Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

by Sheelah Kolhatkar

  Ruggiero pressed the agent to tell her who the other buyer was. Then she called Steinberg back.

  “It’s someone named Stevie Cohen,” she said. Steinberg had never heard of him.

  The next day Steinberg approached the Bear Stearns salesman who was responsible for the Cohen account. “Do you know a guy named Stevie Cohen?” he asked.

  “Yeah,” said the salesman. He wasn’t sure what the context of the question was, so he answered vaguely, “He’s a client.”

  “What do you know about him?” Steinberg asked.

  Cohen was a hedge fund manager and an important client, the salesman said. He’d been to Cohen’s wedding at the Plaza, and was acquainted with his reputation as a trader. The only hedge fund Steinberg was familiar with was the one run by Ivan Boesky, the arbitrageur who was shut down during the Drexel Burnham Lambert insider trading scandal. Steinberg, who was on the board of one of the most tenacious investment firms on Wall Street, was not accustomed to being prevented from doing what he wanted by day traders. “Give me his phone number,” he said.

  Steinberg got Cohen on the phone and introduced himself. “Listen,” he said, “it’s come to my attention that you’re the other guy bidding against me on this house. My wife really has her heart set on it.”

  Cohen replied that his wife would also be devastated not to have the house, and he therefore had every intention of buying it.

  “You’re not going to buy it,” Cohen said. “I am.”

  When Steinberg asked why, Cohen said: “Because I have more money than you.”

  “This is getting out of hand,” Steinberg said, growing exasperated. “Here is what I’m willing to do: I’ll give you a million dollars to walk away.”

  “What am I going to do with a million dollars?” Cohen said, then paused. “Here’s what I’ll do,” he said, chuckling. “Let’s flip a coin for it.”

  “What?” Steinberg said.

  “I’ll flip you for it,” Cohen said.

  Steinberg was insulted. He knew that his wife would be horrified if she found out that he had flipped a coin in order to buy their house. It was absurd. “No,” he said.

  Cohen hung up the phone. Then he called his real estate agent, raised his bid to $14.8 million, and bought the house with cash.

  —

  The excavators started to arrive not long after, one after the other, in a convoy. Cohen and Alex wasted no time upsetting their new neighbors with their renovation. 30 Crown Lane was located in Greenwich’s “backcountry,” the forested area to the north of the town, where families descended from generations of wealth kept things discreet; showiness betrayed insecurity about one’s money. New billionaires like Cohen and his wife were ignorant of such conventions, however, and likely would have ignored them anyway. They immediately started bulldozing the grounds and building massive new additions.

  A new wing was built to accommodate an indoor basketball court and a swimming pool with a one-and-a-half-story glass dome above it. In the backyard, they constructed a six-thousand-square-foot ice-skating rink with its own Zamboni, as well as a shed for the Zamboni. They added a massage room, a gym, and a small golf course with putting greens. They built a nine-foot stone wall around the perimeter and installed a sophisticated security system. The final building was thirty-six thousand square feet, one of the largest in the area. It took 283 dump-truck loads to bring in all the dirt for the landscaping.

  “I feel that it’s not a home,” a neighbor named Susan Hut complained to the town planning board. “It’s a showplace. It could be in the Bronx Botanical Garden.”

  Ruggiero, who has sold real estate in Greenwich for thirty-nine years, cites the Cohen deal when she trains new realtors entering the business each year. She uses it as an example of the two different kinds of wealth that they are likely to find among buyers of high-end properties. “Strangely enough,” she tells them, referring to the first type, “even if you’re someone buying a $3 million, $4 million, or even $6 million house, who may seem very well-off, you’re still a worker—you still have to worry about your salary.”

  There is a second category of rich person, however, for whom money is literally of no concern. They simply take their checkbook out and pay whatever it takes. Those people are great for the real estate business. But if you find yourself bidding against them, she tells the other realtors, it’s best to just step out of their way.

  “The minute you can afford $10 million, $20 million, you don’t have to worry about your paycheck,” Ruggiero said. “Steve Cohen didn’t have to worry about his paycheck. Whatever Stevie wanted, Stevie could get.”

  CHAPTER 3

  MURDERERS’ ROW

  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. As he contemplated the new demands the fund’s size placed on his traders, he looked around SAC’s trading floor and felt annoyed by what he saw: a room full of men with Long Island or New Jersey accents who couldn’t fit in at a proper analyst conference if they tried. They were trading in and out of microchip manufacturers and biotechnology firms every day with very little idea of what these companies actually did. They couldn’t even be fairly characterized as stereotypical Wall Street “speculators.” They were gamblers, and unsophisticated ones at that.

