Black Edge

by Sheelah Kolhatkar

  Weitzman had worked for three years prosecuting organized crime cases. 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.

  Kang began asking Freeman about the environment at SAC. At SAC, Freeman said, there were four ways of communicating with Cohen: in person, by phone, by email, and through portfolio writeups every Friday. Freeman recalled instances when he’d shared inside information with other SAC portfolio managers. He remembered a time when Cohen, whose desk Freeman could see from his own, became animated during a phone call. He hung up the phone and announced that he wanted to go long on financials—that is, to buy bank stocks. Given that it was in the middle of the financial crisis, Freeman thought it seemed like a brazen, possibly self-sabotaging move. The following Saturday, Fannie Mae and Freddie Mac were nationalized, and Freeman couldn’t help but wonder whether Cohen had known it was going to happen. As with many of the other stories Kang heard, it was intriguing, but it wasn’t enough to make a case.

  Kang leaned across the table and stared at him.

  “What did Steve want you to do?” he asked.

  “You were expected to provide your best trading ideas to Steve,” Freeman said without hesitation. “I understood that this involved giving him inside information.” Freeman was adamant that he was not alone in this understanding.

  After Freeman left, the prosecutors ran into their boss’s office to update him. There was definitely insider trading taking place inside SAC, they said, and they finally had a witness to testify about it. With Freeman’s testimony, they felt that they had enough concrete evidence to open a case on SAC directly. The securities chief of the Manhattan U.S. Attorney’s Office wrote “In Re: SAC Capital” down on a folder.

  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.

  —

  Noah Freeman tried not to shake as Kang fitted him with a hidden recording device a few days later. If Freeman hadn’t condemned his friend already, he was about to do so now. He made his way over to Longueuil’s apartment on East Fifty-ninth Street and checked in with the doorman before stepping into the elevator and ascending to the tenth floor. Longueuil had become increasingly insecure about any communication other than face–to-face, and he had stored up a few things he wanted to talk about.

  Feeling sweaty and sick to his stomach, Freeman proceeded to try to implicate his friend, sounding as self-conscious as a sixth-grade boy asking a girl to dance. He brought up the Wall Street Journal article from the previous month and all the drama it had caused.

  “What do you think, worst case, they could get us in trouble for?” he asked Longueuil, and the conversation instantly turned to the most egregious of the things they had done: obtaining inside information about Marvell from the PGR consultant Wini Jiau.

  “I got it from Wini. I gave it to you. So we both…I guess in theory, there’s that,” Freeman said, his voice trailing off. “Did you trade on the Wini P&L? We both did, didn’t we?”

  “Yeah,” Longueuil replied.

  “The Wini thing, that was detailed. That was fucking detailed,” Freeman continued. “I gave that to you.”

  “That was ’08,” Longueuil said, playing right along. “The first half of ’08.”

  “So I traded on that,” Freeman said. “You, you said you traded on that. Sam sure as hell traded on that.”

  Later in the conversation, Freeman asked his friend whether he was worried about Jiau cooperating with the government.

  “I guess,” Longueuil said. “But do they have proof that she gave it to us? I mean, I can tell you whatever you fucking want to hear, or don’t want to. I can lie, whatever. So, yeah, we talked to Wini. It’s ‘he said, she said.’ ”

  “So if she says, ‘I gave them the fucking EPS number’ and then we say…”

  “Where’s the proof?” Longueuil responded. “I don’t remember it like that.”

  Freeman asked him about “the log.” Where was it? It would be devastating if the FBI got its hands on it.

  Yeah, Longueuil acknowledged, the log would be damning. It had the list of all of their sources at the different companies. But Longueuil had taken care of that problem. “The night the Wall Street Journal article came out, I pressed the eject button and everything’s fucking gone,” he said.

  “Is the log gone?” Freeman asked.

  “Destroyed,” Longueuil said. “Everything’s gone.”

  “How did you do it?” he asked.

  “I chopped it up,” Longueuil said. “Chopped up everything.”

  “I don’t see how you get rid of that shit.”

