Black Edge

by Sheelah Kolhatkar

  On August 26, 2008, around 1 P.M., Horvath had sent the email to Michael Steinberg, to whom he reported at SAC, and to another SAC portfolio manager named Gabriel Plotkin. It was the kind of analyst jargon that Wall Street folks used to describe companies’ financial performance all the time. To an average person, it likely would have been incomprehensible. But the SEC knew what it meant. It was conveying detailed, confidential earnings information about Dell.

  The SEC lawyers were intrigued. They began to wonder which other traders at SAC might have received this information.

  Horvath sent the message two days before Dell released its second-quarter earnings. It appeared that Steinberg had then turned around and made $1 million shorting 150,000 shares of Dell right before the earnings announcement. All the government needed was for Horvath to flip and they would have a case against Steinberg as well. And a case against Steinberg would bring them one step closer to Cohen.

  It could, after three years, put them in the inner circle of Cohen’s company. A floppy-haired, low-level functionary at SAC named Jon Horvath whom they’d scarcely noticed before was about to reignite their case.

  CHAPTER 12

  THE WHALE

  Sid Gilman bent over the security table in the lobby of the World Financial Center in lower Manhattan and emptied the contents of his pockets into a plastic dish so they could be sent through an X-ray machine. His lawyer led him through the turnstiles, into an elevator, and up to the fourth-floor conference room at the SEC’s New York regional headquarters. After months of delays, Gilman was appearing for his first meeting with the government attorneys working on the Martoma case.

  Throughout the fall, Charles Riely had constructed a detailed chronology of everything that had gone on before and after the Elan and Wyeth trades. Each time he got a new piece of information, he put it into the “chron” and then emailed it around to everyone involved in the investigation. The documents, on their own, told a logical story. But even as Riely and his colleagues were increasingly sure that they understood the events that led to SAC’s sales of Elan and Wyeth, the government lawyers were still eager to hear from Gilman himself. It would be their first opportunity to question the only person, aside from Martoma and Cohen, who knew what had really happened in July 2008.

  After months of hearing from Gilman’s lawyer that his client, who was nearly eighty, wasn’t physically strong enough to testify, the SEC lawyers expected a sickly, skeletal figure to stagger through the door. Instead, Gilman walked in looking alert in his suit and tie, his cheeks pink, his dark eyes bright. He eased himself into a seat with his back toward the windows and sat upright.

  Riely asked about Gilman’s work on bapineuzumab and how he had gotten to know Martoma. Riely then started sliding documents across the table one by one—copies of emails and calendar entries and agreements with the drug companies—and asked Gilman about each one. If Gilman claimed not to remember something, Riely would pull a sheet of paper out of his folder and show it to him to see whether it loosened his memory.

  Almost from the beginning, it seemed like Gilman was being evasive.

  “What about this calendar entry?” Riely asked, pointing to an appointment in Gilman’s electronic calendar from July 13, 2008, which read: “Mat Martoma will call me re SAEs in bap.” Riely knew from the phone records that Gilman and Martoma had spoken that evening for almost two hours.

  “What are ‘SAE’s in bap’?” Riely asked.

  Gilman slipped into avuncular professor mode, launching into a detailed explanation of Alzheimer’s disease and the challenges and prospects of finding an effective treatment. He brightened up as he described the optimism he had had about bapi’s potential for destroying beta amyloid in the brain, which he believed was a primary cause of cognitive degeneration. Then he finally got around to answering the question. “Serious adverse events” was the technical phrase for side effects observed during the bapi trial.

  “Why would you be talking to Martoma about that?” Riely asked. “Wouldn’t details about the SAE’s be nonpublic information?”

  “I don’t know why that’s in there,” Gilman mumbled, his face suddenly darkening.

  “Look,” his lawyer interjected, “he doesn’t know anything.”

  When Gilman was asked to explain a scientific concept or the aims of his medical research, he became animated. His memory was excellent. He was able to summon the byzantine details of the chemistry of the different drugs on request. But if someone mentioned Martoma’s name or asked about Gilman’s relationship with him, he suddenly morphed into a confused old man who barely knew how to tie his own shoes.

  Avi Weitzman, one of the prosecutors sitting in on the meeting, couldn’t believe what he was seeing. There were huge inconsistencies in Gilman’s story, which was essentially that he didn’t remember a thing he had ever said to Mathew Martoma, even when there was documentary evidence right in front of him showing that he had shared inside information about bapi. How could Gilman remember so much about his research but nothing about his dealings with Martoma?

  The temperature in the room seemed to get warmer as they went back and forth over the same few documents, with the SEC lawyers and the prosecutors repeating the same questions and Gilman saying he didn’t know or couldn’t remember. It went on like this for two hours. The government had been waiting for five months to question Gilman and had so many blind spots they expected him to illuminate. Instead, it seemed to them that Gilman was wasting their time. Riely felt like he was going to explode.

  He asked Gilman again about the consultation he had had with Martoma on July 13, 2008, during which Riely was fairly certain they had discussed bapi. “What was that meeting about?” he asked.

