Edgar Filing: COWEN GROUP, INC.

10Q 9/30/14

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)
Q	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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)

(646) 562-1000

(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 Q 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 Q 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 Q	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 Act). Yes o No Q

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 5, 2014 there were 113,635,176 shares of the registrant's common stock outstanding.

Table of Contents



Item No.			Page No.
PART I. FINANCIAL INFORMATION			4
	1. Unaudited Condensed Consolidated Financial Statements		4
		Condensed Consolidated Statements of Financial Condition	4
		Condensed Consolidated Statements of Operations	5
		Condensed Consolidated Statements of Comprehensive Income (Loss)	6
		Condensed Consolidated Statements of Changes in Equity	7
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9
	2. Management's Discussion and Analysis of Financial Condition and Results of Operations		51
	3. Quantitative and Qualitative Disclosures About Market Risk		82
	4. Controls and Procedures		82
PART II. OTHER INFORMATION			82
	1. Legal Proceedings		82
	1A. Risk Factors		83
	2. Unregistered Sales of Equity Securities and Use of Proceeds		85
	3. Defaults Upon Senior Securities		86
	4. Mine Safety Disclosures		86
	5. Other Information		86
	6. Exhibits		86
SIGNATURES			87
EXHIBIT INDEX			E - 1

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, 2013 as well as Item 1A of this periodic report on Form 10-Q for the quarterly period ended September 30, 2014.

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 and nine months ended September 30, 2014 and 2013. The Consolidated Financial Statements as of December 31, 2013 were audited.

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

(dollars in thousands, except share and per share data)

(unaudited)



	As of September 30, 2014			As of December 31, 2013
Assets
Cash and cash equivalents	$	66,166		$	54,720
Cash collateral pledged	8,862			10,907
Securities owned, at fair value	660,602			311,039
Receivable on derivative contracts, at fair value	35,966			10,075
Securities borrowed	2,321,556			927,773
Other investments	130,584			99,483
Receivable from brokers	95,149			66,980
Fees receivable, net of allowance	43,566			45,067
Due from related parties	29,716			26,910
Fixed assets, net of accumulated depreciation and amortization of $24,437 and $21,853, respectively	27,390			26,999
Goodwill	37,240			37,240
Intangible assets, net of accumulated amortization of $26,189 and $26,610, respectively	9,985			12,094
Other assets	26,622			17,561
Consolidated Funds
Cash and cash equivalents	368			2,048
Other investments	197,001			187,480
Other assets	691			5,624
Total Assets	$	3,691,464		$	1,842,000
Liabilities and Stockholders' Equity
Liabilities
Securities sold, not yet purchased, at fair value	$	209,089		$	130,954
Securities sold under agreement to repurchase	—			3,657
Payable for derivative contracts, at fair value	31,369			7,674
Securities loaned	2,324,682			918,577
Payable to brokers	246,797			75,420
Compensation payable	66,140			51,807
Short-term borrowings and other debt	4,608			2,564
Convertible debt	117,031			—
Fees payable	10,164			6,324
Due to related parties	413			382
Accounts payable, accrued expenses and other liabilities	50,774			45,290
Consolidated Funds
Capital withdrawals payable	—			5,222
Accounts payable, accrued expenses and other liabilities	94			549
Total Liabilities	3,061,161			1,248,420
Commitments and Contingencies (Note 13)
Redeemable non-controlling interests	91,429			85,814
Stockholders' equity
Preferred stock, par value $0.01 per share; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Class A common stock, par value $0.01 per share: 250,000,000 shares authorized, 135,143,171 shares issued and 113,634,803 outstanding as of September 30, 2014 and 130,900,182 shares issued and 115,026,633 outstanding as of December 31, 2013, respectively (including 424,479 and 482,522 restricted shares, respectively)	1,160			1,160
Class B common stock, par value $0.01 per share: 250,000,000 authorized, no shares issued and outstanding	—			—
Additional paid-in capital	766,961			737,341
(Accumulated deficit) retained earnings	(158,498		)	(183,243		)
Accumulated other comprehensive income (loss)	272			592
Less: Class A common stock held in treasury, at cost, 21,508,368 and 15,873,549 shares, respectively	(71,021		)	(48,084		)
Total Stockholders' Equity	538,874			507,766
Total Liabilities and Stockholders' Equity	$	3,691,464		$	1,842,000

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

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Cowen Group, Inc.

Condensed Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues
Investment banking	$	45,799		$	27,694		$	125,653		$	70,431
Brokerage	34,334			28,462			100,475			86,583
Management fees	9,796			9,327			28,412			28,518
Incentive income	(837		)	2,521			4,385			7,086
Interest and dividends	13,725			10,969			35,437			30,905
Reimbursement from affiliates	2,473			2,175			7,391			6,451
Other revenues	1,120			556			2,427			1,519
Consolidated Funds
Interest and dividends	642			255			1,783			414
Other revenues	49			190			717			267
Total revenues	107,101			82,149			306,680			232,174
Expenses
Employee compensation and benefits	65,806			53,614			197,771			145,344
Floor brokerage and trade execution	5,125			5,421			16,638			17,669
Interest and dividends	12,429			6,281			29,694			20,886
Professional, advisory and other fees	4,621			4,022			12,596			10,878
Service fees	1,933			2,351			6,161			7,615
Communications	3,286			3,481			9,554			9,991
Occupancy and equipment	6,650			6,752			19,371			19,019
Depreciation and amortization	2,274			2,624			7,036			7,786
Client services and business development	6,577			3,493			16,726			12,251
Other expenses	3,364			3,248			9,750			8,785
Consolidated Funds
Interest and dividends	218			96			517			157
Professional, advisory and other fees	348			230			622			717
Floor brokerage and trade execution	1			91			7			196
Other expenses	68			33			189			167
Total expenses	112,700			91,737			326,632			261,461
Other income (loss)
Net gains (losses) on securities, derivatives and other investments	13,836			14,680			48,227			30,507
Consolidated Funds
Net realized and unrealized gains (losses) on investments and other transactions	532			3,096			8,474			11,274
Net realized and unrealized gains (losses) on derivatives	1,899			(32		)	1,688			430
Net gains (losses) on foreign currency transactions	2			168			(17		)	1
Total other income (loss)	16,269			17,912			58,372			42,212
Income (loss) before income taxes	10,670			8,324			38,420			12,925
Income tax expense (benefit)	141			(46		)	266			288
Net income (loss)	10,529			8,370			38,154			12,637
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	4,006			4,759			13,409			10,509
Net income (loss) attributable to Cowen Group, Inc. stockholders	$	6,523		$	3,611		$	24,745		$	2,128
Weighted average common shares outstanding:
Basic	114,969			118,359			115,407			116,012
Diluted	118,801			122,708			120,027			119,891
Earnings (loss) per share:
Basic	$	0.06		$	0.03		$	0.21		$	0.02
Diluted	$	0.05		$	0.03		$	0.21		$	0.02

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

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Cowen Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)



	Nine Months Ended September 30, 2014							Nine Months Ended September 30, 2013

Net income (loss)					$	38,154						$	12,637
Other comprehensive income (loss), net of tax:
Foreign currency translation			(233	)						(10	)
Defined benefit pension plan:
Net gain/(loss) arising during the period	(87	)						(223	)
Add: amortization of prior service cost included in net periodic pension cost	—		(87	)				16		(207	)
Total other comprehensive income, net of tax					(320		)					(217		)
Comprehensive income (loss)					$	37,834						$	12,420

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

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Cowen Group, Inc.

