Black Edge — S. Kolhatkar
It would be an investigation unlike any other in the history of Wall Street, a decadelong, multiagency government crackdown on insider trading focused almost entirely on hedge funds. It began with Raj Rajaratnam and the Galleon Group [mentioned in The Buy Side] and quickly expanded to ensnare corporate executives, lawyers, scientists, traders, and analysts across dozens of companies. Its ultimate target was Steven Cohen, the billionaire founder of SAC Capital Advisors, possibly the most powerful hedge fund firm the industry had ever seen.
A story about the SEC’s dogged pursuit of Steven Cohen, who Bloomberg in 2003 called “The Most Powerful Trader on Wall Street You’ve Never Heard of,” link. At SAC Capital (standing for Steven A. Cohen — despite the author never getting an interview with Cohen directly, he paints Cohen as the kid who was always picked on as a kid and took his revenge by making billions on Wall St., an image that is corroborated by naming his own fund after himself), he dominated the 2000s.
Black edge refers to obviously illegal information, vs. grey (ambiguous) and white which is readily available, public information. In 2013, SAC pled guilty to insider trading charges and paid $1.2B in fees and two employees went to jail, but Cohen himself was never charged. Legally barred from accepting external money, Cohen created and moved all his money to Point72 — but basically running the same gig — and SAC was defunct as of 2016. As of 2018, Point72 started accepting outside capital.
SAC’s dominance was due to 2 things, primarily: its early-mover advantage (at the time there weren’t many hedge funds) and its huge trades, which meant that banks lined up to offer their services (both legal and illegal):
SAC was interested in one thing: short-term movements in the stock price that it could exploit for profit. For every one of those shares that Goldman might buy or sell on SAC’s behalf, it collected six cents of commission. It didn’t take a PhD to understand the implications. Although Fidelity was much bigger, SAC generated far more revenue, based purely on volume. In exchange for giving Goldman Sachs millions of dollars of its business, SAC wanted something in return, the salesman said, something that was commensurate with its importance to the company. It wanted preferential treatment, particularly when it came to moves Goldman’s analysts made that might affect a company’s stock price. “If you change a penny or two on your estimates, you call SAC first,” the salesman said. If an analyst was going to recommend that investors buy or sell shares in a company he or she covered, or revise the amount of money he or she estimated the company would make next quarter, SAC would like to know before anyone else. And when a Goldman analyst offered to jump on the phone for a “huddle” with important investors to help them interpret company events, why not do it first with SAC? Was that so much to ask?
SEC
Kolhatkar, in this book, successfully sets the scene from both sides: that of the traders at SAC who were not only pressured into finding ‘black edge’ by the profit-at-all-costs culture, but also implicitly condoned to do so by their superiors; and that of the SEC. The author’s attention to the latter not only gives the story a driving narrative, i.e. good guys to cheer for, but also brings attention to what might be summed up as inefficacy (not incompetence), something that itself is due to multiple reasons, starting with lack of will to persecute:
Bharara had watched prosecutors in the Eastern District lose a closely watched fraud case against two Bear Stearns hedge fund traders a few years earlier, in 2009, a case that had similarly seemed to be a surefire winner. It was one of the first major criminal cases to arise out of the financial crisis, and the two fund managers were acquitted after just six hours. The government was harshly criticized for choosing the case in the first place and for the way it was handled. It was a disaster, and it sent a message to the Justice Department that when it came to pursuing crime on Wall Street, it was much safer to file cases that were close to a sure thing, rather than risk losing after a big trial.
The power/resource mismatch between the SEC and their targets:
One of the challenges of prosecuting white collar crime is the resource mismatch between the two sides, and this was on full display at the conference table. On Cohen’s side sat two silver-haired professionals, each of whom boasted thirty years in the industry as well as illustrious clerkships and Ivy League degrees. They were more experienced, more cynical, and, important, were making boatloads more money, working for a client with nearly unlimited funds. On the other side, Charles Riely and Amelia Cottrell were young, smart, and hardworking, products of fine colleges themselves. But they could have been associates at Klotz’s and Kramer’s firms if they hadn’t been working for the Securities and Exchange Commission.
And, of course, the revolving door, a hint to which is just dropped in the epilogue:
The most startling move of all, however, came from Amelia Cottrell, a senior enforcement attorney at the SEC who oversaw the agency’s Martoma [the trader who was convicted] investigation. At the end of June 2015, she shocked her colleagues by announcing that she was joining Willkie Farr, the firm where Cohen’s longtime defense counsel Marty Klotz worked. It turned out that leading the most powerful case the government assembled against Cohen was the best possible audition for a job working for his consigliere.
All of which, and more is covered excellently in Eisenger’s The Chickenshit Club, which is entirely focused on how the SEC became… well… “The Chickenshit Club.” Too afraid to persecute. Too happy to settle/DPA.
Alternative information
A major element of the story is the “consulting groups” that connected (and probably still connect) investors with boots-on-the-ground employees.
… expert networks like Gerson Lehrman Group, the matchmaking company that helped connect investors with executives at publicly traded companies. Hundreds of doctors involved in drug research and middle managers at technology companies were moonlighting for these expert network firms, taking money to have “consultations” with hedge fund traders. The consultants weren’t supposed to disclose confidential information, but there was little in place to prevent that from happening. Hedge funds were paying millions of dollars in fees to these consultants. Why would they do that for information that anybody could get?
Art
Another recurring theme in Black Edge is Cohen’s predilection for art, which Kolhatkar ties to Cohen’s mission of self-aggrandizing:
The art market offered a way to transform wealth into an alluring form of influence and power. “It is not even cool to be a billionaire anymore—there are, like, two hundred of them,” as Loïc Gouzer, a specialist in contemporary art at Christie’s New York, put it.
Cohen is famed for buying the most expensive paintings in the world — his Wikipedia page has a section dedicated to his art collection. In addition to what we might infer about his persona from this though, it strikes me how complicit and subordinated to capitalism, the art world is: otherwise respectable art dealers kowtow to Cohen (and his cheque book):
“Steve is a very serious, very astute collector,” gushed William Acquavella, one of Cohen’s art dealers, in The New York Times. “He also has just the right instincts, ones that can’t be learned from reading art history books.”
The saddest story
Matthew Matorma was eventually convicted based on pharma inside trades, information for which he swindled (after developing a relationship over many years, including hourlong phone calls) from:
Gilman slowly recovered from his lymphoma treatment over the course of the summer. He was still weak, but his hair was starting to grow back. He waited for weeks to hear from Martoma, but there was no word. He was surprised by it. He couldn’t believe his friend wouldn’t at least check in on him, given his cancer and everything else—in the past, Martoma always showed such concern for Gilman and his health. Finally, in September, Gilman broke down and typed out an email. “Hi Mat, I haven’t heard from you in a while and hope that all is well with you,” he wrote, trying to sound cheerful. “I hope that you have not been too seriously set back by the great turmoil in the markets, plus the disappointing drop in Elan stock.” As he watched the stock market plunging day after day and saw headlines about bank rescues and financial panic, Gilman had been worried about his friend and his young family. “Anyway,” he added, “no need to call, I have nothing new. I just wonder how you are faring. Best Regards, Sid.” Martoma scheduled an appointment through GLG to meet with Gilman a few months later at a medical conference in Seattle, but Martoma canceled the meeting. They never saw each other again.