  Cohen sensed that the industry was changing, and he needed to change with it. He also had his ego to contend with. He wanted to be known as a brilliant investor, not just a “trader,” a title that didn’t confer a lot of prestige. His new goal was for SAC to become a well-respected firm, one that would establish him as a legendary money manager. In order to accomplish that, he and his employees needed to learn to analyze their investments in a more sophisticated way, to understand how companies were going to perform over longer periods of time, rather than trading blindly on momentum. And to do that he needed to hire the kinds of people he had previously shunned, experts who knew something about the stocks they were buying. They would get their edge directly from companies and other sources rather than relying on research from firms like Goldman Sachs and Morgan Stanley. “We’re changing the way we do things around here,” Cohen announced one afternoon after the market closed.

  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.

  He hired a technology-stock trader named David Ganek, the son of a wealthy investment manager, who had run the risk arbitrage department at the investment bank Donaldson, Lufkin & Jenrette. He hired another trader named Larry Sapanski, from Morgan Stanley, who had a reputation as a great oil and gas investor. Cohen seated the new traders he thought were the best
close to him so that he could see what they were doing. That part of the floor became known as “murderers’ row,” once used to describe the New York Yankees lineups of the late 1920s, when players like Babe Ruth and Lou Gehrig made the team the best in history.

  One of the old SAC employees who managed to make the transition to the new style was a former college basketball player named Richard Grodin, who had worked for Cohen since 1992. When Cohen asked him which sector he wanted to specialize in, Grodin immediately picked technology—specifically, semiconductor manufacturers. Technology, to Grodin, meant growth and new products and trading opportunities galore. He believed that he could analyze the microchip industry in terms of supply chains, the interdependence of companies that created components for computer products and cellphones. If you found out that one company along the line was doing poorly, you could make inferences about everyone else on the chain. This information, however, was not easy to get. Most of the companies were based in Asia, making them hard for investors in the United States to access.

  Outside of work, Grodin was known as a gregarious, goofy guy who enjoyed gambling and was quick to laugh. But those who had to interact with him during market hours dreaded it. He was “absolutely the most mercenary guy you will ever meet,” one colleague said. “He would sell his grandmother to make five cents.”

  Grodin’s microchip investing strategy was effective. He was responsible for a relatively small pool of money, typically $30 to $40 million, but his returns were 30 percent or more, the highest at the firm on a risk-adjusted basis. Still, he became a source of frustration to Cohen. Not only was he ungenerous with the information he was getting, but Cohen believed that Grodin could be making a lot more if he would make bigger trades. He was exactly the sort of person Dr. Kiev could have helped, if only Grodin would let him. The trouble was, Grodin lacked that particular genetic condition that enabled Cohen to take massive risks without being consumed with anxiety. Grodin hated the possibility of losing money.

  Cohen made Grodin sit in the chair next to his so that he could watch everything he did. Grodin got in the habit of whispering his orders to his traders so that Cohen wouldn’t hear them. He knew that if he tried to buy 50,000 shares of something, Cohen might try to put in a 100,000-share order before him, pushing the price up before he managed to buy anything himself. Grodin’s traders were always straining to understand what he was saying, and when they asked him to repeat himself, he’d scream: “Are you fucking deaf? You’re a fucking idiot!”

  Grodin couldn’t have done any of it without his most important collaborator, his analyst, Richard Choo-Beng Lee.

  C. B. Lee was a quiet, disheveled fellow with dark eyes, a wide, flat nose, and a belly that protruded slightly over his belt. He didn’t look like an experienced professional who enabled those around him to make millions of dollars in the stock market. But no one had better connections to Asian technology manufacturers. Lee was constantly in motion, traveling around the world to visit chip manufacturers and collecting valuable details about their businesses. The information he gathered was precious.

  As a result, Lee was very popular around SAC’s offices. Everyone, particularly Cohen, wanted access to his reports, but Grodin did not like to share them. He had recruited Lee from a brokerage firm called John Hancock Securities, where he worked as an analyst after getting an engineering degree from Duke, and cultivated him at SAC. Using Lee’s “datapoints,” as he called them, Grodin would methodically formulate a trade and quickly lock in a profit, often not a huge one. Cohen preferred a more aggressive approach. If a trade looked good, Cohen thought you should bet as much as you could.

  There were regular conflicts about getting access to Lee’s research, and shouting matches between Cohen and Grodin erupted with increasing frequency. Catching Grodin trading on Lee’s information before sharing it made Cohen so crazy that he ordered his in-house programmers to design a system that would show him every trade order entered by anyone on SAC’s staff before it was executed, allowing Cohen to enter his own trades ahead of them if he wanted. The new software was referred to as the “eye in the sky.”

  After suffering for months under Cohen’s daily scrutiny, Grodin came up with a plan to get away from him. SAC maintained a satellite office in Manhattan, called Sigma Capital Management, which occupied two floors of a tower on Madison Avenue. Grodin asked to move his trading group there based on the argument that he was getting married and didn’t want to commute anymore. Cohen reluctantly agreed.

