One of the cases Bowe was working on had been initiated by Biovail, a Canadian drug manufacturer. Biovail’s stock price had been lurching up and down as rumors swirled in the market that it was engaged in some sort of accounting fraud. The company’s CEO said he believed that short sellers at a group of hedge funds were colluding with each other and with stock research analysts to publish negative reports about certain companies, including Biovail, in order to drive the share prices down.
Short sellers have an unsavory reputation in the market, as something akin to trolls who rejoice at the misfortune of others. Their livelihood depends on stocks going down, making them the natural enemies of most investors. Shorting is so risky, with potentially unlimited losses if a stock keeps going up, that only the most sophisticated investors, such as hedge funds, generally engage in it. Naturally, most corporate executives see the shorts as enemies of the happy stories they’re trying to tell about their companies, which tend to be full of puffery. For that reason, short sellers play a crucial role in the market, as the only actors who are motivated to look for problems at publicly traded companies—such as accounting fraud—which can be covered up for years. Short sellers were the first ones to point out problems with Enron.
But the field is also filled with opportunities for abuse.
When Bowe first sat down with Biovail’s CEO, Eugene Melnyk, two years earlier, in 2004, he was skeptical of Melnyk’s contention that his company was being targeted by groups of short sellers bent on driving its stock down. But he billed by the hour, so he listened to what Melnyk had to say. Melnyk thought that SAC Capital Advisors was spreading negative information about Biovail in the market, and he wanted Bowe to investigate how the fund worked. The name SAC meant almost nothing to the lawyer. He was well aware of the burgeoning hedge fund industry, but his understanding of SAC’s reputation or how it operated was close to zero. He was surprised by the idea that a private investment fund could terrorize a billionaire CEO.
A little preliminary research brought up the only substantive article that had ever been written about SAC and Steven Cohen, a piece in BusinessWeek published in 2003 called “The Most Powerful Trader on Wall Street You’ve Never Heard Of.” The article described Cohen as an aggressive day trader running a $4 billion fund, someone who paid out over $150 million a year in trading commissions in order to gain access to information before anyone else. 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.) The article said that Cohen was one of Wall Street’s ten largest customers in terms of trading commissions, and quoted someone saying that he was “almost as secretive as Howard Hughes.”
“Who the hell is this Cohen guy?” Bowe wondered.
Intrigued, Bowe and an investigator at his law firm started to look into Melnyk’s conspiracy theories. When Bowe asked people on Wall Street who the most important figures were in the hedge fund business, the name SAC kept coming up. Their business model was described as: They pay to know first.
Bowe put Cohen under surveillance, having him followed on his way to work and monitoring who he had lunch with. His investigator noticed that Cohen always seemed to be surrounded by bodyguards.
On February 23, 2006, Biovail filed a lawsuit against SAC, naming Cohen and a few of his employees and accusing them of manipulating Biovail’s stock. The list of defendants also included Gerson Lehrman Group. The lawsuit accused the SAC traders of working together to drive Biovail’s share price down, from close to $50 to $18 in Canadian dollars. The allegations were based on the idea that Cohen was so powerful, and SAC was such a force in the market, that they were able to demand that the big banks SAC traded with each day give them early access to information that was supposed to be released to everyone at the same time. “To maximize the use of SAC’s substantial market influence,” the complaint read, “under Steven Cohen’s direction, SAC places extreme pressure on its traders, managers, employees and agents to produce at all costs.”
SAC and the other defendants vigorously denied the accusations and argued that the drop in Biovail’s stock price was the result of real problems with its business, which was not an unreasonable assertion. Still, the case gathered momentum, and the SEC launched its own investigation. Then came the kind of publicity that, from the perspective of Kasowitz Benson, was more valuable than anything Bowe could have generated himself: A month after Biovail’s lawsuit was filed, 60 Minutes aired a segment about the litigation, called “Betting on a Fall,” which analyzed Biovail’s case in depth. It also took a highly skeptical view of SAC’s business.
At the time it aired, the stock market was setting record highs every day, while real estate inflated even faster. As the pensions enjoyed by previous generations were phased out, working Americans were pouring their life savings into the stock market with the hope that it would eventually provide for their retirements. Watching the Dow Jones Industrial Average go up became a national obsession.
60 Minutes made it clear that, in spite of the pervasive sense of affluence among many investors, there was something menacing out there. It was not the dangerous bubble that was developing in the real estate market, however; the threat was short sellers at hedge funds. The segment depicted Cohen as a powerful fund manager who sat atop a vast financial network that most Americans didn’t even know existed. Cohen was so private that CBS couldn’t find a photograph of him anywhere that it could use, so instead they broadcast a grainy video that Kasowitz Benson’s investigator had surreptitiously taken of Cohen walking to his car after attending a mixed martial arts fight in Las Vegas. The episode included an extensive interview with Eugene Melnyk. “When you see a tidal wave coming, a tidal wave of negative publicity, a tidal wave of misinformation, and word gets out that the gorilla is about to stomp on you, a lot of people run for the hills,” he said. “We’re lucky we survived.”