  “Oh, we were talking about Parkinson’s disease,” Gilman said.

  Riely sighed. He asked to take a break and summoned his colleagues out into the hallway. “Look,” he told them. “That thing about Parkinson’s—I know it isn’t true.”

  “How do you know that?” Weitzman asked.

  Riely flipped through his files and pulled out one of Gilman’s calendar entries, the one for the particular consultation they were asking about. It read: “Mat Martoma will call me re SAEs in bap.” Riely then produced a corresponding email between Martoma and Gerson Lehrman Group, the expert network that had arranged the consultation. In it, Martoma said that he and Gilman would be talking about Parkinson’s disease. GLG’s own rules prohibited Gilman from talking about the bapi trial to the company’s clients because it might violate confidentiality rules. Gilman and Martoma had evidently misled GLG about what they were planning to talk about.

  Weitzman felt a wave of gratitude for Riely’s thoroughness. His somewhat stiff counterpart at the SEC had just handed them the weapon they needed to prove that Gilman was lying to their faces. They would confront him with it, and he would have to fold. Weitzman grabbed the calendar entry and the email and strode back into the room.

  “Look, Dr. Gilman,” Weitzman said, leaning across the table. “We know you’re not telling the truth. You are risking jail if you stick to this story.”

  Gilman shook his head as Weitzman pushed the two sheets of paper across the table, one showing his calendar entry, the other showing Martoma’s communication with GLG.

  Gilman’s lawyer, Marc Mukasey, quickly recognized what was happening and interrupted. “Can we take a break?” he asked.

  The government lawyers left the room again so Mukasey could talk with his client in private. Weitzman was sure that this was it: Gilman was about to confess everything.

  A few minutes later, Mukasey joined them in the hallway. He had a slight look of surrender on his face. “Listen,” he said. “You’re welcome to continue this line of questioning. I understand why you think it looks bad. But he just doesn’t remember it the way those documents portray it.”

  “Marc, that is just not credible,” Weitzman said.

  “You can continue asking him. I promise to keep working with him too,” Mukasey s
aid. “But he insists he doesn’t remember it the way it looks.”

  The interview continued for two more hours, during which Gilman refused to budge, saying over and over that he didn’t remember what had happened and insisting that the government was wrong. It was one of the most frustrating interviews Weitzman had ever participated in. As he walked back to the U.S. Attorney’s Office afterward, Weitzman felt sure that the Elan case was dead.

  —

  Charles Riely and his SEC colleagues didn’t have much time to feel bad about how poorly things had gone with Gilman because Martoma was coming in for a deposition the next morning. They had to put Gilman behind them and prepare.

  Like Gilman’s lawyer, Martoma’s defense attorney, Charles Stillman, was in a difficult position. He was trying to gauge the intentions of the criminal prosecutors and the SEC and maximize his bargaining position with each of them. If there was a criminal case coming together that could send Martoma to jail, Stillman had to focus on that and be as defensive as possible. Stillman especially wanted to know whether the government had a wiretap. If they did, it was something like a death sentence. If it was only the SEC Martoma had to worry about, a fine was the worst-case scenario, and they could afford to be a little more helpful. Stillman was a well-known criminal defender; he had been around a long time. He prided himself on his ability to respond to situations like this.

  While Stillman tried to test the prosecutors and find out how strong their case was, Avi Weitzman told him that Martoma’s chances of getting a good plea deal would only decline the longer he waited to cooperate. It was a race between Martoma and Gilman: Whoever got there first was going to get the best outcome for himself. So far, Stillman had given no indication that Martoma was willing to flip.

  The possibility that he might quietly go to jail to protect Cohen was not something the prosecutors had taken seriously. The crime could result in a prison term of ten years. Nobody took a sentence like that for someone else—especially not a person who had treated him badly. The FBI had seen countless guys turn on their best friends when the stakes were considerably lower. The longer Martoma held out, the more people involved in the investigation started to wonder if Cohen might be inducing him somehow to stay quiet.

  In fact, 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.

  Just before 10 A.M. on February 3, 2012, Riely went to the SEC’s fourth-floor lobby to meet Martoma and bring him to the conference room. Martoma was waiting by the reception desk with Nathaniel Marmur, a partner of Charles Stillman’s. Riely instantly noticed that Martoma wasn’t wearing a suit, like most people who came in to meet with the SEC; he wore khaki pants and a tweedy jacket, no tie, like he was headed to a cocktail party.

  He was barely through his first question when Martoma read a statement that his lawyers had prepared for him: “On the advice of counsel, I respectfully decline to answer the question at this time based on my right under the United States Constitution not to be a witness against myself.” He was taking the Fifth.

  The SEC lawyers had seen this tactic many times before, and there were different ways defendants handled it. Often, when Wall Street suspects took the Fifth, they acted hostile and angry the whole time, as if they were offended about having to be there. Martoma was different. He was strangely calm. His face betrayed no hint of emotion.