Dr Gilman’s son committed suicide after coming out and becoming estrange from his father. He also cut off ties with his only other child after he came out too.
Notebook Export
Black Edge
Prologue: The Flip
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A few months earlier, on March 7, a federal judge had handed Kang a gift, approving a wiretap application on the cellphone of a Wall Street titan named Raj Rajaratnam. Kang had been practically living in the wire room ever since, gathering evidence for a massive insider trading case. He wasn’t in securities crime just to bust the seedy, small-time frauds he’d been working on for the previous two years. He wanted to take down someone big—someone like Raj—a significant player in the financial world. The fifty-year-old co-founder of the Galleon Group, a $7 billion hedge fund, Rajaratnam was one of the more high-profile traders on Wall Street.
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Six days after that phone call, Kang watched as Akamai announced to the world that its next earnings release was going to be a disappointment. Its stock dropped from $31.25 to $23.34 overnight. Raj, who was short 875,000 shares, made over $5 million in a week. The woman who gave him the tip, a trader named Danielle Chiesi, made $2.5 million. Kang wanted to know where she had gotten such valuable intelligence about what Akamai was going to do, so he subpoenaed her phone records. He could see, looking over her call logs, that she had spoken to a senior executive at Akamai just before she passed the information on to Raj.
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He and the other FBI agents on wire detail were shocked by what they were hearing. Was this normal behavior on Wall Street? Was inside information that easy to get? They had become accustomed to finding corruption in the financial industry, but these interactions were so blatant, so obviously illegal, and seemed to extend in every direction. Each time they discovered one insider trading circle, it would overlap with another, and they’d have a whole new list of suspects to go after. The problem was bigger than Raj. It was a large, complicated network.
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Kang hoped that Far and Lee would lead him closer to SAC, which was one of the biggest hedge funds in the world. Kang had been learning more and more about the fund and its mysterious founder, Steven Cohen, hearing from other traders on Wall Street that Cohen was “always on the right side” of every trade—something that seemed, at least on the surface, to be impossible. No one in the industry understood how Cohen made so much money so consistently; his competitors were envious—and suspicious.
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It would be an investigation unlike any other in the history of Wall Street, a decadelong, multiagency government crackdown on insider trading focused almost entirely on hedge funds. It began with Raj Rajaratnam and the Galleon Group and quickly expanded to ensnare corporate executives, lawyers, scientists, traders, and analysts across dozens of companies. Its ultimate target was Steven Cohen, the billionaire founder of SAC Capital Advisors, possibly the most powerful hedge fund firm the industry had ever seen.
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For years hedge funds existed largely separate from Wall Street’s operatic boom-bust cycles, but by the mid-2000s they’d moved to the center of the industry. Some started producing enormous profits each year. Over time, the name hedge fund lost any connection to the careful strategy that had given such funds their name and came to stand, instead, for unregulated investment firms that essentially did whatever they wanted.
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In 2006, the same year that Lloyd Blankfein, the CEO of Goldman Sachs, was paid $54 million—causing outrage in some circles—the lowest-paid person on the list of the twenty-five highest-paid hedge fund managers made $240 million. The top three made more than a billion dollars each. Cohen was number five that year, at $900 million. By 2015, hedge funds controlled almost $3 trillion in assets around the world and were a driving force behind the extreme wealth disequilibrium of the early twenty-first century.
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If there was one person who personified the rise of hedge funds, and the way they transformed Wall Street, it was Steven Cohen. He was an enigmatic figure, even to those in his own industry, but his average returns of 30 percent a year for twenty years were legendary. What was especially intriguing about him was that his performance wasn’t based on any well-understood strategy, unlike other prominent investors such as George Soros or Paul Tudor Jones; he wasn’t famous for betting on global economic trends or predicting the decline of the housing market. Cohen simply seemed to have an intuitive sense for how markets moved, and he entered the industry at precisely the moment when society reoriented itself to reward that skill above almost all others. He traded in and out of stocks in rapid-fire fashion, dozens of them in a single day. Young traders longed to work for him and rich investors begged to put their money in his hands. By 2012, SAC had become one of the world’s most profitable investment funds, managing $15 billion. On Wall Street, “Stevie,” as Cohen was known, was like a god.
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They laid cable close to stock exchanges so that their trades could be executed nanoseconds faster and employed engineers and coders to make their computers as powerful as those at the Pentagon. They paid soccer moms to walk the aisles at Walmart and report back on what was selling. They studied satellite images of parking lots and took CEOs out to extravagant dinners, digging for information. They did all this because they knew how difficult it is to beat the market, day after day, week after week, year after year. Hedge funds are always trying to find what traders call “edge”—information that gives them an advantage over other investors.
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When one trader was asked if he knew of any fund that didn’t traffic in inside information, he said: “No, they would never survive.” In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost.
Chapter 1: Money, Money, Money
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There tend to be two types of people who seek out jobs on Wall Street. The first are those with wealthy parents who were sent to the right prep schools and Ivy League colleges and who, from their first day on the trading floor, seem destined to be there. They move through life with a sense of ease about themselves, knowing that they will soon have their own apartments on Park Avenue and summer houses in the Hamptons, a mindset that comes from posh schooling and childhood tennis lessons and an understanding of when it is appropriate for a man to wear seersucker and when it isn’t. The second type call to mind terms like street smart and scrappy. They might have watched their fathers struggle to support the family, toiling in sales or insurance or running a small business, working hard for relatively little, which would have had a profound effect on them. They might have been picked on as children or rejected by girls in high school. They make it because they have a burning resentment and something to prove, or because they have the ambition to be filthy rich, or both. They have little to fall back on but their determination and their willingness to do whatever it takes, including outhustling the complacent rich kids. Sometimes the drive these people have is so intense, it’s almost like rage. Steven Cohen came from the second group.
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On Cohen’s first day, he watched Aizer work with a trading assistant, scouring the market for $0.25 or $0.50 they could make on their idiot-proof options schemes. During a lull in activity, he stared at the market screens. Then Cohen announced that he was looking at a stock, ABC. “I think it’s going to open higher tomorrow,” he said. Even brand-new on the job, Cohen was confident in his abilities as a trader. Aizer snickered. “All right,” he said, curious to see whether the new kid with bushy brown hair and glasses had any clue what he was doing. “Go ahead, take a shot.” Cohen made $4,000 that afternoon, and another $4,000 overnight; in 1978, this was a meaningful profit. Watching the price oscillate like a sine wave, placing the bet, taking the risk, absorbing the payoff—his body surged with adrenaline, and Cohen was hooked. Trading was all he wanted to do.
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Money was a constant source of stress in the Cohen household.
