The SEC said that based on these trades, Cohen's hedge funds earned profits and avoided losses totaling more than $275 million.
"Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws," said Andrew J. Ceresney, co-director of the SEC's Division of Enforcement in a statement. "After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law.
(Read more: Ten bets from top hedge fund managers)
An administrative proceeding will determine the penalty against hedge fund manager Cohen, the SEC said in a statement.
The SEC could bar Cohen from overseeing investor funds. According to the SEC document Cohen "shall file an answer to the allegations contained in this order within 20 days after the service of this order."
SAC said in a statement that Cohen acted appropriately and would fight the charges vigorously.
The spokesperson for U.S. Attorney for the Southern District of New York Preet Bharara had no comment on the SEC's action against Cohen.
(Read more: Watch Bharara warn Wall Street: 'People should be afraid')
Cohen and his $15 billion hedge fund, roughly $9 billion of which belongs to founder Steve Cohen and other insiders, have been under a long-running investigation by regulators and federal investigators and that has led some clients to pull funds from SAC Capital.
In June, SAC received between $2 billion and $3 billion in requests from investors for the return of capital, say people familiar with the matter, with the total being closer to $3 billion.
(Read more: SAC Capital redemptions $2 billion to $3 billion: Exclusive)
As of its March 2013 filing, SAC held big positions in companies including Tivo, Walter Energy and Visteon.