, 2011, the Company completed twenty underwriting transactions, three private capital raising transaction, four strategic advisory transactions, and one debt financing transaction. During the six months ended June 30, 2010, the Company completed twelve underwriting transactions, two private capital raising transactions, and seven strategic advisory transactions.


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Brokerage

        Brokerage revenues were $52.2 million for six months ended June 30, 2011, a decrease of $7.2 million compared to $59.4 million for the first six months of 2010. The decrease resulted primarily from decreased revenues related to our core customer facilitation related activities. Aggregate NYSE and NASDAQ trading volumes declined by 20% in the six months ended June 30, 2011 compared to the prior year period.

Management Fees

        Management fees increased $4.8 million to $23 million for the six months ended June 30, 2011 compared with $18.2 million for the first six months of 2010. The increase was a result of an increase in management fees for our CHRP funds of $7.1 million, as a result of an increase in committed capital, and an increase in management fees associated with our Global Credit fund of approx. $0.8 million. These increases were partially offset by a decrease of $3.1 million as a result of continuing to return assets to investors for the second half of 2010 and first half of 2011, as well as no longer charging management fees to certain affiliates of UniCredit S.pA which became effective July 1, 2010.

Incentive Income

        Incentive income was $5.1 million for the six months ended June 30, 2011, compared to $2 million in the first six months of 2010. The increase in incentive fees was a result of an increase in performance primarily from the Value and Opportunity fund and Global Credit fund which resulted in an increase in incentive fees of $2.9 million and $1.6 million, respectively, partially offset by the decrease in performance of our alternative solutions business for $1.2 million.

Interest and Dividends

        Interest and dividends increased $8.2 million to $10.4 million for the six months ended June 30, 2011, compared with $2.2 million in the first six months of 2010. The increase was primarily attributable to an increase in interest income resulting from an increase in investments in interest bearing assets in the second quarter of 2011 relative to the same period last year.

Reimbursements from Affiliates

        Reimbursements from affiliates decreased $1.5 million to $2 million for the six months ended June 30, 2011 compared with $3.5 million for the first six months of 2010. The decrease was attributable to a decrease in AUM associated with the funds for which the Company receives the majority of its reimbursements.

Other Revenue

        Other revenue decreased $0.1 million to $0.9 million for the six months ended June 30, 2011, compared with $1 million in the first six months of 2010.

Consolidated Funds Revenues

        Consolidated funds revenues decreased $8.8 million to $0.3 million for the six months ended June 30, 2011 compared with $9.1 million in the first six months of 2010. The decrease was primarily attributable to a reduction in interest income from Enterprise Fund's long holdings of interest bearing securities, due to the fact that this fund has been closed and the focus has therefore been on selling positions and returning assets rather than producing investment returns.


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Expenses

Employee Compensation and Benefits

        Employee compensation and benefits expenses increased $6.7 million to $88.7 million for the six months ended June 30, 2011 compared with $82 million in the first six months of 2010. The gainsincrease was primarily attributable to an increase in head count combined with additional stock compensation expense offset by a reduction of severance expense. The compensation to revenue ratio was 72% for the six months ended June 30, 2011, compared to 74% for the first six months of 2010. The decrease in the compensation to revenue ratio was driven by the increase to the denominator of the equation as our revenues increased by 11.1%. Average headcount for the six months ended June 2011 has decreased by 1% from the first six months of 2010 due to the acquisition of LaBranche offset by employee turnover.

Interest and losses shown under Dividends

        Interest and dividend expense increased $4.6 million to $5.7 million for the six months ended June 30, 2011 compared with $1.1 million in the first six months of 2010. Interest and dividends expense relates to interest on our credit facility in addition to increased trading activity with respect to the Company's holdings.

General, Administrative and Other Expenses

        General, administrative and other expenses increased $2 million to $67.5 million for the six months ended June 30, 2011 compared with $65.5 million in the first six months of 2010. The increase was primarily due to professional fees incurred in connection with the acquisition of a Luxembourg reinsurance company and transaction costs related to the LaBranche acquisition partially offset by a reversal of an accrual pertaining to subordination agreements entered into by the general partners of two real estate funds with those funds lead investor.

Consolidated Funds reflectExpenses

        Consolidated funds expenses decreased $2.8 million to $1.5 million for the consolidated total performance for such funds, andsix months ended June 30, 2011 compared with $4.3 million in the portionfirst six months of those gains or losses that are attributable to other investors is allocated to a non-controlling interest.2010. The decrease was partially offsetattributable to a decrease in interest expense recognized by the Enterprise Fund due to a decrease in short holdings of interest bearing securities, due to the fact that this fund has been closed and the focus has therefore been on selling positions and returning assets rather than producing investment returns.

Other Income (Loss)

        Other income (loss) increased $32.8 million to $46.1 million for the six months ended June 30, 2011 compared to $13.3 million in the first six months of 2010. The increase primarily relates to recording a $22.2 million bargain purchase gain in relation to the acquisition with LaBranche in June 2011. The increase is also attributable to an increase in performance of the Company's own invested capital driven by improved performance across certain investment strategies within our investment portfolio, particularly the concentrated public equity, credit, deep value and global macro strategies.


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Income Taxes

        Income tax expensebenefit amounted to $0.2a $17.8 million tax benefit for the threesix months ended March 31,June 30, 2011. This compares to a $0.3 million income tax benefitexpense in the prior year quarter.first six months of 2010. The Company's tax expense was driven bybenefit increased primarily because a consolidated subsidiary of the Company's foreign subsidiaries pre-tax income.Company that, as part of a reinsurance service program, acquired Luxembourg reinsurance companies with deferred tax


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liabilities, recorded, pursuant to an Advance Tax Agreement, a deferred tax benefit upon the acquisition of these reinsurance companies.

(Income) LossIncome (loss) Attributable to Non-controlling Interests

        (Income) lossIncome (loss) attributable to non-controlling interests was income of $0.8$3.3 million for the threesix months ended March 31,June 30, 2011 compared with income of $8.1$5.5 million in the prior year quarter.first six months of 2010. The period over period change was the result of a decrease in performance in the Consolidated Funds and therefore lower allocations of income to non-controlling interest holders, primarily driven by Enterprise Master which has been closed and is therefore focused on selling positions and returning capital to its investors rather than producing investment returns.holders.

Segment Analysis and Economic Income (Loss)

Segments

        Prior to the consummation of the Transactions, the Company conducted its operations through one reportable segment, the alternative investment management segment, which provides management services to its hedge funds, fund of funds, real estate and other investment platforms. Following the combination of Ramius and Cowen Holdings, the Company conducts its operations through two segments: an alternative investment management segment and a broker-dealer segment. The Company's alternative investment management segment currently includes its hedge funds, replication products, managed futures funds, fund of funds, real estate, cash management services, and mortgage advisory services and other investment platforms businesses, as well as CHRP, which was a legacy Cowen Group operating business prior to the Transactions. The Company's broker-dealer segment currently includes its investment banking, brokerage and equity research businesses. The condensed consolidated financial results of the Company for the three and six months ended June 30, 2011 includes two days of LaBranche's operating results related to its ETF market-making business.

Economic Income (Loss)

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

        Our Economic Income (Loss) may not be comparable to similarly titled measures used by other companies. We use Economic Income (Loss) as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income (Loss) should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. As a result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) has limitations in that it does not take into account certain items included or excluded under GAAP, including our Consolidated Funds. Economic Income (Loss) is considered by management as a supplemental measure to the GAAP results to provide a more complete understanding of each segment's performance as measured by management. For a reconciliation of Economic Income to GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 1516 to the Company's condensed consolidated financial statements included in this Form 10-Q.


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        In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated funds (both 2011 and 2010) (ii) excludes equity award expense related to the November 2009 Ramius/Cowen transaction (both 2011 and 2010) and (iii) excludes certain other


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acquisition-related and/or reorganization expenses (2011 only). and (iv) excludes the bargain purchase gain which resulted from the LaBranche acquisition. In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For GAAP purposes, these items are included in each of their respective line items. Economic Income revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities. For GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for GAAP purposes is presented gross as part of revenue.

Economic Income Revenues

        The Company's principal sources of Economic Income revenues are derived from activities in the following business segments:

        Our alternative investment management segment generates Economic Income revenues through three principal sources: management fees, incentive income and investment income from our own capital. Management fees are directly impacted by any increase or decrease in assets under management, while incentive income is impacted by our funds' performance and any increase or decrease in assets under management. Investment income from the Company's own capital is impacted by the performance of the funds and other securities in which our capital is invested. The Company periodically receives other Economic Income revenue which is unrelated to our own invested capital or our activities on behalf of the Company's funds, such as certain placement fee income received by a non-wholly owned subsidiary that engaged in the distribution of interests in the real estate funds.

        Our broker-dealer segment generates Economic Income revenues through two principal sources: investment banking and brokerage. The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's target sectors of healthcare, technology, media and telecommunications, consumer, aerospace and defense, industrials, REITs and alternative energy. The Company's brokerage revenues consist of commissions, principal transactions and fees paid for equity research. Management reviews brokerage revenue on a combined basis as the vast majority of the revenue is derived from the same group of clients. The Company derives its brokerage revenue primarily from trading equity and equity-linked securities on behalf of institutional investors. The majority of the Company's trading gains and losses are a result of activities that support the facilitation of client orders in both listed and over-the-counter securities, although all trading gains and losses are recorded in brokerage in the condensed consolidated statement of operations.

Economic Income Expenses

        The Company's Economic Income expenses consist of compensation and benefits, non-compensation expenses—fixed and non-compensation expenses—variable, less reimbursement from affiliates.