Condensed Consolidated Statements of Changes in Equity

(dollars in thousands, except share data)

(unaudited)



	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings/ (Accumulated deficit)			Total Stockholders' Equity			Redeemable Non-controlling Interest
Balance, December 31, 2013	115,026,633		$	1,160	$	(48,084	)	$	737,341	$	592		$	(183,243	)	$	507,766		$	85,814
Net income (loss)	—		—		—			—		—			24,745			24,745			13,409
Defined benefit plan	—		—		—			—		(87		)	—			(87		)	—
Foreign currency translation	—		—		—			—		(233		)	—			(233		)	—
Capital contributions	—		—		—			—		—			—			—			10,273
Capital withdrawals	—		—		—			—		—			—			—			(18,067		)
Restricted stock awards issued	4,242,989		—		—			—		—			—			—			—
Purchase of treasury stock, at cost	(5,634,819	)	—		(22,937		)	—		—			—			(22,937		)	—
Warrants issued (see Note 5)	—		—		—			15,218		—			—			15,218			—
Stock options exercised (See Note 10)	—		—		—			116		—			—			116
Amortization of share based compensation	—		—		—			14,286		—			—			14,286			—
Balance, September 30, 2014	113,634,803		$	1,160	$	(71,021	)	$	766,961	$	272		$	(158,498	)	$	538,874		$	91,429

	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings/ (Accumulated deficit)			Total Stockholders' Equity			Redeemable Non-controlling Interest
Balance, December 31, 2012	112,447,892		$	1,135	$	(31,728	)	$	713,211	$	356		$	(187,865	)	$	495,109		$	85,703
Net income (loss)	—		—		—			—		—			2,128			2,128			10,509
Defined benefit plan	—		—		—			—		(207		)	—			(207		)	—
Foreign currency translation	—		—		—			—		(10		)	—			(10		)	—
Capital contributions	—		—		—			—		—			—			—			11,656
Capital withdrawals	—		—		—			—		—			—			—			(17,689		)
Restricted stock awards issued	4,288,108		—		—			—		—			—			—			—
Common stock issued upon acquisition (See Note 2)	2,514,468		25		—			6,272		—			—			6,297			—
Purchase of treasury stock, at cost	(1,863,684	)	—		(5,879		)	—		—			—			(5,879		)	—
Treasury stock re-issuance	24,744		—		90			—		—			(25		)	65			—
Amortization of share based compensation	—		—		—			13,803		—			—			13,803			—
Balance, September 30, 2013	117,411,528		$	1,160	$	(37,517	)	$	733,286	$	139		$	(185,762	)	$	511,306		$	90,179

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

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Cowen Group, Inc. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited)

	Nine Months Ended September 30,
	2014			2013
Cash flows from operating activities:
Net income (loss) from continuing operations	$	38,154		$	12,637
Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
Depreciation and amortization	7,036			7,786
Amortization of debt discount	3,241			—
Share-based compensation	14,286			13,803
Deferred rent obligations	(1,629		)	(2,467		)
Net loss on disposal of fixed assets	311			350
Purchases of securities owned, at fair value	(3,362,237		)	(5,948,964		)
Proceeds from sales of securities owned, at fair value	3,013,982			6,179,204
Proceeds from sales of securities sold, not yet purchased, at fair value	1,371,216			2,417,838
Payments to cover securities sold, not yet purchased, at fair value	(1,268,348		)	(2,458,420		)
Net (gains) losses on securities, derivatives and other investments	(38,181		)	(33,530		)
Consolidated Funds
Purchases of securities owned, at fair value	—			(298,220		)
Proceeds from sales of securities owned, at fair value	—			287,412
Proceeds from sales of securities sold, not yet purchased, at fair value	—			42,701
Payments to cover securities sold, not yet purchased, at fair value	—			(42,387		)
Purchases of other investments	(19,568		)	(973		)
Proceeds from sales of other investments	21,367			39,195
Net realized and unrealized (gains) losses on investments and other transactions	(11,320		)	(12,729		)
(Increase) decrease in operating assets:
Cash acquired upon transaction	—			10,747
Cash collateral pledged	2,045			143
Securities owned, at fair value, held at broker dealer	4,300			13,078
Receivable on derivative contracts, at fair value	9,820			9,184
Securities borrowed	(1,393,783		)	(494,476		)
Receivable from brokers	(28,169		)	4,628
Fees receivable, net of allowance	1,501			(4,237		)
Due from related parties	(2,806		)	(5,636		)
Other assets	(5,702		)	(10,215		)
Consolidated Funds
Cash and cash equivalents	1,680			2,071
Other assets	4,933			(362		)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at fair value, held at broker dealer	(19,839		)	(9,305		)
Payable for derivative contracts, at fair value	(12,016		)	(917		)
Securities loaned	1,406,105			484,349
Payable to brokers	171,377			(39,512		)
Compensation payable	8,636			(34,020		)
Fees payable	3,840			2,933
Due to related parties	31			(196		)
Accounts payable, accrued expenses and other liabilities	6,521			(10,021		)
Consolidated Funds
Payable to brokers	—			1,030
Accounts payable, accrued expenses and other liabilities	(455		)	(249		)
Net cash provided by / (used in) operating activities	$	(73,671	)	$	122,253

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







	Nine Months Ended September 30,
(continued)	2014			2013
Cash flows from investing activities:
Purchases of other investments	$	(80,153	)	$	(19,406	)
Cash convertible note economic hedge transaction	(35,710		)	—
Proceeds from sales of other investments	75,622			25,668
Tenant allowance	1,240			—
Purchase of fixed assets	(6,890		)	(784		)
Net cash provided by / (used in) investing activities	(45,891		)	5,478
Cash flows from financing activities:
Securities sold under agreement to repurchase	(3,657		)	(159,634		)
Proceeds from issuance of convertible debt	149,500			—
Deferred debt issuance cost	(3,720		)	—
Proceeds from sale of warrant	15,218			—
Borrowings on short-term borrowings and other debt	6,217			2,044
Repayments on short-term borrowings and other debt	(2,913		)	(2,807		)
Proceeds from stock options exercised	116			—
Purchase of treasury stock	(17,327		)	(2,658		)
Cash paid to acquire net assets (contingent liability payment)	(518		)	(73		)
Capital contributions by redeemable non-controlling interests in operating entities	705			501
Capital withdrawals to redeemable non-controlling interests in operating entities	(9,575		)	(2,282		)
Consolidated Funds
Capital contributions by redeemable non-controlling interests in Consolidated Funds	9,568			11,155
Capital withdrawals to redeemable non-controlling interests in Consolidated Funds	(12,606		)	(18,298		)
Net cash provided by / (used in) financing activities	131,008			(172,052		)
Change in cash and cash equivalents	11,446			(44,321		)
Cash and cash equivalents at beginning of period	54,720			83,538
Cash and cash equivalents at end of period	$	66,166		$	39,217

Supplemental non-cash information
Non compete agreements and covenants with limiting conditions acquired (see Note 2)	$	—		$	460
Common stock issuance upon close of acquisition (see Note 2)	$	—		$	6,297
Purchase of treasury stock, at cost, through net settlement (see Note 15)	$	5,610		$	3,156
Cash conversion option (See Note 5)	$	35,710		$	—
Re-issuance of treasury stock for services provided	$	—		$	65
Net assets transferred to Merger Master (see Note 5)	$	—		$	22,152

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

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Organization and Business

Cowen Group, Inc., a Delaware corporation formed in 2009, is a diversified financial services firm and, together with its consolidated subsidiaries (collectively, “Cowen,” “Cowen Group” or the “Company”), provides alternative investment management, investment banking, research, and brokerage (including market-making, sales and trading and securities lending services) through its two business segments: alternative investment and broker-dealer. Ramius, the Company's alternative investment segment, includes hedge funds, replication products, liquid alternative risk premia products, customized solutions, mutual funds, managed futures funds, fund of funds, real estate and healthcare royalty funds. Cowen's broker-dealer segment offers 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, real estate investment trusts ("REITs"), clean technology, energy, metals and mining, transportation, chemicals and agriculture sectors.

