COWEN INC. - Quarter Report: 2017 March (Form 10-Q)

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 March 31, 2017
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,” “smaller reporting company,” and "emerging growth 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	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 28, 2017, there were 27,332,651 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	10
	2. Management's Discussion and Analysis of Financial Condition and Results of Operations		48
	3. Quantitative and Qualitative Disclosures About Market Risk		76
	4. Controls and Procedures		76
PART II. OTHER INFORMATION			76
	1. Legal Proceedings		76
	1A. Risk Factors		77
	2. Unregistered Sales of Equity Securities and Use of Proceeds		77
	3. Defaults Upon Senior Securities		77
	4. Mine Safety Disclosures		78
	5. Other Information		78
	6. Exhibits		78
SIGNATURES			79
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, 2016 as well as Item 1A of this periodic report on Form 10-Q for the quarterly period ended March 31, 2017.

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

Unaudited Condensed Consolidated Financial Statements are presented for the three months ended March 31, 2017 and 2016. The Consolidated Financial Statements as of December 31, 2016 were audited.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Cowen Group, Inc.

Condensed Consolidated Statements of Financial Condition

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

(unaudited)



Assets	As of March 31, 2017			As of December 31, 2016
Cash and cash equivalents	$	78,959		$	112,014
Cash collateral pledged	14,696			13,342
Securities owned, at fair value	656,381			700,876
Receivable on derivative contracts, at fair value	18,137			22,901
Other investments	150,813			157,279
Receivable from brokers	163,622			87,837
Fees receivable, net of allowance	49,925			45,883
Due from related parties	42,792			39,629
Fixed assets, net of accumulated depreciation and amortization of $25,418 and $23,867, respectively	40,836			42,408
Goodwill	60,678			60,678
Intangible assets, net of accumulated amortization of $28,302 and $29,418, respectively	24,465			25,769
Deferred tax asset, net	163,873			165,656
Other assets	62,074			38,406
Consolidated Funds
Cash and cash equivalents	10,293			17,761
Securities owned, at fair value	91,759			79,237
Receivable on derivative contracts, at fair value	909			893
Other investments	401,528			401,465
Receivable from brokers	9,289			5,978
Other assets	518			511
Total Assets	$	2,041,547		$	2,018,523
Liabilities and Stockholders' Equity
Liabilities
Securities sold, not yet purchased, at fair value	$	335,676		$	266,090
Payable for derivative contracts, at fair value	14,143			20,762
Payable to brokers	124,451			210,309
Payable to customers	70,479			—
Compensation payable	31,794			98,084
Notes payable and other debt	77,890			77,030
Convertible debt	132,055			130,029
Fees payable	7,876			3,272
Due to related parties	573			573
Accounts payable, accrued expenses and other liabilities	66,833			51,115
Consolidated Funds
Securities sold, not yet purchased, at fair value	—			883
Payable for derivative contracts, at fair value	876			572
Payable to brokers	1,652			3,700
Due to related parties	—			189
Contributions received in advance	50			2,000
Capital withdrawals payable	4,368			1,408
Accounts payable, accrued expenses and other liabilities	441			652
Total Liabilities	869,157			866,668
Commitments and Contingencies (Note 12)
Redeemable non-controlling interests	394,132			379,205
Stockholders' equity
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized, 120,750 shares issued and outstanding as of March 31, 2017 (aggregate liquidation preference of $120,750,000) and 120,750 shares issued and outstanding as of as of December 31, 2016 (aggregate liquidation preference of $120,750,000), respectively	1			1
Class A common stock, par value $0.01 per share: 62,500,000 shares authorized, 37,451,533 shares issued and 27,312,493 outstanding as of March 31, 2017 and 36,542,091 shares issued and 26,731,289 outstanding as of December 31, 2016, respectively (including 162,176 and 162,176 restricted shares, respectively)	292			292
Class B common stock, par value $0.01 per share: 62,500,000 authorized, no shares issued and outstanding	—			—
Additional paid-in capital	937,425			928,646
(Accumulated deficit) retained earnings	(1,156		)	(2,442		)
Accumulated other comprehensive income (loss)	(4		)	(2		)
Less: Class A common stock held in treasury, at cost, 10,139,040 and 9,810,802 shares, respectively	(158,300		)	(153,845		)
Total Stockholders' Equity	778,258			772,650
Total Liabilities and Stockholders' Equity	$	2,041,547		$	2,018,523

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

Table of Contents

Cowen Group, Inc.

Condensed Consolidated Statements of Operations

(dollars in thousands, except per share data)

(unaudited)



	Three Months Ended March 31,
	2017			2016
Revenues
Investment banking	$	36,553		$	26,147
Brokerage	50,534			50,935
Management fees	8,708			11,030
Incentive income	546			1,111
Interest and dividends	5,089			3,653
Reimbursement from affiliates	1,652			3,887
Aircraft lease revenue	1,059			394
Reinsurance premiums	7,089			1,010
Other revenues	1,400			1,321
Consolidated Funds
Interest and dividends	1,994			1,076
Other revenues	347			475
Total revenues	114,971			101,039
Expenses
Employee compensation and benefits	76,673			63,181
Floor brokerage and trade execution	8,323			7,791
Interest and dividends	9,930			7,310
Professional, advisory and other fees	5,816			5,594
Service fees	2,616			2,184
Communications	4,760			4,139
Occupancy and equipment	7,063			8,005
Depreciation and amortization	3,028			3,067
Client services and business development	7,762			7,040
Reinsurance claims, commissions and amortization of deferred acquisition costs	6,178			563
Other expenses	3,261			5,249
Consolidated Funds
Interest and dividends	3,983			1,120
Professional, advisory and other fees	392			302
Floor brokerage and trade execution	109			22
Other expenses	479			372
Total expenses	140,373			115,939
Other income (loss)
Net gains (losses) on securities, derivatives and other investments	26,056			3,188
Consolidated Funds
Net realized and unrealized gains (losses) on investments and other transactions	9,578			(2,692		)
Net realized and unrealized gains (losses) on derivatives	3,865			3,102
Net gains (losses) on foreign currency transactions	(97		)	(13		)
Total other income (loss)	39,402			3,585
Income (loss) before income taxes	14,000			(11,315		)
Income tax expense (benefit)	1,911			(3,320		)
Net income (loss)	12,089			(7,995		)
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	9,105			(4,297		)
Net income (loss) attributable to Cowen Group, Inc.	2,984			(3,698		)
Preferred stock dividends	1,698			1,698
Net income (loss) attributable to Cowen Group, Inc. common stockholders	$	1,286		$	(5,396	)
Weighted average common shares outstanding:
Basic (a)	27,061			26,591
Diluted (a)	28,401			26,591
Earnings (loss) per share:
Basic (a)	$	0.05		$	(0.20	)
Diluted (a)	$	0.05		$	(0.20	)

(a) Share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016.

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

Table of Contents

Cowen Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(dollars in thousands)

(unaudited)



	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016

Net income (loss)				$	12,089					$	(7,995	)
Other comprehensive income (loss), net of tax:
Foreign currency translation		(2	)					(3	)
Total other comprehensive income (loss), net of tax				(2		)				(3		)
Comprehensive income (loss)				$	12,087					$	(7,998	)

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

Table of Contents

Cowen Group, Inc.

Condensed Consolidated Statements of Changes in Equity

(dollars in thousands, except share data)

(unaudited)



	Common Shares Outstanding		Common Stock		Preferred Shares Outstanding	Preferred 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, 2016	26,731,289		$	292	120,750	$	1	$	(153,845	)	$	928,646		$	(2	)	$	(2,442	)	$	772,650		$	379,205
Net income (loss) attributable to Cowen Group, Inc.	—		—		—	—		—			—			—			2,984			2,984			—
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	—		—		—	—		—			—			—			—			—			9,105
Foreign currency translation	—		—		—	—		—			—			(2		)	—			(2		)	—
Capital contributions	—		—		—	—		—			—			—			—			—			16,099
Capital withdrawals	—		—		—	—		—			—			—			—			—			(10,277		)
Restricted stock awards issued	909,442		—		—	—		—			—			—			—			—			—
Purchase of treasury stock, at cost	(328,238	)	—		—	—		(4,455		)	—			—			—			(4,455		)	—
Preferred stock dividends (See Note 14)	—		—		—	—		—			—			—			(1,698		)	(1,698		)	—
Amortization of share based compensation	—		—		—	—		—			8,779			—			—			8,779			—
Balance, March 31, 2017	27,312,493		$	292	120,750	$	1	$	(158,300	)	$	937,425		$	(4	)	$	(1,156	)	$	778,258		$	394,132

	Common Shares Outstanding		Common Stock		Preferred Shares Outstanding	Preferred 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, 2015	26,401,163		$	292	120,750	$	1	$	(137,356	)	$	903,429		$	—		$	23,627		$	789,993		$	186,911
Net income (loss) attributable to Cowen Group, Inc.	—		—		—	—		—			—			—			(3,698		)	(3,698		)
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds																							(4,297		)
Foreign currency translation	—		—		—	—		—			—			(3		)	—			(3		)	—
Capital contributions	—		—		—	—		—			—			—			—			—			217,633
Capital withdrawals	—		—		—	—		—			—			—			—			—			(2,267		)
Deconsolidation of entities	—		—		—	—		—			—			—			—			—			(73,042		)
Restricted stock awards issued	649,085		—		—	—		—			—			—			—			—			—
Purchase of treasury stock, at cost	(530,698	)	—		—	—		(7,582		)	—			—			—			(7,582		)	—
Preferred stock dividends (See Note 14)	—		—		—	—		—			—			—			(1,698		)	(1,698		)	—
Income tax effect from share based compensation	—		—		—	—		—			(515		)	—			—			(515		)	—
Amortization of share based compensation	—		—		—	—		—			6,423			—			—			6,423			—
Balance, March 31, 2016	26,519,550		$	292	120,750	$	1	$	(144,938	)	$	909,337		$	(3	)	$	18,231		$	782,920		$	324,938

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

Table of Contents



Cowen Group, Inc. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited)
	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	12,089		$	(7,995	)
Adjustments to reconcile net income (loss) to net cash provided by / (used in) operating activities:
Depreciation and amortization	3,028			3,067
Amortization of debt issuance costs	304			291
Amortization of debt discount	1,840			1,665
Tax benefit (expense) from share-based payment arrangements	—			(515		)
Share-based compensation	8,779			6,423
Deferred tax benefit	1,782			(2,384		)
Deferred rent obligations	(225		)	107
Contingent liability adjustment	—			(2,135		)
Purchases of securities owned, at fair value	(1,215,330		)	(1,293,147		)
Proceeds from sales of securities owned, at fair value	1,324,115			1,263,611
Proceeds from sales of securities sold, not yet purchased, at fair value	710,012			1,068,580
Payments to cover securities sold, not yet purchased, at fair value	(673,243		)	(910,751		)
Net (gains) losses on securities, derivatives and other investments	(33,493		)	(2,836		)
Consolidated Funds
Purchases of securities owned, at fair value	(63,563		)	(7,355		)
Proceeds from sales of securities owned, at fair value	55,704			878
Proceeds from sales of securities sold, not yet purchased, at fair value	217			2,049
Payments to cover securities sold, not yet purchased, at fair value	(899		)	(855		)
Purchases of other investments	(8,578		)	(212,028		)
Proceeds from sales of other investments	14,788			855
Net realized and unrealized (gains) losses on investments and other transactions	(11,138		)	245
(Increase) decrease in operating assets:
Cash collateral pledged	(1,354		)	(72		)
Securities owned, at fair value, held at broker-dealer	(30,255		)	8,004
Receivable on derivative contracts, at fair value	4,764			(6,106		)
Receivable from brokers	(75,785		)	(4,785		)
Fees receivable, net of allowance	(4,042		)	(6,759		)
Due from related parties	(3,163		)	5,264
Other assets	(20,199		)	(11,257		)
Consolidated Funds
Cash and cash equivalents	7,468			1,586
Receivable on derivative contracts, at fair value	(16		)	(125		)
Receivable from brokers	(3,311		)	—
Other assets	(7		)	(738		)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased, at fair value, held at broker-dealer	22,772			(6,141		)
Payable for derivative contracts, at fair value	(6,619		)	3,951
Payable to brokers	(85,858		)	(107,952		)
Payable to customers	70,480			—
Compensation payable	(70,745		)	(128,152		)
Fees payable	4,604			(3,892		)
Due to related parties	—			(95		)
Accounts payable, accrued expenses and other liabilities	14,462			3,841
Consolidated Funds
Contributions received in advance	(2,048		)	1,750
Payable to brokers	(1,950		)	2,314
Payable for derivative contracts, at fair value	304			2
Due to related parties	(189		)	265
Accounts payable, accrued expenses and other liabilities	(211		)	707
Net cash provided by / (used in) operating activities	$	(54,709	)	$	(340,620	)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Table of Contents



Cowen Group, Inc. Condensed Consolidated Statements of Cash Flows (dollars in thousands) (unaudited)
	Three Months Ended March 31,
(continued)	2017			2016
Cash flows from investing activities:
Purchases of other investments	$	(4,934	)	$	(16,187	)
Proceeds from sales of other investments	16,180			5,937
Proceeds from loans held for investment	1,200			39,200
Purchase of fixed assets	(150		)	(12,383		)
Net cash provided by / (used in) investing activities	12,296			16,567
Cash flows from financing activities:
Borrowings on notes and other debt	2,247			22,072
Repayments on notes and other debt	(1,504		)	(660		)
Income tax effect from share-based payment arrangements	—			(515		)
Purchase of treasury stock	—			(3,571		)
Cash paid to acquire net assets (contingent liability payment)	(167		)	—
Capital withdrawals to redeemable non-controlling interests in operating entities	(2,059		)	(2,267		)
Consolidated Funds
Capital contributions by redeemable non-controlling interests in Consolidated Funds	23,198			217,633
Capital withdrawals to redeemable non-controlling interests in Consolidated Funds	(12,357		)	(78		)
Net cash provided by / (used in) financing activities	9,358			232,614
Change in cash and cash equivalents	(33,055		)	(91,439		)
Total cash beginning of period	112,014			158,485
Total cash at end of period	78,959			67,046

Supplemental non-cash information
Purchase of treasury stock, at cost, through net settlement (See Note 14)	$	4,455		$	4,012
Preferred stock dividends declared (See Note 14)	$	1,698		$	1,698
Net assets of deconsolidated entities	$	—		$	73,309

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

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(unaudited)

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, sales and trading and prime brokerage services through its two business segments: alternative investment and broker-dealer. The Company's alternative investment segment, includes hedge funds, private equity structures, registered investment companies and listed vehicles. The Company's broker-dealer segment offers research, sales and trading, prime brokerage and investment banking services to companies and primarily institutional investor clients. Our primary target sectors are healthcare, technology, media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and transportation sectors.

On December 5, 2016, the Company effected a one-for-four reverse stock split of the Company's common stock. Except where the context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.

2. Significant Accounting Policies

a. Basis of Presentation

These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") as promulgated by the Financial Accounting Standards Board ("FASB") through Accounting Standards Codification as the source of authoritative accounting principles in the preparation of financial statements, and include the accounts of the Company, its operating and other subsidiaries, and entities in which the Company has a controlling financial interest or a general partner interest. All material intercompany transactions and balances have been eliminated on consolidation. Certain fund entities that are consolidated in these accompanying condensed consolidated financial statements, as further discussed below, are not subject to the consolidation provisions with respect to their own controlled 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.

Certain reclassifications have been made to prior period amounts in order to conform to current period presentation.

The year-end condensed balance sheet data was derived from the audited financial statements, but does not include all disclosures included in the audited financial statements.


b.	Principles of consolidation

The Company consolidates all entities that it controls through a majority voting interest or otherwise, including those funds in which the Company either directly or indirectly has a controlling financial interest. In addition, the Company consolidates all variable interest entities for which it is the primary beneficiary.

In accordance with these standards, the Company presently consolidates six funds for which it acts as the general partner and investment manager. As of March 31, 2017 the Company consolidated the following funds: Ramius Enterprise LP (“Enterprise LP”), Ramius Merger Fund LLC (the "Merger Fund"), Cowen Private Investments LP ("Cowen Private"), Caerus Select Fund LP ("Caerus LP") (between May 1, 2016 through March 1, 2017 when the fund was liquidated), Ramius Archview Credit and Distressed Master Fund ("Archview Master Fund") and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds").

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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 all VOEs in which it owns a majority of the entity's voting shares or units.

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.

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 March 31, 2017 and December 31, 2016, the total net assets of the consolidated VIEs were $468.7 million and $461.6 million, respectively. The VIEs act as investment managers and/or investment companies that may be managed by the Company or the Company may have equity interest in those investment companies. The VIEs are financed through their operations and/or loan agreements with the Company.

As of March 31, 2017 the Company holds variable interests in Ramius Enterprise Master Fund Ltd (“Enterprise Master”), Ramius Merger Master Fund Ltd ("Merger Master") and Caerus Select Master Fund Ltd ("Caerus Master") (between May 1, 2016 through March 1, 2017 when the fund was liquidated) (collectively the “Unconsolidated Master Funds”) through the Consolidated 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 the Unconsolidated Master 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 their 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 4 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 accompanying 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 accompanying condensed consolidated statements of operations.

The Company evaluates its equity method investments for impairment 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 accompanying condensed consolidated statements of operations.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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"), Cowen International Limited ("CIL"), Ramius UK Ltd. ("Ramius UK") and Cowen Prime Services LLC ("Cowen Prime") apply the specialized industry accounting for brokers and dealers in securities also prescribed under US GAAP. The Company also retains specialized accounting upon consolidation.


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.


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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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.

The Company has the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The Company has elected the fair value option for certain of its investments held by its operating companies. This option has been elected because the Company believes that it is consistent with the manner in which the business is managed as well as the way that financial instruments in other parts of the business are recorded.

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 obligations, ETF's, mutual funds 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 and restricted equities, 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 and options 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. In accordance with US GAAP, investments which are valued using NAV per share as a practical expedient are not categorized within the fair value hierarchy.

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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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 level 3 investments within the fair value hierarchy as management uses significant unobservable inputs in determining their estimated fair value.

See Notes 4 and 5 for further information regarding the Company's investments, including equity method investments, and fair value measurements.


e.	Fixed Assets

Fixed assets are stated at cost less accumulated depreciation or amortization. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful life or lease term. When the Company commits to a plan to abandon fixed assets or leasehold improvements before the end of its original useful life, the estimated depreciation or amortization period is revised to reflect the shortened useful life of the asset. Other fixed assets are depreciated on a straight-line basis over their estimated useful lives.

Aircraft and related equipment, which are leased out under operating leases, are carried at cost less accumulated depreciation and are depreciated to estimated residual value using the straight-line method over the lease term or estimated useful life of the asset. Any assets received at the end of the lease are marked to the lower of cost or fair value with the adjustment recorded in other income.



Asset	Depreciable Lives	Principal Method
Telephone and computer equipment	3-8 years	Straight-line
Computer software	3-7 years	Straight-line
Furniture and fixtures	5-8 years	Straight-line
Leasehold improvements	5-15 years	Straight-line
Capitalized lease asset	5 years	Straight-line
Aircraft and related equipment	10-20 years	Straight-line
Modifications to aircraft	4-10 years	Straight-line


f.	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. The Company adopted a new accounting pronouncement, during the first quarter of 2016, which reclassified the unamortized debt issuance costs in the Company's previously reported condensed consolidated statements of financial condition from other assets to a direct reduction from the carrying amount of the debt.

g. 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 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 March 31, 2017 and December 31, 2016 is $10.0 million and $10.3 million, respectively.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

h. Recently issued accounting pronouncements

In March 2017, the FASB issued guidance to amend the amortization period for certain purchased callable debt securities held at a premium. Under current guidance, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. The new guidance shortened the amortization period for the premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements and does not expect this guidance to have a material impact on its condensed statement of financial condition or its condensed statement of operations as the Company does not hold any material callable debt securities.