Non-controlling Interests

        Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities. The non-wholly-owned entity included is Cowen Healthcare Royalty Management, LLC.


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Three Months Ended March 31,June 30, 2011 Compared with the Three Months Ended March 31,June 30, 2010

        For the three months ended March 31,June 30, 2011 and 2010, the Company's alternative investment management segment includes its hedge funds, replication products, mutual funds, managed futures fund, fund of funds, real estate, healthcare royalty funds, cash management services, CHRP's operating results and other investment platforms operating results.

        For the three months ended March 31,June 30, 2011 and 2010, the Company's broker-dealerbroker- dealer segment includes its investment banking and brokerage businesses' operating results.



 Three Months Ended March 31,  
  
 
 Three Months Ended June 30,  
  
 


 2011 2010 Total
Period-to-Period
 
 2011 2010 Total
Period-to-Period
 


 Alternative
Investment
Management
  
 Total
2011
 Alternative
Investment
Management
  
 Total
2010
 
 Alternative
Investment
Management
  
 Total
2011
 Alternative
Investment
Management
  
 Total
2010
 


 Broker-Dealer Broker-Dealer $ Change % Change 
 Broker-Dealer Broker-Dealer $ Change % Change 


 (dollars in thousands)
 
 (dollars in thousands)
 

Economic Income Revenues

Economic Income Revenues

 

Economic Income Revenues

 

Investment banking

 $ $14,682 $14,682 $ $6,005 $6,005 $8,677 144.5%

Investment banking

 $ $14,343 $14,343 $ $9,938 $9,938 $4,405 44.3%

Brokerage

 63 27,528 27,591  29,575 29,575 (1,984) (6.7)%

Brokerage

 11 24,596 24,607  29,794 29,794 (5,187) (17.4)%

Management fees

 14,047  14,047 12,587 28 12,615 1,432 11.4%

Management fees

 15,539  15,539 12,187 (28) 12,159 3,380 27.8%

Incentive income (loss)

 5,163  5,163 1,982  1,982 3,181 160.5%

Incentive income (loss)

 5,697  5,697 (450)  (450) 6,147 (1366.0)%

Investment income (loss)

 17,458 (249) 17,209 11,192 229 11,421 5,788 50.7%

Investment income (loss)

 22,810 (110) 22,700 (2,350) (562) (2,912) 25,612 (879.5)%

Other revenue

 1,252 (198) 1,054 (51) 124 73 981 1343.8%

Other revenue

 (278) (203) (481) 26 56 82 (563) (686.6)%
                                   

Total economic income revenues

Total economic income revenues

 37,983 41,763 79,746 25,710 35,961 61,671 18,075 29.3%

Total economic income revenues

 43,779 38,626 82,405 9,413 39,198 48,611 33,794 69.5%
                                   

Economic Income Expenses

Economic Income Expenses

 

Economic Income Expenses

 

Compensation and benefits

 17,708 25,029 42,737 16,143 25,136 41,279 1,458 3.5%

Compensation and benefits

 15,044 27,323 42,367 7,314 28,564 35,878 6,489 18.1%

Non-compensation expenses—Fixed

 7,050 14,754 21,804 8,568 16,013 24,581 (2,777) (11.3)%

Non-compensation expenses—Fixed

 8,773 17,721 26,494 9,580 15,423 25,003 1,491 6.0%

Non-compensation expenses—Variable

 2,096 6,852 8,948 331 8,455 8,786 162 1.8%

Non-compensation expenses—Variable

 6,591 5,915 12,506 356 7,200 7,556 4,950 65.5%

Reimbursement from affiliates

 (1,169)  (1,169) (1,887)  (1,887) 718 (38.0)%

Reimbursement from affiliates

 (989)  (989) (1,897)  (1,897) 908 (47.9)%
                                   

Total economic income expenses

Total economic income expenses

 25,685 46,635 72,320 23,155 49,604 72,759 (439) (0.6)%

Total economic income expenses

 29,419 50,959 80,378 15,353 51,187 66,540 13,838 20.8%
                                   

Net economic income (loss) (before non-controlling interest)

Net economic income (loss) (before non-controlling interest)

 12,298 (4,872) 7,426 2,555 (13,643) (11,088) 18,514 (167.0)%

Net economic income (loss) (before non-controlling interest)

 14,360 (12,333) 2,027 (5,940) (11,989) (17,929) 19,956 (111.3)%

Non-controlling interest

Non-controlling interest

 (475)  (475) (41)  (41) (434) 1058.5%

Non-controlling interest

 (1,465)  (1,465)  1  (1,465) NM 
                                   

Economic income (loss)

Economic income (loss)

 $11,823 $(4,872)$6,951 $2,514 $(13,643)$(11,129)$18,080 (162.5)%

Economic income (loss)

 $12,895 $(12,333)$562 $(5,940)$(11,988)$(17,929)$18,491 (103.1)%
                                   

Economic Income Revenues

        Total economic income revenues were $79.2$82.4 million for three months ended March 31,June 30, 2011, an increase of $17.5$33.8 million compared to economic income revenues of $61.7$48.6 million for the prior year quarter.

Alternative Investment Management Segment

        Alternative investment management segment economic income revenues were $37.5$43.8 million for the three months ended March 31,June 30, 2011, an increase of $11.8$35.4 million compared to a revenues of $25.7$9.4 million for the prior year quarter.


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        Management Fees.    Management fees for the segment increased by $1.4$3.3 million to $14$15.5 million for the three months ended March 31,June 30, 2011 compared with $12.6$12.2 million for the prior year quarter. The increase was a result of an increase in management fees for our CHRP funds of $2.9$4.5 million, as a result of an increase in committed capital, which wasand an increase in management fees associated with our Global Credit fund of approx. $0.5 million. These increases were partially offset by a decline in average annualized management fees charged, and a decrease in hedge fund management fees of $1.5$1.7 million as a result of continuing to returning assets to investors infor the second half of 2010 and the first quarterhalf of 2011, as a resultwell as no longer charging management fees to certain affiliates of closing the Ramius Multi-Strategy Fund and the Enterprise Fund.


Table of ContentsUniCredit S.pA which became effective July 1, 2010.

        Incentive Income (Loss).    Incentive income for the segment increased by $3.2$6.2 million to $5.2$5.7 million for the three months ended March 31,June 30, 2011 compared to $2with loss of $0.5 million for the prior year quarter. The increase in incentive feesincome was primarily related to a result$5.9 million reversal of an accrual pertaining to subordination agreements entered into by the general partners of two real estate funds with those funds lead investor regardless of the fact that they have not yet met their high-water marks and an increase in performance primarily from the Value and Opportunity fund and Global Credit fund which resulted in an increase in incentive fees of $2.9 million and $0.9 million, respectively, and real estate fees of $0.8 million, partially offset by the decrease in performance of our alternative solutions business.performance.

        Investment Income.    Investment income for the segment increased by $6.3$25.2 million to a gain of $17.5$22.8 million for the three months ended March 31,June 30, 2011 compared with incomeloss of $11.2$2.4 million for the prior year quarter. The increase primarily resulted from the recognition of a deferred tax benefit of $18.3 million pursuant to the acquisition of a Luxembourg reinsurance company, which is a result ofreflected in Investment income in our economic income, as well as an improved performance in the firm's invested capital.

        Other Revenue.    Other revenue for the segment increaseddecreased by $1.4$0.4 million to a gainloss of $1.3$0.3 million for the three months ended March 31,June 30, 2011 compared with a lossgain of $0.1 million for the prior year quarter. The change is primarily related to foreign exchange gains/losses in relation to doing business in our foreign wholly owned subsidiaries.

Broker-Dealer Segment

        Broker-dealer segment economic income revenues increaseddecreased by $5.8$0.6 million to $41.8$38.6 million for the three months ended March 31,June 30, 2011 compared to $36$39.2 million for the prior year quarter. This increasedecrease was primarily due to andan increase in investment banking revenue offset by a decrease in brokerage revenue.

        Investment Banking.    Investment banking revenues increased by $8.7$4.4 million to $14.7$14.3 million for the three months ended March 31,June 30, 2011, compared to $6$9.9 million for the prior year quarter. During the quarter ended March 31,June 30, 2011, the Company completed twelveeight underwriting transactions, two private capital raising transactions, and three strategic advisory transactions. During the quarter ended June 30, 2010, the Company completed eight underwriting transactions, one private capital raising transaction, twoand three strategic advisory transactions, and one debt financing transaction. During the quarter ended March 31, 2010, the Company completed four underwriting transactions, one private capital raising transaction, four strategic advisory transactionstransactions.

        Brokerage.    Brokerage revenues decreased by $2$5.2 million to $27.6$24.6 million for three months ended March 31,June 30, 2011, compared to $29.6$29.8 million for the prior year quarter. The decrease resulted primarily from decreased revenues related to our core customer facilitation related activities as cash equities volumes remained at subdued levels thus far in 2011. Aggregate NYSE and NASDAQ trading volumes declined by 9%28% during the quarter on a year-over-year basis.

Economic Income Expenses

        Compensation and Benefits.    Total compensation and benefits expense increased by $1.4$6.5 million to $42.7$42.4 million for the three months ended March 31,June 30, 2011, compared to $41.3$35.9 million in the prior year quarter. The increase was primarily attributable to an increase in head count combined with additional stock compensation andexpense offset by a reduction of severance expense. The compensation to revenue


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ratio was 51% for the three months ended June 30, 2011, compared to 74% for the prior year quarter. The decrease in the compensation to revenue ratio was driven by the increase to the denominator of the equation as our revenues increased by 69.5%. Average headcount for the second quarter of 2011 has increased by 4% from the prior year quarter primarily due to the acquisition of LaBranche.