  “Oh, it’s easy,” Longueuil said. “You take two pairs of pliers and you rip it open.” He said he also had two external hard drives that had wafer numbers on them, which he pulled apart and put into different baggies. “At 2 A.M. I leave the apartment and go on like a twenty-block walk around the city and threw the shit in the back of like random garbage trucks.”

  “I can see the Feds trying to find it,” Freeman said.

  “Well, they can find it, but it’s all fuckin’ ripped apart,” Longueuil replied. “Everything’s gone.”

  —

  At night, after taking the train home to Jersey City and helping his wife put their four kids to bed, the SEC lawyer Charles Riely stayed up late, combing through sheets of data, looking for connections. It was early 2011, more than a year after his new case had launched, and he still didn’t know who the Elan trader at SAC was. It was driving him crazy.

  It wasn’t until May 2011, the same month that Raj Rajaratnam was convicted on fourteen counts of conspiracy and securities fraud, that Riely had his breakthrough. He had sent out a subpoena for Sid Gilman’s phone records several months before, but they were taking forever to come back. When he finally got them, he was able to identify a phone number on the list: It belonged to a portfolio manager at SAC named Mathew Martoma. The SEC had his name in a database. Suddenly, everything fit together. The doctor and the trader had spoken dozens of times. Riely had his trader.

  He went to tell his boss, Sanjay Wadhwa, that they finally had a suspect. Then Wadhwa placed a call to the head of the securities unit at the U.S. Attorney’s Office.

  Frankly, Wadhwa was feeling frustrated. 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.

  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.

  “Where are you guys?” Wadhwa asked the chief of the securities unit in Bharara’s office and his deputy when he got them on the phone. “There’s a really good case here, but we need you to get involved.”

  Wadhwa, and the SEC generally, were under more than the usual amount of pressure.

  Senator Charles Grassley, an influential Republican senator from Iowa, had started complaining—loudly and publicly—that the SEC was not doing its job policing the stock market. The previous month, Grassley’s office had received a tip from someone suggesting that the Senate Judiciary Committee look into a rogue hedge fund called SAC Capital.

  Grassley had been a vocal critic of the Obama administration’s response to the financial crisis, arguing in interviews and press conferences that the president’s financial reform proposals weren’t strong enough. The SAC case looked like a ripe opportunity to criticize regulators again for missing the next Madoff in their midst. Ironically, Grassley had attended a fundraiser at SAC’s offices in 2008, but he still had little idea what the fund did. In April 2011, a month into the Raj Rajaratnam trial, one of Grassley’s staff members asked FINRA, which monitored stock market activity, to send over every referral it had involving suspicious trading by SAC. Cohen and his firm looked like the perfect bludgeons to use to disparage the SEC. If anything significant came back and the regulatory agency hadn’t done anything about it, Grassley would have cause for a loud and public campaign.

  A few days later, a folder containing a stack of referrals concerning trading in twenty different stocks arrived at Grassley’s congressional office. The young aide who opened it wasn’t an expert on hedge funds, but it sure looked bad.

  There was a referral from May 9, 2007, reporting suspicious trades by the SAC unit CR Intrinsic in something called Connetics Corporation. Another referral from October 26, 2007, flagged SAC trades in Fidelity Bankshares. Another referral, from December 14, 2007, read: “The investigation identified timely purchase of INGR shares by two hedge funds located in Greenwich, CT that had contact with INGR during the period of June 26, 2006 through August 31, 2006.” The funds were part of SAC, and the purchases happened right before a buyout of INGR was announced. The list went on and on: problematic trades in United Therapeutics, Sirtris Pharmaceuticals, Third Wave Technologies, Cougar Biotechnology, Synutra International. Some of the trades had happened as recently as 2010. Included in the pile was the September 5, 2008, referral about Elan and Wyeth and the massive stock sales SAC had made a week before the drug trial announcement.

  Grassley demanded to know whether the SEC had done anything about the referrals. He released a letter to the media outlining his concerns about the SEC’s ability to enforce the securities regulations. Look at SAC, he said. Signs of suspicious activity were rampant, and the SEC hadn’t taken any action—it was another useless government agency.

  Cohen watched the senator’s actions with growing discomfort. Any time someone suggested something improper was going on at SAC, he became defensive. He ordered his executives to do something about the criticism from Washington. A few days after the senator’s letter became public, on May 10, 2011, SAC dispatched a group of executives from Connecticut to Grassley’s offices to try to calm the situation.