In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. If applicable, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The amendments in this guidance are effective for public business entities for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019 with early adoption permitted after January 1, 2017. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements. The Company expects this guidance to simplify its goodwill impairment analysis.

In January 2017, the FASB issued guidance which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current guidance, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes. The new guidance provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements and may use the new definition for its future business combination activities.

In November 2016, the FASB issued guidance which reduces the diversity in practice as to how changes in restricted cash are presented and classified in the statement of cash flows. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance does not provide a definition of restricted cash or restricted cash equivalents. For public business entities, the guidance is effective prospectively for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company currently presents its restricted cash and changes in its restricted cash, separately on its condensed consolidated statement of financial condition and condensed consolidated statements of cash flows respectively. The Company is currently evaluating the impact of this guidance on the Company’s condensed consolidated financial statements. Since the guidance only affects the presentation of restricted cash on the statement of cash flows, the Company does not expect this guidance to have any impact on its consolidated financial statements.

In August 2016, the FASB issued guidance which reduces the diversity in practice as to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance addresses eight specific cash flow issues with the objective of reducing the existing and potential future diversity in practice. The amendments in this guidance are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on the Company’s cash flows presentation. Since the guidance only affects the presentation of statement of cash flows, the Company does not expect this guidance to have any impact on consolidated financial statements. The Company notes that its current presentation is already in line with most of the specific cash flow issues identified in the guidance.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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, 2017. In July 2015, the FASB confirmed a deferral of the effective date by one year, with early adoption on the original effective date permitted. In 2016, the FASB issued various new guidance to clarify the implementation guidance on principal versus agent considerations, revenue from contracts with customers and identifying performance obligations and licensing implementation. The Company is currently evaluating the impact of this guidance on the Company’s financial condition, results of operations and cash flows.

In February 2016, the FASB issued guidance which amends and supersedes its previous guidance regarding leases. The new guidance requires the lessee to recognize the right to use assets and lease liabilities that arise from leases and present them in its statement of financial condition. The recognition of these lease assets and lease liabilities represents a change from previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. There continues to be a differentiation between finance leases and operating leases. However, the principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases should be recognized in the statement of financial condition. For public business entities the guidance is effective for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and its disclosures. The Company notes that a significant majority of the Company’s leases represent operating real estate leases for its respective offices and will require the gross up on its statement of financial conditions.

In January 2016, as a joint project with International Accounting Standards Board (IASB), the FASB issued a new accounting pronouncement to address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The amendments in the update made improvements to US GAAP for equity investments and investments carried at amortized cost. The guidance also simplifies the impairment assessment for equity investments and clarifies the need for valuation allowance on deferred tax asset related to available for sale securities. For public business entities the guidance is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of this guidance on the Company’s financial condition and its disclosure and does not expect the guidance to have a material impact as the Company does not own any significant investments carried at amortized cost.

3. Cash Collateral Pledged

As of March 31, 2017 and December 31, 2016, the Company pledged cash collateral in the amount of $9.2 million and $7.8 million, respectively, which relates to letters of credit issued to the landlords of the Company's premises in New York City, Boston, Stamford and San Francisco. The Company also has a letter of credit, in the amount of $5.5 million, due March 2018, for which cash is pledged as collateral under a reinsurance agreement. (See Note 13).

4. 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 brokers under terms which permit the clearing broker to sell or re-pledge the securities to others subject to certain limitations.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

As of March 31, 2017 and December 31, 2016, securities owned, at fair value consisted of the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Common stocks (b)	$	621,073	$	669,655
Preferred stock (b)	16,516		15,811
Warrants and rights	11,053		8,335
U.S. Government securities (a)	3,790		3,780
Corporate bonds (d)	2,990		2,477
Convertible bonds (c)	250		250
Trade claims	703		562
Mutual funds (b)	6		6
	$	656,381	$	700,876


(a)	As of March 31, 2017, maturities ranged from June 2017 to February 2018 with an interest rate of 0%. As of December 31, 2016, maturities ranged from February 2017 to December 2017 with an interest rate of 0%.


(b)	The Company has elected the fair value option for investments in securities of preferred and common stocks and mutual funds with a fair value of $6.1 million, $4.9 million and $0.1 million, respectively, at March 31, 2017 and $7.0 million, $5.2 million and $0.1 million , respectively, at December 31, 2016.


(c)	As of March 31, 2017, the maturity was March 2018 with an interest rate of 8%. As of December 31, 2016, the maturity was March 2018 with an interest rate of 8%.


(d)	As of March 31, 2017, maturities ranged from March 2021 to January 2036 and interest rates ranged from 5.50% to 13.00%. As of December 31, 2016, maturities ranged from January 2017 to January 2036 and interest rates ranged from 6.25% to 13.00%.

Receivable on and Payable for derivative contracts, at fair value

The Company's direct involvement with derivative financial instruments includes total return swaps, futures, currency forwards, equity swaps, credit default swaps and options. 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.

Upon issuance of the Company's cash convertible unsecured senior notes ("Convertible Notes") (See Note 13), the Company recognized the embedded cash conversion option at fair value of $35.7 million which is valued as of March 31, 2017 at $7.0 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. 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 $7.0 million as of March 31, 2017 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 7,012,196 shares of the Company's Class A common stock and have an initial exercise price of $28.72 per share (share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016). 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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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



Receivable on derivative contracts	As of March 31, 2017				As of December 31, 2016
	Number of contracts / Notional Value		Fair value		Number of contracts / Notional Value		Fair value
	(dollars in thousands)
Futures	$	10,771	$	32	$	12,421	$	104
Currency forwards	$	70,345	243		$	80,608	592
Swaps	$	150,451	2,283		$	46,462	468
Options other (a)	258,783		15,412		256,097		21,539
Foreign currency options	$	44,201	167		$	57,051	198
			$	18,137			$	22,901

(a) Includes index, equity, commodity future and cash conversion options.



Payable for derivative contracts	As of March 31, 2017				As of December 31, 2016
	Number of contracts / Notional Value		Fair value		Number of contracts / Notional Value		Fair value
	(dollars in thousands)
Futures	$	27,783	$	72	$	38,345	$	642
Currency forwards	$	2,134	134		$	—	—
Swaps	$	56,613	3,075		$	9,533	181
Options other (a)	37,897		10,862		23,726		19,939
			$	14,143			$	20,762

(a) Includes index, equity, commodity future and cash conversion options.

The following tables present the gross and net derivative positions and the related offsetting amount, as of March 31, 2017 and December 31, 2016. This table does not include the impact of over collateralization.



							Gross amounts not offset in the Condensed Consolidated 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		Cash Collateral pledged (b)		Net amounts
	(dollars in thousands)
As of March 31, 2017
Receivable on derivative contracts, at fair value	$	18,137	$	—	$	18,137	$	—	$	2,693	$	15,444
Payable for derivative contracts, at fair value	14,143		—		14,143		—		3,209		10,934

As of December 31, 2016
Receivable on derivative contracts, at fair value	22,901		—		22,901		—		1,382		21,519
Payable for derivative contracts, at fair value	20,762		—		20,762		—		181		20,581


(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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The realized and unrealized gains/(losses) related to derivatives trading activities were $(8.6) million and $2.4 million for the three months ended March 31, 2017 and 2016, 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 13) and exchange traded derivatives, the Company is required to post/receive collateral. As of March 31, 2017 and December 31, 2016, collateral consisting of $36.6 million and $17.1 million of cash, respectively, is included in receivable from brokers and payable to brokers on the accompanying condensed consolidated statements of financial condition. As of March 31, 2017 and December 31, 2016 all derivative contracts were with multiple major financial institutions.

Other investments

As of March 31, 2017 and December 31, 2016, other investments included the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Portfolio Funds, at fair value (1)	$	112,425	$	120,023
Equity method investments (2)	38,091		36,991
Lehman claims, at fair value	297		265
	$	150,813	$	157,279

(1) Portfolio Funds, at fair value

The Portfolio Funds, at fair value as of March 31, 2017 and December 31, 2016, included the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Starboard Value and Opportunity Fund LP (c)(*)	$	29,246	$	27,424
Formation8 Partners Fund I, L.P. (f)	21,143		22,234
RCG Longview Debt Fund V, L.P. (i) (*)	15,798		16,187
Green Energy Metals Fund, LP (h)	14,044		6,241
HealthCare Royalty Partners LP (a)(*)	6,990		7,147
RCG LPP2 PNW5 Co-Invest, L.P. (j) (*)	3,104		3,152
HealthCare Royalty Partners II LP (a)(*)	2,162		2,091
Eclipse Ventures Fund I, L.P. (g)	2,157		1,790
Lagunita Biosciences, LLC (n)	1,690		1,698
Starboard Leaders Fund LP (e)(*)	1,181		1,231
Quadratic Fund LLC (k) (*)	965		6,729
RCGL 12E13th LLC (i) (*)	348		348
Starboard Partners Fund LP (d)(*)	—		5,067
Orchard Square Partners Credit Fund LP (b)	—		4,327
Other private investment (l) (*)	8,927		8,548
Other affiliated funds (m)(*)	4,670		5,809
	$	112,425	$	120,023

* 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 12.


(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 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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(d)	Starboard Partners Fund LP permits redemptions on a semi-annual basis on 180 days' prior written notice subsequent to an initial two year lock up.


(e)	Starboard Leaders Fund LP does not permit withdrawals, but instead allows terminations with respect to capital commitments upon 30 days' prior written notice at any time following the first anniversary of an investors' initial capital contribution.


(f)	Formation8 Partners Fund I, L.P. is a private equity fund which invests in early stage and growth transformational information and energy technology companies. Distributions will be made when the underlying investments are liquidated.


(g)	Eclipse Ventures Fund I, L.P. is a private equity fund which invests in early stage and growth hardware companies. Distributions will be made when the underlying investments are liquidated.

(h)

The Green Energy Metals Fund, LP invests the vast majority of its capital in physical off-exchange traded minor metals that are crucial to the production and sustainability of clean energy, emerging technology and energy efficiency. The Company is invested in a managed account specifically targeting cobalt. The Green Energy Metals Fund, LP is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.


(i)	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.


(j)	RCG LPP2 PNW5 Co-Invest, L.P. is a single purpose entity formed to participate in a joint venture which acquired five multi-unit residential rental properties located in the Pacific Northwest. RCG LPP2 PNW5 Co-Invest, L.P. is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.


(k)	Quadratic Fund LLC permits redemptions on a 30 day prior written notice.


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


(m)	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.


(n)	Lagunita Biosciences, LLC, a healthcare investment company that creates and grows early stage companies to commercialize impactful translational science that addresses significant clinical needs, is a private equity structure and therefore distributions will be made when the underlying investments are liquidated.


(2)	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 57%. The Company holds a majority of the outstanding ownership interest (i.e., more than 50%) in RCG Longview Partners II, LLC and in Surf House Ocean Views Holdings, LLC. The operating agreement that governs the management of day-to-day operations and affairs of these entities stipulates 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 entities requires 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 and (b) 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 several activist hedge funds and related managed accounts and c) Surf House Ocean Views Holdings, LLC which is a joint venture in a real estate development project. The Company recorded no impairment charges in relation to its equity method investments for the three months ended March 31, 2017 and 2016.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

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



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Surf House Ocean Views Holdings, LLC	$	13,696	$	13,522
Starboard Value LP	12,817		12,501
RCG Longview Debt Fund V Partners, LLC	7,804		7,256
RCG Longview Management, LLC	758		656
HealthCare Royalty GP, LLC	570		583
HealthCare Royalty GP II, LLC	366		354
RCG Longview Debt Fund IV Management, LLC	331		331
HealthCare Royalty GP III, LLC	149		208
RCG Kennedy House, LLC	136		183
RCG Longview Equity Management, LLC	114		114
HealthCare Overflow Fund GP, LLC	75		68
Other	1,275		1,215
	$	38,091	$	36,991

For the period ended March 31, 2017, none of the equity method investments held by the Company met the significance criteria as defined under SEC guidance.

As of March 31, 2017 and December 31, 2016, 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 $3.1 million and $4.6 million, for the three months ended March 31, 2017 and 2016, respectively, and is included in net gains (losses) on securities, derivatives and other investments on the accompanying condensed consolidated statements of operations.

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 March 31, 2017 and December 31, 2016, securities sold, not yet purchased, at fair value consisted of the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Common stocks	$	329,477	$	263,460
Corporate bonds (a)	6,193		2,591
Warrants and rights	6		39
	$	335,676	$	266,090


(a)	As of March 31, 2017, the maturities ranged from August 2020 to October 2042 with interest rates ranged from 3.63% to 8.88%. As of December 31, 2016, the maturities ranged from April 2021 to January 2036 with interest rates ranged from 5.50% to 6.25%.

Table of Contents

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 $5.1 billion and $0.9 billion as of March 31, 2017 and $5.3 billion and $1.0 billion as of December 31, 2016, respectively. In addition, the maximum exposure relating to these variable interest entities as of March 31, 2017 was $488.1 million, and as of December 31, 2016 was $508.1 million, all of which is included in other investments, at fair value in the accompanying condensed consolidated statements of financial condition. The exposure to loss primarily relates to the Consolidated Feeder Funds' investment in their Unconsolidated Master Funds and the Company's investment in unconsolidated investment companies.


b.	Consolidated Funds

Securities owned, at fair value

As of March 31, 2017 and December 31, 2016, securities owned, at fair value, held by the Consolidated Funds consisted of the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Preferred stock	$	40,716	$	37,343
Common stocks	40,557		28,474
U.S. Government securities (a)	3,495		6,994
Corporate bonds (b)	3,781		4,214
Term Loan	3,208		2,209
Warrants and rights	2		3
	$	91,759	$	79,237

(a) As of March 31, 2017, the maturity was June 2017 with an interest rate of 0%. As of December 31, 2016, the maturity was March 2017 with an interest rate of 0%.

(b) As of March 31, 2017, maturities ranged from October 2017 to June 2038 and interest rates ranged from 0% to 14.37%. As of December 31, 2016, maturities ranged from October 2017 to June 2038 and interest rates ranged from 0% and 14.37%.

Securities sold, not yet purchased, at fair value

As of March 31, 2017, there were no securities sold, not yet purchased, at fair value. As of December 31, 2016, securities sold, not yet purchased, at fair value, held by the Consolidated Funds consisted of the following:



	As of December 31, 2016
	(dollars in thousands)
Corporate bonds (a)	$	672
Common stocks	211
	$	883


(a)	As of December 31, 2016, maturities ranged from September 2019 to September 2023 and interest rates ranged from 4.38% to 9.25%.

Receivable on derivative contracts

As of March 31, 2017 and December 31, 2016, receivable on derivative contracts, at fair value, held by the Consolidated Funds are comprised of:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Currency forwards	$	18	$	18
Equity swaps	812		731
Options	79		144
	$	909	$	893

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Payable for derivative contracts

As of March 31, 2017 and December 31, 2016, payable for derivative contracts, at fair value, held by the Consolidated Funds are comprised of:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Currency forwards	$	27	$	10
Equity swaps	804		495
Options	45		67
	$	876	$	572

Other investments, at fair value

Investments in Portfolio Funds, at fair value

As of March 31, 2017 and December 31, 2016, investments in Portfolio Funds, at fair value, included the following:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Investments of Enterprise LP	$	107,454	$	114,159
Investments of Merger Fund	294,074		281,572
Investments of Caerus LP	—		5,734
	$	401,528	$	401,465

Consolidated portfolio fund 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 $107.5 million and $114.2 million in Enterprise Master as of March 31, 2017 and December 31, 2016, 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. As Enterprise Master winds down its positions, it will return capital to its investors. There are no unfunded commitments at Enterprise LP.

Consolidated portfolio fund 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 $294.1 million and $281.6 million in Merger Master as of March 31, 2017 and December 31, 2016, 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 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 market 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.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Consolidated portfolio fund investments of Caerus LP

Prior to Caerus LP being liquidated on March 1, 2017, it operated under a “master-feeder” structure, whereby Caerus Select Master Fund Ltd's ("Caerus Master") shareholder was Caerus LP. The consolidated investments in Portfolio Funds included Caerus LP's investment of $5.7 million in Caerus Master as of December 31, 2016. Caerus Master’s investment objective was to achieve superior risk-adjusted rates of return that bear little correlation to the overall market. Caerus Master sought to achieve this objective by utilizing a long/short investment strategy, investing primarily in equities and options on equities that trade on major global market exchanges. Caerus Master focused on investments in the global consumer sector, including, but not limited to, securities in sub-sectors such as retail, apparel and footwear, restaurants, gaming and lodging, consumer products, food and beverage, consumer technology, media, transportation and homebuilding and building materials.

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 March 31, 2017 and December 31, 2016, 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 was one indirect concentration that exceeded 5% of the Company's equity as of March 31, 2017 and none at December 31, 2016.

Through its investments in a Consolidated Fund and combined with direct Company investments, the Company maintained exposure to a particular investment which accounted for 5% or more of the Company's equity.

Investments percentage of the Company's equity at March 31, 2017

Issuer

Security Type

Country

Industry

Percentage of Equity

Market Value

Linkem

Equity

Italy

Wireless Broadband

6.2

48,346,757

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 March 31, 2017 and December 31, 2016:

Securities owned by Enterprise Master, at fair value



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Preferred stock	$	1,479	$	1,581
Common stock	803		835
	$	2,282	$	2,416

Portfolio Funds, owned by Enterprise Master, at fair value



		As of March 31, 2017		As of December 31, 2016
	Strategy	(dollars in thousands)
RCG Special Opportunities Fund, Ltd*	Multi-Strategy	$	103,034	$	101,832
RCG Longview Equity Fund, LP*	Real Estate	4,492		4,744
RCG Longview Debt Fund IV, LP*	Real Estate	1,488		1,637
RCG Longview II, LP*	Real Estate	831		836
RCG Renergys, LLC*	Energy	1		1
Other Private Investments	Various	7,932		8,682
Other Real Estate Investments *	Real Estate	—		295
		$	117,778	$	118,027


*	Affiliates of the Company.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Merger Master

As of March 31, 2017, Merger Master held common stock, securities owned, of $934.2 million and common stock, sold not yet purchased, of $343.6 million. As of December 31, 2016, Merger Master held common stock, securities owned, of $835.7 million and common stock, sold not yet purchased, of $395.5 million, respectively.

Receivable on derivative contracts, at fair value, owned by Merger Master



	As of March 31, 2017		As of December 31, 2016
Description	(dollars in thousands)
Options	$	5,451	$	4,264
Equity swaps	3,984		255
	$	9,435	$	4,519

Payable for derivative contracts, at fair value, owned by Merger Master



	As of March 31, 2017		As of December 31, 2016
Description	(dollars in thousands)
Options	$	1,063	$	2,285
Equity swaps	1,079		123
	$	2,142	$	2,408

Caerus Master

As of December 31, 2016, Caerus Master held common stock, of $3.2 million and common stock, sold not yet purchased, of $2.6 million.