2. Acquisitions

On March 11, 2013, the Company completed its acquisition of all of the outstanding interests in Dahlman Rose & Company, LLC ("Dahlman"), a privately-held investment bank specializing in the energy, metals and mining, transportation, chemicals and agriculture sectors. This acquisition was an all-stock transaction. In the aggregate, the purchase price, assets acquired and liabilities assumed were not significant and the near term impact to the Company and its consolidated results of operations and cash flows was not expected to be significant. Dahlman was subsequently renamed to Cowen Securities LLC ("Cowen Securities"). Following the acquisition, the Cowen Securities broker-dealer ceased operations and its business was fully integrated into Cowen and Company.

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"). As such, results of operations for the Cowen Securities are included in the accompanying condensed consolidated statements of operations since the date of the acquisition, and the assets acquired, liabilities assumed and the resulting goodwill were recorded at their fair values within their respective line items on the accompanying condensed consolidated statement of financial condition. The goodwill is fully deductible for tax purposes.

3. Significant Accounting Policies

a. Basis of Presentation

These unaudited condensed consolidated financial statements and related notes have been prepared in accordance with US GAAP and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to interim financial statements. Results for interim periods should not be considered indicative of results for any other interim period or for the full year. These financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012, and 2011, included in the Form 10-K of Cowen Group as filed with the SEC on March 3, 2014. 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 US GAAP.

These condensed consolidated financial statements include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a substantive controlling general partner interest.

All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in these 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 controlling financial 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 that are not owned by the Company are reflected as redeemable non-controlling interests in consolidated subsidiaries in the accompanying condensed consolidated financial statements. The management fees and incentive income earned by the Company from these funds are eliminated in consolidation.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (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.

Under US GAAP, the usual condition for a controlling financial interest in a VOE 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. US GAAP also provides 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 entities deemed to be VOEs for which it acts as the general partner and investment manager.

As of and during the period ended September 30, 2014 the Company consolidated the following funds: Ramius Enterprise LP (“Enterprise LP”) and Ramius Merger Fund LLC (the "Merger Fund") (collectively the "2014 Consolidated Funds"). As of December 31, 2013 and during the nine months ended September 30, 2013, the Company consolidated the following funds: Enterprise LP, Ramius Multi‑Strategy Master FOF LP (“Multi‑Strat Master FOF”), Ramius Vintage Multi‑Strategy Master FOF LP (“Vintage Master FOF”), Ramius Levered Multi‑Strategy FOF LP (“Levered FOF”), and the Merger Fund (collectively the "2013 Consolidated Funds"). As of December 31, 2013, Levered FOF, Multi-Strat Master FOF and Vintage Master FOF, all of which are investment companies managed by Ramius Alternative Solutions LLC, were fully liquidated. RTS Global 3X LP was consolidated through March 31, 2013 when it was liquidated. Collectively, the 2013 Consolidated Funds and the 2014 Consolidated Funds are referred to as the "Consolidated Funds".

As of September 30, 2014, the Company also consolidated three investment companies i) RCG Linkem II LLC, formed to make an investment in a wireless broadband communication provider in Italy, ii) Ramius Co-Investment II LLC, formed to make an investment in a biomedical company that develops gene therapies for severe genetic disorders and iii) Cowen AV Investment LLC, formed to make an investment in a biotechnology company focused on developing gene therapies for certain medical needs. Ramius Co-Investment I LLC, formed for the same purpose as Ramius Co-Investment II LLC, was consolidated as of December 31, 2013 but was deconsolidated during the first quarter of 2014 when Ramius Co-Investment I LLC was liquidated. The Company determined that RCG Linkem II, LLC, Ramius Co-Investment I LLC (up until the first quarter of 2014), Ramius Co-Investment II LLC and Cowen AV Investment LLC are VOE's due to its controlling equity interests held through the managing member and/or affiliates and control exercised by the managing member who is not subject to substantive removal rights. Ramius Co-Investment II LLC was liquidated during the quarter ended September 30, 2014.

Variable Interest Entities—VIEs are entities that lack one or more of the characteristics of a VOE. In accordance with US GAAP, an enterprise must consolidate all VIEs of which it is the primary beneficiary. Under the US GAAP 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 be the primary beneficiary of the VIE and thus is required to consolidate it.

However, the FASB has deferred the application of the revised 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 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 for substantially all of the funds managed by the Company. 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

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

returns, or both. If these conditions are met, the Company is considered to be the primary beneficiary of the VIE and thus is required to consolidate it.

The Company reconsiders whether it is the primary beneficiary of a VIE by performing a periodic qualitative and/or quantitative analysis of the VIE that includes a review of, among other things, its capital structure, contractual agreements between the Company and the VIE, the economic interests that create or absorb variability, related party relationships and the design of the VIE. As of September 30, 2014, the Company consolidated four VIEs and as of December 31, 2013 the Company consolidated three VIEs. As of September 30, 2014 and December 31, 2013, the total net assets of the consolidated VIEs are $4.0 million and $11.3 million, respectively. The VIEs act as managing members/general partners and/or investment managers to affiliated fund entities which they sponsor and/or manage. The VIEs are financed through their operations and/or loan agreements with the Company.

As of September 30, 2014 and December 31, 2013, the Company holds a variable interest in Ramius Enterprise Master Fund Ltd (“Enterprise Master”) through one of its Consolidated Funds, Enterprise LP and the Company holds a variable interest in Ramius Merger Master Fund Ltd through one of its Consolidated Funds, Merger Fund, (the “Unconsolidated Master Funds”). Investment companies, which account for their investments under the specialized industry accounting guidance for investment companies prescribed under US GAAP, 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 these 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. (See Note 5 for additional disclosures on VIEs)

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 share of 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 charge when the loss in value is deemed other than temporary.

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 such entities (primarily, all securities of such entity which are bought and held principally for the purpose of selling them in the near term as trading securities) in accordance with US GAAP, 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 US GAAP. The Company reports its 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 within net realized and unrealized gains (losses) on investments and other transactions. 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, Cowen and Company, LLC (“Cowen and Company”), ATM Execution LLC ("ATM Execution"), ATM USA, LLC ("ATM USA"), and Cowen Equity Finance LP ("Cowen Equity Finance"), apply the specialized industry accounting for brokers and dealers in securities also prescribed under US GAAP. The Company also retains specialized accounting in consolidation.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


c.	Use of estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with US 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 accompanying 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. Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.


d.	Valuation of investments and derivative contracts

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

Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has

the ability to access at the measurement date;

Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including

inputs in markets that are not considered to be active; and

Level 3 Fair value is determined based on pricing inputs that are unobservable and includes situations where there is little,

if any, market activity for the asset or liability. The determination of fair value for assets and liabilities in this

category requires significant management judgment or estimation.

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

The Company and its operating 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 analysis, 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. 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” to value its financial instruments measured at fair value. In determining an instrument's level within the hierarchy, the Company categorizes 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 with values based on quoted market prices in active markets for identical assets are classified within level 1 of the fair value hierarchy. These securities include active listed equities, certain U.S. government and sovereign

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 trading activity may not be readily visible, consisting primarily of convertible debt, corporate debt and loans, are stated at fair value and classified within level 2 of the fair value hierarchy. The estimated fair values assigned by management are determined in good faith and are based on available information considering, trading activity, broker quotes, 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. As level 2 investments include positions that are not always 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. OTC derivatives, such as swaps, options and warrants where market data is not readily available or observable are classified as level 3.

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

Portfolio funds—Portfolio funds (“Portfolio Funds”) include interests in funds and investment companies which may be managed by the Company or its affiliates. The Company follows US GAAP regarding fair value measurements and disclosures relating to investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). The guidance permits, as a practical expedient, an entity holding investments in certain entities that either are investment companies as defined by the AICPA Audit and Accounting Guide, Investment Companies, or have attributes similar to an investment company, and calculate net asset value per share or its equivalent for which the fair value is not readily determinable, to measure the fair value of such investments on the basis of that NAV per share, or its equivalent, without adjustment.