        Compensation and benefits expenses for the alternative investment management segment increased by $1.5$7.7 million to $17.7$15 million for the three months ended March 31,June 30, 2011 compared to $16.2$7.3 million in the prior year quarter. The increase is supported by an increase in the bonus accrual due to higher alternative investment management revenues in accordance with the compensation to revenue ratio. The compensation to revenue ratio was 34% for the three months ended June 30, 2011, compared to 78% for the prior year quarter. In addition, the stock compensation increased resulting in additional February 2011 equity grants offset by a decrease in severance expense.

        Compensation and benefits expenses for the broker-dealer segment were $25decreased by $1.3 million to $27.3 million for the three months ended March 31,June 30, 2011 which substantially remained constant compared to $25.1$28.6 million in the prior year quarter. The decrease is supported by an decrease in the bonus accrual due to lower broker-dealer segment revenues in accordance with the compensation to revenue ratio. The compensation to revenue ratio was 71% for the three months ended June 30, 2011, compared to 73% for the prior year quarter.

        Non-compensation Expenses—Fixed.    Fixed non-compensation expenses increased by $1.5 million to $26.5 million for the three months ended June 30, 2011 compared to $25 million in the prior year quarter. The increase was due to increases in professional fees, increased employment expenses, and additional expenses related to the build-out of our data center offset partially by decreases in occupancy and depreciation costs due to the consolidation of our office space.

        Fixed non-compensation expenses for the alternative investment management segment decreased by $0.8 million to $8.8 million for the three months ended June 30, 2011 as compared to $9.6 million for the first quarter of prior year. Fixed non-compensation expenses for the broker-dealer segment increased by $2.3 million to $17.7 million for the three months ended June 30, 2011 as compared to $15.4 million for the first quarter of prior year.

        The following table shows the components of the non-compensation expenses—fixed, for the three months ended June 30, 2011 and 2010:

 
 Three Months Ended June 30, Period-to-Period 
 
 2011 2010 $ Change % Change 
 
 (dollars in thousands)
 

Non-compensation expenses—fixed:

             

Interest expense

 $218 $353 $(135) (38.2)%

Professional, advisory and other fees

  3,530  2,879  651  22.6%

Occupancy and equipment

  4,987  5,868  (881) (15.0)%

Depreciation and amortization

  2,013  2,390  (377) (15.8)%

Service fees

  4,364  4,041  323  8.0%

Other

  11,382  9,472  1,910  20.2%
          
 

Total

 $26,494 $25,003 $1,491  6.0%
          

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        Non-compensation Expenses—Variable.    Variable non-compensation expenses, which primarily are comprised of expenses which are incurred as a direct result of the processing and soliciting of revenue generating activities, increased by $5 million to $12.5 million for the three months ended June 30, 2011 compared to $7.5 million in the prior year quarter. The increase was due to professional expenses incurred related to the closing of Luxembourg reinsurance deals and syndication costs related to an alternative investment asset fund, offset by a reduction in our floor brokerage and clearing costs due to lower volumes.

        The following table shows the components of the non-compensation expenses—variable, for the three months ended June 30, 2011 and 2010:

 
 Three Months Ended June 30, Period-to-Period 
 
 2011 2010 $ Change % Change 
 
 (dollars in thousands)
 

Non-compensation expenses—Variable:

             

Floor brokerage and trade execution

 $2,675 $3,497 $(822) (23.5)%

CHRP syndication costs

  1,626    1,626  NM 

Expenses related to Luxembourg reinsurance companies

  4,317    4,317  NM 

Marketing and business development

  3,888  4,059  (171) (4.2)%
          
 

Total

 $12,506 $7,556 $4,950  65.5%
          

        Reimbursement from Affiliates.    Reimbursements from affiliates, which relate to the alternative investment management segment, decreased by $1 million to $0.9 million for the three months ended June 30, 2011 compared with $1.9 million in the prior year quarter. The decrease was attributable to a decrease in AUM associated with the funds for which the Company receives the majority of its reimbursements.

        Non-Controlling Interest.    Non-Controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to other investors.


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Six Months Ended June 30, 2011 Compared with the Six Months Ended June 30, 2010

 
 Six Months Ended June 30,  
  
 
 
 2011 2010  
  
 
 
 Total Period-to-Period 
 
 Alternative
Investment
Management
  
 Total
2011
 Alternative
Investment
Management
  
 Total
2010
 
 
 Broker-Dealer Broker-Dealer $ Change % Change 
 
 (dollars in thousands)
 

Economic Income Revenues

                         
 

Investment banking

 $ $29,025 $29,025 $ $15,943 $15,943 $13,082  82.1%
 

Brokerage

  74  52,124  52,198    59,369  59,369  (7,171) (12.1)%
 

Management fees

  29,586    29,586  24,774    24,774  4,812  19.4%
 

Incentive income (loss)

  10,860    10,860  1,532    1,532  9,328  608.9%
 

Investment income (loss)

  40,268  (359) 39,909  8,842  (333) 8,509  31,400  369.0%
 

Other revenue

  974  (401) 573  (25) 180  155  418  269.7%
                  

Total economic income revenues

  81,762  80,389  162,151  35,123  75,159  110,282  51,869  47.0%
                  

Economic Income Expenses

                         
 

Compensation and benefits

  32,752  52,352  85,104  23,498  53,700  77,198  7,906  10.2%
 

Non-compensation expenses—Fixed

  15,823  32,475  48,298  18,148  31,436  49,584  (1,286) (2.6)%
 

Non-compensation expenses—Variable

  8,687  12,767  21,454  687  15,655  16,342  5,112  31.3%
 

Reimbursement from affiliates

  (2,158)   (2,158) (3,784)   (3,784) 1,626  (43.0)%
                  

Total economic income expenses

  55,104  97,594  152,698  38,549  100,791  139,340  13,358  9.6%
                  

Net economic income (loss) (before non-controlling interest)

  26,658  (17,205) 9,453  (3,426) (25,632) (29,058) 38,511  (132.5)%

Non-controlling interest

  (1,940)   (1,940)       (1,940) NM 
                  

Economic income (loss)

 $24,718 $(17,205)$7,513 $(3,426)$(25,632)$(29,058)$36,571  (125.9)%
                  

Economic Income Revenues

        Total economic income revenues were $162.2 million for six months ended June 30, 2011, an increase of $51.9 million compared to economic income revenues of $110.3 million for the prior year quarter.

Alternative Investment Management Segment

        Alternative investment management segment economic income revenues were $81.8 million for the six months ended June 30, 2011, an increase of $46.7 million compared to a revenues of $35.1 million for the first six months of 2010.

        Management Fees.    Management fees for the segment increased by $4.8 million to $29.6 million for the six months ended June 30, 2011 compared with $24.8 million for the first six months of 2010. The increase was a result of an increase in management fees for our CHRP funds of $7.1 million, as a result of an increase in committed capital, and an increase in management fees associated with our Global Credit fund of approx. $0.8 million. These increases were partially offset by a decrease of $3.1 million as a result of continuing to returning assets to investors for the second half of 2010 and first half of 2011, as well as no longer charging management fees to certain affiliates of UniCredit S.pA, effective July 1, 2010.

        Incentive Income (Loss).    Incentive income for the segment increased by $9.4 million to $10.9 million for the six months ended June 30, 2011 compared to $1.5 million for the first six months of 2010. The increase in incentive income was primarily related to a $5.9 million reversal of an accrual pertaining to subordination agreements entered into by the general partners of two real estate funds with those funds lead investor regardless of the fact that they have not yet met their high-water marks


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and an increase in real estate performance. The increase was also related to an increase in performance primarily from the Value and Opportunity fund and Global Credit fund which resulted in an increase in incentive fees of $2.9 million and $1.6 million, respectively. These increases were partially offset by the decrease in performance of our alternative solutions business for $1.2 million.

        Investment Income.    Investment income for the segment increased by $31.5 million to a gain of $40.3 million for the six months ended June 30, 2011 compared with gain of $8.8 million for the first six months of 2010. The increase primarily resulted from the recognition of a deferred tax benefit of $18.3 million pursuant to the acquisition of a Luxembourg reinsurance company, which is reflected in Investment income in our economic income, as well as an improved performance in the firm's invested capital.

        Other Revenue.    Other revenue for the segment increased by $1.1 million to a gain of $1 million for the six months ended June 30, 2011 compared with a loss of $0.1 million for the first six months of 2010. The change is primarily related to foreign exchange gains/losses in relation to doing business in our foreign wholly owned subsidiaries.

Broker-Dealer Segment

  ��     Broker-dealer segment economic income revenues increased by $5.2 million to $80.4 million for the six months ended June 30, 2011 compared to $75.2 million for the first six months of 2010. This increase was primarily due to and increase in investment banking revenue offset by a decrease in brokerage revenue.

        Investment Banking.    Investment banking revenues increased by $13.1 million to $29 million for the six months ended June 30, 2011, compared to $15.9 million for the first six months of 2010. During the six months ended June 30, 2011, the Company completed twenty underwriting transactions, three private capital raising transactions, four strategic advisory transactions, and one debt financing transaction. During the six months ended June 30, 2010, the Company completed twelve underwriting transactions, two private capital raising transactions, and seven strategic advisory transactions.

        Brokerage.    Brokerage revenues decreased by $7.3 million to $52.1 million for six months ended June 30, 2011, compared to $59.4 million for the first six months of 2010. The decrease resulted primarily from decreased revenues related to our core customer facilitation related activities as cash equities volumes remained at subdued levels thus far in 2011. Aggregate NYSE and NASDAQ trading volumes declined by 20% during the first six months of 2011 compared to the same period in 2010.