5. 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 March 31, 2017 and December 31, 2016:

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Assets at Fair Value as of March 31, 2017
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned
US Government securities	$	3,790		$	—		$	—		$	3,790
Preferred stock	—			—			16,516			16,516
Common stocks	610,539			30			10,504			621,073
Convertible bonds	—			—			250			250
Corporate bonds	—			2,990			—			2,990
Trade claims	—			—			703			703
Warrants and rights	6,914			—			4,139			11,053
Mutual funds	6			—			—			6
Receivable on derivative contracts, at fair value
Futures	32			—			—			32
Currency forwards	—			243			—			243
Swaps	—			2,283			—			2,283
Options	8,441			167			6,971			15,579
Other investments
Lehman claim	—			—			297			297
Consolidated Funds
Securities owned
US Government securities	3,495			—			—			3,495
Preferred stock	—			401			40,315			40,716
Common stocks	40,021			240			296			40,557
Corporate bonds	—			3,781			—			3,781
Warrants and rights	—			—			2			2
Term loan	—			2,497			711			3,208
Receivable on derivative contracts, at fair value
Currency forwards	—			18			—			18
Equity swaps	—			812			—			812
Options	79			—			—			79
	$	673,317		$	13,462		$	80,704		$	767,483
Percentage of total assets measured at fair value	87.7		%	1.8		%	10.5		%
Portfolio funds measured at net asset value (a)										112,425
Consolidated funds' portfolio funds measured at net asset value (a)										401,528
Equity method investments										38,091
Total investments										$	1,319,527

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Liabilities at Fair Value as of March 31, 2017
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased
Common stocks	$	329,477		$	—		$	—		$	329,477
Corporate bonds	—			6,193			—			6,193
Warrants and rights	6			—			—			6
Payable for derivative contracts, at fair value
Futures	72			—			—			72
Currency forwards	—			134			—			134
Swaps	—			3,075			—			3,075
Options	3,891			—			6,971			10,862
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			5,274			5,274
Consolidated Funds
Payable for derivative contracts, at fair value
Currency forwards	—			27			—			27
Options	45			—			—			45
Equity swaps	—			804			—			804
	$	333,491		$	10,233		$	12,245		$	355,969
Percentage of total liabilities measured at fair value	93.7		%	2.9		%	3.4		%

(a) In accordance with US GAAP, certain investments that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the condensed consolidated statement of financial condition.

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during the third and fourth quarter of 2015 and the second quarter of 2016, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 2018, December 2020, and June 2018, respectively. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of March 31, 2017 can range from $0.1 million to $15.0 million.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Assets at Fair Value as of December 31, 2016
	Level 1			Level 2			Level 3			Total
				(dollars in thousands)
Operating Entities
Securities owned
US Government securities	$	3,780		$	—		$	—		$	3,780
Preferred stock	—			—			15,811			15,811
Common stocks	658,179			1,355			10,121			669,655
Convertible bonds	—			—			250			250
Corporate bonds	—			2,477			—			2,477
Trade claims	—			—			562			562
Warrants and rights	4,616			—			3,719			8,335
Mutual funds	6			—			—			6
Receivable on derivative contracts, at fair value
Futures	104			—			—			104
Currency forwards	—			592			—			592
Swaps	—			468			—			468
Options	6,662			322			14,753			21,737
Other investments
Lehman claim	—			—			265			265
Consolidated Funds
Securities owned
US Government securities	6,994			—			—			6,994
Preferred stock	—			415			36,928			37,343
Common stocks	19,467			8,712			295			28,474
Corporate bonds	—			4,214			—			4,214
Warrants and rights	—			—			3			3
Term loan	—			1,552			657			2,209
Receivable on derivative contracts, at fair value
Currency forwards	—			18			—			18
Equity swaps	—			731			—			731
Options	132			12			—			144
	$	699,940		$	20,868		$	83,364		$	804,172
Percentage of total assets measured at fair value	87.0		%	2.6		%	10.4		%
Portfolio funds measured at net asset value (a)										120,023
Consolidated funds' portfolio funds measured at net asset value (a)										401,465
Equity method investments										36,991
Total investments										$	1,362,651

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Liabilities at Fair Value as of December 31, 2016
	Level 1			Level 2			Level 3			Total
	(dollars in thousands)
Operating Entities
Securities sold, not yet purchased
Common stocks	$	263,460		$	—		$	—		$	263,460
Corporate bonds	—			2,591			—			2,591
Warrants and rights	39			—			—			39
Payable for derivative contracts, at fair value
Futures	642			—			—			642
Swaps	—			181			—			181
Options	5,186			—			14,753			19,939
Accounts payable, accrued expenses and other liabilities
Contingent consideration liability (b)	—			—			5,997			5,997
Consolidated Funds
Securities sold, not yet purchased
Common stocks	211			—			—			211
Corporate bonds	—			672			—			672
Payable for derivative contracts, at fair value
Currency forwards	—			10			—			10
Options	67			—			—			67
Equity swaps	—			495			—			495
	$	269,605		$	3,949		$	20,750		$	294,304
Percentage of total liabilities measured at fair value	91.6		%	1.3		%	7.1		%

(b) In accordance with the terms of the purchase agreements for acquisitions that closed during 2012 and the third and fourth quarter of 2015, the Company is required to pay to the sellers a portion of future net income and/or revenues of the acquired businesses, if certain targets are achieved through the periods ended December 2018, and December 2020, respectively. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method) which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized. The undiscounted amounts as of December 31, 2016 can range from $0.1 million to $15.1 million.

The following table includes a rollforward of the amounts for the three months ended March 31, 2017 and 2016, for financial instruments classified within level 3. The classification of a financial instrument within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Three Months Ended March 31, 2017
	Balance at December 31, 2016		Transfers in			Transfers out		Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at March 31, 2017		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	15,811	$	—		$	—	$	1,732	$	(31	)	$	(996	)	$	16,516	$	(996	)
Common stocks	10,121		—			—		31		(52		)	404			10,504		404
Convertible bonds	250		—			—		—		—			—			250		—
Options, asset	14,753		—			—		—		—			(7,782		)	6,971		(7,782		)
Options, liability	14,753		—			—		—		—			(7,782		)	6,971		(7,782		)
Warrants and rights	3,719		451		(b)	—		—		—			(31		)	4,139		(31		)
Trade claims	562		—			—		—		(70		)	211			703		190
Lehman claim	265		—			—		—		—			32			297		32
Contingent consideration liability	5,997		—			—		—		(167		)	(556		)	5,274		(556		)
Consolidated Funds
Preferred stock	36,928		—			—		—		—			3,387			40,315		3,887
Common stocks	295		—			—		—		—			1			296		1
Warrants and rights	3		—			—		—		—			(1		)	2		(1		)
Term Loan	657		—			—		—		—			54			711		54



	Three Months Ended March 31, 2016
	Balance at December 31, 2015		Transfers in		Transfers out				Purchases/(covers)		(Sales)/shorts			Realized and Unrealized gains/losses			Balance at March 31, 2016		Change in unrealized gains/losses relating to instruments still held (1)
	(dollars in thousands)
Operating Entities
Preferred stock	$	12,872	$	—	$	—			$	—	$	(218	)	$	992		$	13,646	$	566
Common stocks	2,278		—		—				569		—			1,918			4,765		2,054
Convertible bonds	819		—		—				—		(569		)	—			250		—
Options, asset	18,194		—		—				—		—			2,698			20,892		2,698
Options, liability	18,194		—		—				—		—			2,698			20,892		2,698
Warrants and rights	2,572		—		—				—		—			(67		)	2,505		150
Lehman claim	299		—		—				—		—			(6		)	293		(6		)
Contingent consideration liability	6,158		—		—				—		—			2,135			8,293		2,135
Consolidated Funds
Preferred stock	32,000		—		(4,000		)	(a)	—		—			—			28,000		—

(1) Unrealized gains/losses are reported in other income (loss) in the accompanying condensed consolidated statements of operations.

(a) The investments were converted to common stock.

(b) The Company received warrants as part of a transaction.

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

Certain assets and liabilities are measured at fair value on a nonrecurring basis and therefore are not included in the tables above.

The Company recognizes all transfers and the related unrealized gain (loss) at the beginning of the reporting period.

Transfers between level 1 and 2 generally relate to whether the principal market for the security becomes active or inactive. Transfers between level 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurements or due to change in liquidity restrictions for the investments.

During the three months ended March 31, 2017 and 2016, there were no transfers between level 1 and level 2 assets and liabilities.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table includes quantitative information as of March 31, 2017 and December 31, 2016 for financial instruments classified within level 3. The table below quantifies information about the significant unobservable inputs used in the fair value measurement of the Company's level 3 financial instruments.



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at March 31, 2017		Valuation techniques	Unobservable Inputs	Range
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	10,188	Guideline companies/transaction price Option pricing method, discounted cash flow	Volatility Market multiples Discount rate	37% 0.8x to 9.3x 9.5% to 22%
Trade claims	62		Discounted cash flows	Market multiples Discount rate	6x 20%
Warrants and rights	4,139		Model based	Volatility	30% to 85% (weighted average 73%)
Options	6,971		Option pricing models	Volatility	33%
Other level 3 assets (a)	59,344
Total level 3 assets	80,704
Level 3 Liabilities
Options	6,971		Option pricing models	Volatility	33%
Contingent consideration liability	5,274		Discounted cash flows	Projected cash flow and discount rate	8% - 25% (weighted average 23%)
Total level 3 liabilities	$	12,245



	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2016		Valuation techniques	Unobservable Inputs	Range
Level 3 Assets	(dollars in thousands)
Common and preferred stocks	$	10,917	Guideline companies/transaction price Option pricing method, discounted cash flow	Volatility Market multiples Discount rate	37% 0.8x to 9.3x 9.5% to 10%
Trade claims	520		Discounted cash flows	Market multiples Discount rate	6x 20%
Warrants and rights	3,719		Model based	Volatility	30% to 85% (weighted average 73%)
Options	14,753		Option pricing models	Volatility	40%
Other level 3 assets (a)	53,455
Total level 3 assets	83,364
Level 3 Liabilities
Options	14,753		Option pricing models	Volatility	40%
Contingent consideration liability	5,997		Discounted cash flows	Projected cash flow and discount rate	8% - 25% (weighted average 23%)
Total level 3 liabilities	$	20,750


(a)	The quantitative disclosures exclude financial instruments for which the determination of fair value is based on prices from recent transactions.

The Company has established valuation policies and procedures and an internal control infrastructure over its fair value measurement of financial instruments which includes ongoing oversight by the valuation committee as well as periodic audits performed by the Company's internal audit group. The valuation committee is comprised of senior management, including non-investment professionals, who are responsible for overseeing and monitoring the pricing of the Company's investments, including the review of the results of the independent price verification process, approval of new trading asset classes and use of applicable pricing models and approaches.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The US GAAP fair value leveling hierarchy is designated and monitored on an ongoing basis. In determining the designation, the Company takes into consideration a number of factors including the observability of inputs, liquidity of the investment and the significance of a particular input to the fair value measurement. Designations, models, pricing vendors, third party valuation providers and inputs used to derive fair market value are subject to review by the valuation committee and the internal audit group. The Company reviews its valuation policy guidelines on an ongoing basis and may adjust them in light of, improved valuation metrics and models, the availability of reliable inputs and information, and prevailing market conditions. The Company reviews a daily profit and loss report, as well as other periodic reports, and analyzes material changes from period-to-period in the valuation of its investments as part of its control procedures. The Company also performs back testing on a regular basis by comparing prices observed in executed transactions to previous valuations.

The fair market value for level 3 securities may be highly sensitive to the use of industry standard models, unobservable inputs and subjective assumptions. The degree of fair market value sensitivity is also contingent upon the subjective weight given to specific inputs and valuation metrics. The Company holds various equity and debt instruments where different weight may be applied to industry standard models representing standard valuation metrics such as: discounted cash flows, market multiples, comparative transactions, capital rates, recovery rates and timing, and bid levels. Generally, changes in the weights ascribed to the various valuation metrics and the significant unobservable inputs in isolation may result in significantly lower or higher fair value measurements. Volatility levels for warrants and options are not readily observable and subject to interpretation. Changes in capital rates, discount rates and replacement costs could significantly increase or decrease the valuation of the real estate investments. The interrelationship between unobservable inputs may vary significantly amongst level 3 securities as they are generally highly idiosyncratic. Significant increases (decreases) in any of those inputs in isolation can result in a significantly lower (higher) fair value measurement.

Other financial assets and liabilities

The following table presents the carrying values and fair values, at March 31, 2017 and December 31, 2016, of financial assets and liabilities and information on their classification within the fair value hierarchy which are not measured at fair value on a recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value see Note 2.



	March 31, 2017						December 31, 2016						Fair Value Hierarchy
	Carrying Amount			Fair Value			Carrying Amount			Fair Value			Fair Value Hierarchy
				(dollars in thousands)
Financial Assets
Operating companies
Cash and cash equivalents	$	78,959		$	78,959		$	112,014		$	112,014		Level 1
Cash collateral pledged	14,696			14,696			13,342			13,342			Level 2
Loans receivable	29,170			29,170		(d)	31,088			31,088		(d)	Level 3
Consolidated funds
Cash and cash equivalents	10,293			10,293			17,761			17,761			Level 1
Financial Liabilities
Convertible debt	132,055		(a)	151,508		(b)	130,029		(a)	149,545		(b)	Level 2
Notes payable and other debt	77,890			84,673		(c)	77,030			80,817		(c)	Level 2


(a)	The carrying amount of the convertible debt includes an unamortized discount of $16.0 million and $17.8 million as of March 31, 2017 and December 31, 2016.


(b)	The convertible debt includes the conversion option and is based on the last broker quote available.


(c)	Notes payable and other debt are based on the last broker quote available.


(d)	The fair market value of level 3 loans is calculated using discounted cash flows.

6. Receivables from and Payable to Brokers

Receivables from and payable to brokers includes cash held at the clearing brokers, amounts receivable or payable for unsettled transactions, monies borrowed and proceeds from short sales (including commissions and fees related to securities transactions) equal to the fair value of securities sold, not yet purchased, which are restricted until the Company purchases the securities sold short. Pursuant to the master netting agreements the Company entered into with its brokers, these balances are

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

presented net (assets less liabilities) across balances with the same broker. As of March 31, 2017 and December 31, 2016, receivable from brokers was $163.6 million and $87.8 million, respectively. Payable to brokers was $124.5 million and $210.3 million as of March 31, 2017 and December 31, 2016, respectively. The Company's receivables from and payable to brokers balances are held at multiple financial institutions.

7. Payable to Customers

Payable to customers include amounts due on cash and margin transactions to the Company's clients which have their assets held by a Company omnibus account (included within Receivables from brokers). In this omnibus structure, positions that are owned by CIL are fully cross collateralized by client funds, meaning that the firm, for all intents and purposes, has no market risk. Additionally, CIL has no obligation to settle any trade that it deems inappropriate from a risk perspective, adding an important market and counterparty risk mitigating factor.

8. Redeemable Non-Controlling Interests in Consolidated Subsidiaries and Funds

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



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Redeemable non-controlling interests in consolidated subsidiaries and funds
Operating companies	$	6,297	$	7,638
Consolidated Funds	387,835		371,567
	$	394,132	$	379,205



	Three Months Ended March 31,
	2017		2016
	(dollars in thousands)
Income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds
Operating companies	$	717	$	(78	)
Consolidated Funds	8,388		(4,219		)
	$	9,105	$	(4,297	)

9. Reinsurance

The Company’s wholly-owned Luxembourg subsidiary, Hollenfels Re SA (“Hollenfels”) provides reinsurance to third party insurance and reinsurance companies. As Hollenfels started its operations during 2016, all claims it experienced (reported or not reported) were from the 2016 accident year through March 31, 2017. During the three months ended March 31, 2017, Hollenfels’ share of incurred and paid claims, as reported to it by the underlying insurance and reinsurance companies, amounted to $0.6 million. During the same period, Hollenfels’ share of claims incurred but not reported plus expected development on reported claims totaled $0.9 million. Hollenfels generally employs an estimation methodology whereby historical average claims ratios over a period of 5 or 10 years, based on availability of data, are utilized. In cases where an event may have occurred that could give rise to claims in excess of the amount calculated using the above-mentioned methodology, then actuarial methods are used to calculate the impact of such an event. During the quarter, Hollenfels did not change its methodology for determining claim liability or claim adjustment expenses and calculated them using the above-mentioned methods.

While Hollenfels typically settles its premiums and claim payments on a quarterly basis, the frequency of claims in the underlying policies is impractical for Hollenfels to obtain. This is because certain contracts Hollenfels has written are on a quota-share basis while the other policies provide aggregate loss protection, rendering the collection of information for all underlying contracts impracticable. Hollenfels did not discount any of its reserves and did not cede any portion of its exposures during the three months ended March 31, 2017. As a result, the figures above are the same as reported on the Company’s balance sheet.

10. Share-Based and Deferred Compensation and Employee Ownership Plans

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The Company issues share based compensation under the 2006 Equity and Incentive Plan, the 2007 Equity and Incentive Plan (both established prior to the November 2009 transaction between Ramius and Cowen) and the Cowen Group, Inc. 2010 Equity and Incentive Plan (collectively, the “Equity Plans”). The Equity Plans permit the grant of options, restricted shares, restricted stock units, stock appreciation rights ("SAR's") and other equity based awards to the Company's employees and directors. Stock options granted generally vest over two-to-five-year periods and expire seven years from the date of grant. Restricted shares and restricted share units issued may be immediately vested or may generally vest over a two-to-five-year period. SAR's vest and expire after five years from grant date. Awards are subject to the risk of forfeiture. As of March 31, 2017, there were approximately 0.2 million shares available for future issuance under the Equity Plans.

Under the 2010 Equity Plan, the Company awarded $24.1 million of deferred cash awards to its employees during the three months ended March 31, 2017. These awards vest over a four year period and accrue interest at 0.70% per year. As of March 31, 2017, the Company had unrecognized compensation expense related to deferred cash awards of $50.9 million.

The Company measures compensation cost for share based awards according to the equity method. In accordance with the expense recognition provisions of those standards, the Company amortizes unearned compensation associated with share based awards on a straight-line basis over the vesting period of the option or award. In relation to awards under the Equity Plans, the Company recognized compensation expense of $8.8 million and $6.4 million, for the three months ended March 31, 2017 and 2016, respectively. The income tax effect recognized for the Equity Plans was a benefit of $2.5 million and $3.1 million, for the three months ended March 31, 2017 and 2016, respectively.

Stock Options and Stock Appreciation Rights

The Company values options and SAR's on grant date using the Black-Scholes valuation model which requires the Company to make assumptions regarding the expected term, volatility, risk-free rate and dividend yield:

Expected term. Expected term represents the period of time that awards granted are expected to be outstanding. The Company elected to use the "simplified" calculation method, as applicable to companies that lack extensive historical data. The mid-point between the vesting date and the contractual expiration date is used as the expected term under this method.

Expected volatility. The Company bases its expected volatility on its own stock price history.

Risk free rate. The risk-free rate for periods within the expected term of the award is based on the interest rate of a traded zero-coupon U.S. Treasury bond with a term equal to the awards' expected term on the date of grant.

Dividend yield. The Company has not paid and does not expect to pay dividends in the foreseeable future. Accordingly, the assumed dividend yield is zero.

The following table summarizes the Company's stock option activity for the three months ended March 31, 2017:



	Shares Subject to Option		Weighted Average Exercise Price/Share		Weighted Average Remaining Term	Aggregate Intrinsic Value(1)
					(in years)	(dollars in thousands)
Balance outstanding at December 31, 2016	4,167		$	19.56	0.10	$	—
Options granted	—		—		—	—
Options exercised	—		—		—	—
Options expired	(4,167	)	19.56		—	—
Balance outstanding at March 31, 2017	—		$	—	0	$	—
Options exercisable at March 31, 2017	—		$	—	0	$	—


(1)	Based on the Company's closing stock price of $14.95 on March 31, 2017 and $15.50 on December 31, 2016.