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In high school, Cohen discovered the one extracurricular activity that ignited true passion in him: poker.
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Cohen was admitted to Wharton, and his parents were overjoyed. They had inherited some money from Jack’s parents, freeing them from the burden of student loans, although Steve would still have to work to earn money for books and going out. As soon as he arrived on campus, he noticed that the parking lot was filled with BMWs and Mercedes that belonged to his fellow students. Once again, Cohen was in an environment where most everyone around him came from wealthier families than he did and he was shut out of the most elite social circles. His fraternity house became the center of his life. The culture at Wharton was driven by the worship of money. Cohen’s fraternity, Zeta Beta Tau, or ZBT, was the wealthier of the two Jewish fraternities on campus. Its nickname was “Zillions Billions Trillions.”
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One day, during a statistics exam, while the others in the class were struggling to finish, Cohen stood up and marched out the door before he was done to check his closing stock prices. He thought he had no chance of competing with the prep school kids who spoke the same language and had all read the same books. He would have to outsmart them.
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He started skipping classes to visit the Merrill Lynch offices in Philadelphia, where he could watch the NYSE ticker. “I’d just stand there and stare,” he said. “I could hear the tick tick tick of the tape, and you would watch a stock go by at, say, 50…50…50…And then it might go up or down a tick. You could see the trade happening. You could just watch it happen in slow motion. And later, not right away, I found I was pretty good at guessing which way those numbers would go.”
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Cohen and the rest of Aizer’s employees couldn’t have chosen a more opportune moment to begin a career in finance. Ronald Reagan’s pro-business policies had strapped a jet pack on Wall Street and the traders and raiders who filled its ranks. Regulations were loosened, freeing companies to borrow money and buy their competitors, and the stock market began one of the most prolonged upward swings in its history. The pace of mergers and acquisitions increased, fueled in part by Milken’s empire at Drexel Burnham Lambert, which had created a new way of financing corporate takeovers through high-yield debt, also known as junk bonds—which were ranked “below investment grade” by ratings agencies because they were riskier than other bonds. With these new instruments, companies that couldn’t borrow money could suddenly issue junk bonds, which gave them the financial resources to launch hostile takeovers of their competitors. Every day, rumors of these leveraged buyouts sent companies’ share prices soaring, earning millions for the traders buying and selling their stocks.
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The SEC wanted Cohen to come in and testify. In fact, the agency was looking at a handful of other stocks, too—Warner Communications, General Foods, and Union Carbide, all of which had recently been targets of takeover offers. Trading on material nonpublic information that was leaked by an insider who was supposed to keep it confidential was a violation of securities laws. The SEC noticed that a group of people connected to Cohen had accumulated shares of all three stocks, as well as RCA, right before public announcements had driven the prices higher. The agency suspected an insider trading ring of some sort.
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During depositions there was usually a struggle over this point. It was always a goal of the SEC to get a witness to admit that he was “taking the Fifth” on the record when he was refusing to answer their questions; it could be used later as an inference of guilt. If you were innocent, the thinking went, why wouldn’t you use the opportunity to tell the SEC all about it? White collar defense attorneys were well aware of this, of course, so it was their job to resist and try to avoid letting the client say that he was “taking the Fifth,” even when he was taking the Fifth, for precisely the same reason. It was standard legal maneuvering.
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The savings and loan crisis was also getting worse, causing the collapse of more than a thousand banks around the country. Wall Street was in crisis. Cohen, however, remained in control. For the next month after the crash, as the NYSE floor specialists struggled to open trading in their securities every morning, Cohen’s “clerks” would call them before the market opened and get quotes for where they thought particular stocks would start trading. Due to the ongoing shock of the crash, the biggest trading opportunities often came at the start of the day, when nobody knew what was going to happen and fear ran high. Could this be the day it all went to zero? Cohen would get his “look” conveyed to him from the floor specialists, as in, “Gillette’s going to open up 2.” Then as soon as the stock opened he’d short as many shares as he could—selling shares he didn’t actually own and buying them back when the stock went down again. He did this over and over again for weeks, shorting nearly every stock in the Dow—DuPont, GE, IBM—making money almost every time as the prices went lower. It wasn’t a patriotic move, when the market was struggling to recover, but his colleagues marveled at his ability to turn off his emotions. Gruntal, and Cohen’s trading group, ultimately survived.
Chapter 2: What Stevie Wants, Stevie Gets
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He wasn’t particularly fantastic at math, he didn’t study global economies, he had no unique investing philosophy. He was just a great trader, one who was so good that a traditional Wall Street career couldn’t contain him.
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Within three years, SAC had quadrupled in size, to almost $100 million.
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He signed up for a dating service and sent out invitations in response to twenty of the profiles. Only one woman responded. Her name was Alexandra Garcia. She had long dark hair. They had their first date at a noisy Italian restaurant near Cohen’s apartment in Manhattan, where they talked for several hours. They started seeing each other regularly, but Alex made it clear that she wasn’t interested in a casual relationship. She wanted to get married. On the surface, she was an unlikely match for a successful Wall Street trader. Alex was a struggling single mother raised in a large Puerto Rican family in Spanish Harlem. She had not gone to college. She had a son. She and Cohen had very little in common.
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SAC was doing so well that he was able to charge higher fees than almost any other fund, keeping 50 percent of the profits at the end of the year. Most hedge funds charged 20 percent. But Cohen’s investors did not complain. In fact, they fought to get in.
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One Monday morning in 1998, a group of Goldman Sachs employees gathered for their division’s weekly meeting an hour before the market opened. The man preparing to address the crowd was a Goldman securities salesman, the person responsible for keeping some of the firm’s most important trading customers happy. He had urgent information to share about his most lucrative account. “SAC Capital,” he announced, “is now the single largest generator of commissions to the equity division.”
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Turned Duff book
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SAC was a hedge fund, he explained to the confused Goldman employees, some of whom had never heard of the company. They don’t just buy blocks of IBM to hold for months at a time while playing golf and collecting dividends, they trade. And they don’t just trade. They trade hundreds of stocks a day, hundreds of thousands of shares at a time. They were not interested in a company’s long-term health or whether the new products it had under development would enable it to hire more people in five years. SAC was interested in one thing: short-term movements in the stock price that it could exploit for profit. For every one of those shares that Goldman might buy or sell on SAC’s behalf, it collected six cents of commission. It didn’t take a PhD to understand the implications. Although Fidelity was much bigger, SAC generated far more revenue, based purely on volume. In exchange for giving Goldman Sachs millions of dollars of its business, SAC wanted something in return, the salesman said, something that was commensurate with its importance to the company. It wanted preferential treatment, particularly when it came to moves Goldman’s analysts made that might affect a company’s stock price. “If you change a penny or two on your estimates, you call SAC first,” the salesman said. If an analyst was going to recommend that investors buy or sell shares in a company he or she covered, or revise the amount of money he or she estimated the company would make next quarter, SAC would like to know before anyone else. And when a Goldman analyst offered to jump on the phone for a “huddle” with important investors to help them interpret company events, why not do it first with SAC? Was that so much to ask?