Economic Income Expenses

        Compensation and Benefits.    Total compensation and benefits expense increased by $7.9 million to $85.1 million for the six months ended June 30, 2011, compared to $77.2 million in the first six months of 2010. The increase was primarily attributable to an increase in head count combined with additional stock compensation expense offset by a reduction of severance expense. The compensation to revenue ratio was 52% for the six months ended June 30, 2011, compared to 70% for the prior year period. The decrease in the compensation to revenue ratio was driven by the increase to the denominator of the equation as our revenues increased by 47%. Average headcount for the six months ended June 2011 has decreased by 1% from the first six months of 2010 due to the acquisition of LaBranche offset by employee turnover.

        Compensation and benefits expenses for the alternative investment management segment increased by $9.3 million to $32.8 million for the six months ended June 30, 2011 compared to $23.5 million in the first six months of 2010. The increase is supported by an increase in the bonus accrual due to higher alternative investment management revenues in accordance with the compensation to revenue ratio. The compensation to revenue ratio was 40% for the six months ended June 30, 2011, compared


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to 67% for the prior year quarter. In addition, the stock compensation increased resulting in additional February 2011 equity grants offset by a decrease in severance expense.

        Compensation and benefits expenses for the broker-dealer segment decreased by $1.3 million to $52.4 million for the six months ended June 30, 2011 compared to $53.7 million in the first six months of 2010. The decrease is supported by an decrease in the compensation to revenue ratio during 2011. The compensation to revenue ratio was 65% for the six months ended June 30, 2011, compared to 71% for the prior year quarter.

        Non-compensation Expenses—Fixed.    Fixed non-compensation expenses decreased by $2.8$1.3 million to $21.8$48.3 million for the threesix months ended March 31,June 30, 2011 compared to $24.6$49.6 million in the prior


Tablefirst six months of Contents


year quarter.2010. The decrease was due to decreases in occupancy costs and general efficiencies received in relation to the November 2009 Ramius/Cowen transaction, offset by increases in professional fees.

        Fixed non-compensation expenses for the alternative investment management segment decreased by $1.6$2.3 million to $7$15.8 million for the threesix months ended March 31,June 30, 2011 as compared to $8.6$18.1 million for the first quartersix months of prior year. Non-compensation2010. Fixed non-compensation expenses for the broker-dealer segment decreasedincreased by $1.2$1.1 million to $14.8$32.5 million for the threesix months ended March 31,June 30, 2011 as compared with $16to $31.4 million for the first quartersix months of prior year.2010.

        The following table shows the components of the non-compensation expenses—fixed, for the threesix months ended March 31,June 30, 2011 and 2010:



 Three Months Ended
March 31,
 Period-to-Period 
 Six Months Ended June 30, Period-to-Period 


 2011 2010 $ Change % Change 
 2011 2010 $ Change % Change 


 (dollars in thousands)
 
 (dollars in thousands)
 

Non-compensation expenses—fixed:

Non-compensation expenses—fixed:

 

Non-compensation expenses—fixed:

 

Interest expense

Interest expense

 $217 $116 $101 87.1%

Interest expense

 $435 $469 $(34) (7.2)%

Professional, advisory and other fees

Professional, advisory and other fees

 2,917 2,388 529 22.2%

Professional, advisory and other fees

 6,447 5,267 1,180 22.4%

Occupancy and equipment

Occupancy and equipment

 5,117 5,645 (528) (9.4)%

Occupancy and equipment

 10,104 11,513 (1,409) (12.2)%

Depreciation and amortization

Depreciation and amortization

 2,056 2,494 (438) (17.6)%

Depreciation and amortization

 4,069 4,884 (815) (16.7)%

Service fees

Service fees

 3,612 3,812 (200) (5.2)%

Service fees

 7,976 7,853 123 1.6%

Other

Other

 7,885 10,126 (2,241) (22.1)%

Other

 19,267 19,598 (331) (1.7)%
                   

Total

 $21,804 $24,581 $(2,777) (11.3)%

Total

 $48,298 $49,584 $(1,286) (2.6)%
                   

        Non-compensation Expenses—Variable.    Variable non-compensation expenses, which primarily are comprised of expenses which are incurred as a direct result of the processing and soliciting of revenue generating activities, increased by $0.1$5.2 million to $8.9$21.5 million for the threesix months ended March 31,June 30, 2011 compared to $8.8$16.3 million in the prior year quarter.first six months of 2010. The increase was due to increases in conference relatedprofessional expenses expensesincurred related to the closing of Luxembourg reinsurance deals, and syndication costs related to an alternative investment asset fund, and increased conference related expenses, offset by a reduction in our floor brokerage expensesand clearing costs due to lower volumes.


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        The following table shows the components of the non-compensation expenses—variable, for the threesix months ended March 31,June 30, 2011 and 2010:



 Three Months Ended
March 31,
 Period-to-Period 
 Six Months Ended
June 30,
 Period-to-Period 


 2011 2010 $ Change % Change 
 2011 2010 $ Change % Change 


 (dollars in thousands)
 
 (dollars in thousands)
 

Non-compensation expenses—Variable:

Non-compensation expenses—Variable:

 

Non-compensation expenses—Variable:

 

Floor brokerage and trade execution

Floor brokerage and trade execution

 $3,033 $4,945 $(1,912) (38.7)%

Floor brokerage and trade execution

 $5,708 $8,442 $(2,734) (32.4)%

CHRP syndication costs

CHRP syndication costs

 1,072  1,072 NM 

CHRP syndication costs

 2,698  2,698 NM 

Expenses related to Luxembourg reinsurance companies

Expenses related to Luxembourg reinsurance companies

 545  545 NM 

Expenses related to Luxembourg reinsurance companies

 4,862  4,862 NM 

Marketing and business development

Marketing and business development

 4,298 3,841 457 11.9%

Marketing and business development

 8,186 7,900 286 3.6%
                   

Total

 $8,948 $8,786 $162 1.8%

Total

 $21,454 $16,342 $5,112 31.3%
                   

        Reimbursement from Affiliates.    Reimbursements from affiliates, which relate to the alternative investment management segment, decreased by $0.7$1.6 million to $1.2$2.2 million for the threesix months ended March 31,June 30, 2011 compared with $1.9$3.8 million in the prior year quarter.first six months of 2010. The decrease was attributable to a decrease in AUM associated with the funds for which the Company receives the majority of its reimbursements.


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        Non-Controlling Interest.    Non-Controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to other investors.

Liquidity and Capital Resources

        We continually monitor our liquidity position. The working capital needs of the Company's business have been met through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months will be to:

        Based on our historical results, management's experience, our current business strategy and current assets under management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next twelve months. Our cash reserves include cash, cash equivalents and assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are generally readily marketable. As of March 31,June 30, 2011, we had cash and cash equivalents of $26.3$110.2 million, which includes $9.5$51.6 million held in foreign subsidiaries, and net liquid investment assets of $205.5 million. At April 1, 2011, the Company's investment in the Enterprise Fund was valued at $138.9 million. The Company has received total distributions of $16 million from the Enterprise Fund during 2011 which includes the April 1, 2011 redemption of $8.8$276.3 million.

        The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries bi-weeklysemi-monthly during the year, cash bonus payments, which can make up a significant portion of total compensation, are generally paid once a year in February.

        As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Impacting Our Business" we have entered into a modification agreement with affiliates of Unicredit S.p.A and it is not expected to have a material impact on the Company's liquidity and capital resources.

        As of March 31,June 30, 2011, the Company had unfunded commitments of $8.3$6.6 million pertaining to capital commitments in three real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time, subject to advance notice. In addition, the The


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Company also has committed to invest $40.8$41 million to the funds managed by Cowen Healthcare Royalty Partners (the "CHRP Funds") as a limited partner of the CHRP Funds and also as a member of Cowen Healthcare RoyaltyCHRP GP, LLC, the general partner of the CHRP Funds. This commitment is expected to be called over a two to five year period. The Company will make its pro-rata investment in the CHRP Funds along with the other limited partners. Through March 31,June 30, 2011, the Company has funded $19.7$19.5 million towards these commitments. In April 2011, the Company committed $15 million to Starboard Value and Opportunity Fund LP, which may increase or decrease over time with the performance of Starboard Value and Opportunity Fund LP. As of June 30, 2011 the Company's unfunded commitment to Starboard Value and Opportunity Fund LP is $13.7 million. Such commitment can be called at any time, subject to advance notice.

        Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by our customers and clearing house requirements, among others. Certain regulatory requirements constrain the use of a portion of our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different requirements and uses.

        As a registered broker-dealer, Cowen and Company, LLC ("Cowen and Company") is subject to the SEC's Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the maintenance of minimum net capital. Under the alternative method permitted by the Rule, Cowen and CompanyCompany's minimum net capital requirement, as defined, is $1.0$1 million. Cowen and Company is not permitted to withdraw equity if certain minimum net capital requirements are not met. As of March 31,June 30, 2011, Cowen and


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Company had total net capital of approximately $39.9$42.9 million, which was approximately $38.9$41.9 million in excess of its minimum net capital requirement of $1.0$1 million.

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

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

        Ramius UK Ltd. ("Ramius UK") and Cowen International Limited ("CIL") are subject to the capital requirements of the Financial Services Authority ("FSA")FSA of the UK. Financial Resources, as defined, must exceed the total Financial Resources requirement of the FSA. At March 31,June 30, 2011, Ramius UK's Financial Resources of $4.3 million exceeded its minimum requirement of $0.6 million by $3.7 million. At March 31,June 30, 2011, CIL's Financial Resources of $4.0$4.5 million exceeded its minimum requirement of $2.2$2.3 million by $1.8$2.2 million.