As of March 31, 2017, the Company's stock options were fully expensed.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The following table summarizes the Company's SAR's for the three months ended March 31, 2017:



	Shares Subject to Option		Weighted Average Exercise Price/Share		Weighted Average Remaining Term	Aggregate Intrinsic Value(1)
					(in years)	(dollars in thousands)
Balance outstanding at December 31, 2016	100,000		$	11.60	1.21	$	435
SAR's granted	—		—		—	—
SAR's vested	(25,000	)	11.60		—	—
SAR's expired	—		—		—	—
Balance outstanding at March 31, 2017	75,000		$	11.60	0.96	$	421
SAR's exercisable at March 31, 2017	—		$	—	0	$	—


(1)	Based on the Company's closing stock price of $14.95 on March 31, 2017 and $15.50 on December 31, 2016.

As of March 31, 2017 and December 31, 2016, the unrecognized compensation expense related to the Company's grant of SAR's was $0.1 million and $0.1 million, respectively.

Restricted Shares and Restricted Stock Units Granted to Employees

Restricted shares and restricted stock units are referred to collectively as restricted stock. The following table summarizes the Company's restricted share and restricted stock unit activity for the three months ended March 31, 2017:



	Nonvested Restricted Shares and Restricted Stock Units		Weighted-Average Grant Date Fair Value
Balance outstanding at December 31, 2016	5,717,932		$	16.23
Granted (1)	1,859,333		15.05
Vested	(915,503	)	16.35
Canceled	—		—
Forfeited	(18,501	)	15.31
Balance outstanding at March 31, 2017 (1)	6,643,261		$	15.88

(1) Performance linked restricted stock units of 481,438 were awarded to employees of the Company in December 2013 and January 2014. An additional 700,000 performance linked restricted stock units were awarded in March 2016. Of the awards granted, 96,875 have been forfeited through March 31, 2017. The remaining awards, included in the outstanding balance as of March 31, 2017, will vest between March 2019 and December 2020 and will be earned only to the extent that the Company attains specified market conditions relating to its volume-weighted average share price and total shareholder return in relation to certain benchmark indices and performance goals relating to aggregate net income and average return on shareholder equity. The actual number of RSUs ultimately earned could vary from zero, if performance goals are not met, to as much as 150% of the targeted award. Each RSU is equal to the one share of the Company’s Class A common stock. Compensation expense is recognized to the extent that it is probable that the Company will attain the performance goals.

The fair value of restricted stock (excluding performance linked units which are valued using the Monte Carlo valuation model) is determined based on the number of shares granted and the quoted price of the Company's common stock on the date of grant.

As of March 31, 2017, there was $81.8 million of unrecognized compensation expense related to the Company's grant of nonvested restricted shares and restricted stock units to employees. Unrecognized compensation expense related to nonvested restricted shares and restricted stock units granted to employees is expected to be recognized over a weighted-average period of 2.75 years.

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

There were no restricted stock units awarded during the three months ended March 31, 2017. As of March 31, 2017 there were 162,176 restricted stock units outstanding.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

11. Income Taxes

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

The Company calculates its U.S. tax provision using the estimated annual effective tax rate methodology. The tax expense or benefit caused by an unusual or infrequent item is recorded in the quarter in which it occurs. To the extent that information is not available for the Company to fully determine the full year estimated impact of an item of income or tax adjustment, the Company calculates the tax impact of such item discretely. Accordingly, the Company uses the discrete methodology to calculate the income tax provision for its foreign subsidiaries and the tax impact of income attributable to redeemable non-controlling interests in consolidated subsidiaries and funds. In addition, during the three months ended March 31, 2017, the unusual or infrequent items whose tax impact were recorded discretely related to stock compensation. Based on these methodologies, the Company’s effective income tax rate was 13.65% and 29.35% for the three months ended March 31, 2017 and 2016, respectively.

For the three months ended March 31, 2017 and 2016, the effective tax rate differs from the statutory rate of 35% primarily due to income attributable to redeemable non-controlling interests in consolidated subsidiaries and funds, stock compensation, foreign taxes, as well as other nondeductible expenses.

The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating or capital loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that, in management's view, is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. As of March 31, 2017, the Company recorded a valuation allowance against deferred tax assets related to its foreign net operating losses.

The Company is subject to examination by the United States Internal Revenue Service as well as state, local and foreign tax authorities in jurisdictions where the Company has significant business operations, such as New York, United Kingdom and Luxembourg. Currently, the Company is under audit by the Internal Revenue Service for the 2014 tax year, and New York State for the 2010 to 2012 tax years. Management is not expecting a material tax liability from these audits.

The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but remits the current earnings of its foreign subsidiaries to the United States to the extent permissible under local regulatory rules. The undistributed earnings of the Company’s foreign subsidiaries totaled $1.5 million and $0.8 million as of March 31, 2017 and December 31, 2016, respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately $0.2 million and $0.1 million, respectively.

12. Commitments and Contingencies

Lease Obligations

The Company has entered into leases for office space and equipment. These leases contain rent escalation clauses. The Company records rent expense on a straight-line basis over the lease term, including any rent holiday periods. Rent expense was $4.8 million and $5.3 million for the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017, future minimum annual lease and service payments for the Company were as follows:



	Equipment Leases (a)		Service Payments		Facility Leases (b)
	(dollars in thousands)
2017	$	1,810	$	12,024	$	12,256
2018	2,359		9,067		17,148
2019	928		2,848		15,633
2020	6		740		15,352
2021	—		676		15,597
Thereafter	—		—		17,297
	$	5,103	$	25,355	$	93,283

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)


(a)	Equipment Leases include the Company's commitments relating to operating and capital leases. See Note 13 for further information on the capital lease minimum payments which are included in the table.


(b)	The Company has entered into various agreements to sublease certain of its premises. The Company recorded sublease income related to these leases of $0.4 million and $0.8 million, and for the three months ended March 31, 2017 and 2016, respectively.

Clawback Obligations

For financial reporting purposes, the general partners of a real estate fund have recorded a liability for potential clawback obligations to the limited partners, due to changes in the unrealized value of the fund's remaining investments and where the fund's general partner has previously received carried interest distributions. The clawback liability, however, is not realized until the end of the fund's life. The life of the real estate funds with a potential clawback obligation is currently in a winding-up phase whereby the remaining assets of the fund are being liquidated as promptly as possible so as to maximize value, however a final date for liquidation has not been set. The fund is currently winding-down and as of both March 31, 2017 and December 31, 2016, and the clawback obligation was $6.2 million.

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

Unfunded Commitments

The following table summarizes unfunded commitments as of March 31, 2017:



Entity	Unfunded Commitments		Commitment term
	($ in millions)
Real estate (a)	$	12.6	(a)
HealthCare Royalty Partners funds (b)	$	7.3	2 years
Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.)	$	0.6	7 years
Lagunita Biosciences, LLC	$	3.0	3 years
Eclipse Fund II, L.P.	$	0.9	8 years
Eclipse Continuity Fund I, L.P.	$	0.9	9 years

(a) The Company had unfunded commitments pertaining to capital commitments in six real estate investments held by the Company, all of which pertain to related party investments. Such commitments can be called at any time up to four years, subject to advance notice.

(b) The Company is a limited partner of the HealthCare Royalty Partners funds (which are managed by Healthcare Royalty Management) and is a member of HealthCare Royalty Partners General Partners. The Company will make its pro-rata investment in the HealthCare Royalty Partners funds along with the other limited partners.

Litigation

In the ordinary course of business, the Company and its affiliates and subsidiaries and current and former officers, directors and employees (the "Company and Related Parties") are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.

In the ordinary course of business, the Company and Related Parties are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain affiliates and subsidiaries of the Company are investment banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, the Company and such affiliates and subsidiaries receive requests, and orders seeking documents and other information in connection with various aspects of their regulated activities.

Due to the global scope of the Company's operations, and its presence in countries around the world, the Company and Related Parties may be subject to litigation, and governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

differ substantially, and present substantially different risks, from those the Company and Related Parties are subject to in the United States.

The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests liability, allegations of wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.

In accordance with US GAAP, the Company establishes reserves for contingencies when the Company believes that it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. The Company discloses a contingency if there is at least a reasonable possibility that a loss may have been incurred and there is no reserve for the loss because the conditions above are not met. The Company's disclosure includes an estimate of the reasonably possible loss or range of loss for those matters, for which an estimate can be made. Neither a reserve nor disclosure is required for losses that are deemed remote.

The Company appropriately reserves for certain matters where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Such amounts are included within accounts payable, accrued expenses and other liabilities in the accompanying condensed consolidated statements of financial condition. Estimates, by their nature, are based on judgment and currently available information and involve a variety of factors, including, but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, the advice of legal counsel, the Company's defenses and its experience in similar cases or proceedings as well as its assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings. The Company may increase or decrease its legal reserves in the future, on a matter-by-matter basis, to account for developments in such matters. The Company accrues legal fees as incurred.

13. Convertible Debt and Notes Payable

As of March 31, 2017 and December 31, 2016, the Company's outstanding debt was as follows:



	As of March 31, 2017		As of December 31, 2016
	(dollars in thousands)
Convertible debt	$	132,055	$	130,029
Note payable	60,959		60,953
Other notes payable	15,301		14,237
Capital lease obligations	1,630		1,840
	$	209,945	$	207,059

Convertible Debt

On March 10, 2014, the Company issued $149.5 million of 3.0% cash convertible senior notes ("Convertible Notes"). The Convertible Notes are due on March 15, 2019 unless earlier repurchased by the Company or converted by the holder into cash in accordance with their terms prior to such date. The interest on the Convertible Notes is payable semi-annually on March 15 and September 15 of each year. The Convertible Notes are senior unsecured obligations and rank senior in right of payments to other obligations. The Convertible Notes may be converted into cash, upon the occurrence of certain events, whereby a holder will receive, per $1,000 principal amount of notes being converted, an amount equal to the sum of principal amount outstanding and the conversion amount based on the current conversion price (the "Conversion Option"). The Convertible Notes were issued with an initial conversion price of $21.32 per share (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016).

The Company recorded interest expense of $1.1 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively. The initial unamortized discount on the Convertible Notes was $35.7 million and is shown net in convertible debt in the accompanying condensed consolidated statements of financial condition. Amortization on the discount, included within interest expense in the accompanying condensed consolidated statements of operations is $1.8 million and $1.7 million for the three months ended March 31, 2017 and 2016, respectively, based on an effective interest rate of 8.89%. The Company capitalized the debt issuance costs in the amount of $3.7 million, which is a direct deduction from the carrying value of the debt and will be amortized over the life of the Convertible Notes.

Of the net proceeds from the sale of the Convertible Notes, approximately $20.5 million was applied to pay the net cost of a cash convertible note economic hedge and warrant transaction which increases the effective conversion price to $28.72 (see Note 4) (per share amounts have been retroactively updated to reflect the one-for-four reverse stock split effective as of December 5, 2016), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The remainder of the net proceeds is being used for general corporate purposes.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Note Payable

On October 10, 2014 the Company completed its public offering of $63.3 million aggregate principal amount of 8.25% senior notes due on October 15, 2021 ("2021 Notes"). Interest on the 2021 Notes is payable quarterly in arrears on January 15, April 15, July 15 and October 15, commencing on January 15, 2015. The Company recorded interest expense of $1.3 million and $1.3 million for the three months ended March 31, 2017 and 2016, respectively. The Company capitalized debt issuance costs of approximately $2.9 million which is a direct deduction from the carrying value of the debt and will be amortized over the life of the 2021 Notes. As of December 31, 2016, the Company fell below a minimum calculation as required by a covenant. As a result, the Company may not currently incur new debt or make restricted payments, other than in limited permitted amounts set out in the Senior Indenture.

Other Notes Payable

During January 2017, the Company borrowed $2.1 million to fund insurance premium payments. This note has an effective interest rate of 1.50% and is due on December 31, 2017, with monthly payment requirements of $0.2 million. As of March 31, 2017, the outstanding balance on this note payable was $1.5 million. Interest expense for the three months ended March 31, 2017 was insignificant.

The Company has entered into various financing for its aircraft. The aircraft financing, net of debt costs, is recorded in notes payable and short-term borrowings in the accompanying condensed consolidated statements of financial condition. The debt maturities ranged from January 2019 to May 2021 and interest rates ranged from 4.21% to 7.25%. As of March 31, 2017, the remaining balance on the aircraft financing agreements was $13.8 million. Interest expense was $0.2 million for the three months ended March 31, 2017.

Capital Lease Obligations

The Company has entered into several capital leases for computer equipment which amounted to $7.6 million and are recorded in fixed assets and as capital lease obligations. These capital lease obligations are included in short-term borrowings and other debt in the accompanying condensed consolidated statements of financial condition, and have lease terms that range from 48 to 60 months and interest rates that range from 0.60% to 6.03%. As of March 31, 2017, the remaining balance on these capital leases was $1.6 million. Interest expense was $0.1 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

Annual scheduled maturities of debt and minimum payments for all debt outstanding as of March 31, 2017, is as follows:



	Convertible Debt			Note Payable			Other Note Payable			Capital Lease Obligation
	(dollars in thousands)
2017	$	2,243		$	3,913		$	3,577		$	704
2018	4,485			5,218			2,826			938
2019	151,743			5,218			4,304			78
2020	—			5,218			2,256			—
2021	—			68,468			4,723			—
Thereafter	—			—			—			—
Subtotal	158,471			88,035			17,686			1,720
Less: Amount representing interest (a)	(26,416		)	(27,076		)	(2,385		)	(90		)
Total	$	132,055		$	60,959		$	15,301		$	1,630


(a)	Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes the unamortized discount on the convertible debt.

Letters of Credit

As of March 31, 2017, the Company has eight irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has a letter of credit, in the amount of $5.5 million, due March 2018, for which cash is pledged as collateral under a reinsurance agreement.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



Location	Amount		Maturity
	(dollars in thousands)
New York	$	355	May 2017
New York	$	70	May 2017
New York	$	695	October 2017
New York	$	2,811	October 2017
New York	$	1,600	November 2017
San Francisco	$	710	January 2018
Connecticut	$	65	January 2018
Boston	$	382	March 2018

To the extent any letter of credit is drawn upon, interest will be assessed at the prime commercial lending rate. As of March 31, 2017 and December 31, 2016, there were no amounts due related to these letters of credit.

14. Stockholder's Equity

On December 5, 2016, the Company effected a one-for-four reverse stock split of the Company's class A and class B common stock. All share and per share information has been retroactively adjusted to reflect the reverse stock split. In addition, there was a reclassification of $0.9 million from the par value of our class A common stock to additional paid-in capital to reflect the impact of the reverse stock split.

Preferred Stock and Purchase of Capped Call Option

On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock ("Series A Convertible Preferred Stock") that provided $117.2 million of proceeds, net of underwriting fees and issuance costs of $3.6 million. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum which will be payable, when and if declared by the board of directors of the Company, quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option, pay dividends in cash, common stock or a combination thereof. During the three months ended March 31, 2017, and 2016 the Company declared and accrued a cash dividend of $1.7 million and $1.7 million.

Each share of Series A Convertible Preferred Stock is non-voting and has a liquidity preference over the Company's Class A common stock and ranks senior to all classes or series of the Company's Class A common stock, but junior to all of the Company's existing and future indebtedness with respect to divided rights and rights upon the Company's involuntary liquidation, dissolution or winding down.

Each share of Series A Convertible Preferred Stock is convertible, at the option of the holder, into a number of shares of our Class A common stock equal to the liquidation preference of $1,000 divided by the conversion rate. The initial conversion rate (subsequent to the December 5, 2016 reverse stock split) is 38.0619 shares (which equates to $26.27 per share) of the Company's Class A common stock for each share of the Series A Convertible Preferred Stock. At any time on or after May 20, 2020, the Company may elect to convert all outstanding shares of the Series A Convertible Preferred Stock into shares of the Company’s Class A common stock, cash or a combination thereof, at the Company’s election, in each case, based on the then-applicable conversion rate, if the last reported sale price of the Company’s Class A common stock equals or exceeds 150% of the then-current conversion price on at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days (including on the last trading day of such period) immediately prior to such election. At the time of conversion, the conversion rate may be adjusted based on certain events including but not limited to the issuance of cash dividends or Class A common stock as a dividends to the Company's Class A common shareholders or a share split or combination.

In connection with the issuance and sale of the Series A Convertible Preferred Stock, the Company entered into a privately negotiated capped call option transaction (the “Capped Call Option Transaction”) with Nomura Global Financial Products Inc. (the “option counterparty”) for $15.9 million. The Capped Call Option Transaction is expected generally to reduce the potential dilution to the Company’s Class A common stock (if the Company elects to convert to common shares) and/or offset any cash payments that the Company is required to make upon conversion of any Series A Convertible Preferred Stock. The Capped Call Option Transaction has an initial effective strike price of $26.27 per share, which matches the initial conversion price of the Series A Convertible Preferred Stock, and a cap price of $33.54 per share. However, to the extent that the market price of Class A common stock, as measured under the terms of the Capped Call Option Transaction, exceeds the cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if it is settled in cash or stock it qualifies for equity classification as a reduction to additional paid in capital.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

Treasury Stock

Treasury stock of $158.3 million as of March 31, 2017, compared to $153.8 million as of December 31, 2016, resulted from $4.5 million acquired through repurchases of shares to cover employee minimum tax withholding obligations related to stock compensation vesting events under the Company's Equity Plan or other similar transactions.

The following represents the activity relating to the treasury stock held by the Company during the three months ended March 31, 2017:



	Treasury stock shares	Cost (dollars in thousands)		Average cost per share
Balance outstanding at December 31, 2016	9,810,802	$	153,845	$	15.68
Shares purchased for minimum tax withholding under the Equity Plan or other similar transactions	328,238	4,455		13.57
Purchase of treasury stock	—	—		—
Balance outstanding at March 31, 2017	10,139,040	$	158,300	$	15.61

15. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income includes the after tax change in unrealized gains and losses on foreign currency translation adjustments. During the periods presented, the Company did not have material reclassifications out of other comprehensive income.



	Three Months Ended March 31,
	2017			2016
	(dollars in thousands)
Beginning Balance	$	(2	)	$	—
Foreign currency translation	(2		)	(3		)
Ending Balance	$	(4	)	$	(3	)

16. Earnings Per Share

The Company calculates its basic and diluted earnings per share in accordance with US GAAP. Basic earnings per share is calculated by dividing net income attributable to the Company's common stockholders by the weighted average number of common shares outstanding for the period. As of March 31, 2017, there were 27,312,493 shares outstanding. The Company has included 162,176 fully vested, unissued restricted stock units in its calculation of basic earnings per share. As of December 5, 2016, share and per share amounts have been retroactively updated to reflect the one-for-four reverse stock split.

Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive items. The Company uses the treasury stock method to reflect the potential dilutive effect of the warrants (see Note 4(a)), unexercised stock options, unvested restricted shares, restricted stock units, and SAR's. In calculating the number of dilutive shares outstanding, the shares of common stock underlying unvested restricted shares and restricted stock units are assumed to have been delivered, and options and warrants are assumed to have been exercised, on the grant date. The assumed proceeds from the assumed vesting, delivery and exercising were calculated as the amount of compensation cost attributed to future services and not yet recognized.

The Company can elect to settle the Series A Convertible Preferred Stock in shares, cash, or a combination of both. The Company's intent is to settle in cash and, based on current and projected liquidity needs, the Company has the ability to do so.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

The computation of earnings per share is as follows:



	Three Months Ended March 31,
	2017		2016
	(dollars in thousands, except per share data)
Net income (loss)	$	12,089	$	(7,995	)
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	9,105		(4,297		)
Net income (loss) attributable to Cowen Group, Inc.	2,984		(3,698		)
Preferred stock dividends	1,698		1,698
Net income (loss) attributable to Cowen Group, Inc. common stockholders	$	1,286	$	(5,396	)

Shares for basic and diluted calculations:
Weighted average shares used in basic computation	27,061		26,591
Performance based restricted stock	—		—
Stock appreciation rights	12		—
Restricted stock	1,328		—
Weighted average shares used in diluted computation	28,401		26,591
Earnings (loss) per share:
Basic	$	0.05	$	(0.20	)
Diluted	$	0.05	$	(0.20	)

17. Segment Reporting

The Company conducts its operations through two segments: the alternative investment segment and the broker‑dealer segment. These activities are conducted primarily in the United States and substantially all of its revenues are generated domestically. The performance measure for these segments is Economic Income (Loss), which management uses to evaluate the financial performance of and make operating decisions for the segments including determining appropriate compensation levels. Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors.

In general, Economic Income (Loss) is a pre-tax measure that (i) eliminates the impact of consolidation for consolidated funds (ii) excludes goodwill and intangible impairment (iii) excludes certain other acquisition-related adjustments and/or reorganization expenses and (iv) excludes preferred stock dividends. In addition, Economic Income (Loss) revenues include investment income that represents the income the Company has earned in investing its own capital, including realized and unrealized gains and losses, interest and dividends, net of associated investment related expenses. For US GAAP purposes, these items are included in each of their respective line items. Economic Income (Loss) revenues also include management fees, incentive income and investment income earned through the Company's investment as a general partner in certain real estate entities and the Company's investment in the activist business. For US GAAP purposes, all of these items are recorded in other income (loss). In addition, Economic Income (Loss) expenses are reduced by reimbursement from affiliates, which for US GAAP purposes is presented gross as part of revenue.

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

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

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Three Months Ended March 31, 2017
									Adjustments
	Alternative Investment			Broker-Dealer		Total Economic Income/(Loss)			Funds Consolidation			Other Adjustments				US GAAP
	(dollars in thousands)
Revenues
Investment banking	$	—		$	36,553	$	36,553		$	—		$	—			$	36,553
Brokerage	—			52,313		52,313			—			(1,779		)		50,534
Management fees	13,145			801		13,946			(527		)	(4,711		)	(a)	8,708
Incentive income (loss)	3,060			—		3,060			(489		)	(2,025		)	(a)	546
Investment income (loss)	15,149			6,477		21,626			—			(21,626		)	(c)(f)	—
Interest and dividends	—			—		—			—			5,089			(c)	5,089
Reimbursement from affiliates	—			—		—			(78		)	1,730			(e)	1,652
Aircraft lease revenue	—			—		—			—			1,059			(f)	1,059
Reinsurance premiums	—			—		—			—			7,089			(g)	7,089
Other revenue	819			285		1,104			—			296			(g)	1,400
Consolidated Funds revenues	—			—		—			2,341			—				2,341
Total revenues	32,173			96,429		128,602			1,247			(14,878		)		114,971
Expenses
Non interest expense	23,191			93,967		117,158			(429		)	8,751			(b)(d)	125,480
Interest and dividends	3,241			1,100		4,341			—			5,589			(c)	9,930
Consolidated Funds expenses	—			—		—			4,963			—				4,963
Total expenses	26,432			95,067		121,499			4,534			14,340				140,373
Total other income (loss)	—			—		—			11,674			27,728			(c)	39,402
Income taxes expense / (benefit)	—			—		—			—			1,911			(b)	1,911
(Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	(1,645		)	—		(1,645		)	(8,387		)	927				(9,105		)
Economic Income (Loss) / Net Income (loss) attributable to Cowen Group, Inc.	$	4,096		$	1,362	$	5,458		$	—		$	(2,474	)		$	2,984

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)



	Three Months Ended March 31, 2016
										Adjustments
	Alternative Investment			Broker-Dealer			Total Economic Income/(Loss)			Funds Consolidation			Other Adjustments				US GAAP
	(dollars in thousands)
Revenues
Investment banking	$	—		$	26,147		$	26,147		$	—		$	—			$	26,147
Brokerage	—			52,867			52,867			—			(1,932		)		50,935
Management fees	16,128			775			16,903			(370		)	(5,503		)	(a)	11,030
Incentive income (loss)	6,920			—			6,920			(157		)	(5,652		)	(a)	1,111
Investment income (loss)	1,395			455			1,850			—			(1,850		)	(c)(f)	—
Interest and dividends	—			—			—			—			3,653			(c)	3,653
Reimbursement from affiliates	—			—			—			(14		)	3,901			(e)	3,887
Aircraft lease revenue	—			—			—			—			394			(f)	394
Reinsurance premiums	—			—			—			—			1,010			(g)	1,010
Other revenue	682			271			953			—			368			(g)	1,321
Consolidated Funds revenues	—			—			—			1,551			—				1,551
Total revenues	25,125			80,515			105,640			1,010			(5,611		)		101,039
Expenses
Non interest expense	20,261			83,761			104,022			—			2,791			(b)(d)	106,813
Interest and dividends	3,183			1,090			4,273			—			3,037			(c)	7,310
Consolidated Funds expenses	—			—			—			1,816			—				1,816
Total expenses	23,444			84,851			108,295			1,816			5,828				115,939
Total other income (loss)	—			—			—			(3,413		)	6,998			(c)	3,585
Income taxes expense / (benefit)	—			—			—			—			(3,320		)	(b)	(3,320		)
(Income) loss attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	(2,227		)	—			(2,227		)	4,219			2,305				4,297
Economic Income (Loss) / Net Income (loss) attributable to Cowen Group, Inc.	$	(546	)	$	(4,336	)	$	(4,882	)	$	—		$	1,184			$	(3,698	)

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

Economic Income (Loss):

Funds Consolidation: The impacts of consolidation and the related elimination entries of the Consolidated Funds are not included in Economic Income (Loss). Adjustments to reconcile to US GAAP net income (loss) include elimination of incentive income and management fees earned from the Consolidated Funds and addition of fund expenses excluding management fees paid, fund revenues and investment income (loss).

Other Adjustments:

(a) Economic Income (Loss) recognizes revenues (i) net of distribution fees paid to agents and (ii) our proportionate share

of management and incentive fees of certain real estate operating entities, the healthcare royalty business and the activist business.

(b) Economic Income (Loss) excludes income taxes and acquisition related adjustments as management does not consider

these items when evaluating the performance of the segment.

(d) Economic Income (Loss) recognizes the Company's proportionate share of expenses, for certain real estate

operating entities and the activist business, for which the investments are recorded under the equity method of accounting for investments.

(e) Reimbursement from affiliates is shown as a reduction of Economic Income expenses, but is included as a part of

revenues under US GAAP.

(f) Aircraft lease revenue is shown net of expenses in other revenue for Economic Income (Loss).

(g) Economic Income (Loss) recognizes underwriting income from the Company's insurance related activities, net of

expenses, within other revenue.

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

For the three months ended March 31, 2017 and 2016, there was no one fund or other customer which represented more than 10% of the Company's total revenues.

18. Regulatory Requirements

As registered broker-dealers, Cowen and Company, ATM Execution and Cowen Prime are subject to the SEC's Uniform Net Capital Rule 15c3-1 (the “Rule”), which requires the maintenance of minimum net capital. Under the alternative method permitted by the Rule, Cowen and Company's minimum net capital requirement, as defined, is $1.0 million. Under the alternative method ATM Execution and Cowen Prime are required to maintain minimum net capital, as defined, equal to $250,000. The broker-dealers are not permitted to withdraw equity if certain minimum net capital requirements are not met. As of March 31, 2017, Cowen and Company had total net capital of approximately $93.2 million, which was approximately $92.2 million in excess of its minimum net capital requirement of $1.0 million. As of March 31, 2017, ATM Execution had total net capital of approximately $2.3 million, which was approximately $2.0 million in excess of its minimum net capital requirement of $250,000. As of March 31, 2017, Cowen Prime had total net capital of approximately $7.3 million, which was approximately $7.1 million in excess of its minimum net capital requirement of $250,000.

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

Proprietary accounts of broker-dealers (“PAB”) held at the clearing broker are considered allowable assets for net capital purposes, pursuant to agreements between Cowen and Company, ATM Execution and Cowen Prime and the clearing brokers, which require, among other things, that the clearing brokers perform computations for PAB and segregate certain balances on behalf of Cowen and Company, ATM Execution and Cowen Prime, if applicable.

Ramius UK and CIL are subject to the capital requirements of the Financial Conduct Authority (“FCA”) of the UK. Financial Resources, as defined, must exceed the requirement of the FCA. As of March 31, 2017, Ramius UK's Financial Resources of $0.22 million exceeded its minimum requirement of $0.05 million by $0.17 million. As of March 31, 2017, CIL's Financial Resources of $10.7 million exceeded its minimum requirement of $5.7 million by $5.0 million.

Cowen’s Luxembourg reinsurance companies, Vianden RCG Re SCA (“Vianden”) and Hollenfels, are required to maintain a solvency capital ratio as calculated by relevant European Commission directives and local regulatory rules in Luxembourg. Each company’s solvency capital ratio as of March 31, 2017 was in excess of this minimum requirement.

Based on minimum capital and surplus requirements pursuant to the laws of the state of New York that apply to captive insurance companies, RCG Insurance Company, Cowen’s captive insurance company incorporated and licensed in the state of New York, was required to maintain capital and surplus of approximately $0.3 million as of March 31, 2017. RCG Insurance Company’s capital and surplus as of March 31, 2017 totaled approximately $20.9 million.

19. Related Party Transactions

The Company and its affiliated entities are the managing member, general partner and/or investment manager to the Company's alternative asset management products and certain managed accounts. Management fees and incentive income are primarily earned from affiliated entities. As of March 31, 2017 and December 31, 2016, $12.4 million and $12.6 million, respectively, included in fees receivable are earned from related parties. The Company may, at its discretion, reimburse certain fees charged to the funds that it manages to avoid duplication of fees when such funds have an underlying investment in another affiliated investment fund. For the three months ended March 31, 2017, the Company reimbursed the funds it manages $0.1 million, which were recorded net in management fees and incentive income in the accompanying condensed consolidated statements of operation. For the three months ended March 31, 2016, these amounts were immaterial. As of March 31, 2017 and December 31, 2016, related amounts still payable were $0.1 million and $0.3 million, respectively, and were reflected in fees payable in the accompanying condensed consolidated statements of financial condition. Fees receivable and fees payable are recorded at carrying value, which approximates fair value.

The Company may also make loans to employees or other affiliates, excluding executive officers of the Company. These loans are interest bearing and settle pursuant to the agreed-upon terms with such employees or affiliates and are included in due from related parties in the accompanying condensed consolidated statements of financial condition. As of March 31, 2017 and December 31, 2016, loans to employees of $12.5 million and $9.2 million, respectively, were included in due from related parties on the accompanying condensed consolidated statements of financial condition. Of these amounts $5.5 million and $3.3 million, respectively, are related to forgivable loans. These forgivable loans provide for a cash payment up-front to employees, with the amount due back to the Company forgiven over a vesting period. An employee that voluntarily ceases employment, or is terminated with cause, is generally required to pay back to the Company any unvested forgivable loans granted to them. The

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

forgivable loans are recorded as an asset to the Company on the date of grant and payment, and then amortized to compensation expense on a straight-line basis over the vesting period. The vesting period on forgivable loans is generally one to three years. The Company recorded compensation expense of $0.4 million and $0.6 million, for the three months ended March 31, 2017 and 2016, respectively. This expense is included in employee compensation and benefits in the accompanying condensed consolidated statement of operations. For the three months ended March 31, 2017 and 2016, the interest income was insignificant for all related party loans and advances.

Included in due to related parties is approximately $0.6 million and $0.7 million as of March 31, 2017 and December 31, 2016, respectively, related to a subordination agreement with an investor in certain real estate funds. This total is based on a hypothetical liquidation of the real estate funds as of the balance sheet date.

As of March 31, 2017 and December 31, 2016, included in due from related parties is $18.4 million and $18.7 million, respectively, related to the sales of portions of the Company's ownership interest in the activist business of Starboard Value to the Starboard principals. It is being financed through the profits of the relevant Starboard entities over a five year period and earns interest at 5% per annum. The interest income for the three months ended March 31, 2017 and 2016, was $0.2 million and $0.2 million, respectively.

The remaining balance included in due from related parties of $11.9 million and $11.8 million as of March 31, 2017 and December 31, 2016, respectively, relates to amounts due to the Company from affiliated funds and real estate entities due to expenses paid on their behalf.

Employees and certain other related parties invest on a discretionary basis within consolidated entities. These investments generally are subject to preferential management fee and performance fee arrangements. As of March 31, 2017 and December 31, 2016, such investments aggregated $27.9 million and $32.9 million, respectively, were included in redeemable non-controlling interests on the accompanying condensed consolidated statements of financial condition. Their share of the net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds aggregated $1.9 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively.

20. Guarantees and Off-Balance Sheet Arrangements

Guarantees

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

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

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

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

Table of Contents

Cowen Group, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

has not recorded any contingent liability in the accompanying condensed consolidated financial statements for these indemnifications.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements as of March 31, 2017 and December 31, 2016. However, through indemnification provisions in the clearing agreement, customer activities may expose the Company to off-balance-sheet credit risk. Pursuant to the clearing agreement, the Company is required to reimburse the Company's clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.

In addition, during the normal course of business, the Company has exposure to a number of risks including market risk, currency risk, credit risk, operational risk, liquidity risk and legal risk. As part of the Company's risk management process, these risks are monitored on a regular basis throughout the course of the year.

21. Subsequent Events

On April 3, 2017, the Company announced the signing of a definitive agreement (the “Purchase Agreement”) pursuant to which it will acquire one hundred percent of the issued and outstanding equity securities of ConvergEx Group, LLC (“ConvergEx”) from private equity firm GTCR, Bank of New York Mellon, and other shareholders, for a total consideration, less certain closing adjustments, of $116 million, at least 50% of which will be paid in cash with the remainder (to be determined in the Company’s sole discretion) to be paid in shares of the Company’s Class A common stock. The Purchase Agreement contains customary representations, warranties and covenants. The transaction is expected to close by the end of the second quarter of 2017, subject to satisfaction of customary closing conditions.

The Company has evaluated events that have occurred after the balance sheet date but before the financial statements are issued and has determined that there were no additional subsequent events requiring adjustment or disclosure in the condensed consolidated financial statements.

Table of Contents

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

The discussion contains forward-looking statements, which involve numerous risks and uncertainties, including, but not limited to, those described in the section titled “Risk Factors” in Item 1A of our 2016 Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and related notes of Cowen Group, Inc. included elsewhere in this quarterly report. Actual results may differ materially from those contained in any forward-looking statements.

Overview

Cowen Group, Inc. (the "Company"), 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, sales and trading and prime brokerage services through its two business segments: alternative investment and broker-dealer. The alternative investment segment includes private investment funds, managed accounts, commodity pools, real estate funds, private equity structures, registered investment companies and listed vehicles and also manages a significant portion of the Company’s proprietary capital. The broker-dealer segment offers industry focused investment banking for growth-oriented companies including advisory and global capital markets origination and domain knowledge-driven research and a sales and trading platform for institutional investors.

The Company's alternative investment platform, which operates primarily under the Ramius name, offers innovative investment products and solutions across the liquidity spectrum to institutional and private clients. The predecessor to this business was founded in 1994 and, through one of its subsidiaries, has been a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisors Act") since 1997. Ramius offers investors access to strategies to meet their specific needs including long/short equity, merger arbitrage, activist equity, event driven credit, fundamental global macro, health care royalties and real estate direct lending and equity. Ramius focuses on attracting and retaining talented in-house and affiliated investment teams and providing seed capital and working capital, an institutional infrastructure, robust sales and marketing and industry knowledge. A significant portion of the Company’s capital is invested alongside Ramius’s alternative investment clients. The Company has also invested some of its capital in its recently formed aviation and reinsurance businesses. Our alternative investment business had approximately $10.7 billion of assets under management as of April 1, 2017. See the section titled "Assets Under Management and Fund Performance" for further analysis.

Our broker-dealer businesses include research, sales and trading, prime brokerage and investment banking services to companies and primarily institutional investor clients. Our primary target sectors ("Target Sectors") are healthcare, technology, media and telecommunications, information and technology services, consumer, aerospace and defense, industrials, energy and transportation. We provide research and brokerage services to over 1,000 domestic and international clients seeking to trade securities and other financial instruments, principally in our target sectors. The broker-dealer segment also offers a full-service suite of introduced prime brokerage services targeting emerging hedge fund managers. Historically, we have focused our investment banking efforts on small to mid-capitalization public companies as well as private companies. From time to time, the Company invests in private capital raising transactions of its investment banking clients.

On December 5, 2016, the Company effected a one-for-four reverse stock split of our common stock. Except where the context indicates otherwise, all share and per share information has been retroactively adjusted to reflect the reverse stock split.

Certain Factors Impacting Our Business

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

•

Assets under management. Our revenues from management fees are directly linked to assets under management. As a result, the future performance of our alternative investment business will depend on, among other things, our ability to retain assets under management and to grow assets under management from existing and new products. In addition, positive performance increases assets under management which results in higher management fees.


•	Investment performance. Our revenues from incentive income are linked to the performance of the funds and accounts that we manage. Performance also affects assets under management because it influences investors' decisions to invest assets in, or withdraw assets from, the funds and accounts managed by us.

•

Fee and allocation rates. Our management fee revenues are linked to the management fee rates we charge as a percentage of assets under management. Our incentive income revenues are linked to the incentive allocation rates we charge as a percentage of performance-driven asset growth. Our incentive allocations are generally subject to “high-water marks,” whereby incentive income is generally earned by us only to the extent that the net asset value of a fund at the end of a measurement period exceeds the highest net asset value as of the end of the earlier measurement period for which we earned incentive income. Our incentive allocations, in some cases, are subject to performance hurdles.

Table of Contents


•	Investment performance of our own capital. We invest our own capital and the performance of such invested capital affects our revenues.

Our broker-dealer business and results of operations are impacted by the following factors:

•

Underwriting, private placement and strategic/financial advisory fees. Our revenues from investment banking are directly linked to the underwriting fees we earn in equity and debt securities offerings in which the Company acts as an underwriter, private placement fees earned in non-underwritten transactions, sales commissions earned in at-the-market offerings and success fees earned in connection with advising both buyers and sellers, principally in mergers and acquisitions. As a result, the future performance of our investment banking business will depend on, among other things, our ability to secure lead manager and co-manager roles in clients capital raising transactions as well as our ability to secure mandates as a client's strategic financial advisor.


•	Commissions. Our commission revenues depend for the most part on our customer trading volumes.

•

Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities and net trading gains and losses on inventory and other firm positions. Commissions associated with these transactions are also included herein. In certain cases, the Company provides liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk.

•

Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and credit research. The Company also permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. Our ability to generate revenues relating to our equity and credit research depends on the quality of our research and its relevance to our institutional customers and other clients.


•	Investment performance of our own capital. Investment income in the broker-dealer business includes gains and losses generated by the capital the Company invests in private capital raising transactions of its investment banking clients. Our revenues from investment income are linked to the performance of the underlying investments.

External Factors Impacting Our Business

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

•

Our broker-dealer business has been, and may continue to be, adversely affected by market conditions. Increased competition continues to affect our investment banking and capital markets businesses. The same factors also affect trading volumes in secondary financial markets, which affect our brokerage business. Commission rates, market volatility, increased competition from larger financial firms and other factors also affect our brokerage revenues and may cause these revenues to vary from period to period.

•

Our broker-dealer business focuses primarily on small to mid-capitalization and private companies in specific industry sectors. These sectors may experience growth or downturns independent of general economic and market conditions, or may face market conditions that are disproportionately better or worse than those impacting the economy and markets generally. In addition, increased government regulation has had, and may continue to have, a disproportionate effect on capital formation by smaller companies. Therefore, our broker-dealer business could be affected differently than overall market trends.

•

Our alternative investment business can be adversely affected by unanticipated levels of requested redemptions. We experienced significant levels of requested redemptions during the 2008 financial crisis and, while the environment for investing in alternative investment products has since improved, it is possible that we could intermittently experience redemptions above historical levels, regardless of fund performance.

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

Table of Contents

Recent Developments

On March 29, 2017, the Company announced entry into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Shanghai Huaxin Group (Hong Kong) Limited (the “Investor”), a Hong Kong company and an affiliate of China Energy Company Limited (“CEFC China”), pursuant to which the Company agreed to issue and sell to the Investor a number of shares of the Company’s Class A common stock representing approximately 19.9% of the outstanding shares of Class A common stock at the closing of the transaction (the “Shares”) for an estimated aggregate purchase price of approximately $100 million (the “Equity Investment”).

In connection with the Equity Investment, the Company has also entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Investor pursuant to which the Investor will have the right following the closing of the Equity Investment to nominate directors of the Company’s board of directors, subject to certain conditions. In addition, the Investor will be subject to a customary standstill restriction. The Investor will also have certain registration rights, preemptive rights and anti-dilution protection under the Investor Rights Agreement.

In connection with and pursuant to the Stock Purchase Agreement, the Investor has agreed to make a senior unsecured loan (the “Loan”) to the Company in an amount equal to $175 million pursuant to the terms of a term loan agreement to be entered into upon closing of the Equity Investment (the “Term Loan Agreement”).

The Equity Investment and the Loan are expected to close concurrently by the end of the third quarter of 2017, subject to satisfaction of customary closing conditions.

During the first quarter of 2017, Cowen International Limited ("CIL"), which is based in London, launched its international prime brokerage business and began on-boarding clients. CIL clients are offered traditional prime brokerage services such as clearing, custody, financing and stock loan services along with the same types of customer support and use of the firm's proprietary technologies to which its U.S. customers have become accustomed.

Basis of presentation

The unaudited condensed consolidated financial statements of the Company in this Form 10-Q are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP") as promulgated by the Financial Accounting Standards Board ("FASB") through Accounting Standards Codification as the source of authoritative accounting principles in the preparation of financial statements and include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest or a substantive, controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. Certain fund entities that are consolidated in the condensed consolidated financial statements, are not subject to these consolidation provisions with respect to their own investments pursuant to their specialized accounting.

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

Revenue recognition

Our principal sources of revenue are derived from two segments: an alternative investment segment and a broker-dealer segment, as more fully described below.

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

Table of Contents

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

Management fees

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

Several management companies of the funds are owned jointly by the Company and third parties. Accordingly, the management fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, these fees received by the management companies that are accounted for under the equity method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.

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


•	Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of assets under management or notional trading level. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income.


•	Registered Funds. Management fees for the Company’s registered funds (State Street/Ramius Managed Futures Strategy Fund and Ramius Archview Credit and Distressed Fund) are generally charged at an annual rate of up to 1.50% of assets under management.

•

Real Estate. Management fees from the Company's real estate business are generally charged at an annual rate from 0.25% to 1.50% of total capital commitments during the investment period and of invested capital or net asset value of the applicable fund after the investment period has ended. Management fees are typically paid to the general partners on a quarterly basis, at the beginning of the quarter in arrears, and are prorated for changes in capital commitments throughout the investment period and invested capital after the investment period.

•

HealthCare Royalty Partners. In HealthCare Royalty Partners main funds, during the investment period (as defined in the relevant partnership agreements), management fees are generally charged at an annual rate of 1% to 2% of committed capital. After the investment period, management fees for these funds are generally charged at an annual rate of 0.5% to 2% of the net asset value or the aggregate cost basis of the unrealized investments held by the funds. For the other funds (and managed accounts) managed by Healthcare Royalty Partners, the management fee ranges from 0.2% to 1% and there is no adjustment based on an investment period. Management fees for the HealthCare Royalty Partners funds are calculated on a quarterly basis.

•

Ramius Trading Strategies. Management fees and platform fees for the Company's private commodity trading advisory business are generally charged at an annual rate of up to 0.5%. Management and platform fees are generally calculated monthly based on each account's notional trading level at the end of each month. The Company has decided to close the Ramius Trading Strategies private commodity trading advisory business. This business is expected to be closed during the second quarter of 2017.

Incentive income

The Company earns incentive income based on net profits (as defined in the respective investment management agreements) with respect to certain of the Company's funds and managed accounts, allocable for each fiscal year that exceeds cumulative unrecovered net losses, if any, that have been carried forward from prior years. For the products we offer, incentive income earned is typically up to 20% for hedge funds (in certain cases on performance in excess of a benchmark), of the net profits earned for the full year that are attributable to each fee-paying investor. Generally, incentive income on real estate funds is earned after the investor has received a full return of their invested capital, plus a preferred return. However, for certain real estate funds, the Company is entitled to receive incentive fees earlier, provided that the investors have received their preferred return on a current basis or on an investor by investor basis. These funds are generally subject to a potential clawback of these incentive fees upon the liquidation of the fund if the investor has not received a full return of its invested capital plus the preferred return thereon. Incentive income in the HealthCare Royalty Partners funds is generally earned only after investors receive a full return of their capital plus a preferred return. Several general partners of the funds are owned jointly by the Company and third parties. Accordingly, the incentive fees generated by these funds are split between the Company and these third parties. Pursuant to US GAAP, incentive income received by the general partners that are accounted for under the equity

Table of Contents

method of accounting and are reflected under net gains (losses) on securities, derivatives and other investments in the accompanying condensed consolidated statements of operations.

In periods following a period of a net loss attributable to an investor, the Company generally does not earn incentive income on any future profits attributable to that investor until the accumulated net loss from prior periods is recovered, an arrangement commonly referred to as a “high-water mark.” The Company has elected to record incentive income revenue in accordance with “Method 2” of US GAAP. Under Method 2, the incentive income from the Company's funds and managed accounts for any period is based upon the net profits of those funds and managed accounts at the reporting date. Any incentive income recognized in the accompanying condensed consolidated statement of operations may be subject to future reversal based on subsequent negative performance prior to the conclusion of the fiscal year, when all contingencies have been resolved.

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

Investment Banking

The Company earns investment banking revenue primarily from fees associated with public and private capital raising transactions and providing strategic advisory services. Investment banking revenues are derived primarily from small and mid-capitalization companies within the Company's Target Sectors.

Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent fees.

•

Underwriting fees. The Company earns underwriting fees in securities offerings in which the Company acts as an underwriter, such as initial public offerings, follow-on equity offerings, debt offerings, and convertible security offerings. Fee revenue relating to underwriting commitments is recorded when all significant items relating to the underwriting process have been completed and the amount of the underwriting revenue has been determined. This generally is the point at which all of the following have occurred: (i) the issuer's registration statement has become effective with the SEC or the other offering documents are finalized; (ii) the Company has made a firm commitment for the purchase of securities from the issuer; and (iii) the Company has been informed of the number of securities that it has been allotted.

When the Company is not the lead manager for an underwriting transaction, management must estimate the Company's share of transaction-related expenses incurred by the lead manager in order to recognize revenue. Transaction-related expenses are deducted from the underwriting fee and therefore reduce the revenue the Company recognizes as co-manager. Such amounts are adjusted to reflect actual expenses in the period in which the Company receives the final settlement, typically within 90 days following the closing of the transaction.

•

Strategic/financial advisory fees. The Company's strategic advisory revenues include success fees earned in connection with advising companies, principally in mergers and acquisitions and restructuring transactions. The Company also earns fees for related advisory work such as providing fairness opinions. The Company records strategic advisory revenues when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.

•

Placement and sales agent fees. The Company earns agency placement fees and sales agent commissions in non-underwritten transactions such as private placements of loans and debt and equity securities, including, private investment in public equity transactions (“PIPEs”), and as sales agent in at-the-market offerings of equity securities. The Company records placement revenues (which may be in cash and/or securities) when the services for the transactions are completed under the terms of each assignment or engagement and collection is reasonably assured. The Company records sales agent commissions on a trade date basis. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded.

Brokerage

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


•	Commissions. Commission revenue includes fees from executing client transactions. These fees are recognized on a trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for

Table of Contents

research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the related expenditures on an accrual basis. Commission revenues also includes fees from making algorithms available to clients.

•

Principal transactions. Principal transactions revenue includes net trading gains and losses from the Company's market-making activities in over-the-counter equity and fixed income securities, trading of convertible securities, and trading gains and losses on inventory and other firm positions, which include warrants previously received as part of investment banking transactions. In certain cases, the Company provides liquidity to clients by buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects the Company to market risk. These positions are typically held for a very short duration.


•	Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee amount is fixed or determinable, and collection is reasonably assured.

Investment Income

Investment income earned by the alternative investment and broker-dealer segments are earned from investing the Company's capital in various strategies and from investments in private capital raising transactions of its investment banking clients.

Interest and Dividends

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

Reimbursement from Affiliates

The Company allocates, at its discretion, certain expenses incurred on behalf of its hedge fund and real estate businesses. These expenses relate to the administration of such subsidiaries and assets that the Company manages for its funds. In addition, pursuant to the funds' offering documents, the Company charges certain allowable expenses to the funds, including charges and personnel costs for legal, compliance, accounting, tax compliance, risk and technology expenses that directly relate to administering the assets of the funds. Such expenses that have been reimbursed at their actual costs are included in the condensed consolidated statements of operations as employee compensation and benefits, professional, advisory and other fees, communications, occupancy and equipment, client services and business development and other.

Aircraft lease revenue

Aircraft lease revenue associated with the Company's aircraft leasing business is recorded on a straight-line basis over the term of the lease, net of deferred rent and/or prepaid initial direct costs.

Reinsurance premiums

Premiums for insurance-related contracts are earned over the coverage period. In most cases, premiums are recognized as revenues ratably over the term of the contract with unearned premiums computed on a monthly basis. In accordance with US GAAP, for each of its contracts, the Company determines if the contract provides indemnification against loss or liability relating to insurance risk. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract under the deposit method of accounting with any net amount receivable reflected as an asset in other assets, and any net amount payable reflected as a liability within accounts payable, accrued expenses and other liabilities on the condensed consolidated statements of financial condition.

The liabilities for losses and loss adjustment expenses are recorded at the estimated ultimate payment amounts, including reported losses. Estimated ultimate payment amounts are based upon (1) reports of losses from policyholders, (2) individual case estimates and (3) estimates of incurred but not reported losses.

Provisions for losses and loss adjustment expenses are charged to earnings after deducting amounts recovered and estimates of recoverable amounts and are included in other expenses on the condensed consolidated statements of operations.

Costs of acquiring new policies, which vary with and are directly related to the production of new policies, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include

Table of Contents

commissions and allowances as well as certain costs of policy issuance and underwriting and are included within other assets on the condensed consolidated statements of financial condition.

Expenses

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

•

Compensation and Benefits. Compensation and benefits is comprised of salaries, benefits, discretionary cash bonuses and equity-based compensation. Annual incentive compensation is variable, and the amount paid is generally based on a combination of employees' performance, their contribution to their business segment, and the Company's performance. Generally, compensation and benefits comprise a significant portion of total expenses, with annual incentive compensation comprising a significant portion of total compensation and benefits expenses.


•	Interest and Dividends. Interest and dividend expense relates primarily to trading activity with respect to the Company's investments and interest expense on debt issued during March and October 2014.


•	Reinsurance claims, commissions and amortization of deferred acquisition costs. Reinsurance related expenses reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations.


•	General, Administrative and Other. General, administrative and other expenses are primarily related to professional services, occupancy and equipment, business development expenses, communications, expenses associated with our reinsurance business and other miscellaneous expenses. These expenses may also include certain one-time charges and non-cash expenses.


•	Consolidated Funds Expenses. Certain funds are consolidated by the Company pursuant to US GAAP. As such, the Company's condensed consolidated financial statements reflect the expenses of these consolidated entities and the portion attributable to other investors is allocated to a redeemable non-controlling interest.

Income Taxes

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

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

Redeemable Non-controlling Interests

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

Assets Under Management and Fund Performance

Assets Under Management

Assets under management refer to all of our alternative investment products, solutions and services including hedge funds, private equity structures, registered investment companies and listed vehicles. The Company's alternative investment segment includes such strategies as long/short equity, activist equity, event driven equity, event driven credit, global macro, customized portfolio solutions, managed futures, health care royalties and private real estate.

Assets under management also include the fair value of assets the Company manages pursuant to separately managed accounts, collateralized debt obligations for which the Company is the collateral manager, and, as indicated in the footnotes to the table below, proprietary assets which the Company has invested in these products. Also, as indicated, assets under management for certain products may represent committed capital or committed funding that may not be under our control but forms part of the alternative investment product’s trading level.

Table of Contents

As of April 1, 2017, the Company had assets under management of $10.7 billion, a 1.6% increase as compared to assets under management of $10.5 billion as of January 1, 2016. The $0.2 billion increase in assets under management during the three months ended March 31, 2017 primarily resulted from the real estate business.

The following table is a breakout of total assets under management by platform as of April 1, 2017 (which excludes cross investments from other Ramius platforms):



	Platform
	Hedge Funds (a) (b) (g)			Alternative Solutions (a)			Ramius Trading Strategies (h)			Real Estate (a) (i)			Healthcare Royalty Partners (c) (d) (j)			Other (k)			Total
	(dollars in millions)
January 1, 2015	$	4,218		$	3,784		$	147		$	1,707		$	2,582		$	48		$	12,486
Subscriptions	2,725			997			—			—			—			—			3,722
Redemptions	(572		)	(810		)	(49		)	(65		)	(178		)	(14		)	(1,688		)
Performance (e)	(781		)	(419		)	(3		)	—			5			—			(1,198		)
Net Return (f)	(18.52		)%	(11.07		)%	(2.04		)%	—		%	0.19		%	—		%	(9.59		)%
January 1, 2016	5,590			3,552			95			1,642			2,409			34			13,322
Subscriptions	1,537			—			—			—			—			—			1,537
Redemptions	(714		)	(3,641		)	(40		)	(220		)	(137		)	(21		)	(4,773		)
Performance (e)	362			89			(3		)	—			10			—			458
Net Return (f)	6.48		%	2.51		%	(3.16		)%	—		%	0.42		%	—		%	3.44		%
January 1, 2017	6,775			—			52			1,422			2,282			13			10,544
Subscriptions	359			—			—			299			—			—			658
Redemptions	(304		)	—			(8		)	—			(74		)	(13		)	(399		)
Performance (e)	(93		)	—			(1		)	—			5			—			(89		)
Net Return (f)	(1.37		)%	—		%	(1.92		)%	—		%	0.22		%	—		%	(0.84		)%
April 1, 2017	$	6,737		$	—		$	43		$	1,721		$	2,213		$	—		$	10,714

(a)

The Company owns between 20% and 55% of the general partners or managing members of the real estate business, the activist business, the global macro strategy business (the single strategy hedge funds) and the alternative solutions business (starting as of September 2013). On September 23, 2016, the Company completed the sale of its interest in the alternative solutions business, thereby reducing the Company’s estimated assets under management by approximately $2.5 billion.


(b)	These amounts include the Company's invested capital of approximately $179.6 million, $176.6 million and $173.6 million as of April 1, 2017, January 1, 2017 and January 1, 2016, respectively. Assets under management amounts include approximately $544.0 million of committed but undrawn capital that will only be charged fees when invested.


(c)	These amounts include the Company's invested capital of approximately $10.3 million, $10.5 million and $20.2 million as of April 1, 2017, January 1, 2017 and January 1, 2016, respectively.


(d)	This amount reflects committed capital.


(e)	Performance and net returns are net of all management and incentive fees and includes the effect of any foreign exchange translation adjustments and leverage in certain funds.


(f)	Net returns are calculated on the platform as a whole. Net return of individual funds will vary based on the timing and strategy the respective funds.

(g)

The Company’s actively marketed hedge fund products have varying liquidity terms typically ranging from daily to quarterly liquidity with less liquidity applying to certain co-investment vehicles. In 2010, the Company suspended redemption rights with respect to certain hedge funds that are being wound down. The hedge funds that have suspended redemption rights represent approximately 4.94% of the total hedge fund assets under management.


(h)	The Ramius Trading Strategies products offer investors daily liquidity.

Table of Contents


(i)	The real estate business does not provide investors with redemption rights. Investors receive distributions upon dispositions of the underlying real estate investments of which a portion reflects committed capital.


(j)	The Healthcare Royalty funds do not provide investors with redemption rights. Investors receive distributions upon realizations of the funds’ investments.


(k)	The collateralized debt obligations managed by the Company is an amortizing pool of assets with cash returned to investors in periodic distributions as it becomes available.

Fund Performance

For the quarter ended March 31, 2017 the Company's strategies had mostly positive results, and no significant drawdowns in the strategies that underperformed.

Our activist strategy had slightly positive performance for the quarter, lagging the Russell 2000 Index, which continued its advance following the U.S. presidential and congressional elections in November. The portfolio management team has maintained its long term out performance versus the index since the strategy’s inception. The merger arbitrage strategy also finished the quarter with positive performance, exceeding its benchmark HFRI index as well. The strategy has produced a significant recovery following the drawdown of last April. The first quarter of 2017 featured a high level of global merger and acquisitions activity, with January representing the strongest initial month of the year since 2000 accordingly to Bloomberg. The UCITS Merger Fund, in partnership with Bank America Merrill Lynch, also continued to have positive results since trading was initiated in July 2016, and met expectations for the more diversified portfolio. The Ramius event team manages the merger arbitrage component for two multi-manager Advisor Act funds. Positive results were also achieved in these products for the quarter.

Our options-based global macro strategy had negative performance for the first quarter as the decline in volatility across multiple asset classes which permeated throughout 2016 continued into this year. Another of our affiliate managers engages in equity long/short investing in consumer-related stocks. Following a challenging fourth quarter due to extreme intra-sector movements within the consumer space, the strategy experienced a sharp recovery in the first quarter, with performance exceeding the relevant hedged equity index. Our other equity long/short affiliate, which had successfully launched its commingled fund on October 1, 2016 and enjoyed a positive fourth quarter, also had gains in the first quarter of 2017. The latter team follows a multi-sector approach and has consistently seeks to take advantage of performance dispersion across various equity sectors.

The State Street Ramius Managed Futures Strategy Fund, which offers exposure to multi-manager managed futures, had negative returns for the first quarter despite a marginally better environment for commodity trading advisors, who had modest positive performance for the period as compared to the relevant index. The Company has decided to close the Ramius Trading Strategies private commodity trading advisory business. This business is expected to be closed during the second quarter of 2017.

The internally managed multi-strategy vehicles, following an overall increase in valuation on the remaining assets during the fourth quarter of 2016, were able to execute opportunistic sales of certain holdings at year end. This resulted in a distribution to investors during the first quarter of 2017.

With regard to the longer-dated investment vehicles in real estate, the largest legacy real estate debt vehicle, as well as the legacy equity vehicles, experienced minimal changes in value for the first quarter. Certain of the legacy real estate funds, inclusive of these two, are in the process of returning capital to investors. The most recent real estate debt vehicle remains active, with interim results meeting performance expectations. In addition, fund raising is well underway for the sixth debt fund, expected to close in 2017.

Our healthcare royalty strategy, having raised a substantial amount of capital in 2014, still remains in its investment period. As noted in previous quarterly comments, ongoing turbulence in the pharmaceutical and healthcare sectors last year presented attractive opportunities to long term investors, which continue to be available. As a result, the strategy has been able to invest significant capital in both its latest commingled fund and separate managed accounts.

Invested Capital

The Company invests a significant portion of its capital base to help drive results and facilitate the growth of its alternative investment and broker/dealer businesses. Management allocates capital to three primary investment categories: (i) trading strategies; (ii) merchant banking investments; and (iii) real estate investments. The Company seeks to make strategic and opportunistic investments in varying capital structures across a diverse array of businesses, hedge funds and mutual funds. Much of the Company's trading strategy portfolio is invested alongside the Company's alternative investment clients and includes liquid investment strategies such as corporate credit trading, event driven, macro trading, and enhanced cash

Table of Contents

management. Within its merchant banking investments, management generally takes a long-term view that typically involves investing directly in public and private companies globally, private equity funds and alongside its alternative investment clients. In addition, from time to time the Company makes investments in private capital raising transactions of its investment banking clients. The Company's real estate investment strategy focuses on making investments alongside the alternative investment clients invested in the RCG Longview funds, as well as in direct investments in commercial real estate projects.

As of March 31, 2017, the Company's invested capital amounted to a net value of $644.9 million (supporting a long market value of $1,071.7 million), representing approximately 83% of Cowen Group's stockholders' equity presented in accordance with US GAAP. The table below presents the Company's invested equity capital by strategy and as a percentage of Cowen Group's stockholders' equity as of March 31, 2017. The net values presented in the table below do not tie to Cowen Group's condensed consolidated statement of financial condition as of March 31, 2017 because they are included in various line items of the accompanying condensed consolidated statement of financial condition, including “securities owned, at fair value”, “other investments”, “cash and cash equivalents”, and “consolidated funds-securities owned, at fair value”.



Strategy	Net Value		% of Stockholders' Equity
	(dollars in millions)
Trading	$	424.3	55%
Merchant Banking	168.6		22%
Real Estate	52		7%
Total	644.9		83%
Stockholders' Equity	$	778.3	100%

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

Results of Operations

To provide comparative information of the Company's operating results for the periods presented, a discussion of Economic Income (Loss) (which is a non-GAAP measure) of our alternative investment and broker-dealer segments follows the discussion of our total consolidated US GAAP results. Economic Income (Loss) reflects, on a consistent basis for all periods presented in the Company's condensed consolidated financial statements, income earned from the Company's funds and managed accounts and from its own invested capital. Economic Income (Loss) excludes certain adjustments required under US GAAP. See the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company-Segment Analysis and Economic Income (Loss),” and Note 17 to the accompanying Company's condensed consolidated financial statements, appearing elsewhere in this Form 10-Q, for a reconciliation of Economic Income (Loss) to total Company US GAAP net income (loss).

Table of Contents

Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016



	Condensed Consolidated Statements of Operations
	Three Months Ended March 31,					Period to Period
	2017		2016			$ Change			% Change
	(dollars in thousands)
Revenues
Investment banking	$	36,553	$	26,147		$	10,406		40	%
Brokerage	50,534		50,935			(401		)	(1	)%
Management fees	8,708		11,030			(2,322		)	(21	)%
Incentive income	546		1,111			(565		)	(51	)%
Interest and dividends	5,089		3,653			1,436			39	%
Reimbursement from affiliates	1,652		3,887			(2,235		)	(57	)%
Aircraft lease revenue	1,059		394			665			169	%
Reinsurance premiums	7,089		1,010			6,079			602	%
Other revenues	1,400		1,321			79			6	%
Consolidated Funds revenues	2,341		1,551			790			51	%
Total revenues	114,971		101,039			13,932			14	%
Expenses
Employee compensation and benefits	76,673		63,181			13,492			21	%
Interest and dividends	9,930		7,310			2,620			36	%
Reinsurance claims, commissions and amortization of deferred acquisition costs	6,178		563			5,615			NM
General, administrative and other expenses	42,629		43,069			(440		)	(1	)%
Consolidated Funds expenses	4,963		1,816			3,147			173	%
Total expenses	140,373		115,939			24,434			21	%
Other income (loss)
Net gains (losses) on securities, derivatives and other investments	26,056		3,188			22,868			717	%
Consolidated Funds net gains (losses)	13,346		397			12,949			3,262	%
Total other income (loss)	39,402		3,585			35,817			999	%
Income (loss) before income taxes	14,000		(11,315		)	25,315			(224	)%
Income tax expense (benefit)	1,911		(3,320		)	5,231			158	%
Net income (loss)	12,089		(7,995		)	20,084			(251	)%
Net income (loss) attributable to redeemable non-controlling interests in consolidated subsidiaries and funds	9,105		(4,297		)	13,402			(312	)%
Net income (loss) attributable to Cowen Group, Inc.	2,984		(3,698		)	6,682			(181	)%
Preferred stock dividends	1,698		1,698			—			—	%
Net income (loss) attributable to Cowen Group, Inc. common stockholders	$	1,286	$	(5,396	)	$	6,682		(124	)%

Revenues

Investment Banking

Investment banking revenues increased $10.5 million to $36.6 million for the three months ended March 31, 2017 compared with $26.1 million in the prior year period. During the three months ended March 31, 2017, the Company completed 23 underwriting transactions and two strategic advisory transactions. During the three months ended March 31, 2016, the Company completed 12 underwriting transactions and two debt capital market transactions. Despite the increase in total fees, the average underwriting fee per transaction was 26.1% less for the three months ended March 31, 2017 as compared to the prior year period.

Brokerage

Brokerage revenues decreased $0.4 million to $50.5 million for the three months ended March 31, 2017 compared with $50.9 million in the prior year period. This was attributable to lower commissions due to a decrease in customer trading volumes in our cash, option and prime service businesses offset by an increase in revenues due to the initiation of our credit trading business in May 2016. Customer trading volumes across the industry (according to Bloomberg) decreased 20% for the three months ended March 31, 2017 compared to the prior year period.

Table of Contents

Management Fees

Management fees decreased $2.3 million to $8.7 million for the three months ended March 31, 2017 compared with $11.0 million in the prior year period. The decrease in management fees was primarily related to the sale of our interest in the alternative solutions business during the third quarter of 2016.

Incentive Income

Incentive income decreased $0.6 million to $0.5 million for the three months ended March 31, 2017, compared with $1.1 million in the prior year period.

Interest and Dividends

Interest and dividends increased $1.4 million to $5.1 million for the three months ended March 31, 2017 compared with $3.7 million in the prior year period. This was primarily attributable to an increase in the number of investments in interest bearing securities during 2017 as compared to 2016.

Reimbursements from Affiliates

Reimbursements from affiliates decreased $2.2 million to $1.7 million for the three months ended March 31, 2017 compared with $3.9 million in the prior year period. The decrease is primarily related to a decrease in reimbursements from the activist business.

Aircraft lease revenues

Aircraft lease revenues were $1.1 million for the three months ended March 31, 2017 compared to $0.4 million in the prior year period. Our aircraft leasing business began during the first quarter of 2016.

Reinsurance premiums

Reinsurance premiums of $7.1 million relate to premiums from our insurance-related business.

Other Revenues

Other revenues increased $0.1 million to $1.4 million for the three months ended March 31, 2017 compared with $1.3 million in the prior year period. The decrease primarily relates to a decrease in sublease income from our New York offices.

Consolidated Funds Revenues

Consolidated Funds revenues increased $0.7 million to $2.3 million for the three months ended March 31, 2017 compared with $1.6 million in the prior year period. The increase is due to increased interest and dividend income from our consolidated funds.

Expenses

Employee Compensation and Benefits

Employee compensation and benefits expenses increased $13.5 million to $76.7 million for the three months ended March 31, 2017 compared with $63.2 million in the prior year period. The increase is primarily due to $13.9 million higher total revenues and $35.8 million more other income (loss) during 2017 as compared to 2016 resulting in a higher compensation and benefits accrual and the inclusion of new credit and research groups during 2016, The compensation to revenue ratio, including other income (loss), was 50% for the three months ended March 31, 2017, compared with 60% in the prior year period.

Interest and Dividends

Interest and dividend expenses increased $2.6 million to $9.9 million for the three months ended March 31, 2017 compared with $7.3 million in the prior year period. This was primarily attributable to an increase in the number of debt securities held during 2017 as compared to 2016.

Reinsurance claims, commissions and amortization of deferred acquisition costs

Reinsurance related expenses of $6.2 million reflect loss and claim reserves, acquisition costs and other expenses incurred with respect to our insurance and reinsurance operations.

General, Administrative and Other Expenses

General, administrative and other expenses remained constant at $42.6 million for the three months ended March 31, 2017 compared with the prior year period.

Table of Contents

Consolidated Funds Expenses

Consolidated Funds expenses increased $3.2 million to $5.0 million for the three months ended March 31, 2017 compared with $1.8 million in the prior year period. The increase is due to increased interest and dividend expense in one of our consolidated funds.

Other Income (Loss)

Other income (loss) increased $35.8 million to $39.4 million for the three months ended March 31, 2017 compared with $3.6 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital. The gains and losses shown under Consolidated Funds reflect the consolidated total performance for such funds, and the portion of those gains or losses that are attributable to other investors is allocated to redeemable non-controlling interests.

Income Taxes

Income tax benefit decreased $5.2 million to $1.9 million for the three months ended March 31, 2017 compared with an income tax benefit of $3.3 million in the prior year period. This change is primarily attributable to the Company’s operating results.

Income (Loss) Attributable to Redeemable Non-controlling Interests

Income (loss) attributable to redeemable non-controlling interests increased $13.4 million to income of $9.1 million for the three months ended March 31, 2017 compared with a loss of $4.3 million in the prior year period. The increase was primarily the result of losses incurred by one of our consolidated funds in the prior year period. Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the other owners of such entities.

Preferred Stock Dividends

On May 19, 2015, the Company completed its offering of 120,750 shares of the Company's 5.625% Series A cumulative perpetual convertible preferred stock. Each share of the Series A Convertible Preferred Stock is entitled to dividends at a rate of 5.625% per annum. The Company may, at its option, pay dividends in cash, common stock or a combination thereof.

Segment Analysis and Economic Income (Loss)

Segments

The Company conducts its operations through two segments: an alternative investment segment and a broker-dealer segment.

For the three months ended March 31, 2017 and 2016, the Company's alternative investment segment includes hedge funds, private equity structures, registered investment companies and listed vehicles operating results and other investment platforms operating results.

For the three months ended March 31, 2017 and 2016, the Company's broker-dealer segment includes investment banking, research, sales and trading and prime brokerage businesses' operating results.

Economic Income (Loss)

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

Our Economic Income (Loss) may not be comparable to similarly titled measures used by other companies. We use Economic Income (Loss) as a measure of each segment's operating performance, not as a measure of liquidity. Economic Income (Loss) should not be considered in isolation or as a substitute for operating income, net income, operating cash flows, investing and financing activities, or other income or cash flow statement data prepared in accordance with US GAAP. As a result of the adjustments made to arrive at Economic Income (Loss), Economic Income (Loss) has limitations in that it does not take into account certain items included or excluded under US GAAP, including our Consolidated Funds. Economic Income (Loss) is considered by management as a supplemental measure to the US GAAP results to provide a more complete understanding of each segment's performance as measured by management. For a reconciliation of Economic Income (Loss) to US GAAP net income (loss) for the periods presented and additional information regarding the reconciling adjustments discussed above, see Note 17 to the Company's condensed consolidated financial statements included in this 10-K.

Table of Contents

Economic Income (Loss) Revenues

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

Our alternative investment segment generates Economic Income (Loss) revenues through three principal sources: management fees, incentive income and investment income from our own capital. Management fees are directly impacted by any increase or decrease in assets under management, while incentive income is impacted by our funds' performance and resulting increase or decrease in assets under management. Investment income from the Company's own capital is impacted by the performance of the funds and other securities in which our capital is invested.

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

Economic Income (Loss) Expenses

The Company's Economic Income expenses consist of non-interest expenses and interest expense. Non interest expenses consist of compensation and benefits and non-compensation expenses (fixed and variable), less reimbursement from affiliates. Interest expense is primarily interest from indebtedness, not trading activity (which is included within investment income (loss)).

Non-controlling Interests

Non-controlling interests represent the pro rata share of the income or loss of the non-wholly owned consolidated entities attributable to the partners of such entities.

Table of Contents

Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016



	Three Months Ended March 31,
	2017						2016						Total Period-to-Period
	Alternative Investment				Total		Alternative Investment				Total		Total Period-to-Period
	Alternative Investment		Broker-Dealer		Total		Alternative Investment		Broker-Dealer		Total		$ Change			% Change
	(dollars in thousands)
Economic Income Revenues
Investment banking	$	—	$	36,553	$	36,553	$	—	$	26,147	$	26,147	$	10,406		40	%
Brokerage	—		52,313		52,313		—		52,867		52,867		(554		)	(1	)%
Management fees	13,145		801		13,946		16,128		775		16,903		(2,957		)	(17	)%
Incentive income (loss)	3,060		—		3,060		6,920		—		6,920		(3,860		)	(56	)%
Investment income (loss)	15,149		6,477		21,626		1,395		455		1,850		19,776			1,069	%
Other income (loss)	819		285		1,104		682		271		953		151			16	%
Total economic income revenues	$	32,173	$	96,429	$	128,602	$	25,125	$	80,515	105,640		22,962			22	%

Economic Income (Loss)

Total Economic Income (Loss) was $5.5 million for the three months ended March 31, 2017, an increase of $10.4 million compared to Economic Income (Loss) which was a loss of $4.9 million in the prior year period.

Total Economic Income (Loss) revenues were $128.6 million for the three months ended March 31, 2017, an increase of $23.0 million compared to Economic Income (Loss) revenues of $105.6 million in the prior year period. This was related to an increase in investment banking activity and an increase in performance in investment income.

Alternative Investment Segment Revenues

Alternative investment segment Economic Income (Loss) revenues were $32.2 million for the three months ended March 31, 2017, an increase of $7.1 million compared to Economic Income (Loss) revenues of $25.1 million in the prior year period.

Management Fees. Management fees for the segment decreased $3.0 million to $13.1 million for the three months ended March 31, 2017 compared with $16.1 million in the prior year period. This decrease in management fees was primarily related to the sale of our interest in the alternative solutions business during the third quarter of 2016.

Incentive Income (Loss). Incentive income for the segment decreased $3.8 million to $3.1 million for the three months ended March 31, 2017 compared with $6.9 million in the prior year period. This decrease was primarily related to a decrease in performance from our activist business.

Investment Income (Loss). Investment income for the segment increased $13.7 million to $15.1 million for the three months ended March 31, 2017 compared with $1.4 million in the prior year period. The increase primarily relates to an increase in performance of the Company's own invested capital.

Other Income (Loss). Other income (loss) for the segment increased $0.1 million to $0.8 million for the three months ended March 31, 2017 compared with $0.7 million in the prior year period.

Broker-Dealer Segment Revenues

Broker-dealer segment Economic Income (Loss) revenues were $96.4 million for the three months ended March 31, 2017, an increase of $15.9 million compared with Economic Income (Loss) revenues of $80.5 million in the prior year.

Investment Banking. Investment banking revenues increased $10.5 million to $36.6 million for the three months ended March 31, 2017 compared with $26.1 million in the prior year period. During the three months ended March 31, 2017, the Company completed 23 underwriting transactions and two strategic advisory transactions. During the three months ended March 31, 2016, the Company completed 12 underwriting transactions and two debt capital market transactions. Despite the increase in total fees, the average underwriting fee per transaction was 26.1% less for the three months ended March 31, 2017 as compared to the prior year period.

Brokerage. Brokerage revenues decreased $0.6 million to $52.3 million for the three months ended March 31, 2017, compared with $52.9 million in the prior year period. This was attributable to lower commissions due to a decrease in customer trading volumes in our cash, option and prime service businesses offset by an increase in revenues due to the initiation of our

Table of Contents

credit trading business in May 2016. Customer trading volumes across the industry (according to Bloomberg) decreased 20% for the three months ended March 31, 2017 compared to the prior year period.

Investment Income (Loss). Investment income for the segment increased $6.0 million to $6.5 million for the three months ended March 31, 2017, compared with $0.5 million in the prior year period.

Other Income (Loss). Other income (loss) for the segment remained at $0.3 million for the three months ended March 31, 2017, compared with $0.3 million in the prior year period.

Non-Interest Expenses

Non-interest expenses. Total non-interest expenses increased $13.2 million to $117.2 million for the three months ended March 31, 2017, compared with $104.0 million in the prior year period.

Compensation and benefits expenses. Compensation and benefits expenses, included within non-interest expenses, increased $12.9 million to $75.0 million for the three months ended March 31, 2017 compared with $62.1 million in the prior year period. The increase is due to $23.0 million higher revenues during 2017 as compared to 2016 which resulted in a higher compensation and benefits accrual and the inclusion of new credit and research groups during 2016. The compensation to revenue ratio was 58% for the three months ended March 31, 2017 compared with 59% in the prior year period.

Non-compensation Expenses—Fixed. Fixed non-compensation expenses, included within non-interest expenses, decreased $0.6 million to $23.8 million for the three months ended March 31, 2017 compared with $24.4 million in the prior year period.

The following table shows the components of the non-compensation expenses—fixed, for the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,				Period-to-Period
	2017		2016		$ Change			% Change
	(dollars in thousands)
Non-compensation expenses—fixed:
Communications	$	4,714	$	4,137	$	577		14	%
Professional, advisory and other fees	3,927		4,324		(397		)	(9	)%
Occupancy and equipment	6,664		7,220		(556		)	(8	)%
Service fees	2,590		2,160		430			20	%
Expenses from equity investments	2,763		3,719		(956		)	(26	)%
Other	3,167		2,848		319			11	%
Total	$	23,825	$	24,408	$	(583	)	(2	)%

Depreciation and amortization expenses. Depreciation and amortization expenses decreased $0.2 million to $2.6 million for the three months ended March 31, 2017 compared with $2.8 million in the prior year period. The decrease is primarily related to a decrease in depreciation expense from fully depreciated fixed assets partially offset by an increase in amortization on intangible assets related to acquisitions during late 2015 and during 2016.

Non-compensation Expenses—Variable. Variable non-compensation expenses, included within non-interest expenses, which primarily are comprised of expenses which are incurred as a direct result of the processing and soliciting of revenue generating activities, increased $1.2 million to $16.4 million for the three months ended March 31, 2017 compared with $15.2 million in the prior year period. The increase is primarily related to higher floor brokerage and trade execution costs and increased marketing and business development expenses.

The following table shows the components of the non-compensation expenses—variable, for the three months ended March 31, 2017 and 2016:

Table of Contents



	Three Months Ended March 31,				Period-to-Period
	2017		2016		$ Change			% Change
	(dollars in thousands)
Non-compensation expenses—Variable:
Floor brokerage and trade execution	$	7,448	$	7,062	$	386		5	%
HealthCare Royalty Partners syndication costs	132		132		—			—	%
Expenses related to Luxembourg companies	862		978		(116		)	(12	)%
Marketing and business development	7,542		6,611		931			14	%
Other	420		448		(28		)	(6	)%
Total	$	16,404	$	15,231	$	1,173		8	%

Reimbursement from Affiliates. Reimbursements from affiliates, included within non-interest expenses, which relate to the alternative investment segment remained constant at $0.6 million for the three months ended March 31, 2017 compared to the prior year period.

Interest expense

Interest expense, which primarily relates to debt issued during the first and fourth quarters of 2014, remained constant at $4.3 million for the three months ended March 31, 2017 compared to the prior year period.

Non-Controlling Interest

Income (loss) attributable to redeemable non-controlling interests decreased by $0.6 million to $1.6 million for the three months ended March 31, 2017 compared with $2.2 million in the prior year period. Non-Controlling interest represents the portion of the net income or loss attributable to certain non-wholly owned subsidiaries that is allocated to our partners in those subsidiaries.

Liquidity and Capital Resources

We continually monitor our liquidity position. The working capital needs of the Company's business have been met through current levels of equity capital, current cash and cash equivalents, and anticipated cash generated from our operating activities, including management fees, incentive income, returns on the Company's own capital, investment banking fees and brokerage commissions. The Company expects that its primary working capital liquidity needs over the next twelve months will be:


•	pay our operating expenses, primarily consisting of compensation and benefits, interest on debt and other general and administrative expenses; and


•	provide capital to facilitate the growth of our existing business.

Based on our historical results, management's experience, our current business strategy and current assets under management, the Company believes that its existing cash resources will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next twelve months. Our cash reserves include cash, cash equivalents and assets readily convertible into cash such as our securities held in inventory. Securities inventories are stated at fair value and are generally readily marketable. As of March 31, 2017, we had cash and cash equivalents of $79.0 million and net liquid investment assets of $427.0 million. Cash and cash equivalents and short-term investments held by foreign subsidiaries as of March 31, 2017 and December 31, 2016 were $7.4 million and $13.7 million, respectively. The Company intends to permanently reinvest the capital and accumulated earnings of its foreign subsidiaries in the respective subsidiary, but remits the current earnings of its foreign subsidiaries to the United States to the extent permissible under local regulatory rules. The undistributed earnings of the Company’s foreign subsidiaries totaled $1.5 million and $0.8 million as of March 31, 2017 and December 31, 2016, respectively, and the tax liability that would arise if these earnings were remitted to the United States would be approximately $0.2 million and $0.1 million, respectively.

The timing of cash bonus payments to our employees may significantly affect our cash position and liquidity from period to period. While our employees are generally paid salaries semi-monthly during the year, cash bonus payments, which can make up a significant portion of total compensation, are generally paid once a year by March 15th.

Table of Contents

Unfunded commitments

The following table summarizes unfunded commitments as of March 31, 2017:



Entity	Unfunded Commitments		Commitment term
	($ in millions)
Real estate (a)	$	12.6	(a)
HealthCare Royalty Partners funds (b)	$	7.3	2 years
Eclipse Ventures Fund I, L.P. (formerly Formation8 Partners Hardware Fund I, L.P.)	$	0.6	7 years
Lagunita Biosciences, LLC	$	3	3 years
Eclipse Fund II, L.P.	$	0.9	8 years
Eclipse Continuity Fund I, L.P.	$	0.9	9 years

Due to the nature of the securities business and our role as a market-maker and execution agent, the amount of our cash and short-term investments, as well as operating cash flow, may vary considerably due to a number of factors, including the dollar value of our positions as principal, whether we are net buyers or sellers of securities, the dollar volume of executions by our customers and clearing house requirements, among others. Certain regulatory requirements constrain the use of a portion of our liquid assets for financing, investing or operating activities. Similarly, due to the nature of our business lines, the capital necessary to maintain current operations and our current funding needs subject our cash and cash equivalents to different requirements and uses.

Preferred Stock and Purchase of Capped Call Option

Table of Contents

cap price thereof, there would nevertheless be dilution and/or such cash payments would not be offset. As the Capped Call Option Transaction is a free standing derivative that is indexed to the Company's own stock price and the Company controls if it is settled in cash or stock it qualifies for equity classification as a reduction to additional paid in capital.

The Company may also incur additional indebtedness or raise additional capital under certain circumstances to respond to market opportunities and challenges. Current market conditions may make it more difficult or costly to borrow additional funds or raise additional capital.

Regulation

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

Cash Flows Analysis

The Company's primary sources of cash are derived from its operating activities, fees and realized returns on its own invested capital. The Company's primary uses of cash include compensation and general and administrative expenses.

Operating Activities. Net cash used in operating activities of $54.7 million for the three months ended March 31, 2017 was primarily related to cash used to pay for year end bonuses and a decrease in payable to brokers offset partially by sales of securities owned, at fair value. Net cash used in operating activities of $340.6 million for the three months ended March 31, 2016 was primarily related to purchases of other investments, cash used to pay for year end bonuses and an increase in cash held at other brokers.

Investing Activities. Net cash provided by investing activities of $12.3 million for the three months ended March 31, 2017 was primarily related to sales of other investments offset partially by purchases of other investments. Net cash provided by investing activities of $16.6 million for the three months ended March 31, 2016 was primarily related to repayment of certain loans made for investing purposes offset partially by the purchases of other investments and fixed assets.

Financing Activities. Net cash provided by financing activities for the three months ended March 31, 2017 of $9.4 million was primarily related to contributions from non-controlling interests in Consolidated Funds. Net cash provided by financing activities for the three months ended March 31, 2016 of $232.6 million was primarily related to contributions from non-controlling interests in Consolidated Funds and borrowings on short term debt.

Table of Contents

Debt

Convertible Debt

Of the net proceeds from the sale of the Convertible Notes, approximately $20.5 million was applied to pay the net cost of a cash convertible note economic hedge and warrant transaction which increases the effective conversion price to $28.72 (see Note 4), and approximately $0.3 million was applied to repurchase shares of Cowen Class A common stock. The remainder of the net proceeds is being used for general corporate purposes.

Note Payable

The 2021 Notes were issued pursuant to an Indenture, dated as of October 10, 2014 (the “Senior Indenture”), by and among the Company and The Bank of New York Melon, as trustee. The Senior Indenture contains covenants that, among other things, limit (subject to certain exceptions) the Company’s ability and the ability of the Company’s Restricted Subsidiaries (as defined in the Senior Indenture) to: (1) incur debt (including certain preferred stock), if the incurrence of such indebtedness would cause the Company’s consolidated fixed charge coverage ratio, as defined in the Senior Indenture, to fall below 2.0 to 1.0, (2) pay dividends or make distributions on its capital stock, or purchase, redeem or otherwise acquire its capital stock, and (3) grant liens securing indebtedness of the Company without securing the 2021 Notes equally and ratably. If certain conditions are met, certain of these covenants may be suspended. As of March 31, 2016, the Company was in compliance with these covenants.

Other Notes Payable

Capital Lease Obligations

Table of Contents

from 48 to 60 months and interest rates that range from 0.60% to 6.03%. As of March 31, 2017, the remaining balance on these capital leases was $1.6 million. Interest expense was $0.1 million and $0.1 million for the three months ended March 31, 2017 and 2016, respectively.

Letters of Credit

As of March 31, 2017, the Company has the following eight irrevocable letters of credit, related to leased office space, for which there is cash collateral pledged, which the Company pays a fee on the stated amount of the letter of credit. The Company also has a letter of credit, in the amount of $5.5 million, due March 2018, for which cash is pledged as collateral under a reinsurance agreement.



Location	Amount		Maturity
	(dollars in thousands)
New York	$	355	May 2017
New York	$	70	May 2017
New York	$	695	October 2017
New York	$	2,811	October 2017
New York	$	1,600	November 2017
San Francisco	$	710	January 2018
Connecticut	$	65	January 2018
Boston	$	382	March 2018

Contractual Obligations

The following tables summarize the Company's contractual cash obligations as of March 31, 2017:



	Total		< 1 Year		1-3 Years		3-5 Years		More Than 5 Years
	(dollars in thousands)
Equipment/Aircraft Leases, Service Payments and Facility Leases
Real Estate	$	93,283	$	12,256	$	32,781	$	30,949	$	17,297
Service Payments	25,355		12,024		11,915		1,416		—
Equipment leases	2,163		865		1,292		6		—
Aircraft	2,940		945		1,995		—		—
Total	123,741		26,090		47,983		32,371		17,297
Debt
Convertible Debt	158,471		2,243		156,228		—		—
Note Payable	88,035		3,913		10,436		73,686		—
Other Notes Payable	17,686		3,577		7,130		6,979		—
Total	$	264,192	$	9,733	$	173,794	$	80,665	$	—

Clawback obligations

The clawback liability, however, is not realized until the end of the fund's life. The life of the real estate funds with a potential clawback obligation is currently in a winding-up phase whereby the remaining assets of the fund are being liquidated as promptly as possible so as to maximize value, however a final date for liquidation has not been set.

The fund is currently winding-down as of March 31, 2017 and the clawback obligations were $6.2 million (see Note 4 to the Company's condensed consolidated financial statements).

Minimum payments for all debt outstanding

Annual scheduled maturities of debt and minimum payments for all debt outstanding as of March 31, 2017, is as follows:

Table of Contents



	Convertible Debt			Note Payable			Other Note Payable			Capital Lease Obligation
	(dollars in thousands)
2017	$	2,243		$	3,913		$	3,577		$	704
2018	4,485			5,218			2,826			938
2019	151,743			5,218			4,304			78
2020	—			5,218			2,256			—
2021	—			68,468			4,723			—
Thereafter	—			—			—			—
Subtotal	158,471			88,035			17,686			1,720
Less: Amount representing interest (a)	(26,416		)	(27,076		)	(2,385		)	(90		)
Total	$	132,055		$	60,959		$	15,301		$	1,630


(a)	Amount necessary to reduce net minimum payments to present value calculated at the Company's implicit rate at inception. This amount also includes the unamortized discount on the convertible debt.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements as of March 31, 2017. However, through indemnification provisions in our clearing agreements, customer activities may expose us to off-balance-sheet credit risk. Pursuant to the clearing agreements, we are required to reimburse our clearing broker, without limit, for any losses incurred due to a counterparty's failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.

Cowen and Company, Cowen Prime and ATM Execution are members of various securities exchanges. Under the standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the shortfall. The Company's liability under these arrangements is not quantifiable. Accordingly, no contingent liability is carried in the accompanying condensed consolidated statements of financial condition for these arrangements.

Critical Accounting Policies and Estimates

Critical accounting policies are those that require the Company to make significant judgments, estimates or assumptions that affect amounts reported in its condensed consolidated financial statements or the notes thereto. The Company bases its judgments, estimates and assumptions on current facts, historical experience and various other factors that the Company believes to be reasonable and prudent. Actual results may differ materially from these estimates.

The following is a summary of what the Company believes to be its most critical accounting policies and estimates.

Consolidation

These condensed consolidated financial statements include the accounts of the Company, its subsidiaries, and entities in which the Company has a controlling financial interest, including the Consolidated Funds, in which the Company has a controlling general partner interest. All material intercompany transactions and balances have been eliminated in consolidation. The Company’s funds are not subject to these consolidation provisions with respect to their investments pursuant to their specialized accounting.

The Company’s condensed consolidated financial statements reflect the assets, liabilities, revenues, expenses and cash flows of the Consolidated Funds on a gross basis. The management fees and incentive income earned by the Company from the Consolidated Funds were eliminated in consolidation; however, the Company’s allocated share of net income from these funds was increased by the amount of this eliminated income. Hence, the consolidation of these funds had no net effect on the Company’s net earnings.

Table of Contents

Credit and Distressed Master Fund ("Archview Master Fund") and Ramius Merger Arbitrage UCITS Fund ("UCITS Fund") (collectively the "Consolidated Funds").

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.

The Company does not consolidate certain 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 their 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.

Retention of Specialized Accounting—The Consolidated Funds and certain other consolidated companies 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

Table of Contents

apply the specialized industry accounting for brokers and dealers in securities also prescribed under US GAAP. The Company also retains specialized accounting upon consolidation.

Valuation of investments and derivative contracts

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.

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 obligations, ETF's, mutual funds 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.

Table of Contents

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

ii.

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.

Revenue recognition

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

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

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

Table of Contents

Management fees


•	Hedge Funds. Management fees for the Company's hedge funds are generally charged at an annual rate of up to 2% of assets under management or notional trading level. Management fees are generally calculated monthly based on assets under management at the end of each month before incentive income.


•	Registered Funds. Management fees for the Company’s registered funds (State Street/Ramius Managed Futures Strategy Fund and Ramius Archview Credit and Distressed Fund) are generally charged at an annual rate of up to 1.50% of assets under management.

•

Incentive income

Table of Contents

Investment Banking

Investment banking revenue consists of underwriting fees, strategic/financial advisory fees and placement and sales agent fees.

•

Brokerage

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

•

Commissions. Commission revenue includes fees from executing client transactions. These fees are recognized on a trade date basis. The Company permits institutional customers to allocate a portion of their commissions to pay for research products and other services provided by third parties. The amounts allocated for those purposes are commonly referred to as soft dollar arrangements. Commissions on soft dollar brokerage are recorded net of the related expenditures on an accrual basis.

Table of Contents

•


•	Equity and credit research fees. Equity and credit research fees are paid to the Company for providing equity and credit research. Revenue is recognized once an arrangement exists, access to research has been provided, the fee amount is fixed or determinable, and collection is reasonably assured.

Investment Income

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition, but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.

In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under US GAAP, the Company first assesses the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amounts as a basis for determining if it is necessary to perform the two-step approach. The first step requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds the fair value, there is an indication that the related goodwill might be impaired and the step two is performed to measure the amount of impairment, if any.

The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment is recognized in an amount equal to that excess. Goodwill impairment tests involve significant judgment in determining the estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in acceptable valuation techniques, such as the market approach (earning and or transactions multiples) and / or income approach (discounted cash flow method). Changes in these estimates and assumptions could have a significant impact on the fair value and any resulting impairment of goodwill.

Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the condensed consolidated statements of operations if the sum of the estimated discounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

Legal Reserves

The Company estimates potential losses that may arise out of legal and regulatory proceedings and records a reserve and takes a charge to income when losses with respect to such matters are deemed probable and can be reasonably estimated, in accordance with US GAAP. These amounts are reported in other expenses, net of recoveries, in the condensed consolidated statements of operations. See Note 12 "Commitments and Contingencies" in our accompanying condensed consolidated financial statements for the quarter ended March 31, 2017 for further discussion.

Table of Contents

Recently adopted and future adoption of accounting pronouncements

For a detailed discussion, see Note 2 "Recently issued accounting pronouncements" in our accompanying condensed consolidated financial statements for the quarter ended March 31, 2017.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three months ended March 31, 2017, there were no material changes in our quantitative and qualitative disclosures about market risks from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. For a more detailed discussion concerning our market risk, see Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K.

Item 4. Controls and Procedures

Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer (the principal executive officer and principal financial officer, respectively), evaluated our disclosure controls and procedures as of March 31, 2017.

Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of March 31, 2017, our disclosure controls and procedures are effective to provide a reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended March 31, 2017.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we are named as defendants in, or as parties to, various legal actions and proceedings. Certain of these actions and proceedings assert claims or seek relief in connection with alleged violations of securities, banking, anti-fraud, anti-money laundering, employment and other statutory and common laws. Certain of these actual or threatened legal actions and proceedings include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive relief.

In the ordinary course of business, we are also subject to governmental and regulatory examinations, information gathering requests (both formal and informal), certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Certain of our affiliates and subsidiaries are investment banks, registered broker-dealers, futures commission merchants, investment advisers or other regulated entities and, in those capacities, are subject to regulation by various U.S., state and foreign securities, commodity futures and other regulators. In connection with formal and informal inquiries by these regulators, we receive requests, and orders seeking documents and other information in connection with various aspects of our regulated activities.

Due to the global scope of our operations, and presence in countries around the world, we may be subject to litigation, and governmental and regulatory examinations, information gathering requests, investigations and proceedings (both formal and informal), in multiple jurisdictions with legal and regulatory regimes that may differ substantially, and present substantially different risks, from those we are subject to in the United States.

Table of Contents

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There are no material changes from the risk factors previously disclosed in our 2016 Form 10-K filed with the SEC on February 27, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

As of March 31, 2017, the Company's Board of Directors has a share repurchase program that authorizes the Company to purchase up to $138.3 million of Cowen Class A common stock from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. During the three months ended March 31, 2017, the Company did not repurchase any shares of Cowen Class A stock through the share repurchase program.

The table below sets forth the information with respect to purchases made by or on the behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act, as amended), of our common stock during the three months ended March 31, 2017. Board approval of repurchases is based on dollar amount. As a result, the Company cannot estimate the number of shares that may yet be purchased.



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs

Month 1 (January 1, 2017 – January 31, 2017)
Common stock repurchases(1)	—	$	—	—	20,916,234
Employee transactions(2)	19,626	$	14.84	—	—
Total	19,626	$	14.84	—

Month 2 (February 1, 2017 – February 28, 2017)
Common stock repurchases(1)	—	$	—	—	20,916,234
Employee transactions(2)	6,355	$	15.79	—	—
Total	6,355	$	15.79	—

Month 3 (March 1, 2017 – March 31, 2017)
Common stock repurchases(1)	—	$	—	—	20,916,234
Employee transactions(2)	302,257	$	13.44	—	—
Total	302,257	$	13.44	—

Total (January 1, 2017 – March 31, 2017)
Common stock repurchases(1)	—	$	—	—	20,916,234
Employee transactions(2)	328,238	$	13.57	—	—
Total	328,238	$	13.57	—


(1)	The Company's Board of Directors have authorized the repurchase, subject to market conditions, of up to $138.3 million of the Company's outstanding common stock.


(2)	Represents shares of common stock withheld in satisfaction of tax withholding obligations upon the vesting of equity awards or other similar transactions.

Table of Contents

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		COWEN GROUP, INC.
		By:	/s/ PETER A. COHEN
		Name:	Peter A. Cohen
		Title:	Chief Executive Officer (principal executive officer)

		By:	/s/ STEPHEN A. LASOTA
		Name:	Stephen A. Lasota
Date:	May 1, 2017	Title:	Chief Financial Officer (principal financial officer and principal accounting officer)

Table of Contents

Exhibit Index



Exhibit No.			Description
10.1			Stock Purchase Agreement, dated as of March 29, 2017, by and between Cowen Group, Inc. and Shanghai Huaxin Group (Hong Kong) Limited, a Hong Kong company (previously filed as Exhibit 10.1 to the Form-8-K filed on March 30, 2017).
10.2			Investor Rights Agreement, dated as of March 29, 2017, by and between Cowen Group, Inc. and Shanghai Huaxin Group (Hong Kong) Limited, a Hong Kong company (previously filed as Exhibit 10.2 to the Form-8-K filed on March 30, 2017).
10.3			Form of Term Loan Agreement (previously filed as Exhibit 10.3 to the Form 8-K filed on March 30, 2017).
31.1			Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2			Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32			Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS			XBRL INSTANCE DOCUMENT
101.SCH			XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL			XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
101.DEF			XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
101.LAB			XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
101.PRE			XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

E - 1