Chapter 3: Murderers’ Row
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Between 1998 and 1999, SAC reached an important marker, surpassing $1 billion a year in assets, which was achieved after five years of almost doubling their money each year. As SAC grew, though, the drawbacks of its bare-knuckled investing approach became increasingly hard for Cohen to ignore. He had hundreds of millions of dollars to invest, and, by necessity, the size of the positions the fund took were larger than they’d ever been before. But Cohen’s trading method, which continued to be a form of day-trading, only worked with a smaller pool of money, where one could build more modest, but significant, positions and get out of them quickly. New hedge funds were opening every day, with competitors moving into areas that Cohen had once claimed as his own. With so many traders pursuing the same ideas, returns were getting harder to find. When traders at other firms found out that Cohen was buying a particular stock, they tried to replicate what he was doing, driving the price up and eliminating the profits that once came so easily.
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He told his top lieutenants that, from now on, he wanted to hire only traders who had a “fundamental edge,” that is, deep expertise or connections in a particular industry. He walked around SAC’s own trading desk, pointing at his employees one by one and anointing them healthcare traders, consumer stock experts, energy traders. Anyone who couldn’t adapt and turn himself into a specialist would be let go. The era of anti-intellectualism at SAC was over. This shift opened the door to a new breed of person at the firm: the slick, well-connected, Ivy League–educated professional. To remake the company, Cohen began to hunt them down.
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One of the things SAC looked for in new traders was personal connections the trader had with people working at public companies that might yield valuable intelligence. If a potential hire had a summer rental in the Hamptons with a corporate executive at an Internet company, for example, this was noted with approval in the file. Friends, fraternity brothers, fathers-in-law, and wives: They could all prove valuable when it came to getting information.
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The art market offered a way to transform wealth into an alluring form of influence and power. “It is not even cool to be a billionaire anymore—there are, like, two hundred of them,” as Loïc Gouzer, a specialist in contemporary art at Christie’s New York, put it. “But, if that same guy buys a painting, suddenly it puts you in a whole circle….They enter a whole circuit. You are going to meet artists, you are going to meet tech guys. It is the fastest way to become an international name.” Cohen watched as some of his employees transformed their reputations by amassing extravagant art collections, as each new museum endowment was covered in the society pages.
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Art dealers and galleries in New York operated under their own restrictive code, and they wouldn’t deal with just anyone, no matter how much money he or she had. You couldn’t simply walk into a gallery and write a check for a Monet to hang on your penthouse wall. The gatekeepers of the art world understood that the exclusivity of their product depended on not allowing rich hedge fund managers from Greenwich to buy whatever they wanted. It was a form of discrimination, in a sense, but it was also simple market economics: In order to generate demand, you needed to control the supply. In response, Wall Street collectors needed to hire the right people to make the introductions that would move them to the front of the line.
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Martoma thought that it might prove to be a huge commercial success, and he wanted to learn everything he could about the science behind it and the logistics of the trials. To do so, he planned to make use of every resource he had access to, which at SAC included several high-priced research services. One in particular was of great interest to him, the Gerson Lehrman Group, which was an “expert network” or “matchmaking” firm. The matches it made were between Wall Street investors like Martoma and people who worked inside hundreds of different publicly traded companies, people responsible for ordering new truck parts or buyers for retail chains who could provide insight on their industries, their competitors, or even their own firms. The investors paid GLG a fee to connect them with these company employees, who in turn were paid handsomely—sometimes as much as $1,000 an hour or more—to talk to the investors. The company employees were supposed to share only information that was publicly available, to avoid breaking any laws. Or at least that was the idea.
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In 2000, the SEC, deciding that such shenanigans were bad for the market, passed a rule called Regulation Fair Disclosure, often called “Regulation FD.” It prohibited public companies from offering important information about their businesses to some investors and not others. After the rule passed, companies had to tell everyone everything at the same time through public announcements and press releases. This made it much easier to get the information, but it also made the information much less useful, because everyone else had it as well. Traders had to find some other way to gain an advantage in the market. Companies like GLG rose up to help provide it, by offering access to the heart of a company’s operations.
Chapter 4: It’s Like Gambling at Rick’s
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As evidence of how close SAC seemed to be to nearly every Wall Street controversy, the article reported that the day after Sam Waksal, the chairman of the biotechnology company ImClone Systems, had found out that his company’s application for approval of a cancer drug had been rejected, a full twenty-four hours before the news became public, he got a call from an SAC trader who had allegedly noticed a movement in the stock that no one else had picked up on. (The SAC call came a few minutes before Martha Stewart tried to reach Waksal, leading to her infamous insider trading and perjury case; no one ever returned the SAC call.)
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“If you follow the money, hedge funds are where it leads,” Carroll explained. He wasn’t saying that all hedge funds were breaking the law, but he was concerned that the FBI didn’t have a clue as to what these funds were doing and how they were making so much money.
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During interviews with informants and witnesses from the financial world, Kang always asked the same questions: Who are the most successful hedge fund traders? How do they make their money? Do people think they’re clean? One name came up over and over again: SAC Capital. SAC, according to Kang’s sources on Wall Street, was the most profitable, and aggressive, fund out there.
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In 2000, New York attorney general Eliot Spitzer launched an investigation of research departments at Wall Street investment banks, ultimately charging them three years later with manipulating their buy and sell ratings on stocks, the same ratings that many investors in the market turned to as guides when evaluating the health of various companies. Spitzer accused the banks of using their analyst reports as sales tools to generate investment banking business for their firms.
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Bowe believed that hedge funds could easily manipulate the market by commissioning negative reports on companies whose shares they were already short and then making a profit when the negative research drove the stock price down.
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Finally, Bowe told Kang about expert networks like Gerson Lehrman Group, the matchmaking company that helped connect investors with executives at publicly traded companies. Hundreds of doctors involved in drug research and middle managers at technology companies were moonlighting for these expert network firms, taking money to have “consultations” with hedge fund traders. The consultants weren’t supposed to disclose confidential information, but there was little in place to prevent that from happening. Hedge funds were paying millions of dollars in fees to these consultants. Why would they do that for information that anybody could get? This in particular struck Bowe as an arrangement that could easily be misused.
Chapter 5: Edgy, Proprietary Information
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A couple of days later, after the office had emptied out, Steinberg called Horvath over to his desk. “I can day-trade these stocks and make money by myself, I don’t need your help to do that,” Steinberg told him, speaking slowly. “What I need you to do is go out and get me edgy, proprietary information that we can use to make money in these stocks.” Steinberg paused. “You need to talk to your contacts and the companies, bankers, consultants, and leverage your peer network to get that information.” He looked hard at Horvath, seemingly to make sure that he understood. To Horvath, it was clear what his boss wanted him to do: get inside information. Something guaranteed to make money.