        CCAL (formerly known as Cowen Latitude Advisors Limited ("CLAL")Limited) is subject to the financial resources requirements of the Securities and Futures Commission ("SFC") of Hong Kong. Financial Resources, as defined, must exceed the Total Financial Resources requirement of the SFC. At March 31,June 30, 2011, CLAL'sCCAL's Financial Resources of $1.0$0.9 million exceeded the minimum requirement of $0.1 million by $0.9$0.8 million.

        As a registered broker-dealer and FINRA member firm, Cowen Capital LLC (formerly known as LaBranche Capital, LLC) is subject to SEC Rule 15c3-1, as adopted and administered by the SEC and FINRA. Cowen Capital LLC is required to maintain minimum net capital, as defined, equivalent to the greater of $1 million or 2% of aggregate indebtedness, as defined. As of June 30, 2011, Cowen


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Capital LLC's net capital, as defined, was $33.3 million, which exceeded minimum requirements by $32.3 million. Cowen Capital LLC's aggregate indebtedness to net capital ratio was 0.16 to 1.

        As a registered broker dealer in the United Kingdom, Cowen International Trading Limited ("CITL") (formerly known as LaBranche Structured Products Europe Limited) is subject to the capital adequacy and capital resources as managed and monitored in accordance with the regulatory capital requirements of the Financial Services Authority ("FSA") in the United Kingdom. In calculating regulatory capital, CITL's capital consists wholly of Tier 1 capital. Tier 1 capital is the core measure of a company's financial strength from a regulator's point of view. It consists of the type of financial capital considered the most reliable and liquid, primarily Shareholder's Equity. As of June 30, 2011, Tier 1 capital, as defined, was $51.2 million which exceeded the total variable capital requirement by $28 million. This Tier 1 capital included a loan to Cowen Structured Holdings Inc. (formerly known as LaBranche Structured Holdings, Inc.) by CITL as of February 2011, in the aggregate principal amount of $11.9 million.

        As a registered corporation under the Hong Kong Securities and Futures Ordinance, Cowen Structured Products Hong Kong Limited ("CSPH") (formerly known as LaBranche Structured Products Hong Kong Limited) is subject to the capital requirements of the Hong Kong Securities and Futures (Financial Resources) Rules ("FRR"). The minimum paid-up share capital requirement is HKD 5,000,000 ($0.6 million at June 30, 2011) and the minimum liquid capital requirement is the higher of HKD 3,000,000 ($0.4 million at June 30, 2011) and the variable required liquid capital as defined in the FRR. The Company monitors its compliance with the requirements of the FRR on a daily basis. As of June 30, 2011, CSPH's liquid capital, as defined was $2.7 million, which exceeded its minimum requirements by $2.3 million.

        The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital.

        The Company uses securities purchased under agreements to resell and securities sold under agreements to repurchase ("Repurchase Agreements") as part of its liquidity management activities and to support its trading and risk management activities. In addition, ourparticular, securities purchased and sold under Repurchase Agreements are used for short-term liquidity purposes. As at June 30, 2011, Repurchase Agreements are secured revolvingpredominantly by liquid corporate credit facilityand/or government-issued securities. The use of Repurchase Agreements will fluctuate with UniCredit Bank AG (formerly knownthe Company's need to fund short term credit or obtain competitive short term credit financing. The Company's securities purchased under agreements to resell and securities sold under agreements to repurchase were transacted pursuant to agreements with multiple counterparties as Bayerische Hypo-und Vereinsbank AG) ("HVB AG") referenced below prohibits usof June 30, 2011 and certainDecember 31, 2010.

        There were no material differences between the average and period-end balances of our subsidiaries from incurringthe Company's Repurchase Agreements. The following table represents the Company's securities purchased


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under agreements to resell and securities sold under agreements to repurchase as of June 30, 2011 and December 31, 2010:

 
 As of June 30,
2011
 
 
 (dollars in thousands)
 

Securities purchased under agreements to resell

    

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

 $77,333 
    

Securities sold under agreements to repurchase

    

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

  49,450 

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

  119,989 
    

 $169,439 
    

*
The repurchase date is open and the agreement can be terminated by either party at any indebtedness, other than certain indebtedness permitted under the facility.time. The agreement continues on a day-to-day basis.


 
 As of December 31,
2010
 
 
 (dollars in thousands)
 

Securities purchased under agreements to resell

    

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

 $97,755 
    

Securities sold under agreements to repurchase

    

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

  48,532 

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

  143,633 
    

 $192,165 
    

Cash Flows Analysis

        The Company's primary sources of cash are derived from its operating activities, fees and realized returns on its own invested capital and borrowings under its line of credit.capital. The Company's primary uses of cash include compensation, general and administrative expenses and payments of interest and principal under itsthe former line of credit.

        Operating Activities.    Net cash provided by operating activities of $33.4$147.6 million for the threesix months ended March 31,June 30, 2011 was predominately related to an increase in cash held at brokers and proceeds fromcash acquired upon the saleacquisition of other investments owned by Consolidated Funds,LaBranche, partially offset by cash used to pay for year end bonuses included in compensation payable.payable and payments for purchases of securities related to proprietary capital. Net cash used in operating activities of $87.5$76.7 million for the threesix months ended March 31,June 30, 2010 was predominately related to cash used to pay for year endyear-end bonus accruals included in compensation payable and payments for purchases of securities related to the firms invested capital partially offset by proceeds from sale of other investments owned by consolidated funds.proprietary capital.

        Investing Activities.    Net cash provided by investing activities of $23$15.1 million for the threesix months ended March 31,June 30, 2011 was primarily from increased repurchase agreement activity. Net cash provided by investing activities of $2.5$2.4 million for the threesix months ended March 31,June 30, 2010 was primarily due to the proceeds from sale of other investments.


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        Financing Activities.    Net cash used in financing activities for the threesix months ended March 31,June 30, 2011 was $66.5$88.9 million primarily related to increased repurchase agreement activity, repayments on the line of credit and payments by the consolidated funds to investors for capital withdrawals. Net cash used in financing activities for the threesix months ended March 31,June 30, 2010 was $49.6$57.7 million primarily related to a repayment on the line of credit and payments by the consolidated funds to investors for capital withdrawals.


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Short-Term Borrowing and Other Debt

        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$50 million aggregate loan commitment amount available. The first borrowing under this line occurred on June 30, 2009. As of March 31,June 30, 2011 and December 31, 2010, the Company had borrowings of $23.0 millionnil and $24.0$24 million, respectively. At the Company's election and discretion, borrowings under the 2009 collateralized revolving credit agreement bear interest per annum (based on a 360 day year) equal to either: (1) the lender's prime rate plus 1.5% or (2) the 1, 2 or 3 month LIBOR rate plus 3.5%. Due to the variable interest rate on these borrowings, their carrying values approximate fair value. The Company is required to pay a quarterly commitment fee on the undrawn portion of the revolving credit facility equal to 1.0% per annum of the undrawn amount. The 2009 collateralized revolving credit agreement iswas to mature on September 29, 2011. However, during 2011, the Company agreed to repay in full its obligations pursuant to the credit agreement and HVB AG agreed to terminate the credit agreement. On June 27, 2011, the Company fully repaid the then borrowing amount outstanding of $23 million and the credit agreement was terminated as of that date. The 2009 collateralized revolving credit agreement contained financial and other restrictive covenants that limited the Company's ability to incur additional debt and engage in other activities. As of March 31,June 30, 2011 and during the period from June 3, 2009 to March 31,through June 27, 2011 the Company was in compliance with these covenants. The Company's investment in Enterprise Master through the Enterprise Fund hashad been pledged as collateral under the line of credit.

        On January 31, 2011, in accordance with the terms Upon termination of the collateralized revolving credit agreement on June 27, 2011, the Company remitted $1 millionCompany's collateral pledge to HVB AG reducing its revolving line ofwas released and the Company is no longer subject to the restrictive covenants contained in the credit balance.agreement.

        Interest incurred on the Company's lines of credit was $0.2 million and $0.3 million for the three months ended March 31,June 30, 2011 and 2010, respectively.respectively, and was $0.4 million and $0.1 million for the six months ended June 30, 2011 and 2010.

        In November 2010, the Company borrowed $0.6 million and $1.5 million to fund insurance premium payments. These notes bear interest at 5.05% and 4.95%, respectively and are due in October of 2011. As of March 31,June 30, 2011, the outstanding balance on these combined notes payable was $0.9$0.4 million. Interest expense for the three months and six months ended March 31,June 30, 2011 was not significant.

        The Company entered into several capital leases for computer equipment during the fourth quarter of 2010. These leases amount to $6.3 million and are recorded in fixed assets and as capital lease obligations and have lease terms that range from 48 to 60 months and interest rates that range from 0%0.60% to 6.36%6.14%. No payments have been madeAs of June 30, 2011, the remaining balance on these capital leases duringwas $5.9 million. Interest expense for the three months and six months ended March 31, 2011.June 30, 2011 was $0.1 million.