The Company categorizes its investments in Portfolio Funds within the fair value hierarchy dependent on its ability to redeem the investment. If the Company has the ability to redeem its investment at NAV at the measurement date or within the near term, the Portfolio Fund is categorized as a level 2 investment within the fair value hierarchy. If the Company does not know when it will have the ability to redeem its investment or cannot do so in the near term, the Portfolio Fund is categorized as a level 3 investment within the fair value hierarchy. See Notes 5 and 6 for further details of the Company's investments in Portfolio Funds.

ii.

Real estate investments—Real estate debt and equity investments are valued at fair value. The fair value of real estate investments are estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. Real estate investments without a public market are valued based on assumptions and valuation techniques used by the Company. Such valuation techniques may include discounted cash flow analysis, prevailing market capitalization rates or earnings multiples applied to earnings from the investment, analysis of recent comparable sales transactions, actual sale negotiations and bona fide purchase offers received from third parties, consideration of the amount that currently would be required to replace the asset, as adjusted for obsolescence, as well as independent external appraisals. In general, the Company considers several valuation techniques when measuring the fair value of a real estate investment. However, in certain circumstances, a single valuation technique may be appropriate. Real estate investments are reviewed on a quarterly basis by the Company for significant changes at the property level or a significant change in the overall market which would impact the value of the real estate investment resulting in unrealized appreciation or depreciation.

Real estate and capital markets are cyclical in nature. Property and investment values are affected by, among other things, the availability of capital, occupancy rates, rental rates and interest and inflation rates. In addition, the Company invests in real estate and real estate related investments for which no liquid market exists. The market prices for such investments may be volatile and may not be readily ascertainable. Amounts ultimately realized by the Company from investments sold may differ from the fair values presented, and the differences could be material.

The Company's real estate investments are typically categorized as a level 3 investment within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

See Notes 5 and 6 for further information regarding the Company's investments, including equity method investments, and fair value measurements.


e.	Securities borrowed and securities loaned

Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced or received on a gross basis. The related rebates are recorded in the statement of operations as interest income and interest expense. Securities borrowed transactions require the Company to deposit cash collateral with the lender. With respect to securities loaned, the Company receives cash collateral from the borrower. The initial collateral advanced or received approximates or is greater than the market value of securities borrowed or loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or returned, as necessary. Securities borrowed and loaned may also result in credit exposures for the Company in an event that the counterparties are unable to fulfill their contractual obligations. The Company minimizes its credit risk by continuously monitoring its credit exposure and collateral values by demanding additional or returning excess collateral in accordance with the netting provisions available in the master securities lending contracts in place with the counterparties.

Fees and interest received or paid are recorded in interest and dividend income and interest expense, respectively, on an accrual basis. In cases where the fair value basis of accounting is elected, any resulting change in fair value is reported in trading revenues. Accrued interest income and expense are recorded in the same manner as under the accrual method. At September 30, 2014 and December 31, 2013, the Company does not have any securities lending transactions for which fair value basis of accounting was elected.


f.	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 December 31, 2013, Repurchase Agreements were 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 sold under agreements to repurchase were transacted pursuant to agreements with one counterparty as of December 31, 2013. The Company does not hold any Repurchase Agreements as of September 30, 2014.

Collateral is valued daily 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 and in accordance with the master netting agreements in place with the counterparty. Collateralized Repurchase Agreements may result in credit exposure in the event the counterparties to the transactions are unable to fulfill their contractual obligations. The Company minimizes the credit risk associated with this activity by monitoring credit exposure and collateral values, and by requiring additional collateral to be promptly deposited with or returned to the Company when deemed necessary.

g. Debt

Long-term debt is carried at the principal amount borrowed net of any discount/premium. The discount is accreted to interest expense using the effective interest method over the remaining life of the underlying debt obligations. Accrued but unpaid coupon interest is included in accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition.

h. Deferred rent

Deferred rent primarily consists of step rent, allowances from landlords and valuing the Company's lease properties in accordance with US GAAP. Step rent represents the difference between actual operating lease payments due and straight-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 exceed the straight-line expense. Landlord allowances are generally comprised of amounts received and/or promised to the Company 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. The Company records 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 the Company's leased properties acquired

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

through business combinations are quantified by comparing the current fair value of the leased space to the current rental payments on the date of acquisition. Deferred rent, included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition, as of September 30, 2014 and December 31, 2013 is $13.9 million and $14.6 million, respectively.

i. Recently issued accounting pronouncements

In April 2014, the FASB issued a new pronouncement regarding Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The guidance changes the criteria for disposals to qualify as discontinued operations and requires new disclosures about disposals of both discontinued operations and certain other disposals that do not meet the new definition. The guidance is effective beginning in the first quarter of 2015. The Company does not expect the guidance to have a significant impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued guidance which amends and supersedes the revenue recognition requirements and most industry-specific guidance and creates a single source of revenue guidance. The new guidance outlines the principles an entity must apply to measure and recognize revenue and related cash flows. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain non-financial assets. The guidance is effective for reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on the Company’s financial condition, results of operations and cash flows.

In August 2014, the FASB issued guidance which requires all entities to perform an interim and annual assessment of their ability to continue as a going concern for one year from the date of issuance of the financial statements. The guidance also requires disclosures if there is “substantial doubt” of the entity’s ability to continue as a going concern. The guidance is effective for reporting periods beginning after December 31, 2016. The Company does not expect this guidance to have a material impact on our financial position and results of operations.

4. Cash collateral pledged

As of September 30, 2014 and December 31, 2013, the Company pledged cash collateral in the amount of $8.9 million and $10.9 million, respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City, Boston and San Francisco (see Note 14).

5. Investments of Operating Entities and Consolidated Funds


a.	Operating Entities

Securities owned, at fair value

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

As of September 30, 2014 and December 31, 2013, securities owned, at fair value consisted of the following:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
U.S. Government securities (a)	$	1,009	$	9
Preferred stock	574		324
Common stocks	430,941		176,939
Restricted common stock	11,993		—
Convertible bonds (b)	7,501		5,958
Corporate bonds (c)	188,832		121,372
Warrants and rights	3,370		5,912
Mutual funds	16,382		525
	$	660,602	$	311,039


(a)	As of September 30, 2014, maturities ranged from May 2015 to April 2016 and an interest rates ranged between 0% to 5.95%. As of December 31, 2013, the maturity was April 2016 with an interest rate of 5.95%.

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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(b)	As of September 30, 2014, maturities ranged from October 2014 to November 2014 and interest rates ranged between 4.00% to 10.00%. As of December 31, 2013, maturities ranged from May 2014 to October 2014 and interest rates ranged between 5.00% to 10.00% .


(c)	As of September 30, 2014, maturities ranged from February 2015 to February 2046 and interest rates ranged between 5.38% to 11.54%. As of December 31, 2013, maturities ranged from January 2014 to February 2046 and interest rates ranged between 3.38% to 11.75%.

Receivable on and Payable for derivative contracts, at fair value

The Company's direct involvement with derivative financial instruments includes futures, currency forwards, equity swaps, options and warrants and rights. Open equity positions 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 the Company to certain risks, such as price and interest rate fluctuations, volatility risk, credit risk, counterparty risk, foreign currency movements and changes in the liquidity of markets.