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To persuade a judge to authorize a wiretap, prosecutors couldn’t just go on hunches or educated guesses. They essentially had to show that criminal activity was being discussed over a specific phone line—i.e., that it was “dirty.” Wiretaps hadn’t been used in insider trading cases before, but the insider trading rings were in many ways similar to organized crime. And like crime syndicates, many of the hedge funds the FBI was looking at were secretive and hierarchical, with the lower-level workers doing questionable things while the bosses at the top maintained intentional ignorance and reaped most of the benefits. The FBI felt that it needed the same tools it had used to investigate the Mob. Makol helped Slaine make a recording of a call with one of his best friends, a Galleon trader named Zvi Goffer, in which they discussed illegal information. Using this as evidence, the government got permission to wiretap Goffer’s phone. Soon, the FBI’s wire room came to life.
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Just as the financial crisis hit, SAC reached its peak, with close to 1,200 employees and almost $17 billion in assets, half of which belonged to Cohen and his employees. Since its founding in 1992, the firm had gone through several reinventions: first a day-trading shop staffed with Cohen’s college friends; then a more professional operation with Ivy League types; and finally a research and intelligence-gathering machine filled with analysts who specialized in different industries. Its final expansion had been the most ambitious. Cohen had pushed the company into every corner of the market, opening offices in Asia and Europe, launching a private equity unit to take stakes in private companies, and starting a bond trading group, an area he knew little about but that now accounted for a quarter of his fund. SAC’s returns had averaged 30 percent over the previous eighteen years, an impossibly high level of performance that was several times greater than the average market return. Cohen was one of the richest men in the world, worth nearly $10 billion.
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Chapter 6: Conflict of Interest
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Gerson Lehrman Group called itself a “knowledge broker,” a description that carried a certain irony. In reality, it was a vehicle for delivering superior information to sophisticated investors who were willing to pay for it. Gilman didn’t find his role as an actor in this small market injustice to be unpleasant, however. Quite the opposite. “It was a chance to talk with people with a totally different perspective than the students I dealt with day to day,” Gilman said of the work. “It paid well. It was a diversion. It was enjoyable.” He didn’t need the money—the university paid him $310,000 a year, a generous living in the frugal Midwest—but it didn’t hurt that he was seeing his bank account balance grow every month. For a thirty-minute phone call with a hedge fund trader, GLG paid him $1,000, around twice what top corporate lawyers billed. In-person meetings were charged at $2,000 each. Gilman was soon earning hundreds of thousands of dollars a year consulting, simply by talking about the work he loved.
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In 2005, Journal of the American Medical Association published a study finding that almost 10 percent of the doctors in the United States had paid ties to Wall Street investors, an increase of 750 percent since 1996. The unofficial number was probably much higher.
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Although Gilman spoke to dozens of other hedge fund traders, Martoma was his top consulting client. During their conversations, Martoma confided in him, sharing details about his relationship with his wife and the challenges of having children so close together. Although Gilman initially resisted Martoma’s push to be friends, because it seemed inappropriate, he felt genuinely, perhaps inexplicably, concerned for Martoma’s well-being. Gilman wanted him to succeed and felt invested in that success. The truth was, Martoma reminded him of his first son, Jeff. In turn, Martoma treated Gilman as something of a father figure. Their relationship became so close that Gilman barely noticed when Martoma started nudging him into areas of discussion that were explicitly forbidden. Gradually, Martoma began asking more direct questions. He seemed especially focused on the side effects Gilman was observing among the patients taking bapi, which could indicate whether there was a problem with the drug. “What side effects might one expect to see?” Martoma kept asking. Through his exhaustive research, he understood that vasogenic edema, or brain swelling, was a possibility, and he pressed Gilman about it. A side effect like that had the potential to derail the drug’s approval.
Chapter 7: Stuff That Legends Are Made Of
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At 9:45 A.M., Martoma called Cohen. They talked for twenty minutes. After they hung up the phone, Martoma emailed Cohen again, listing all of their holdings in Elan and Wyeth stock, which by now totaled more than $1 billion in value. Then Cohen typed out a message to his top trader, Phillipp Villhauer. He wanted to start selling off their Elan shares as soon as possible. And he wanted it done quietly.
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Even after liquidating his position, Cohen wasn’t finished. Once the selling was done, Cohen shorted 4.5 million shares of Elan, worth $960 million. In just over a week, he had turned his bet on the stock completely around.
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He imagined that the decision to sell all of the firm’s Elan—and then short it before the disastrous trial announcement—would someday end up on a list of the most celebrated trades in Wall Street history. “We’ll catch up over a beer, and I’ll tell you a tad bit more.” Jandovitz was still bewildered as to how they’d avoided the Elan-Wyeth disaster. He recalled all the times Martoma had promoted the stocks, claiming a conviction rating of 9 in the idea. Something had happened to cause Martoma and Cohen to suddenly change their minds, and it had happened in secret.
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Gilman slowly recovered from his lymphoma treatment over the course of the summer. He was still weak, but his hair was starting to grow back. He waited for weeks to hear from Martoma, but there was no word. He was surprised by it. He couldn’t believe his friend wouldn’t at least check in on him, given his cancer and everything else—in the past, Martoma always showed such concern for Gilman and his health. Finally, in September, Gilman broke down and typed out an email. “Hi Mat, I haven’t heard from you in a while and hope that all is well with you,” he wrote, trying to sound cheerful. “I hope that you have not been too seriously set back by the great turmoil in the markets, plus the disappointing drop in Elan stock.” As he watched the stock market plunging day after day and saw headlines about bank rescues and financial panic, Gilman had been worried about his friend and his young family. “Anyway,” he added, “no need to call, I have nothing new. I just wonder how you are faring. Best Regards, Sid.” Martoma scheduled an appointment through GLG to meet with Gilman a few months later at a medical conference in Seattle, but Martoma canceled the meeting. They never saw each other again.
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As was often the case when good information led to a big prize, though, the thrill of success was overshadowed almost immediately by anxiety about how they would do it again. Each time the inside information worked, it raised the expectations for the next quarter, and the next quarter, and the quarter after that. The pressure to find more edge was that much greater. It was like a drug.
Chapter 8: The Informant
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In fact, Makol seemed to know a lot about what Hollander had worked on while he was at SAC. The FBI knew that Hollander had traded stock in Albertsons, a supermarket chain—a friend of Hollander’s who was involved in a takeover of the company had leaked it to him ahead of time, Makol said. “We arrested Ramesh,” Makol went on, referring to the friend, who worked at the Blackstone Group in London and who was at that moment being confronted by FBI agents at JFK airport. “Your two other friends are going to jail. You’re going to jail, too, if you don’t help yourself.”
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Yes, he acknowledged, he had traded Albertsons shares, but the company had been a rumored takeover target forever, and he traded in and out of it for six months. He had a whole binder of financial analysis he’d done before SAC made the investment, concluding that the company’s real estate holdings were worth more than the price where the stock was trading. This was an area he knew intimately. After earning his MBA from Stanford in 2003, he had worked with his dad finding “triple net lease” opportunities in Maryland. They would buy the real estate under a chain restaurant or store, like an Outback Steakhouse or a Walgreens, and then lease the property back to the chain. In exchange for taking on the burden of taxes and property costs, the tenant paid rents that were generally lower than the norm but still left a nice margin for a landlord with access to cheap financing. The strategy worked best when the investor understood the neighborhood and the market extremely well.