—
On the night the 60 Minutes report aired, miles away from the CBS television studio, a woman sat transfixed in front of a TV, smoking one cigarette after another. As she watched the exposé on Steve Cohen and his hedge fund, Patricia Cohen drew her breath in sharply. She could not believe the way her former husband was being portrayed.
Ever since she and Cohen had finalized their divorce in 1990, she had been unhappy about the settlement, which left her with $1 million in cash, their Manhattan apartment, and child support, which, as she saw it, was not enough to live on. It never seemed fair, considering the millions she imagined her husband was earning trading at the time. It didn’t help matters when the real estate market crashed almost immediately after the agreement was signed, and Patricia was unable to sell the apartment as she had planned. She ran out of money and asked Cohen for more, $100,000 a week. It was a war, but one whose front line might have seemed absurd to some people: Patricia’s lawyer wrote in a petition to the court that she and their children, aged ten and six at the time, “are on the verge of being put out on the street because [Cohen’s] wife…is virtually penniless.” Cohen reluctantly increased the child support payments to $5,200 a month and then to $10,400, although they dropped again when Robert, their youngest, left for college at Brown. Cohen complained that his ex-wife was on a “never ending quest to poison my relationship with our children” and accused her of having a “vendetta” against him and his second wife. When Patricia said that she was out of money again, Cohen told her to get a job.
After the 60 Minutes segment ended, Patricia started to wonder: Was it possible that her ex-husband was a truly dishonest perso
n? Could he have hidden money or lied to her during their divorce? While they were married, she paid very little attention to the details of his business affairs. If he asked her to sign papers for an insurance policy or a checking account, she signed them without asking questions, as many wives of her generation did. Now, fifteen years later, she had only a foggy sense of his wealth or how it was achieved.
She went to her computer and typed Cohen’s name into a search engine. An article that she’d never seen before popped up, a lengthy piece in Fortune from 2003 titled “Shabby Side of the Street.” It was about Gruntal, the brokerage where Cohen had worked when they were married. The article depicted the company as a sleazy place, to say the least. During the 1980s and 1990s, it claimed, Gruntal brokers were charged with insider trading and securities fraud; the company paid $750,000 to settle a sexual harassment lawsuit; and a group of employees was indicted for embezzling $14 million over a period of ten years by siphoning money from the dormant accounts of dead customers. And that was only a partial list. But it gave Patricia a sense of the environment her ex-husband was operating in as he started on the path to building his hedge fund empire. She remembered the SEC investigation that Steve had been so upset about in 1986, when the agency questioned whether he had traded RCA shares based on inside information. He had cried on her shoulder every night.
The next day, Patricia picked up the phone and dialed the number for Kasowitz Benson.
Michael Bowe was sitting with his feet up on his desk when his phone rang. His office looked like a high wind had just passed through, with baseball jerseys hanging off the chairs, his son’s chess trophies crowded in a corner, cups and papers and folders all over the place in little piles. The desk didn’t have any clear space on it.
“My name is Patricia, and I used to be married to Steve Cohen,” a woman’s voice said. “I have some information that may be of interest to you.”
Bowe took his feet down and sat up.
“How can I help you?” he said.
She needed advice, she told Bowe. She felt that she’d gotten an unfair divorce settlement and she didn’t know what to do. She was out of money and was living in a three-bedroom apartment on Central Park West that Cohen held under his own name, so she could get kicked out onto the street at any moment. Cohen’s wife, Alex, wrote the maintenance check every month. She also believed that she had information about Cohen that she thought Bowe should know, information she’d kept secret for years. She never felt comfortable coming forward with it, because everyone she talked to was afraid of Cohen. But Bowe didn’t seem scared of him.
She met with Bowe in his office and told him about her relationship with her ex-husband and his time at Gruntal. In their private conversations, he had admitted to receiving information about the RCA takeover by General Electric in the 1980s, she said. He had panicked when the SEC investigated him and was afraid that he would end up in prison. After that investigation ended without any charges, she said, Cohen became extremely careful, almost paranoid, about his trading. He was moody and had an uncontrollable temper. He kept a shrink on retainer at his office, whom she thought was incompetent. She believed their children were frightened of him.
Bowe wasn’t sure what to do. Matrimonial law wasn’t his area of expertise. Patricia was clearly, at a minimum, extremely biased. But Bowe was also disgusted by what he was hearing. It reminded him of Cohen’s reputation on the trading floor, where he went out of his way to abuse people and belittle them. Here was a damaged woman, suffering from serious emotional and financial distress. Bowe couldn’t believe that Cohen, who made close to a billion dollars that year, wouldn’t find a way to pay some amount of money to resolve his issues with his ex-wife. Instead, he had a team of lawyers fighting with her over every expense and his wife looking through her dry-cleaning bills.
The first thing he did was introduce Patricia to one of the lawyers in Kasowitz Benson’s divorce group. Then Patricia asked Bowe whether he thought she should go to the FBI.