  Cohen’s advisors seemed confident that they could “charm” the Senate staffers into dropping their concerns about SAC. Tom Conheeney, SAC’s president, Peter Nussbaum, its general counsel, and an SAC executive in Washington named Michael Sullivan descended on Grassley’s office. Sullivan was a former advisor to another powerful Republican senator, a Washington operator through and through, and Cohen had hired him specifically to address this kind of problem. Sullivan argued to the senator’s investigators that the firm took its compliance seriously and that they should lighten up.

  “Steve is very civic-minded,” Sullivan told Grassley’s staffers. “He’s thinking about taking a stake in the New York Mets.”

  The staff members stared at him, unable to comprehend what they were hearing. “Oooh, I’m a Mets fan—he must be a good guy,” thought one member of Grassley’s staff sarcastically.

  The meeting ended awkwardly and, from Cohen’s perspective, fruitlessly. On May 24, Grassley released another letter to the media, this time accusing the SEC of failing to investigate SAC and demanding a meeting with the chair of the SEC. “I have had a longstanding interest in whether the Securities and Exchange Commission is properly policing and regulating our financial markets,” Grassley wrote. He explained that he had recently obtained twenty referrals of suspicious trades at SAC from FINRA and demanded a written explanation as to how the SEC had resolved each one.

  By the time Wadhwa got a call from the SEC’s enforcement chief about it, the Grassley campaign was threatening to escalate into a full-blown scandal.

  “We have got to get ahead of this,” Wadhwa’s boss told him. “Can you look into it?”

  —

  After hearing from the SEC about the Gilman-Martoma connection to the Elan case, the head of the securities unit at the U.S. Attorney’s Office agreed that it was time to look again at what the SEC had found. Two criminal prosecutors, Avi Weitzman, who was working on the Noah Freeman and Donald Longueuil cases, and Arlo Devlin-Brown, who was in the middle of a high-profile case involving illegal Internet gambling sites, walked over to the SEC’s offices. B. J. Kang came, too.

  Charles Riely still wasn’t positive about what had happened with Elan, but he had a theory. He tried to describe the criminal conspiracy as clearly as he could. “We think it’s most likely that Gilman, or another doctor, tipped Martoma,” he said. It was famously difficult to build an insider trading case on circumstantial evidence alone, but every new document that came in supported the narrative that was emerging. Riely felt in his bones that this was going to be a huge case.

  To everyone in the room, the link seemed obvious: There was a major drug announcement that caused a stock to plunge; that announcement was made by a doctor who had access to the information well in advance; that doctor had been paid a fortune to consult with a trader at SAC, who was paid a fortune by Cohen, who made millions of dollars trading the stock the week before the news came out. It was like Occam’s razor, or the law of parsimony: Among competing hypotheses, the simplest one was usually correct
. Any other explanation defied common sense.

  “Guys,” Wadhwa said to the prosecutors. “This is a really important case. If you don’t start doing something, we’ll have to go forward alone.” He couldn’t have cared less about Martoma personally, he added. The big catch here was Cohen.

  “You’re right,” said the head of the securities unit. “We need to move on this.”

  Kang had to leave the meeting early, but he had heard enough to be convinced about Elan. He had developed a skeptical view of what was happening on Wall Street, to put it mildly. He’d heard over and over from his cooperators and sources that cheating was rampant. When the incentives were so huge and you had so many funds competing to the death—all of them with the same Wharton-trained wizards on staff, the same state-of-the-art technology systems, the same expert network consultants, the same greed and determination—how else could you rise above everyone else and beat the market year after year? In the Galleon case, they had charged Raj Rajaratnam and a few others over eleven trades and alleged a $64 million illegal profit. With Elan and Wyeth, the profit was four times as large.

  The FBI finally had a live lead, Gilman, who was ready for an approach.

  —

  When Kang got back to his office, he plugged Martoma’s Social Security number into the FBI’s database. It turned out that Mathew Martoma had a particular status called “known to the Bureau.” He had apparently been interviewed by an FBI agent in 2000 as a potential witness in connection with a separate fraud investigation.