On the date of issuance of the Company's cash convertible unsecured senior notes ("Convertible Notes") (see Note 14), the Company recognized the embedded cash conversion option of $35.7 million which is valued as of September 30, 2014 at $28.8 million and is included in payable for derivative contracts in the accompanying condensed consolidated statement of financial condition. Also, on the date of issuance of the Convertible Notes, the Company entered into a separate cash convertible note economic hedge transaction (the "Hedge Transaction") with a counterparty (the “Option Counterparty”) whereby, the Company purchased a cash settled option contract with terms identical to the conversion option embedded in the Convertible Notes and simultaneously sold an equity settled warrant with a higher strike price. The Hedge Transaction is expected to reduce the Company’s exposure to potential cash payments in excess of the principal amount of converted notes that the Company may be required to make upon conversion of the Convertible Notes. On the date of issuance of the Convertible Notes, the Company paid a premium of $35.7 million for the option under the Hedge Transaction and received a premium of $15.2 million for the equity settled warrant transaction, for a net cost of $20.5 million. The Hedge Transaction is valued at $28.8 million as of September 30, 2014 and is included in receivable on derivative contracts in the accompanying condensed consolidated statement of financial condition. Aside from the initial premium paid, the Company will not be required to make any cash payments under the Hedge Transaction and could be entitled to receive an amount of cash from the Option Counterparty generally equal to the amount by which the market price per share of common stock exceeds the strike price of the Hedge Transaction during the relevant valuation period. The warrants cover 28,048,786 shares of the Company's Class A common stock and have an initial exercise price of $7.18 per share. The warrants expire over a period of 80 trading days beginning on November 14, 2018. The warrant transaction could have a dilutive effect to the extent that the market value per share of the Company’s Class A common stock exceeds the applicable strike price of the warrants.

The Company's long and short exposure to derivatives is as follows:



Receivable on derivative contracts	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Commodity Future	$	177	$	285
Cross Rate	291		22
Equity Swap (a)	1,541		70
Options (b)	33,957		9,698
	$	35,966	$	10,075

(a) The notional values of equity swaps classified as receivable on derivative contracts are $5.6 million and $21.4 million as of September 30, 2014 and December 31, 2013, respectively.

(b) As of September 30, 2014 and December 31, 2013, the Company had 349,989 and 71,129 contracts held, respectively.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



Payable for derivative contracts	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Futures	$	24	$	275
Currency forwards	—		301
Equity and credit default swaps (a)	51		525
Options (b)	31,294		6,573
	$	31,369	$	7,674

(a) The notional values of equity and credit default swaps classified as payable for derivative contracts are $5.5 million and $16.5 million as of September 30, 2014 and December 31, 2013, respectively.

(b) As of September 30, 2014 and December 31, 2013, the Company had 20,224 and 38,221 contracts held, respectively.

The following tables present the gross and net derivative positions and the related offsetting amount, as of September 30, 2014 and December 31, 2013.



							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts recognized		Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a)		Net amounts included on the Condensed Consolidated Statements of Financial Condition		Financial instruments		Collateral pledged (b)		Net amounts
	(dollars in thousands)
As of September 30, 2014
Receivable on derivative contracts, at fair value	$	35,966	$	—	$	35,966	$	—	$	1,832	$	34,134
Payable for derivative contracts, at fair value	31,369		—		31,369		—		51		31,318

As of December 31, 2013
Receivable on derivative contracts, at fair value	10,075		—		10,075		—		92		9,983
Payable for derivative contracts, at fair value	7,674		—		7,674		—		826		6,848


(a)	Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.


(b)	Includes the amount of collateral held or posted.

The realized and unrealized gains/(losses) related to derivatives trading activities were $5.1 million and $0.8 million for the three months ended September 30, 2014 and 2013 and $1.4 million and $(3.6) million for the nine months ended September 30, 2014 and 2013, respectively, and are included in other income in the accompanying condensed consolidated statements of operations.

Pursuant to the various derivatives transactions discussed above, except for the cash convertible note hedge (See Note 14) and exchange traded derivatives, the Company is required to post/receive collateral. As of September 30, 2014 and December 31, 2013, collateral consisting of $14.1 million and $10.0 million of cash, respectively, is included in receivable from brokers on the accompanying condensed consolidated statements of financial condition. As of September 30, 2014 and December 31, 2013 all derivative contracts were with multiple major financial institutions.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Other investments

As of September 30, 2014 and December 31, 2013, other investments included the following:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
(1) Portfolio Funds, at fair value	$	97,004	$	71,051
(2) Real estate investments, at fair value	2,285		2,088
(3) Equity method investments	30,935		25,966
(4) Lehman claims, at fair value	360		378
	$	130,584	$	99,483


(1)	Portfolio Funds, at fair value

The Portfolio Funds, at fair value as of September 30, 2014 and December 31, 2013, included the following:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
HealthCare Royalty Partners (a)(*)	$	11,242	$	9,741
HealthCare Royalty Partners II (a)(*)	6,445		4,961
Orchard Square Partners Credit Fund LP (b)(*)	13,925		12,674
Starboard Value and Opportunity Fund LP (c)(*)	19,205		17,495
Starboard Partners Fund LP (d)(*)	14,961		—
Formation 8 Partners Fund I (e)	6,295		2,788
RCG LV Park Lane LLC (f) (*)	1,425		678
RCGL 12E13th LLC (g) (*)	640		558
RCG Longview Debt Fund V, L.P. (g) (*)	12,976		11,979
Other private investment (h)	7,141		7,772
Other affiliated funds (i)(*)	2,749		2,405
	$	97,004	$	71,051

* These portfolio funds are affiliates of the Company.

The Company has no unfunded commitments regarding the portfolio funds held by the Company except as noted in Note 13.


(a)	HealthCare Royalty Partners, L.P. and HealthCare Royalty Partners II, L.P. are private equity funds and therefore distributions will be made when cash flows are received from the underlying investments, typically on a quarterly basis.


(b)	Orchard Square Partners Credit Fund LP (formerly known as Ramius Global Credit Fund LP) has a quarterly redemption policy with a 60 day notice period and a 4% penalty on redemptions of investments of less than a year in duration.


(c)	Starboard Value and Opportunity Fund LP permits quarterly withdrawals upon 90 days notice.


(d)	Starboard Partners Fund LP permits redemptions on a semi-annual basis on 180 days prior written notice subsequent to an initial two year period when redemptions are not permitted.


(e)	Formation 8 Partners Fund I is a private equity fund which invests in equity of early stage and growth transformational information and energy technology companies. Distributions will be made when the underlying investments are liquidated.


(f)	RCG LV Park Lane LLC is a single purpose entity formed to participate in a joint venture which acquired, at a discount, the mortgage notes on a portfolio of multifamily real estate properties located in Birmingham, Alabama. RCG LV Park Lane LLC is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.


(g)	RCGL 12E13th LLC and RCG Longview Debt Fund V, L.P. are real estate private equity structures and therefore distributions will be made when the underlying investments are liquidated.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(h)	Other private investment represents the Company's closed end investment in a portfolio fund that invests in a wireless broadband communication provider in Italy.


(i)	The majority of these funds are affiliates of the Company or are managed by the Company and the investors can redeem from these funds as investments are liquidated.


(2)	Real estate investments, at fair value

Real estate investments as of September 30, 2014 and December 31, 2013 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 $2.3 million and $2.1 million, respectively.


(3)	Equity method investments

Equity method investments include investments held by the Company in several operating companies whose operations 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 20% to 55%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in three of these entities: RCG Longview Debt Fund IV Management, LLC, RCG Longview Debt Fund IV Partners, LLC and RCG Longview Partners II, LLC. The operating agreements that govern the management of day-to-day operations and affairs of each of these three entities stipulate that certain decisions require support and approval from other members in addition to the support and approval of the Company. As a result, all operating decisions made in these three entities require the support of both the Company and an affirmative vote of a majority of the other managing members who are not affiliates of the Company. As the Company does not possess 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 are the investments in (a) HealthCare Royalty Partners General Partners (b) an investment in the CBOE (Chicago Board Options Exchange) Stock Exchange LLC ("CBOE SE") representing a 9.5% stake in the exchange service provider for which the Company exercises significant influence over through representation on the CBOE Board of Directors, and (c) Starboard Value (and certain related parties) which serves as an operating company whose operations primarily include the day to day management (including portfolio management) of a deep value small cap hedge fund and related managed accounts.