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The FBI, the prosecutors at the Manhattan U.S. Attorney’s Office, and their counterparts at the SEC debated the arguments for letting the investigation continue without making any arrests, to see how many more traders could be drawn in. They understood that as soon as Raj was arrested, all of Wall Street would be alerted to the fact that the FBI was listening to their phone calls. More important, the government knew that arresting Raj would give its ultimate target, Steven Cohen, and his hundreds of traders and portfolio managers a warning that they might be next.
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The teams rarely shared ideas with one another, just with Cohen, who took their best ideas and traded on them himself. The arrangement was different from the way most other hedge funds operated, where people tended to work on the same portfolio rather than against one another. Cohen could see what everyone around him was doing, while all the others stayed isolated from one another.
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All of the ideas for trades were filtered through layers of portfolio managers and assigned codes for how strong they were before they reached him—a “high conviction” idea might be given to the boss without explaining why the analyst was so sure about it. Cohen wanted guaranteed moneymaking ideas; the system was designed so that Cohen did not need to know what his traders had to do to get them.
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There are two things that dominate the thoughts of a typical SEC employee: how much more money he or she could be making at a big law firm, and how little credit he or she received for forgoing that opportunity to fight the excesses of Wall Street.
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For decades after its founding in 1934, the SEC was a feared and respected force on Wall Street, its lawyers priding themselves on their discretion and political independence. Over the previous few years, however, the culture at the SEC had changed; incompetence had become ingrained. The SEC enforcement staff was openly discouraged from pursuing ambitious cases, and getting permission to send out subpoenas required four levels of managerial approval, often taking weeks. This was partly a reflection of the SEC’s chairman, Christopher Cox, a Republican congressman from California who had been appointed by George W. Bush in 2005. Cox was a reluctant regulator who made no secret of his staunchly free market, pro-business views. He felt that regulatory agencies had no business trying to tell big banks and major investors on Wall Street what to do and that the financial industry could monitor itself for bad behavior.
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The mechanism for reporting and tracking suspicious activity in the stock market was tragically antiquated. Financial regulators were like sad, old librarians overseeing a paper card catalog long after the rest of the world had gone digital. Except that these librarians happened to be responsible for ensuring the stability of a market in which trillions of dollars change hands each day. When strange activity was detected—a sudden increase in trading in options of a company the day before a takeover was announced, for example—by a bank employee or an investor, that person was encouraged to report it to the Financial Industry Regulatory Authority. FINRA would then spit out a referral—essentially a letter pointing out that a suspicious trade had occurred, without providing much in the way of details or context. These referrals were then passed along to the SEC, which was supposed to investigate them. The problem was, minimal effort was made to put all the pieces of evidence together. FINRA’s referrals, which were the vital seeds of securities fraud cases, were forwarded to the SEC’s office in Washington, D.C., where they were entered into a self-contained database. And there they would sit.
Chapter 9: The Death of Kings
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There he helped lead an inquiry into Bush’s firing of eight United States Attorneys around the country, a politically motivated purge that Bharara worked to expose—the scandal ultimately led to the resignation in 2007 of Bush’s attorney general, Alberto Gonzales.
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What about trump doing the same?
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Patricia filed a lawsuit charging Cohen, SAC Capital Advisors, and Cohen’s brother Donald with violating the Racketeer Influenced and Corrupt Organizations Act by conspiring to defraud her over a period of years. She included everything she had found in her complaint: her interviews with Cohen’s former Gruntal colleagues, the Lurie deal that had gone so bad, the documents she had acquired from the SEC. She alleged that her husband had confessed to trading in RCA based on inside information that he’d gotten from Bruce Newberg, a Wharton buddy who had worked as a trader for Michael Milken at Drexel Burnham Lambert until he was charged with securities fraud. Newberg, she alleged, had gotten the information from Dennis Levine, another Drexel executive who was later convicted. RICO was a federal law that had been passed in 1970 specifically to target organized crime. Patricia was using it to claim marital fraud. As part of her suit she demanded $300 million in damages. It was a bombshell. Cohen strenuously denied the allegations.
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Longueuil grabbed the USB drive and the two other external hard drives he used to store notes from his information exchanges with Freeman and Barai. All along he’d been exceedingly careful, never saving any of the illegal information on his SAC computer, and never writing anything incriminating in his work email. All of his questionable dealings had been conducted via one of his numbered Gmail accounts on his laptop, with all his notes saved on the external drives. He tried to do most of his instant-message chats through Skype, which he was sure couldn’t be wiretapped. He tore around his apartment looking for a pair of pliers, which he used to rip the USB and hard drives apart, stripping them into little bits. Then he divided the pieces into four ziplock bags. He stuffed the bags into the pockets of his North Face jacket and turned to his fiancée. “We’re going for a walk,” he said. At 1:52 A.M., in the early hours of the morning of Saturday, November 20, video surveillance captured them hurrying through the lobby of their condominium building, past the doorman and down an elegant slate walkway lined with bamboo plants. They turned past the Chinese restaurant next door and took a tour through the neighborhood. Longueuil looked for garbage trucks making the rounds. When he spotted one he ran it down and tossed one of the bags of hard-drive parts into the back. Over the next thirty minutes he dispersed the bags into four different trucks. As he threw each one, he wondered what would happen if the Feds found them. Maybe it would have made more sense to dump them in the East River? He was pretty sure they were so damaged it would be impossible to read any of the data, even if by some miracle the FBI got its hands on them.*
Chapter 10: Occam’s Razor
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The most dramatic one had been a murder case involving the Albanian mob in which two brothers killed their best friend after mistakenly concluding that he was working as an informant and then tossed the gun into the bay under the Verrazano Bridge. Even though the people involved in those kinds of cases were often committing heinous crimes, murdering and extorting and stealing from vulnerable people, Weitzman observed that they operated by a code that said you did not betray your friends and family. The bonds of loyalty were strong. In the Wall Street cases, by contrast, people turned on one another with very little prompting. There was no code at all, nothing beyond a shared lust for making money. Freeman hewed to type. He barely hesitated before flipping on Longueuil, who had been the best man at his wedding.
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SAC was finally, officially, the subject of its own investigation. Weitzman asked Kang to send him every set of interview notes he had that mentioned Cohen or SAC Capital. The notes were accounts of conversations with witnesses written by FBI agents, who weren’t known for their elegant prose. A few hours later, two four-inch binders full of notes were dropped on Weitzman’s desk. He started reading through them. He was immediately struck by how many interview subjects had said that Cohen was trading on inside information or that people who worked at SAC were doing so with Cohen’s knowledge. At the same time, few had any hard evidence to back up their claims. There was clearly a culture of insider trading at the firm but also strong mechanisms in place to protect Cohen from what was going on. People fed tips into Cohen’s portfolio by using a numbered “conviction rating” to convey how sure they were about the value of the tip. This meant Cohen was insulated.