“No,” Bowe told her. He knew that what he was telling her was partly out of self-interest, because he wanted to keep her as a possible source for his own cases. “I know it feels empowering and all that,” he said, “but you have to know where talking to the Feds would lead. It’d be like sticking your neck into a buzz saw.”
A few months went by, and Bowe didn’t hear from Patricia. Then she surprised him one afternoon with a phone call. “I just finished a long meeting with an FBI agent,” she told him.
Bowe tried not to seem too interested, but he was curious. “Oh yeah?” he said. “Who?”
“His name was B. J. Kang.”
—
A few weeks after the 60 Minutes broadcast, Bowe received another odd phone call. It was an executive with a Canadian insurance company called Fairfax Financial Holdings. The executive had been following the Biovail case closely, largely because the accusations Biovail had made sounded familiar. The Fairfax executive said that they, too, had been targeted by short sellers at a group of hedge funds who had been generating negative research about their company and even harassing Fairfax’s executives. The difference was that while the Biovail case mostly dealt with events that had already happened, the Fairfax situation was still unfolding. Internet chat rooms were buzzing every day with talk about how Fairfax was going to collapse. Bowe watched one day as Fairfax’s stock fell after message boards were flooded with rumors that the company’s CEO had fled the country and that its offices were being raided by the Royal Canadian Mounted Police.
Fairfax was founded by Prem Watsa, a Canadian billionaire frequently described as “Canada’s Warren Buffett” in the press. Watsa alleged that an analyst at an independent research and trading shop based in Memphis called Morgan Keegan was working in partnership with a handful of hedge funds to spread false information about Fairfax. It turned out that one of the funds was SAC Capital. Through its investigation, Bowe uncovered emails that he believed showed that a Morgan Keegan analyst had sent a draft of his Fairfax report to SAC and other funds before publishing it. Bowe hoped to prove that the hedge funds were insider trading on company research they were helping generate themselves.
Anonymous websites had been created comparing Fairfax to Enron, and Fairfax employees reported getting prank phone calls in the middle of the night: “Fairfax is a fraudulent company,” a voice would say. “Save yourself!” Traders shorting the stock lobbied the FBI and the SEC to start an investigation into possible accounting fraud at the company. The Manhattan U.S. Attorney’s Office also opened an investigation. Fairfax had an incredibly complex structure that made it seem like it could easily be designed to conceal accounting issues. Traders at various hedge funds shorted the stock, making money each time it went down, dropping from $150 to below $110.
On July 26, 2006, Bowe filed a lawsuit in New Jersey State Court, accusing SAC and a group of other funds of spreading false rumors about Fairfax in the market. The lawsuit accused the hedge funds of violating the Racketeer Influenced and Corrupt Organizations Act, or RICO, a criminal statute designed to target the Mafia by holding the leaders of a criminal syndicate responsible for the actions of its lower-level employees. Fairfax asked for $5 billion in damages. SAC and the other defendants denied the charge.*
Just hours after Fairfax filed its case, Bowe got a call from the U.S. Attorney’s Office in Manhattan. It was a prosecutor from the securities unit named Helen Cantwell.
“Can you come down here?” she said, sounding irritated. “We need to talk to you.” She was in the midst of a criminal investigation involving Fairfax, working with an FBI Special Agent named B. J. Kang. The government was looking into possible fraud at Fairfax, not misconduct of hedge funds—basically the opposite of what Bowe’s case alleged. Fairfax’s complaint was full of all sorts of information that came as a surprise to the government, suggesting that it was on the completely wrong track. Cantwell and everyone else at the U.S. Attorney’s Office seemed upset. They wanted Bowe there the next day.
/> The next morning, Bowe strolled into a conference room inside 1 St. Andrew’s Plaza in downtown Manhattan. Kang was at one end of the table and an investigator from the SEC was at the other. Cantwell was in the middle. She pointed toward a chair and Bowe sat down. None of them looked happy.
“What would you like to know?” he asked.
Cantwell said that the U.S. Attorney’s Office was investigating Fairfax for possible fraud. She said that Fairfax, and Bowe, should have waited to file Fairfax’s lawsuit until their criminal investigation was resolved. The lawsuit had just created major problems for their case. Was the government supposed to be looking into possible allegations of fraud at Fairfax or criminal activity of short sellers at hedge funds who were shorting Fairfax stock? Cantwell wanted Bowe to explain every aspect of Fairfax’s 160-page complaint.
Bowe spent the next three hours describing the charges and the evidence behind them, telling them about SAC and the other hedge funds Fairfax believed were targeting them, the false rumors and prank phone calls, the short selling and the allegations of insider trading. While he spoke, Kang took notes.
The atmosphere was chilly, but Cantwell said that they would look into Fairfax’s claims against the hedge funds. She thanked him and said goodbye.
—
Michael Bowe was not raised to avoid conflict. In some ways he sought it out. Most everything he knew about life he’d learned growing up in Pearl River, a town an hour north of Manhattan crammed with Irish bars and knickknack shops. At recess, eight hundred children of New York City cops and firefighters would extrude from the Catholic elementary school in town into an asphalt schoolyard where a teacher looked the other way as the kids took turns picking on one another and concocting cruel games.
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