        As of March 31,June 30, 2011 the Company also has five additionalsix irrevocable letters of credit, for which there is cash or bond collateral pledged, including (i) $50,000, which expires on July 12, 2011, supporting workers' compensation insurance with Safety National Casualty Corporation, (ii) $57,000, which expires on May 12, 2011,2012, supporting Cowen Healthcare Royalty Management, LLC's Stamford office lease and (iii) $82,000, which expires on May 12, 2011,2012, supporting the Company's San Francisco office and (iv) $1.2 million which expires on August 31, 2011, supporting the Company's lease of additional office space in New York and (iv)(v) $6.7 million, which supportsexpires December 12, 201, supporting the lease of office space in New York which the Company pays a fee on the stated amount of the letter of credit at a rate equal to 0.5%, expiring December 12, 2011.and (vi) $0.9 million which expires May 25, 2017, supporting the lease of additional office space in New York.


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Off-Balance Sheet Arrangements

        We have no material off-balance sheet arrangements as of March 31,June 30, 2011. However, through indemnification provisions in our clearing agreement, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the clearing agreement, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.


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

Critical Accounting Policies and Estimates

        Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in its condensed consolidated financial statements or the notes thereto. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent. Actual results may differ materially from these estimates.

        The following is a summary of what the Company believes to be its most critical accounting policies and estimates:

        These condensed consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The Company's funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting.

        The Company's condensed consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the Consolidated Funds were eliminated in consolidation; however, the Company's allocated share of net income from these funds was increased by the amount of this eliminated income. Hence, the consolidation of these funds had no net effect on the Company's net earnings.

        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


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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.

 

 

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

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

        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.


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        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


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on whether or not they are deemed to be actively traded. OTC derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within level 2. Derivative contracts are included within other assets on the condensed consolidated statements of financial condition.

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


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Revenue Recognition

        The Company generates through several principal sources as more fully described below:

        The Company earns management fees from funds and managed accounts for which serves as the investment manager or general partner, generally, based on a fixed percentage of net asset value, committed capital or invested capital. Management fees are based on contractual terms specified in the underlying investment management agreements with each specific fund or managed account. Management fees are generally paid on a quarterly basis at the beginning of each quarter in arrears and are prorated for capital inflows and redemptions. Management fees earned from our fund of funds products and certain portfolio funds are based and initially calculated on estimated net asset values and actual fees ultimately earned could be impacted to the extent of any changes in these estimates.

        The Company earns incentive income based on net profits (as defined in the respective investment management agreements) of certain of the Company's funds and certain managed accounts, allocable for each fiscal year to the extent, in most cases, that exceedsnet profits exceed cumulative unrecovered net losses, if any, that have carried forward from prior years. For the products we offer, incentive income earned is typically 20% for hedge funds and 10% for fund of funds (in certain cases in excess of a benchmark), in each case, of the net profits earned for the full year that are attributable to each fee-paying investor. Incentive income on real estate investments is earned in the year of a sale or realization of a private investment. Incentive income in the CHRP Funds is earned only after investors receive a full return of their capital plus a preferred return.

        In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to that investor until the accumulated net


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loss from prior periods is recovered, an arrangement commonly referred to as a "high-water mark." The Company has elected to record incentive income revenue in accordance with "Method 2" of the Financial Accounting Standards Board ("FASB") accounting standards. Under Method 2, the incentive income from the Company's funds and managed accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive income recognized in a quarter's condensed consolidated statement of operations may be subject to reversal in a subsequent quarter as a result of subsequent negative investment performance prior to the conclusion of the fiscal year, when all contingencies have been resolved. As a result of negative investment performance in 2008, and in the case of certain real estate funds, in 2009, the Company entered 2010 with high-water marks in certain of its fund products. These high-water marks require the funds to recover cumulative losses before the Company could begin to earn incentive income in 2010 and beyond with respect to the investments of investors who previously suffered losses. In 2010, the RamiusStarboard Value and Opportunity Funds surpassed their high water marks and the Company began to earn incentive income again on these products.


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

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


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        Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. The Company


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tests goodwill for impairment in accordance with the two-step method described in FASB accounting standards. The first step involves a comparison of the estimated fair value of the reporting unit to its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, its goodwill is not impaired and the second step of the impairment test is not necessary. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess. Goodwill is tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. Goodwill impairment tests are subject to significant judgment in determining the estimation of future cash flows, discount rates and other assumptions. Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill.

        Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset's or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

        The Company estimates potential losses that may arise out of legal and regulatory proceedings 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. These amounts are reported in other expenses, net of recoveries, in the condensed consolidated statements of operations. The condensed consolidated statements of operations do not include litigation expenses incurred by the Company in connection with indemnified litigation matters. See Note 1213 to the Company's condensed consolidated financial statements for further discussion. As the successor of the


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named party in these litigation matters, the Company recognizes the related legal reserve in the condensed consolidated statements of financial condition.

Recently adopted accounting pronouncements

        For a detailed discussion, see Note 2g.3g. "Recently adopted accounting pronouncements" in our condensed consolidated financial statements for the quarter ended March 31,June 30, 2011 and "Significant Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2010 which was filed with the SEC on March 14, 2011.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

        During the three months and six months ended March 31,June 30, 2011, except as described below, there were no material changes in our quantitative and qualitative disclosures about market risks from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. For a detailed discussion concerning our market risk, see the information below together with Item 7A "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K.

Our ETFs Market-Making Risk Management Process

        As a market-maker in ETFs through Cowen Capital LLC (formerly known as LaBranche Capital, LLC), Cowen International Trading Limited (formerly known as LaBranche Structured Products Europe Limited) and Cowen Structured Products Hong Kong Limited (formerly known as LaBranche Structured Products Hong Kong Limited), we trade as principal. In our market-making function, we bring immediacy and liquidity to the markets when we participate. Our market-making activities expose us to certain risks, including, but not limited to, price fluctuations and volatility.

        In connection with these market-making activities, we are engaged in various securities trading and lending activities and assume positions in stocks, rights, options, ETFs, U.S. Government securities, corporate securities, futures and foreign currencies for which we are exposed to credit risk associated with the nonperformance of counterparties in fulfilling their contractual obligations pursuant to these securities transactions. We are also exposed to market risk associated with the sale of securities not yet purchased, which can be directly impacted by volatile trading in the markets on which we conduct our trading activities. Additionally, in the event of nonperformance and unfavorable market price movements, we may be required to purchase or sell financial instruments at a loss.

        We enter into various transactions involving derivatives and off balance sheet financial instruments. These financial instruments include forwards and foreign exchange contracts, exchange traded and over-the-counter options, and swaps. Derivative transactions are entered into for trading purposes, including to hedge market, industry, sector and geographical risks associated with our market-making activities. Our derivatives trading activities exposes us to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, foreign currency movements and changes in the liquidity of markets.

        Our traders purchase and sell futures, options, the stocks underlying certain ETF and other derivative securities positions, U.S. Government securities and foreign currencies in an attempt to hedge market and foreign currency risk. Certain members of management, including our chief risk officer, who oversee our ETFs market-making activities and our global derivatives arbitrage business, are responsible for monitoring these risks. These managers utilize proprietary and third-party software applications, as well as information received directly from the traders, to monitor market-making positions on a real-time basis. By monitoring actual and theoretical profit and loss, volatility and other standard risk measures, these individuals seek to ensure that our traders operate within the parameters set by management. Furthermore, our aggregate risk in connection with our ETFs and other principal derivatives securities trading is under constant evaluation by certain members of management and our


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traders, and all significant trading strategies and positions are closely monitored. When an unusual or large position is observed by the chief risk officer, he communicates the issue to senior management, who communicate with the trader to understand the strategy and risk management behind the trade and, if necessary, determine avenues to mitigate risk exposure. Our ETFs and other securities trading are primarily executed on national and foreign exchanges but also at times executed as OTC transactions. These trades clear through the Depository Trust Clearing Corporation, the Options Clearing Corporation, the National Securities Clearing Corporation or the applicable foreign exchange clearing organization, all of which reduce potential credit risk.

Item 4.    Controls and Procedures

        Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer (the principal executive officer and principal financial officer, respectively), evaluated our disclosure controls and procedures as of March 31,June 30, 2011.

        Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of March 31,June 30, 2011, our disclosure controls and procedures are effective to provide a reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate, to allow timely decisions regarding required disclosure.

        There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

        The following information reflects developments with respect to the Company's legal proceedings that occurred in the firstsecond quarter of 2011. These items should be read together with the Company's discussion in Note 1213 "Commitments, Contingencies and Guarantees—Litigation," in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 and the Company's discussion set forth under Legal Proceedings in Part I, Item 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 2010.2010, as well as Note 12 "Commitments and Contingencies—Litigation" in the Notes to Condensed Consolidated Financial Statements (unaudited) in Part 1, Item 1 and the Company's discussion set forth under Legal Proceedings in Part 2, Item 1 of the Company Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.

        As previously disclosed, Cowen and Company filed an answer to the complaint on January 6, 2011. To the extent that the Company incurs additional legal fees or pays any fine or monetary sanction, it will be indemnified byOn June 1, 2011, Société Générale.rale, which was liable for any losses in the Adelphia litigation pursuant to the Indemnification Agreement by and between Cowen and Société Générale, entered into a settlement agreement with the Huff plaintiffs. On July 18, 2011, the SDNY so ordered the settlement stipulation and dismissal of Société Générale from the lawsuit. No settlement contribution was made by Cowen Group.

        On March 24,May 12, 2011, the District CourtIssuer-Defendants filed a demurrer, which was joined by the Underwriter-Defendants, including Cowen and Company. Plaintiffs filed an opposition on July 11, 2011. Cowen Group's reply is due August 1, 2011. The hearing on the demurrer is scheduled for the Southern District of California remanded the case back to the Superior Court for the State of California, County of San Diego. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

        The parties are presently conducting discovery, and the SDNY intends to set a briefing schedule for summary judgment motions on June 29,September 2, 2011. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

        On February 22,May 13, 2011, a putative class action by a purported holderthe SDNY issued its final order approving the Stipulation and Agreement of LaBranche & Co. stock, captionedSettlement.