  Riely and his colleagues studied him closely as he repeated the statement in response to each query, dozens of times. They found him impenetrable. If Martoma was innocent, they thought, he would have taken this opportunity to say so. He clearly had something to hide.

  —

  With all of their most promising leads running into obstacles, there was only one person left who had the answers the government wanted. The SEC needed to insist that Steve Cohen come in and answer questions.

  It was a major decision. Bringing a billionaire in for questioning wasn’t something the SEC did every day. It wasn’t long ago, in fact, that SEC attorneys were openly discouraged from pestering important people on Wall Street. The leadership of the SEC had often hinted to the staff that the wealthiest, most successful individuals in the financial world were not to be disturbed. It was part of the former SEC chairman’s “hands-off” approach to regulation.

  But in 2012, post–Bernie Madoff, the agency was in the midst of a transformation. This time, no one questioned the Elan team’s desire to bring Cohen in for a deposition. The new director of enforcement was trying to make it easier for SEC attorneys to do their jobs. On March 12, Riely sent a subpoena requesting that Cohen appear to testify. They all knew it was unlikely that Cohen would say anything that would be helpful to them—it was likely to be one of the most carefully rehearsed and lawyered interviews they had ever done. But they had to try.

  The intensifying investigation couldn’t have come at a less convenient moment for Cohen. For years he had been interested in buying a professional sports franchise, trying to find a way to become the owner of a major league baseball team. It was something he had dreamed about since he was a kid. He had just spent $20 million to buy a 4 percent stake in the New York Mets, which was meant to be a first step toward full ownership. He had to prove to the governing forces of baseball that he was responsible and reputable enough.

  For the previous several months, he had taken time off from running SAC to assemble a bid for the Los Angeles Dodgers, a franchise that had been driven into bankruptcy by a parking lot mogul named Frank McCourt. But with his name now appearing in the newspaper with alarming frequency in connection with the insider trading investigation, Cohen was struggling to gain the confidence of Major League Baseball, which had to approve his bid. In an effort to market himself to the city, he joined the board of the Museum of Contemporary Art, Los Angeles and teamed up with a local entrepreneur to prepare the offer. He thought that having an L.A. businessman by his side would help his case. But Cohen didn’t want to be a fool, like other Wall Street moguls before him who had blown exorbitant sums to buy sports teams. He was determined to make the Dodgers work as a business. He submitted a bid of $1.6 billion.

  On March 27, 2012, he was on a list of finalists to buy the team that was leaked to the media. He was the only one in the group who didn’t need to borrow money for the purchase, which strengthened his position. Cohen felt certain he was going to get it.

  Then, the following day, Major League Baseball announced its decision. It had accepted a $2 billion bid from Guggenheim Partners, a multibillion-dollar investment firm that had made its offer with the former Lakers star Magic Johnson, a beloved figure in Los Angeles. One of Guggenheim’s most significant investors was Michael Milken. Cohen didn’t usually get emotional about his investments, but he was sorely disappointed.

  —

  Charles Riely lowered himself into a chair in the SEC’s testimony room and stared at the door that Steve Cohen was about to walk through. His folders and files were carefully arranged on the chair next to him. He double-checked that everything was in the right order. He knew Cohen was smooth and experienced; a transcript of a deposition he had given in the Fairfax case a year earlier showed just how naturally Cohen could respond to questions without really answering them. Riely understood that the best possible scenario was that he could catch Cohen in some small contradiction or extract a detail that they could use to put more pressure on Martoma. This was the most important moment in Riely’s career. He took a deep breath.

  “This is it,”
Riely thought. “I’m ready.”

  Cohen had struggled over the decision of whether to testify or take the Fifth in response to the SEC. The calculus for Cohen’s legal team was simple: A subpoena from the criminal prosecutors would have been too threatening, so Cohen would have told them to “pound sand” and refused to answer their questions; but the SEC was not pursuing a criminal case, so cooperating was the smarter option. Cohen could spend a day downtown under the guise of trying to be helpful, creating the appearance that he had nothing to hide. He had to try not to lie—if he did so, he would perjure himself, and that could be used against him. But at least he could tell his investors that he was cooperating with the securities regulators, which would reassure them in the face of increasingly negative coverage in the press.

  Hedge fund investors, the people whose money Cohen had such a talent for multiplying, were a predictable and self-serving group. Many of them, including university endowments and pension funds managing retirement accounts for public school teachers and police officers, were only too happy to overlook the questionable things hedge funds were doing—as long as they made money. Pension fund managers in particular had enormous, in some cases impossible, financial obligations to fulfill for their retirees, and very few ways of earning the returns they needed. Cohen had made his investors so much money over the years, it was going to take a lot to compel them to leave. And if there was one thing the Bernie Madoff case had shown, it was that even sophisticated investors could fall for the lure of easy money.

  Once the government’s investigation of SAC reached a certain feverish stage, however, circumstances began to change. Cohen was getting calls from anxious investors seeking an explanation as to why his name was in the newspaper every few days. Wasn’t this a distraction? What was he doing to put this behind him? Finally, he had something positive that he could tell them: He was cooperating with the SEC.