  Relocating to the city gave Grodin a little more freedom, but the new state of affairs wouldn’t last long. Barely a year later, in January 2004, Cohen sent Grodin an instant message: “Richie, by the way—I want cb to write up ideas this year or no capital.” Until that point, C. B. Lee had conveyed his market research to Grodin in informal ways, mostly over the phone or in brief emails. Now Cohen was demanding a more formal presentation, a report that he could read for himself and pass along to others. It was the only method Cohen could come up with to try to ensure that his traders were giving their most valuable information to him before anyone else.

  Grodin hated the idea. “So the whole firm can IM it all over the street?” he replied.

  “Than quit,” Cohen wrote back, in one of his famously typo-riddled communiqués. “Rules are the same for everybody. You no like, than time to move on. Why should outside people get cb ideas and me not? It’s wrong and needs to be corrected. I will be firm on this and if no happy than life goes on.”

  Grodin tried to negotiate, asking why Cohen was suddenly being so rigid after all of their years working together. “Cb doesn’t write up ideas he has datapts and if they make sense I put them on in positions which u see,” he wrote.

  “Not enough,” Cohen wrote. “It pisses me off that people don’t feel any obligation to keep me up. That I have to guess. It is totally wrong.”

  “Ok,” Grodin wrote back. The next day, he submitted his resignation.

  —

  The need to hire new traders and analysts at SAC became a constant, almost unmanageable challenge. Cohen approached every aspect of his life like a trader, and with his employees it was no different; many years, Cohen fired dozens of people for failing to deliver the returns he wanted. Others, like Grodin, got frustrated and quit. For traders, getting a job at SAC was like pulling the pin out of a grenade: It wasn’t a question of if you would blow up, it was a matter of when. It was a place that made many careers—and ruined even more.

  Despite the high-stress environment, there was no shortage of eager candidates. Everyone wanted to work at a hedge fund, particularly SAC. The money that could be made was magnitudes greater than anywhere else, and even at a place as volatile as SAC, you could quickly save enough money to be comfortable for the rest of your life. Responsibility for finding new candidates at SAC fell to an enterprising and aggressive group led by Solomon Kumin, the firm’s director of business development. Sol was a natural salesman. He was a former Johns Hopkins lacrosse player with a taste for popsicle-hued polo shirts and had a powerful charisma that drew comparisons to Bill Clinton. He called everyone he met “buddy” and he lived flamboyantly, always flying private and betting prodigiously on sports. His nickname was “King Midas.”

  Kumin’s job was to search for the very best traders on Wall Street; he sometimes followed their careers for years before approaching them. As more and more hedge funds sprouted up, competition for talent became intense. Two funds in particular, Citadel Investment Group, founded by Ken Griffin in Chicago, and Millennium Management, run out of New York by Israel “Izzy” Englander, were often trying to hire the same traders as SAC. Both funds had models similar to SAC’s, with hundreds of traders making short-term investments that were expected to be influenced by some kind of event.

  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 w
ith 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.

  In late 2004, an ambitious young employee approached Cohen with an idea: What if they developed an exclusive new unit at SAC, a trading group that was driven by in-depth research? The concept was to have traders who were focused on developing industry expertise, in the mold of the famous investor Warren Buffett, who took large stakes in companies and held them for decades through his wildly successful firm Berkshire Hathaway. They wouldn’t be concerned with tiny stock price movements when companies announced their earnings each quarter, for example, and as a result, the firm would be less dependent on Cohen and his intuition for those kinds of trades. These new traders and analysts would become authorities on the companies they were researching. Over a series of meetings, the employee, a manager in his twenties named Matthew Grossman, outlined his vision for Cohen. He referred to it as SAC’s “top gun.” Part of the purpose of the new unit, Grossman explained, would be to manage Cohen’s own portfolio, which deserved to be handled by the best people at the firm. They would hire a bunch of new analysts and traders to staff it, and it would become the firm’s equivalent of the Navy SEALs.

  Cohen was intrigued. It was really an extension of what he was trying to do already. The concept appealed to his sense of vanity in that it made him sound more like a visionary than a profiteer. Even people who disapproved of Wall Street generally admired Warren Buffett, who got calls from bank presidents and Treasury secretaries seeking his counsel. But the research unit also made business sense. SAC was now managing billions of dollars; a more studious, longer-term approach was wise. Cohen liked Grossman, who was privileged and precocious. He’d attended Deerfield Academy, an elite boarding school in Massachusetts, and gone to college at Columbia, and then finagled himself a job as the first-ever college intern at Julian Robertson’s trailblazing hedge fund Tiger Management. Grossman had been with SAC since 2002.