During the second quarter of 2014, CBOE SE initiated a plan to wind down its operations and liquidate its assets and liabilities. As a result, the Company determined that the carrying value of its investment in CBOE SE was no longer recoverable and reassessed it for impairment. As a result, the Company recognized an impairment loss of $0.8 million, during the second quarter of 2014, which was deemed to be other than temporary. The impairment loss was measured based on the estimated recovery under the liquidation plan submitted to the creditors and the regulators and potential sale to a third party and is included in other income (loss) on the condensed consolidated statement of operations. The Company recorded no other impairment charges in relation to its equity method investments for the three and nine months ended September 30, 2014

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table summarizes equity method investments held by the Company:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
RCG Longview Debt Fund IV Management, LLC	$	728	$	1,533
RCG Longview Debt Fund V Partners, LLC	2,049		1,497
HealthCare Royalty GP, LLC	917		794
HealthCare Royalty GP II, LLC	1,297		840
HealthCare Royalty GP III, LLC	52		47
CBOE Stock Exchange, LLC	435		1,351
Starboard Value LP	19,766		14,263
RCG Longview Partners, LLC	237		1,839
RCG Longview Management, LLC	1,034		308
RCG Urban American, LLC	396		316
RCG Urban American Management, LLC	344		238
RCG Longview Equity Management, LLC	250		292
Urban American Real Estate Fund II, LLC	2,208		1,785
RCG Kennedy House, LLC	533		502
Other	689		361
	$	30,935	$	25,966

For the period ended September 30, 2014, an equity method investment held by the Company has met the significance criteria as defined under SEC guidance. As such, the Company is required to present summarized financial information for this significant investee for the three and nine months ended September 30, 2014 and 2013. The summarized income statement information for the Company's investment in the individually significant investee is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(dollars in thousands)
Revenues	$	3,432	$	2,979	$	10,171	$	7,264
Expenses	—		—		—		—
Net realized and unrealized gains (losses)	34		43		89		95
Net Income	$	3,466	$	3,022	$	10,260	$	7,359

As of September 30, 2014 and December 31, 2013, 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. These amounts are included in accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition. 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.

The Company's income (loss) from equity method investments was $7.2 million and $5.2 million for the three months ended September 30, 2014 and 2013 and $17.5 million and $12.6 million for the nine months ended September 30, 2014 and 2013, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations.


(4)	Lehman Claims, at fair value

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 assets which the Company believed were held at LBIE at the time of Administration (the “Total Net Equity Claim”) consisted of $1.0 million, which the Company believed would represent an unsecured claim against LBIE. On November 2,

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

2012, the Company executed a Claims Determination Deed with respect to this claim. By entering into this deed, the Company and LBIE reached agreement on the amount of the Company's unsecured claim, which was agreed to be approximately $0.9 million. As a result of entering into this deed, the Company is entitled to participate in dividends to unsecured creditors of LBIE. At the end of November 2012, the Company received its first dividend in an amount equal to 25.2% of its agreed claim, or approximately $0.2 million, at the end of June 2013 the Company received its second dividend in an amount equal to 43.3% of its agreed claim, or approximately $0.4 million, at the end of November 2013, the Company received its third dividend in an amount equal to 23.7% of its agreed claim, or approximately $0.2 million, and at the end of April 2014 the Company received its fourth dividend in an amount equal to 7.8% of its agreed claim, or approximately $0.1 million. The total amounts received to date in respect of the Company’s unsecured claim against LBIE are approximately $1.0 million, representing 100.0% of its agreed claim. LBIE also indicated that no further distributions will be possible until such time as matters concerning how the surplus remaining in the estate will be distributed are resolved. Accordingly, the Company does not know the timing with respect to future dividends to unsecured creditors or the ultimate value that will be received, with respect to its claim. The claim described above does not include claims held by the Company against LBIE through its investment in Enterprise Master discussed in Note 5b(2).

Given the fact that LBIE has made multiple distributions to unsecured creditors and the increased trading levels for unsecured claims of LBIE, the Company decided to record the estimated fair value of the Total Net Equity Claim at 138.3% and 131.5% as of September 30, 2014 and December 31, 2013, respectively, which represented 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 LBIE 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 recovery that may ultimately be received by the Company with respect to the pending LBIE claim is not known and could be different from the estimated value assigned by the Company. (See Note 5b(2)).

Securities sold, not yet purchased, at fair value

Securities sold, not yet purchased, at fair value represent obligations of the Company to deliver a specified security at a contracted price and, thereby, create a liability to purchase that security at prevailing prices. The Company's liability for securities to be delivered is measured at their fair value as 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, at fair value may exceed the amount reflected in the accompanying condensed consolidated statements of financial condition. Substantially all equity securities and options are pledged to the clearing broker under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations. As of September 30, 2014 and December 31, 2013, securities sold, not yet purchased, at fair value consisted of the following:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Common stocks	$	209,031	$	130,899
Corporate bonds (a)	58		55
	$	209,089	$	130,954


(a)	As of September 30, 2014 and December 31, 2013, the maturity was January 2026 with an interest rate of 5.55%.

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

The Company held no securities purchased under agreements to resell or securities sold under agreements to repurchase as of September 30, 2014. The following table represents the Company's securities sold under agreements to repurchase as of December 31, 2013:



	As of December 31, 2013
	(dollars in thousands)
Securities sold under agreements to repurchase
Agreements with Royal Bank of Canada bearing interest of 1.75% due June 2015 to November 2015	$	3,657
	$	3,657

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following tables present the gross and net repurchase agreements and the related offsetting amount, as of December 31, 2013.



As of December 31, 2013
							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts recognized		Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a)		Net amounts included on the Condensed Consolidated Statements of Financial Condition		Financial instruments		Collateral pledged (b)		Net amounts
	(dollars in thousands)
Securities sold under agreements to repurchase	$	3,657	$	—	$	3,657	$	—	$	3,657	$	—


(a)	Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.


(b)	Includes the amount of collateral held or posted.

For all of the Company's holdings of repurchase agreements as of December 31, 2013, the repurchase dates were open and the agreement could be terminated by either party at any time. The agreements rolls over on a day-to-day basis.

Transactions involving the purchase or sale of securities under repurchase/resell agreements are carried at their contract value, which approximates fair value, and are accounted for as collateralized financings. In connection with these financings, as of December 31, 2013, the Company had pledged collateral of $4.6 million (consisting of corporate bonds), which is included in securities owned, at fair value in the accompanying condensed consolidated statements of financial condition.

Securities lending and borrowing transactions

As of September 30, 2014 and December 31, 2013, the Company has loaned to brokers and dealers, securities having a market value of $2.2 billion and $881.7 million, respectively. In addition, the Company has borrowed from brokers and dealers, securities having a market value of $2.2 billion and $892.8 million as of September 30, 2014 and December 31, 2013, respectively.

The following tables present the contractual gross and net securities borrowing and lending agreements and the related offsetting amount, as of September 30, 2014 and December 31, 2013.



							Gross amounts not offset in the Statement of Financial Condition
	Gross amounts recognized		Gross amounts offset on the Condensed Consolidated Statements of Financial Condition (a)		Net amounts included on the Condensed Consolidated Statements of Financial Condition		Financial instruments		Collateral pledged (b)		Net amounts
	(dollars in thousands)
As of September 30, 2014
Securities borrowed	$	2,321,556	$	—	$	2,321,556	$	—	$	2,321,556	$	—
Securities loaned	2,324,682		—		2,324,682		—		2,324,682		—

As of December 31, 2013
Securities borrowed	927,773		—		927,773		—		927,773		—
Securities loaned	918,577		—		918,577		—		918,577		—


(a)	Includes financial instruments subject to enforceable master netting provisions that are permitted to be offset to the extent an event of default has occurred.