        On June 29, 2011, the Supreme CourtSDNY ordered that motions for summary judgment are due December 2, 2011. The Company cannot presently predict the ultimate outcome of the Statelitigation or estimate the possible loss or range of New York, County of New York, naming as defendants the Company, loss, if any.

        On May 2, 2011, counsel for the parties to the consolidated lawsuit reached an agreement in principle to settle the consolidated lawsuit reflected in a memorandum of understanding. In connection with the settlement, LaBranche and Cowen Group agreed to make certain additional disclosures in the Form S-4 filed in connection with the LaBranche transaction. The memorandum of understanding also contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement


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will contain customary releases and will be subject to customary conditions, including approval by the Court. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Court will consider the fairness, reasonableness and adequacy of the settlement which, if finally approved by the Court, will resolve all of the claims that were or could have been brought in the actions being settled, including all claims relating to the merger,acquisition, the Merger Agreement and any disclosure made in connection therewith. In addition, in connection with the settlement and as provided


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in the memorandum of understanding, the parties contemplate that plaintiffs' counsel will seek an award of attorneys' fees and expenses as part of the settlement.

        There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if any.

        On February 22, 2011, a putative class action, captionedMallen v. Alphatec Holdings, Inc., et. al., was filed in the United States District Court for the Southern District of California, naming as defendants Alphatec Holdings, Inc. ("Alphatec"), members of the Alphatec board of directors, Healthpoint Capital Partners, LLP, Healthpoint Capital Partners II, LLP, as well as Jefferies & Co., Inc., Canaccord Adams, Inc., Lazard Capital Markets, LLC, and Cowen and Company, LLC (the "Underwriter Defendants"). The complaint brings claims against the Underwriter Defendants under sections 11 and 12 of the Securities Act of 1933 for alleged materially inaccurate and misleading statements and omissions in the registration statement and prospectus for an April 2010 offering of common stock of Alphatec regarding the success of Alphatec's acquisition of a company named Scient'x.        On April 18, 2011, the Underwriter Defendants filed a motion to dismiss the complaint as against the Underwriter Defendants. On June 6, 2011, Plaintiffs filed their opposition to the motion to dismiss. And on June 27, 2011, the Underwriter Defendants filed their reply. The hearing on the motion to dismiss is set for August 29, 2011. The Company cannot presently predict the ultimate outcome of the litigation or estimate the possible loss or range of loss, if anyany.

        Given the additional market information available to Ramius, Ramius has decided to value its total net equity claim as follows: (i) the trust assets that we have been informed are within the control of LBIE and are expected to be distributed to us in the relatively near term are beingThe LBI claim was valued at market less a 1% discount that corresponds to the fee that will be charged under the Claim Resolution Agreement for the return of trust assets, (ii) the trust assets that are not within the control of LBIE, but that Ramius believes are held by LBIE through Lehman Brothers, Inc. ("LBI"), are being valued at 54%56% which representsrepresented the present value of the mid-point between what Ramius believes arethe Company believed were reasonable estimates of the low-side and high-side potential recovery rates with respect to its LBI exposure (iii) Ramius's unsecuredwhile LBIE claims againstwere valued as follows: (i) the trust assets that the Company was informed were within the control of LBIE are beingand were expected to be returned in the relatively near term were valued at 48%market less a 1% discount that corresponds to the fee to be charged under the Claim Resolution Agreement ("CRA"), which represents Ramius's estimate of potential recovery rates with respect to this exposure and (iv)(ii) the trust assets that are not within the control of LBIE and are not believed to be held through LBI are beingwere valued at 48% with respect to US denominated Assets and 48% with respect to foreign denominated Assets, which represented the Company's estimate of potential recovery rates (iii) the remaining unsecured claims against LBIE were valued at 48%, which represents Ramius'srepresented the Company's estimate of potential recovery rates with respect to this exposure assumingusing available market quotes.

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

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

        On September 15, 2004, plaintiffs filed a Consolidated Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty, alleging that they represent a class consisting of all public investors who purchased and/or sold shares of stock listed on the NYSE from October 17, 1998 to October 15, 2003. Plaintiffs allege that LaBranche & Co Inc., LaBranche & Co. LLC, Mr. LaBranche, other NYSE specialist firms, including Bear Wagner Specialists LLC, Fleet Specialist, Inc., SIG Specialists, Inc., Spear, Leeds & Kellogg Specialists LLC, Performance Specialist


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Group, LLC and Van der Moolen Specialists USA, LLC, and certain parents and affiliates of those firms, and the NYSE, violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by failing to disclose alleged improper specialist trading that was the subject of specialist trading investigations by the SEC and NYSE, improperly profiting on purchases and/or sales of NYSE listed securities, and breaching and/or aiding and abetting breaches of fiduciary duty. Section 20(a) control person claims also are alleged, including against LaBranche & Co Inc., LaBranche & Co. LLC and Mr. LaBranche. Plaintiffs seek unspecified money damages, restitution, forfeiture of fees, commissions and other compensation, equitable and/or injunctive relief, including an accounting and the imposition of a constructive trust assets are not availableand/or asset freeze on trading proceeds, and become unsecuredattorneys' fees and reimbursement of expenses.

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

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

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

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

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

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

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

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

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

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


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

        On June 11, 2010, NYSE Regulation, Inc.'s Division of Enforcement ("NYSE Regulation"), on behalf of NYSE Amex, LLC ("NYSE Amex") and NYSE Arca Equities, Inc. ("NYSE Arca"), commenced a proceeding against LSP and LSP's former head of options trading alleging, during the period from March 2005 through July 2007, violations of Regulation SHO Rule 203(b)(1), by allegedly effecting short sales of "threshold securities" without first locating shares to borrow, allegedly in improper reliance upon Regulation SHO's market maker exemption from locate requirements; Regulation SHO Rule 203(b)(3), by allegedly entering closing transactions that failed to properly close out fail-to-deliver positions in the "threshold securities;" and Part 224 of the Federal Reserve Board Rules ("Regulation X"), by allegedly causing LSP's clearing firm to improperly extend LSP "good faith margin" as a market maker. NYSE Regulation also alleges, during the period from September 18, 2008 to October 8, 2008, violations of Section 12(k)(4) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's September 18, 2008 Emergency Order that banned the short selling of securities of financial services companies, by improperly relying on an exemption that would enable short sales of the common stock of financial services companies. NYSE Regulation also alleges, during both of these time periods, violations of AMEX Rule 320 and NYSE Arca Rule 6.18(b), by allegedly failing to supervise these trading activities to comply with the rules alleged to have been violated.

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

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

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

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

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

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

Item 1A.    Risk Factors

        The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.2010 as well as those set forth below relating to our recently acquired market-making business. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of


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operations, cash flows, strategies or prospects in a material and adverse manner.


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Risks Related to Our Broker-Dealer Business

The market structure in which our market-making business operates may continue to change or lose its viability, making it difficult for this business to achieve or maintain profitability.

        Market structure changes have had an adverse affect on the results of operations of our market-making business. These changes may make it difficult for us to maintain and/or predict levels of profitability of, or may cause us to generate losses in, our market-making business. The most notable recent events that could have or have had a direct impact on our market-making business are the proposal for a stock and options transactions tax by the Obama administration, the NYSE's new market model, which commenced in late December 2008, the NYSE's mergers with Archipelago and Euronext in 2006 and 2007 and the pending merger of the NYSE with the Deutsche Borse, the 2008 merger of NYSE Regulation and the NASD, forming FINRA, SEC emergency rulemaking with respect to Regulation SHO and the SEC's structural changes in the U.S. equity trading markets.

        Further, the internalization of orders, in which large brokerage firms are able to cross trades among their large client bases without directing any business to the major exchanges and marketplaces, has restricted order flow and, consequently, our market-making business' ability to participate in trades, as could significant declines in order flow due to redemptions at large funds and investors exiting the markets, such as those that occurred in 2008 and 2009.

The growth of electronic trading and the introduction of new technology in the markets in which our market-making business operates may adversely affect this business and may increase competition.

        The continued growth of electronic trading and the introduction of new technologies, such as our options, and ETFs market-making algorithms, is changing our market-making business and presenting new challenges. Securities, futures and options transactions are increasingly occurring electronically, both on our own systems and through other alternative trading systems. It appears that the trend toward alternative trading systems will continue to accelerate. This acceleration could further increase program trading, increase the speed of transactions and decrease our ability to participate in transactions as principal, which would reduce the profitability of our market-making business. Some of these alternative trading systems compete with our market-making business, and we may experience continued competitive pressures in these and other areas. Significant resources have been invested in the development of our electronic trading systems and we expect this to continue, but there is no assurance that the revenues generated by these systems will yield an adequate return on the investment, particularly given the increased program trading and increased percentage of stocks trading off of the historically manual trading markets.

        Our market-making technology, which was designed to trade on various exchanges and marketplaces, is limited by the systems with which it interacts. This means that there are times when system failures on the exchanges on which we operate have had an impact on the profitability of our market-making business. We cannot provide assurance that any of these exchanges will be able to understand or agree that those losses were in fact caused by their systems failures or will be able to reimburse us for all losses incurred as a result of their systems failures on a timely basis, or at all, any of which could adversely affect the results of operations of our market-making business. In addition, the exchanges' systems failures could result in erroneous regulatory investigations that could be generated by false exception reports by the market surveillance groups of those exchanges.