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The SEC’s Elan investigation had been going on for more than a year. During that time, mostly through analysis of the limited phone records they were able to get, they had pieced together elements of a massive financial fraud. Now, thanks to Riely’s work, they had two suspects, Martoma and Gilman. And the case also appeared to envelop Cohen himself, the whale they had all been chasing for the previous few years. Despite all that, though, the U.S. Attorney’s Office still had not assigned a prosecutor to the case, giving the SEC the distinct sense that they did not think it was important. He had already urged them twice to put a prosecutor on the Elan case, and nothing had happened.
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The three interrelated groups involved in federal securities investigations—the SEC lawyers, FBI agents, and federal prosecutors—formed a sort of unsteady but codependent triumvirate. Although they often worked together closely and the FBI was technically a subsidiary of the Justice Department, each felt some resentment toward the others, and members of each group wondered whether they were putting in most of the effort and receiving insufficient credit for the cases being filed. The FBI prided itself on being the tough guys who did the dangerous work of flipping witnesses and wiretapping people. FBI agents hated it when people suggested that the SEC ever arrested people, a misunderstanding they had to correct with maddening frequency. The SEC believed, not without reason, that it was the brains behind most securities cases—the only ones who truly understood the complex securities laws. Many SEC attorneys felt underappreciated and sometimes disrespected. The prosecutors, who were drawn heavily from the graduating classes of elite Ivy League law schools, tended to believe that cases weren’t important until they got involved and did all the preparation required to bring them to trial. Preet Bharara’s pattern of announcing new charges at press conferences threw gasoline on the smoldering resentment. He usually thanked his “partners” at the FBI and the SEC, but the optics made clear that he was the one bringing the Wall Street criminals to justice.
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As the SEC was still trying to pin down a meeting time with Gilman, Riely made a startling discovery while looking through a batch of phone records: Martoma had apparently placed a twenty-minute call to Cohen’s home phone on the morning of Sunday, July 20, 2008, at 9:45 A.M. It was an odd time for a work conversation. The following morning, Monday, trading records showed that SAC started liquidating its Elan and Wyeth shares, a nearly $1 billion investment. Martoma had to have told Cohen why they should reverse course and sell all their
Chapter 12: The Whale
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SAC was covering Martoma’s legal costs, no questions asked. It was the policy of the firm to cover the legal expenses of employees and former employees who came under investigation for things they’d done during the course of their employment. Still, it struck the prosecutors as bizarre and unfair: The person advising Martoma on whether he should cooperate against Cohen was being paid by Cohen. What’s more, SAC had made it clear that the size of the defense lawyers’ bills was of no concern. While some companies won’t cover legal expenses without itemized receipts, Stillman’s firm simply sent SAC a number each month. Their invoices had never been paid so fast.
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One of the challenges of prosecuting white collar crime is the resource mismatch between the two sides, and this was on full display at the conference table. On Cohen’s side sat two silver-haired professionals, each of whom boasted thirty years in the industry as well as illustrious clerkships and Ivy League degrees. They were more experienced, more cynical, and, important, were making boatloads more money, working for a client with nearly unlimited funds. On the other side, Charles Riely and Amelia Cottrell were young, smart, and hardworking, products of fine colleges themselves. But they could have been associates at Klotz’s and Kramer’s firms if they hadn’t been working for the Securities and Exchange Commission.
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Chapter 13: Karma
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The prosecutors had made an unusual move in the way they filed the charges. Rather than charging Martoma through an indictment—a formal criminal charge that comes after a federal grand jury has heard evidence against the defendant—Bharara’s office had charged Martoma only with a complaint. A complaint was the first step in a prosecution. An indictment meant that a grand jury had already found probable cause for the U.S. Attorney’s Office to go ahead with a prosecution. The prosecutors could have gone directly to the indictment, but they hoped that delaying that step would serve as an effective pressure tactic. It was like giving Martoma a warning about what was likely coming: Are you sure you want this? There is another way. Still, they didn’t ask him directly to cooperate against Cohen. They didn’t want to seem desperate. “If Martoma didn’t do this alone, we’d like to hear about it,” Arlo Devlin-Brown told Charles Stillman, Martoma’s lawyer. “He shouldn’t feel like he needs to have something that’s 100 percent specific….”
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The SEC had proposed a fine of $601.7 million for the Elan and Wyeth trades and another $13.9 million for Dell. The fines were based partly on the illegal profits the SEC was alleging in each instance, which were $275 million in Elan and Wyeth and $6.4 million in Dell. In total, it would be one of the largest settlements the SEC had ever extracted, almost four times what Raj Rajaratnam had been forced to pay. As the sole owner of SAC, Cohen would be paying the fines himself. After Wadhwa outlined the penalties they were proposing, Klotz said that his client would agree.
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It was Marty Klotz. “Hi Sanjay,” Klotz said. “We’ve been continuing to dig for the most recent documents you requested, and we discovered something that we wanted to let you know about as soon as possible….” Klotz was referring to the SEC’s most recent batch of subpoenas. His voice trailed off. There was a long, painful silence. “We found out that the Dell email actually made its way to Steve.”
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The question of how, and when, to disclose such a significant piece of information was tricky. If he never mentioned it, and Cohen went ahead and signed the $616 million SEC settlement, there was a good chance the SEC staff would find the email later on their own, in which case they’d be justifiably angry and unlikely ever to trust him again. It could lead to bigger problems in the future. After so much work had been done to get the settlement ready, waiting to reveal it until right before was masterful, in a certain way. Klotz would gain some credibility for bringing it to their attention, while leaving them so little time to react that they might just choose to go ahead with the settlement anyway. Klotz’s goal, as always, was the best possible outcome for Cohen.
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According to the metadata on the email, the SAC analyst Jon Horvath had sent it at 1:09 P.M. on August 26, 2008, to Michael Steinberg and Gabriel Plotkin. One of the SEC staff attorneys, Justin Smith, also noticed a new name on the email chain: Anthony Vaccarino. Apparently Plotkin had forwarded the email to Vaccarino at 1:13 P.M., four minutes after Horvath sent it. Smith excitedly typed out a message to his colleagues, alerting them to this new fact. The SEC was not familiar with Anthony Vaccarino. They were familiar with Plotkin’s name—he was a star portfolio manager, someone Cohen looked to for trading ideas, especially in large consumer companies. Vaccarino was identified on an SAC staff list as a “research trader.” He worked directly for Cohen. At 1:29 P.M., Vaccarino had forwarded the Dell email to Cohen’s personal and office email addresses. The SEC rushed to get Vaccarino’s phone records. Sure enough, there was a call to Cohen’s cellphone from Vaccarino at 1:37 P.M. It lasted less than one minute. Two minutes later, Cohen sold 200,000 shares of Dell. He kept selling over the course of the afternoon and was out of his entire 500,000-share position by the end of the day. Two days later, Dell announced disappointing earnings—just as Horvath had predicted.
Chapter 14: The Life Raft
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On a purely financial basis, Steinberg’s case was minuscule. Under normal circumstances, the government probably wouldn’t have even bothered to charge him. He was alleged to have made only $1.4 million on his illegal trades—a tiny amount compared to the $276 million Martoma case. But the arrest sent an important message. It was the first time that someone close to Cohen was dragged out of his home in handcuffs. Unlike most of the others charged until that point, Steinberg was like Cohen’s son. “We got your guy,” Preet Bharara seemed to be saying to Cohen. “We’re coming for you next.”
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The meeting had been arranged in part to accommodate his schedule. The purpose was to discuss how the investigation would move forward in light of the new information the government had about Cohen receiving the “2nd hand read” email about Dell. Securities fraud had a five-year statute of limitations. The Elan trade had happened in July 2008, the Dell trade in August of the same year. That gave them three and four months, respectively, to charge Cohen—or anyone else—with crimes in those cases. They had no time to waste.
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Bharara had watched prosecutors in the Eastern District lose a closely watched fraud case against two Bear Stearns hedge fund traders a few years earlier, in 2009, a case that had similarly seemed to be a surefire winner. It was one of the first major criminal cases to arise out of the financial crisis, and the two fund managers were acquitted after just six hours. The government was harshly criticized for choosing the case in the first place and for the way it was handled. It was a disaster, and it sent a message to the Justice Department that when it came to pursuing crime on Wall Street, it was much safer to file cases that were close to a sure thing, rather than risk losing after a big trial.
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Chickenshit club
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It was far from clear that a trade made by Steve after he received the “2nd hand read” email would even constitute insider trading, he argued. The Dell information had passed from a Dell investor relations employee to another trader named Sandeep Goyal, to Jesse Tortora to Horvath to Steinberg to Plotkin to Vaccarino to Cohen. Klotz and his colleagues from the defense bar believed that Cohen was too far from the original source of the information, and too ignorant of the circumstances, to be criminally liable for any securities fraud.
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The burden of proof that the SEC had to meet was lower than that for the criminal prosecutors, who had to prove guilt beyond a reasonable doubt. For a civil case, the SEC only needed to prove the facts by a preponderance of the evidence—essentially, that it was more likely to be true than not.
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In another instance, a portfolio manager had learned about a negative research report that was about to be released about a company called Medicis Pharmaceutical and shorted it before the report came out. It was the only case the prosecutors had found where SAC’s own compliance department had sanctioned someone for insider trading. The internal punishment was a fine.
Chapter 15: Justice
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He was largely able to do this because major investment banks like Morgan Stanley, JPMorgan Chase, and Goldman Sachs, the ones that had earned hundreds of millions of dollars in commissions from Cohen over more than a decade, refused to abandon him during his time of darkness, even though his company had been branded a criminal enterprise and Cohen himself was still at risk of criminal prosecution. It was virtually unprecedented in the financial industry. Mainstream Wall Street looked at the agency that stood for law and order and ethics in their field and at the most profitable trader they had ever worked with and then pointed at Cohen and said, “We choose you.”
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Chapter 16: Judgment
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“And it’s fair to say that in the entire interview that happened between the FBI agents and you, they never mentioned any other client but Mathew Martoma, correct?” “I believe that’s correct,” Gilman replied. As Strassberg moved on to his next set of questions, Gilman started to fidget in his seat. There was something more he wanted to say. He asked the judge if he could return to the previous question because he hadn’t answered fully. “No, Dr. Gilman,” Strassberg snapped. “Your Honor, I would ask that Dr. Gilman answer the questions that I am asking.” But Judge Gardephe was intrigued. He told Gilman that he could answer again. The doctor took a deep breath. “The agent also mentioned that I am only a grain of sand, as is Mr. Martoma,” Gilman said in a clear voice. “They are really after a man named Steven A. Cohen.” There were gasps in the courtroom. The prosecutors, the judge in his robes, the bus drivers and actuaries in the jury box—it was as if they were all playing a role in the prosecution of Martoma, when the real story was about Cohen. He was the target, the one the FBI wanted, the person Martoma was supposed to have testified against in order to save himself. The lawyers and the judge had taken pains to keep Cohen’s name out of the proceedings, but Gilman was too old, and had too little left to lose, to care about any of that. For a moment, he yanked back the curtain and showed everyone what was really going on.
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To an outside observer, the Martoma case had never made much sense. Martoma had been given ample opportunity to testify against his former boss in exchange for a lighter sentence, and he had refused. Instead, he went through a humiliating trial and now faced more than ten years of jail time. Why? It was the question that surrounded his case for three years. Federal prosecutors who had pursued Steven Cohen for almost a decade were certain that Martoma had information to incriminate him. People charged with crimes like Martoma’s who were facing long sentences almost always flipped. Why hadn’t Martoma played along?
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The first was honor. Perhaps Martoma simply could not accept the idea of being an informant. Such a principled stand was highly unusual in white collar cases, and for someone with Martoma’s history it seemed particularly implausible. Could this be the moment when he suddenly chose the righteous path? The second was fear. Perhaps Martoma believed he would face some kind of retribution if he crossed Cohen. This, too, was hard to accept. Martoma had already left the financial industry, and for all his ruthlessness as a businessman, there was no evidence that Cohen had ever employed the loyalty enforcement methods of an actual gangster. Another hypothesis, the one that was mentioned most often by those involved in building the case, was material self-interest, or that Martoma harbored a desperate hope that Cohen would repay his loyalty. There was no evidence to support this theory, but it was easier to grasp than the others. Money, in the end, is what drives most people on Wall Street, and the case had left Martoma financially ruined. The government ordered him to forfeit his and Rose’s house in Boca Raton, $3.2 million in an American Express Bank account in Martoma’s name, $245,000 in an ING Direct account in Rosemary’s name, as well as $934,897 that was left in the Mathew and Rosemary Martoma Foundation. It turned out that, after establishing the foundation as a nonprofit in 2010 and depositing $1 million into the account and talking about devoting themselves to charity, the Martomas had received a tax benefit for the gift and then barely gave any of the money away. That same year they charged $22,826 in travel and other expenses to the foundation. Everything that was left in the account would be going to the government.
Epilogue
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“Steve is a very serious, very astute collector,” gushed William Acquavella, one of Cohen’s art dealers, in The New York Times. “He also has just the right instincts, ones that can’t be learned from reading art history books.”
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The most startling move of all, however, came from Amelia Cottrell, a senior enforcement attorney at the SEC who oversaw the agency’s Martoma investigation. At the end of June 2015, she shocked her colleagues by announcing that she was joining Willkie Farr, the firm where Cohen’s longtime defense counsel Marty Klotz worked. It turned out that leading the most powerful case the government assembled against Cohen was the best possible audition for a job working for his consigliere.