(b)	Includes the amount of cash collateral held/posted.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Variable Interest Entities

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 $2.4 billion and $247.7 million as of September 30, 2014 and $1.7 billion and $242.5 million as of December 31, 2013, respectively. In addition, the maximum exposure relating to these variable interest entities as of September 30, 2014 was $190.5 million, and as of December 31, 2013 was $193.9 million, all of which is included in other investments, at fair value in the Company's condensed consolidated statements of financial condition. The exposure to loss primarily relates to the Consolidated Feeder Funds' investment in their Unconsolidated Master Funds as of September 30, 2014 and December 31, 2013.


b.	Consolidated Funds

Other investments, at fair value

As of September 30, 2014 and December 31, 2013 other investments, at fair value, held by the Consolidated Funds are comprised of:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
(1) Portfolio Funds	$	196,640	$	182,638
(2) Lehman claims	361		4,842
	$	197,001	$	187,480


(1)	Investments in Portfolio Funds, at fair value

As of September 30, 2014 and December 31, 2013, investments in Portfolio Funds, at fair value, included the following:



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Investments of Enterprise LP	$	146,987	$	155,530
Investments of Merger Fund	49,653		26,963
Investments of consolidated fund of funds	—		145
	$	196,640	$	182,638

Consolidated investments of Enterprise LP

Enterprise LP operates under a “master-feeder” structure, whereby Enterprise Master's shareholders are Enterprise LP and RCG II Intermediate Fund, L.P. The consolidated investments in Portfolio Funds include Enterprise LP's investment of $147.0 million and $155.5 million in Enterprise Master as of September 30, 2014 and December 31, 2013, 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.

Consolidated investments of Merger Fund

The Merger Fund operates under a “master-feeder” structure, whereby Ramius Merger Master Ltd's ("Merger Master") shareholders are Merger Fund and Ramius Merger Fund Ltd. The consolidated investments in Portfolio Funds include Merger Fund's investment of $49.7 million and $27.0 million in Merger Master as of September 30, 2014 and December 31, 2013, respectively. The Merger Master’s investment objective is to achieve consistent absolute returns while emphasizing the preservation of investor capital. The Merger Master seeks to achieve these objectives by taking a fundamental, research-driven approach to investing, primarily in the securities of issuers engaged in, or subject to, announced (or unannounced but otherwise anticipated) extraordinary corporate transactions, which may include, but are not limited to, mergers, acquisitions, leveraged buyouts, tender offers, hostile takeover bids, sale processes, exchange offers, and recapitalizations. Merger Master invests in the securities of one or more issuers engaged in or subject to such extraordinary corporate transactions. Merger Master typically

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

seeks to derive a profit by realizing the price differential, or “spread,” between the market price of securities purchased or sold short and the market price or value of securities realized in connection with the completion or termination of the extraordinary corporate transaction, or in connection with the adjustment of market prices in anticipation thereof, while seeking to minimize the market risk associated with the aforementioned investment activities. Merger Master will, depending on markets conditions, generally focus the majority of its investment program on announced transactions. If the investment manager of Merger Master considers it necessary, it may either alone or as part of a group, also initiate shareholder actions seeking to maximize value. Such shareholder actions may include, but are not limited to, re-orienting management’s focus or initiating the sale of the company (or one or more of its divisions) to a third party. There are no unfunded commitments at Merger Fund.

Investment of a consolidated fund of funds investment company

The investment of the consolidated fund of fund investment company was $0.1 million as of December 31, 2013, which was the remaining investment of Vintage Master FOF that was transferred to a third party during the three months ended March 31, 2014. Vintage Master FOF's investment objective was 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. The investment held at December 31, 2013 was a hedged equity strategy held in an externally managed portfolio fund. The hedged equity strategy focused on equity strategies with some directional market exposure. The strategy attempted to profit from market efficiencies and direction. There are no fund of fund investment companies consolidated as of September 30, 2014.


(2)	Lehman Claims, at fair value

With respect to the aforementioned Lehman claims, the Total Net Equity Claim of Enterprise Master based on the value of assets at the time of Lehman's insolvency held directly by Enterprise Master and through Enterprise Master's ownership interest in affiliated funds consisted 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. In December 2011, Enterprise Master received an aggregate of approximately $2.4 million relating to securities, interest and dividends earned with respect to securities held by LBIE on behalf of Enterprise Master and its affiliated funds. A distribution of $2.9 million occurred in February of 2012. On November 2, 2012, Enterprise Master executed a Claims Determination Deed with respect to the unsecured portion of its direct claim against LBIE. By entering into this deed, Enterprise Master and LBIE reached agreement on the amount of Enterprise Master's unsecured claim, which was agreed to be approximately $1.3 million. As a result of entering into this deed, Enterprise Master was entitled to participate in dividends to unsecured creditors of LBIE and at the end of November 2012 Enterprise Master received its first dividend in an amount equal to 25.2% of its agreed claim, or approximately $0.3 million. In February 2013, Enterprise Master sold its unsecured claim, including the amount received in connection with the first dividend, for $1.3 million, or par. Enterprise Master distributed the proceeds of the sale to the Company in March 2013. Of the original remaining net equity claim, $10.6 million represented claims to trust assets that the Company believes were held by LBIE through Lehman Brothers, Inc. (“LBI”). LBIE made a corresponding claim for these assets and other trust assets held at LBI by LBIE on behalf of other prime brokerage clients pursuant to an omnibus customer claim (the “LBIE Omnibus Customer Claim”). LBIE was only going to be able to return trust assets held at LBI to Enterprise Master once LBIE received a distribution from LBI in respect of the LBIE Omnibus Customer Claim. In February 2013, LBIE, Lehman Brothers Holdings, Inc. and LBI announced that they entered into two separate agreements settling all intercompany claims between LBI on the one part, and LBHI and LBIE on the other part. The settlement agreements were subject to the approval by the U.S. Bankruptcy Judge in the LBI Securities Investor Protection Act (SIPA) proceeding and, in the case of the agreement between LBI and LBIE, an order of the English High Court. The U.S. Banking Judge approved the settlement agreement in April 2013 and the English High Court issued an order approving the settlement in May 2013. The settlements allowed the trustee appointed under SIPA (the “SIPA Trustee”) to proceed with plans to allocate and distribute sufficient cash and securities to LBI's customer claimants, including LBIE with respect to the LBIE Omnibus Customer Claim, to enable the SIPA Trustee to satisfy valid customer claims in full. In March 2013, LBIE made a consensual proposal to the clients holding trust assets pursuant to the LBIE Omnibus Customer Claim to facilitate the return of the amounts recovered from LBI with respect to the LBIE Omnibus Customer Claim. Under the consensual proposal, LBIE indicated that it intended to liquidate any securities received from LBI with respect to the LBIE Omnibus Customer Claim and then allocate the value received from LBI among all of the LBIE clients who had trust assets held at LBI under the LBIE Omnibus Customer Claim. In allocating the amounts received from LBI, LBIE indicated that it intended to allow clients to determine their entitlements on a portfolio basis based on the higher of (i) the market value of the portfolio as of September 19, 2008 or (ii) the market value of the portfolio together with accrued income thereon as of November 30, 2012 (the “Best Claim”). LBIE's purpose in seeking a consensual arrangement with its clients relating to the liquidation and allocation described above was to ensure that a distribution could be made without having to seek UK court direction on these issues,