An inability to timely or successfully develop enhanced proprietary trading systems and increases in electronic trading on other exchanges for our market-making businesses, may adversely affect the profitability of our market-making business.

        As the securities trading marketplace has become almost completely automated, we have developed or acquired electronic trading capabilities which allow us to interact with electronic order


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flow, and to engage in market-making transactions in options, ETFs and other derivative product in other markets, such as the NYSE Amex Exchange, the NYSE Arca Exchange, the NYBOT, the Comex and other options and derivative product exchanges, which have introduced their own version of a fully or mostly automated market in order to comply with Regulation NMS. All of these electronic-based markets have required us to expend significant programming efforts and resources to transact business in the electronic marketplace. Throughout this process, we have internally developed trading systems to interact on these markets and these systems. Our market-making business has experienced declines in revenues and/or has generated losses at times under these conditions, and may experience further declines in trading or revenues as the new markets models and electronic trading platforms emerge. It is still early in the new electronic trading environment to fully determine the successes or failures of these trading technologies and their effect on the profitability of our market-making business. We have also developed internal fair value programs designed to enable us to provide competitive quotations on request from other broker-dealers in our derivative product market-making business quickly and efficiently. We cannot guarantee that these fair value models and programs will be effective or competitive in comparison to other similar market-makers and our ability to compete in this area may depend on the resources we devote to these programs and the talent of our personnel. Our ability to compete with other market-making firms may be adversely affected if others are able to more quickly and efficiently make markets better than we can.

        We have developed and are continuing to develop more advanced trading technologies to trade opportunistically in our market-making business while continuing to comply with our obligations in our other market-making activities in options and ETFs. There can be no assurance that our internally-developed market-making algorithms do not have errors or can always monitor or prevent rule violations. In addition, we cannot assure you that our trading algorithms cannot have flaws or that our quality assurance procedures will always catch those flaws, which could result in algorithmic trading programs that generate losses in a short or prolonged timeframe. In the event all violations or losses cannot be prevented, these trading programs may expose us to regulatory fines and penalties by exchange regulatory authorities or expose our market-making business to significant trading losses.

        We cannot assure that our more advanced trading systems, even if they perform as designed, will be profitable due either to the changing nature of the marketplace or changes in exchange and/or securities rules or laws. We also cannot provide assurance that these proprietary trading systems will enable our market-making business to compete effectively with its direct competitors, who may have better or more advanced technology. The profitability of our market-making business and its ability to compete may depend on the ability of our personnel to effectively adapt these advanced trading systems to changes in the marketplace, while adequately maintaining our market-making obligations. In the event we cannot successfully build and adapt this trading technology, the results of operations of our market-making business may be adversely affected.

The future success of our market-making business will depend on the ability to upgrade information and communications systems, and any failure to do so could harm the profitability of this business.

        The development of complex communications systems and new technologies, including Internet-based technologies, may render our existing information and communications systems outdated. In addition, our information and communications systems must be compatible with those of the NYSE Arca Exchange, the NYSE Amex Exchange, the Comex and the other exchanges on which we conduct our market-making business. As a result, when those exchanges upgrade their systems, we will need to make corresponding upgrades. For example, in recent years, the NYSE made numerous changes to its trading technologies, both major and minor, in its discretion. Some of these changes required us to adapt our trading technology, with processes that can at times be time consuming and costly and that often carried risks associated with high frequency trading algorithms, such as coding errors, system malfunctions, quality assurance testing errors and technology glitches. The CBOE stock exchange also


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made many upgrades to its communication and trading systems in 2010, with which we had difficulty adjusting our communication systems. These same types of errors and system issues can arise in our general trading algorithm technology development lifecycle, as well. The future success of our market-making business will depend on our ability, on a cost-effective basis, to timely and competitively respond to changing technologies. Our failure to do so could have an adverse effect on this business and its operating results.

Failures in the trading algorithms of our broker-dealer business and their development processes could adversely affect the trading and profitability of our broker-dealer business.

        As both national and international financial markets have become and continue to become more automated, we are no materialincreasingly dependent on our electronic trading systems to effectively compete. This is especially true in our broker-dealer business due to the high frequency nature of trades and due to our obligations and desire to interact with high-paced order flow. We have internally developed trading algorithms to interact with the faster, more electronic order flow and employ significant personnel dedicated to the trading algorithm development process. Our development process entails communications among management at each of our broker-dealers, traders, compliance personnel and the coders to ensure that the development of our trading programs are adequately designed to achieve the goals of our business, as well as to comply with securities rules and regulations. If there are any failures in this communication process our trading technologies could not be efficient or profitable, or may expose us to liability for rule violations.

        In addition, once the goals of the trading technology are communicated, we have a development process to code and implement our trading algorithms. This process includes the following:

        It is possible that some employees in our technology development process may not adequately follow our procedures or, even if all procedures are followed, it is possible that coding errors pass through our procedures undetected. This risk is enhanced by the fact that certain exchanges do not provide us with a test environment to run our algorithms other than "live" production. If our procedures are not followed by our employees or if undetected errors are implemented, our high frequency algorithms could potentially cause errors that, if not immediately detected, could result in significant trading losses and/or regulatory investigations. Any such event could have an adverse effect on the operations or profitability of our broker-dealer business.

Risks associated with our market-making trading transactions could result in trading losses.

        A majority of our market-making revenues are derived from our trading for our own account as principal. We may incur trading losses relating to these activities, since each trade primarily involves the purchase, sale or short sale of securities for our own account. In any period, we may incur trading losses in a significant number of our market-making options, ETFs, and/or the underlying securities such as stocks, foreign currencies and other derivatives for a variety of reasons, including price declines, lower trading volumes and the required performance of our obligations. From time to time, our market-making business has large position concentrations in securities of a single issuer or issuers engaged in a specific industry due to our obligations as market-maker or otherwise. In general, because our inventory of securities is marked-to-market on a daily basis, any downward price movement in these securities results in an immediate reduction of our revenues and operating results. For example, during and following the "flash crash" in May 2010 caused by algorithmic trading in the market place,


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many of our positions lost significant value and caused us to generate losses. Our market-maker trading in options, ETFs, other derivative instruments and foreign currencies also exposes us to certain additional risks associated with such factors as price fluctuations, foreign exchange currency movements, changes fromin the liquidity of markets, volatility and counterparty credit. We cannot be sure that the risk factors previously disclosedmanagement procedures and technologyof our market-making business have been formulated properly to identify or completely limit our risks and, even if formulated properly, we cannot be sure that we will successfully capture all of the risk associated with our market-making business, including fast and large market movements. As a result, this business may not be able to manage these risks successfully or avoid trading losses.

Derivative transactions may expose our market-making business to unexpected risk and potential losses.

        We are party to a large number of derivative transactions, many of which are intended to hedge our market-making risk, including credit derivatives, which require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold the underlying security, loan or other obligation and may have difficulty obtaining, or be unable to obtain, the underlying security, loan or other obligation through the physical settlement of other transactions. As a result, we are subject to the risk that our market-making business may not be able to obtain the security, loan or other obligation within the required contractual time frame for delivery. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to the firm.

Regulatory rules related to our market-making businesses require us to make unprofitable trades and refrain from making profitable trades.

        Our role as a market maker, at times, may result in our 2010 Form 10-K filedmaking trades that adversely affect the operating results of our market-making business. For example, we may act as a principal when buyers or sellers outnumber each other and take a position counter to the market in order to stem an imbalance in the market. By having to support an orderly market, maintain inventory positions and refrain from trading under some favorable conditions, we are subject to risk. Our market-making compliance systems, which are designed to monitor compliance with these rules may malfunction or may not timely detect failures to satisfy these obligations, which could result in fines and/or penalties. In many cases where we comply with our obligations, our compliance with rules could cause this business to generate losses.

We cannot assure you that we will continue to be able to effectively compete in the SECmarket-making industry.

        We cannot be sure that we will be able to compete effectively with current or future competitors in the market-making industry. We compete with significantly larger entities to be the market-maker in ETFs, options and other derivative products. Although we have been able to secure a market share of these market-making businesses, we cannot assure you that our growth in market share will continue as our competitors focus more resources on March 14, 2011.their market-making and other trading businesses as the derivatives market-making business becomes more competitive and fragmented. Some of our competitors may have significantly greater financial and other resources than we have in our market-making activities and may have greater name recognition. These competitors may be able to respond more quickly to new or evolving opportunities and listing company requirements. They also may be able to undertake more extensive promotional activities to attract new listing companies. Our failure to compete effectively would have an adverse effect on the operating results of our market-making business.


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Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

        None.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Removed and Reserved

Item 5.    Other Information

        None.

Item 6.    Exhibits

        See Exhibit Index.


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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  COWEN GROUP, INC.

 

 

By:

 

/s/ PETER A. COHEN

    Name: Peter A. Cohen
    Title: Chief Executive Officer and President
(principal executive officer)

 

 

By:

 

/s/ STEPHEN A. LASOTA

    Name: Stephen A. Lasota
    Title: Chief Financial Officer
(principal financial officer
and principal accounting officer)

Dated: May 10,August xx, 2011


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Exhibit Index

Exhibit No. Description
 31.110.1 Employment Agreement with George M.L. LaBranche, IV, dated as of February 16, 2011, by and between Cowen Group, Inc. and George M.L. LaBranche, IV.


31.1


Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

 

31.2

 

Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

 

32

 

Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


101


Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Financial Condition as of June 30, 2011 and December 31, 2010, (ii) the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (iii) the Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2011 (iv) the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (v) the notes to Condensed Consolidated Financial Statements, tagged as blocks of text.*

*
Pursuant to Rule 406T of Regulation S-T, this information is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections