Black Edge

by Sheelah Kolhatkar

  “Fuck you,” Cohen said. “I’m the boss.”

  Within a relatively short time, the gloom of Black Monday went away. The stock market started another long climb. The SEC’s RCA insider trading investigation petered out, apparently without charges or sanctions against anyone. The same happened with the criminal case. Through it all, a lesson that many other suspects of financial crime would come to understand in the future had emerged: Taking the Fifth could take all the momentum out of a securities investigation.

  CHAPTER 2

  WHAT STEVIE WANTS, STEVIE GETS

  “This is what we’re gonna do,” Cohen announced to his traders in 1992. “I want us to get out of Gruntal’s broker dealer fiefdom. They’re sucking our profits, they’re holding us back.” As long as Cohen’s trading group was part of a registered broker, which Gruntal was, they were subject to heavy regulation that restricted their activities—they couldn’t invest in initial public offerings, for example, which were becoming an important new source of profit. Cohen grinned. “We’re doing this. We’re going out on our own.”

  By this time, Gruntal had earned a reputation as a less than reputable firm and was the subject of multiple regulatory investigations. In an era characterized by unscrupulousness and outright lawbreaking on Wall Street, Gruntal’s CEO, Howard Silverman, had given Cohen total freedom, and Cohen had thrived. Over fourteen years he had gone from being a junior trader to a Wall Street star. He was almost thirty-six years old, freshly divorced, and ready to make a change. It was time for him to go out on his own.

  Cohen started SAC with around $23 million in capital and nine employees. He put in about $10 million of his own money, and his traders and friends and investors put in the rest. Many of his traders were in their late twenties and early thirties, with young kids at home. Some of their wives had been opposed to the decision to leave a stable job and take a chance on Cohen’s new startup. They didn’t have a big bank to help them in an emergency; it was their own life savings at risk.

  During their first weeks in business, Cohen could tell that his new employees were nervous. Now that they were trading their own money, they became timid, hesitating over every buy and sell order, calculating and recalculating how much money they might lose if the market moved against them. Cohen tried to resist the temptation to scold and belittle them and instead tried to build up their confidence. “Come on,” he told his traders. “There’s nothing different about this!”

  He wanted to have people around him who were comfortable taking risk. He loved hiring guys who were driven and competitive, especially those who’d played college sports. His dream was to have a room full of mini–Steve Cohens, men as fearless as he was. “Tell me some of the riskiest things you’ve ever done in your life,” Cohen would ask his prospective traders. “I want guys who have the confidence to be out there, to be risk-takers.”

  The way to make money in the stock market, Cohen believed, was by taking intelligent risks. If you had a good investment idea but you were too scared to put a lot of capital behind it, you couldn’t make abundant profits. Cohen figured that 5 percent of his trades accounted for most of the money he made. If he’d only placed those winning trades on a modest scale, those profits would have been considerably smaller. But what came naturally to him was a struggle for most people. It was practically a genetic anomaly, this ability to behave like a reptile while he was trading, as opposed to a human being prone to fear and self-doubt. When he interviewed potential new hires he tried to test for this quality as best he could.

  Cohen’s investing method was different from the ones employed by most other hedge funds. He absorbed vast amounts of information from every corner of the market each day, watched the bids and offers as they appeared in the market, then bought up tens or even hundreds of thousands of shares and sold them as soon as the price moved up. He did the same thing shorting, when stocks went down. He was a glorified day trader. It was a style that was almost impossible to replicate successfully, but if there was a model for Cohen’s trade-making process it was probably the investing strategy employed by Michael Steinhardt, who’d started his hedge fund, Steinhardt, Fine, Berkowitz, in 1967. Steinhardt came into stock trading just as pensions were becoming popular, with ordinary people investing billions of dollars of new money in the stock market each year. The number of American workers with guaranteed benefit retirement funds tripled between 1950 and 1970, and all that money needed to be invested. Trading went from being an administrative job carried out by clerks in color-coded jackets to the fastest path to Wall Street superstardom. As one of few individual investors trading high volume at the time, Steinhardt demanded that big brokers with large blocks of stock to trade call him first and offer him better prices than ordinary investors could obtain in the open market. Steinhardt’s intimate, and controversial, relationship with banks and brokerage firms provided much of his advantage over other investors, and his fortune.

  For years, hedge funds had existed apart from mainstream Wall Street, populated mainly by eccentric men who avoided publicity. A few investing celebrities had emerged from hedge funds in the 1980s, including George Soros and Paul Tudor Jones, but what exactly they did was still unclear to most people. Eventually, it became known that these brainy oddballs were quietly amassing multibillion-dollar fortunes, and the media started to pay attention. They bought mansions the size of the Taj Mahal, traveled by helicopter to beach houses on Long Island, and collected artwork that belonged in the Metropolitan Museum. They became objects of extreme envy.

  Cohen was a little different. 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. Having his own hedge fund gave him an entrée to a new universe of wealth and power.

  —

  As SAC grew larger, with more money to trade and invest, established Wall Street firms began to notice. How could they not? Within three years, SAC had quadrupled in size, to almost $100 million. Cohen and his traders bought and sold so many shares each day that brokers started to worry they were missing out on a huge amount of revenue if they didn’t trade with SAC. The problem the brokers had to overcome was that many of the big firms that employed them were suspicious of hedge funds in general, and Cohen in particular. There were rumors that SAC was making 100 percent annual returns. Traders at the big firms told each other that Cohen had to be cheating. J. P. Morgan refused to do business with him.

  Cohen, meanwhile, wanted SAC to keep growing, which required finding new investors as well as salesmen who could help SAC get into IPOs or who could offer investment ideas they couldn’t come up with on their own. He went out for steak dinners, golf and racquetball games. But Cohen didn’t enjoy socializing for business purposes, and he wasn’t good at building the kinds of relationships that would have helped the firm expand. He didn’t really want to be part of the club. He needed to bring in a professional to do it for him.

  He knew of one person who was perfect for the job. His name was Kenny Lissak, a blue-eyed, broad-shouldered stock salesman Cohen had hired during his last years at Gruntal. Lissak enjoyed golfing and going out drinking with brokers. He had developed contacts at Merrill Lynch, Goldman, Lehman, all the firms where Cohen was struggling to get people to treat him like an important client. In many ways, Lissak was the opposite of Cohen. They got along immediately.

  Lissak had a more traditional perspective on trading than Cohen. Having worked at Shearson Lehman Brothers, one of the largest brokerage firms in the United States, Lissak understood how institutional research could influence stock prices. If Merrill Lynch put out an analyst report criticizing IBM, investors were likely to sell the stock and it would go down. Even if the substance of the report was wrong, the mere fact of the stock being upgraded or downgraded by a respected analyst had a powerful effect on its price. Not keeping track of these basic mechanisms was costing Cohen money.

&
nbsp; Lissak met with brokers at Goldman Sachs and First Boston and pitched Cohen as a serious investor who should have access to their best research analysts. In exchange, Lissak told the brokers, there were huge trading commissions to be made. When he wasn’t rushing to meetings, Lissak traded stocks himself, co-managing a portfolio with Cohen. They were best friends who worked hard all week and then spent the weekends relaxing side by side, golfing at the Glen Head Country Club on Long Island and taking ski vacations in Aspen.

  Each morning the two of them arrived at the office and read the papers and checked the stock prices, deciding where they’d be making their money that day. If there was news about a company or a big buy or sell order coming into the market, Cohen prepared to take advantage of whatever momentum was created, buying shares as the stock ticked upward and selling as soon as it was ready to drop. Cohen was so good at it that traders at other firms began tracking what he was doing.

  Cohen and Lissak spent hours analyzing their trades and trying to figure out how they could have done better. Lissak characterized their core philosophy in simple terms: It was all about improving their odds of earning a profit by eliminating the ways they lost money and increasing the ways they made money. The key to making money, they believed, was by intelligently controlling their losses. Academically, this was known as risk management.

  Their trades usually went in their favor, but not always. One day after the market had closed, early in their relationship, Cohen and Lissak met at a frozen yogurt shop on the Upper East Side to talk through an especially difficult afternoon.

  “What the fuck happened?” Cohen said morosely.

  They had just experienced a huge loss in shares of Northern Telecom. The stock had gone from $38 to $31, but, reluctant to admit defeat, Cohen and Lissak bought more as it kept going lower. They’d been certain that the worst was over and that the stock would rebound. It was the sort of ego-driven stupidity that affects investors all the time, the fear of selling and realizing a loss, and believing, irrationally, that the moment you capitulate and sell, the stock will suddenly shoot back up. That one trade cost them close to $2 million. The loss wasn’t going to cause them to have to shut down, but for Cohen, it was painful. He took each trade he made, every single day, very seriously. No miscalculations were forgivable.

  “What are we going to do, drive a cab?” Cohen said.

  After the Northern Telecom trade, Cohen implemented strict discipline when it came to losing money: If a trade is going against you, you set a limit, and then you sell, no matter what. Never let emotions get in the way.

  —

  The Hamptons, a longtime summer vacation spot for Manhattan’s elite, comprise a handful of shingled villages stretching east from Westhampton to Montauk along the Atlantic Ocean, just eighty-eight miles from where Cohen grew up. By the time he founded SAC, Cohen could finally afford to be there. He and Lissak had started relocating their trading operation to East Hampton for the season. They rented a five-bedroom house with a pool and a housekeeper and took over an office above the Grand Café, a coffee shop in the center of East Hampton where rich ladies came in with their poodles. It would serve as their headquarters for July and August.

  Cohen was sharing custody of Jessica and Robert every other weekend, trying to reconcile being a dad with his affluent bachelor lifestyle. His ex-wife, Patricia, didn’t feel he paid enough attention to his kids when she wasn’t around. Cohen lived alone and occasionally left the children by themselves while he worked out. One time, five-year-old Robert fell into the pool at Cohen’s house in East Hampton, and Cohen had to jump in, fully clothed, and pull him out.

  Cohen didn’t like being alone, and yet he didn’t enjoy the process of trying to meet women. 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.

  Cohen wasn’t sure about getting married again after going through a painful divorce.

  “I don’t know what to do,” Cohen said to Lissak one day at a pizza place near their summer house.

  Alex was pressuring him to get engaged, he explained, but she didn’t like the idea of signing a prenuptial agreement. Cohen was ambivalent for other reasons, too. He was still attracted to Patricia, for one thing. Cohen’s friends compared his ex-wife to Margaret “Hot Lips” Houlihan, the sexpot army nurse on the TV show M*A*S*H. He also couldn’t imagine getting married again without taking measures to protect his growing personal fortune. As Cohen agonized about what to do, Patricia and Alex developed an intense hatred for one another. They had to interact every time the kids were dropped off or were picked up from visitation with their father. The tension between them occasionally erupted into arguments on the street.

  Lissak, though, could see that his friend was lonely and that Alex seemed to make him happy. “Just get her a ring,” he advised Cohen. “What does it cost, three-eighths on $100,000? If it doesn’t work out, you’re out thirty grand.”

  Steve and Alex broke up at least four times in the intervening months, and each time, Alex fumed and made threats. It was now or never, she kept saying. Cohen finally took Lissak’s advice and proposed to her. They were married on June 6, 1992, at the Plaza Hotel, an extravagant black-tie affair with three hundred guests. Lissak was the best man.

  Alex immediately started to exert influence over her husband. Cohen was shy, someone who tried to avoid being the center of attention. Yet somehow, eight months after they were married, Alex convinced him to do something unthinkable: She signed them up to appear on a well-known Latin daytime TV program, The Cristina Show, that was doing a special on couples who were involved in toxic emotional entanglements with the husbands’ ex-spouses. “Poor Alex has been married to Steven Cohen for only eight months,” said Cristina, a blond, Latina version of Oprah. “She feels her battle with his ex-wife will never end. She says that she and his ex-wife despise each other so much, she only agreed to come here if we guaranteed that the supposedly insane ex-wife was not invited.” Cristina leaned forward and paused theatrically. “Tell us, Alex, is she that crazy?”

  Cohen, who showed up thinking they were going to talk about the challenges of parenting stepchildren, was mortified by the experience. Still, he did the best he could to acquit himself. When Cristina brought up the fact that Cohen had continued seeing his first wife after he and Alex had started dating, the audience gasped with disapproval. Cohen turned pale. “A lot of these things occurred in the first year of our relationship, where I still wasn’t committed to Alex, and maybe I used the ex as a wedge,” he sputtered. “I had gone through a pretty nasty divorce, and I wasn’t ready….We went back and forth for a while. And there were some financial difficulties….”

  Cohen’s friends were stunned by the episode, both the embarrassing revelations and the fact that their cautious, shy friend had agreed to appear on a TV talk show in the first place. Cohen was the opposite of an exhibitionist. His colleagues at SAC saw the episode as a sign that Alex had complete control over him.

  —

  Cohen threw a Christmas party at his new apartment on East Seventy-ninth Street to celebrate the great year the firm had in 1993. Everyone was in a fine mood, feeling excited about the enormous amount of money they had just made. Bartenders poured drinks. Cohen touched Lissak on the shoulder. “Can I talk to you for a second?” he said. They went into an empty room.

  Over the previous three years, Lissak had become Cohen’s most dependable partner, t
he main person who communicated with investors and Wall Street banks, the head trader–recruiter–operations person and the one anyone who worked for them went to with a problem. “You’re invaluable to running SAC,” Cohen said, according to Lissak. “I’m making you a 20 percent general partner.”

  Lissak was thrilled. He loved working with Cohen, running the fund by his side and trading all day. Becoming a partner would offer security, but it would mean a lot more money, too—in the tens of millions of dollars, easily. They rejoined the party and started to tell SAC’s employees about Lissak’s promotion. The reaction was overwhelmingly positive. Lissak was widely liked and respected. Having someone like him implanted in the company made it seem more stable and legitimate.

  “Steve was the mad scientist and Kenny was the people person,” said Warren Dempsey, a trader who joined SAC in the early 1990s to help it build a presence investing in IPOs in Europe. “They were running the place. Kenny had real authority there. At least in my time there, I don’t think Steve did much without talking to Kenny.”

  Two years later SAC moved to a new office at 520 Madison Avenue, a block away from the Museum of Modern Art. Cohen sat at the center of a T-shaped desk, with his traders seated in front of banks of monitors that stretched out to either side of him. San Pietro, a glitzy Italian restaurant with frescoes on the walls, was located downstairs. The SAC traders became some of its best patrons.

  —

  While SAC was prospering, nearly doubling every twelve months, Cohen continued to struggle with his own well-being. Even though he had achieved his life’s dream of running his own firm, he was still unhappy, and he had become dependent on a psychiatrist named Ari Kiev to help him manage his moods.

  In addition to treating depression, Kiev’s other area of expertise was success and how to achieve it. He had worked as a psychiatrist and coach with Olympic basketball players and rowers trying to improve their performance and overcome their fear of failure. His background building athletic champions appealed to Cohen’s unrelenting need to dominate in every transaction he entered into, and he started asking Kiev to spend entire days at SAC’s offices, tending to his staff. Kiev was tall, with a bushy mustache and a portly midsection, and he would often appear silently at a trader’s side and ask him how he was feeling. Sometimes the trader would be so startled to see Kiev there he’d practically jump out of his seat. Cohen asked Kiev to give motivational speeches to his employees, to help them get over their anxieties about losing money.