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

which would otherwise have substantially delayed any distribution. On April 2, 2013, LBIE announced that the consensual proposal had been accepted by a sufficient number of clients to satisfy the acceptance threshold and would therefore become effective. The settlement agreement between LBI and LBIE also became effective and LBIE announced in June 2013 that it had recovered the majority of the cash and securities from LBI and that it had liquidated approximately 90% of the aggregate value of securities received or to be received from LBI and that it intended to make its first distribution to trust asset claimants at the end of September 2013. On September 26, 2013, LBIE announced that it had made a first interim distribution to trust claimants of 100% of the claimant's Best Claim amount. As previously announced by LBIE, LBIE requested guidance from the US Internal Revenue Service ("IRS") with regard to the character and source of the settlement payments. In order to balance LBIE's objective of making a significant distribution to claimants with the requirement to pay the appropriate US withholding tax in respect of distributions, as an interim solution LBIE deposited 30% of the gross distribution to claimants with the IRS as a reserve, except with respect to claimants who provided LBIE with a validly executed Form W-9. Once the appropriate US withholding tax treatment of the distributions is finally determined by the IRS, LBIE expects to be in a position to promptly receive back funds and release any excess reserves back to the appropriate claimants. On June 12, 2014, LBIE made a distribution to trust claimants in order to release excess reserves from the amounts withheld with respect to the September 26, 2013 distribution back to the appropriate claimants. The amount of the distribution received by Enterprise Master on September 26, 2013 was $14.9 million and the amount reserved by LBIE with respect to this distribution was $1.0 million. The amount received by Enterprise Master on June 12, 2014 as a release of excess reserves was $1.0 million. On January 30, 2014, LBIE made a second distribution to trust claimants of 6% of the claimant’s Best Claim amount. LBIE has also requested guidance from the IRS with respect to the character and source of this settlement payment and as an interim solution the withholding agent has reserved 30% of the distribution amount paid, except with respect to claimants who provided LBIE with a validly executed Form W-9. As of September 30, 2014, after giving effect to the receipt of the distributions described above, the Company is valuing Enterprise Master's remaining trust asset claim at 101.5% of its Best Claim, or $0.2 million. In June 2014, Enterprise Master received a distribution with respect to certain foreign denominated trust assets that were not within the control of LBIE. In this distribution, Enterprise Master received assets that Enterprise Master had valued at $0.8 million. Enterprise Master and its affiliated funds sold the returned assets for an aggregate $0.8 million. In July 2014, Enterprise Master made a distribution of $5.7 million to its investors. In September 2014, Enterprise Master received an additional distribution of approximately $35,000 in cash with respect to certain foreign denominated trust assets that were not within the control of LBIE and that were not returned by LBIE. After giving effect to all of these distributions, the remaining Net Equity Claim for Enterprise Master held directly and through its ownership interest in affiliated funds was $0.5 million as of September 30, 2014. Of the $0.5 million current valuation of Enterprise Master's claim, $0.4 million was attributable to Enterprise LP based on its ownership percentage in Enterprise Master at the time of the Administration.

In addition to Enterprise Master's claims against LBIE, LBI was a prime broker to Enterprise Master and Enterprise Master held cash balances of $4.9 million at LBI. These are not part of the LBIE Omnibus Customer Claim. 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 settlement agreements between LBI, LBHI and LBIE discussed above have permitted the trustee appointed under the Securities Investor Protection Act (the “SIPA Trustee”) to make distributions to LBI customers and the SIPA Trustee announced that it expected to be able to make 100% distributions to its customers. In July 2013, Enterprise Master received a distribution of $4.9 million from LBI in respect of this claim.

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

Indirect Concentration of the Underlying Investments Held by Consolidated Funds

From time to time, either directly or indirectly through its investments in the Consolidated Funds, the Company may maintain exposure to a particular issue or issuer (both long and/or short) which may account for 5% or more of the Company's equity. Based on information that is available to the Company as of September 30, 2014 and December 31, 2013, the Company assessed whether or not its interests in an issuer for which the Company's pro-rata share exceeds 5% of the Company's equity. There were no indirect concentrations that exceed 5% of the Company's equity as of September 30, 2014 or December 31, 2013.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Underlying Investments of Unconsolidated Funds Held by Consolidated Funds

Enterprise Master and Merger Master

Enterprise LP's investment in Enterprise Master represents Enterprise LP's proportionate 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. Merger Fund's investment in Merger Master represents Merger Fund's proportionate share of Merger Master's net assets; as a result, the investment balances of Merger Master reflected below may exceed the net investment which Merger Fund has recorded.The following tables present summarized investment information for the underlying investments and derivatives held by Enterprise Master and Merger Master as of September 30, 2014 and December 31, 2013:

Securities owned by Enterprise Master, at fair value



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Bank debt	$	6	$	5
Common stock	2,516		2,677
Preferred stock	973		973
Private equity	413		406
Restricted stock	124		124
Rights	2,321		2,528
Trade claims	128		128
Asset backed securities	1		—
	$	6,482	$	6,841

Derivative contracts, at fair value, owned by Enterprise Master, net



	As of September 30, 2014		As of December 31, 2013
Description	(dollars in thousands)
Currency forwards	$	—	$	(21	)
	$	—	$	(21	)

Portfolio Funds, owned by Enterprise Master, at fair value



		As of September 30, 2014		As of December 31, 2013
	Strategy	(dollars in thousands)
RCG Longview Equity Fund, LP*	Real Estate	$	8,848	$	8,470
RCG Longview II, LP*	Real Estate	800		800
RCG Longview Debt Fund IV, LP*	Real Estate	6,249		17,641
RCG Longview, LP*	Real Estate	40		319
RCG Soundview, LLC*	Real Estate	441		442
RCG Urban American Real Estate Fund, L.P.*	Real Estate	1,166		1,812
RCG International Sarl*	Multi-Strategy	1,574		1,795
RCG Special Opportunities Fund, Ltd*	Multi-Strategy	87,430		82,119
RCG Endeavour, LLC*	Multi-Strategy	—		6
RCG Energy, LLC *	Energy	2,832		2,842
RCG Renergys, LLC*	Energy	1		1
Other Private Investments	Various	12,585		12,952
Real Estate Investments	Real Estate	10,982		15,024
		$	132,948	$	144,223


*	Affiliates of the Company.

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Merger Master

Securities owned by Merger Master, at fair value



	As of September 30, 2014		As of December 31, 2013
	(dollars in thousands)
Common stocks	$	88,975	$	33,901
Corporate bonds (a)	21,977		14,444
Options	455		200
	$	111,407	$	48,545


(a)	As of September 30, 2014, maturities ranged from February 2017 to October 2022 and interest rates ranged between 5.38% and 9.75%. As of December 31, 2013, maturities ranged from April 2016 to October 2020 and interest rates ranged between 7.00% and 10.88%.

Securities sold, not yet purchased, by Merger Master, at fair value

As of September 30, 2014 and December 31, 2013, Merger Master held common stock, sold not yet purchased, of $33.1 million and $19.5 million, respectively.

Derivative contracts, at fair value, owned by Merger Master, net



	As of September 30, 2014			As of December 31, 2013
Description	(dollars in thousands)
Currency forwards	$	41		$	(10	)
Options	(137		)	(54		)
Equity swaps	500			(92		)
	$	404		$	(156	)

6. Fair Value Measurements for Operating Entities and Consolidated Funds

The following table presents the assets and liabilities that are measured at fair value on a recurring basis on the accompanying condensed consolidated statements of financial condition by caption and by level within the valuation hierarchy as of September 30, 2014 and December 31, 2013:

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Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Operating Entities



	Assets at Fair Value as of September 30, 2014
	Level 1		Level 2		Level 3		Total
			(dollars in thousands)
Securities owned and derivatives
US Government securities	$	1,009	$	—	$	—	$	1,009
Preferred stock	—		—		574		574
Common stocks	428,145		2,506		290		430,941
Restricted Common stocks	—		11,993		—		11,993
Convertible bonds	—		5,751		1,750		7,501
Corporate bonds	—		188,832		—		188,832
Warrants and rights	762		—		2,608		3,370
Mutual funds	16,382		—		—		16,382
Receivable on derivative contracts, at fair value
Futures	177		—		—		177
Currency forwards	—		291		—		291
Equity swaps	—		1,541		—		1,541
Options	5,172		—		28,785		33,957
Other investments
Portfolio Funds	—		36,530		60,474