Black Edge

by Sheelah Kolhatkar

  Then a second reporter asked essentially the same question. “Sometimes when you bring a case, that opens up doors to bringing other cases in the future,” Bharara said. “You’ll have to wait and see.”

  As Bharara ended the press conference, which was broadcast live on CNBC, everyone on SAC’s trading floor stared at Cohen, who was trying to pretend that it was just another typical trading day.

  “A lot of people were thinking Steve was just going to walk away,” said one person who was there. “Assistants were asking if they should box up their belongings.”

  Cohen made an announcement over the company’s PA system: “We’re going to be okay,” he said, trying to sound reassuring. “We’re going to get through this.”

  Privately, though, Cohen was in a state of shock. He withdrew to East Hampton for the weekend with Alex and their four youngest children, the eldest of whom was home visiting from university. Through most of the investigation, Alex had tried to protect the kids from the news coverage and had banned any discussion of it at home. Cohen had been terrified of how they would react to the cartoonish depictions of him in the press, and he had avoided talking to them about it. But now, with the Manhattan U.S. Attorney broadcasting to the world that their father was the financial world’s Al Capone, he couldn’t keep it hidden any longer.

  His daughters climbed to the second floor of the seven-bedroom house, where Cohen spent most of his time in his office staring into his trading station, to talk to him.

  You are going to be reading and hearing a lot of stuff about me that isn’t very pleasant, Cohen told them. He struggled with what to say; he was bitter about what was happening. His friends had started making jokes that he “looked good in stripes,” but he didn’t find them funny.

  “People will have different opinions,” Cohen said to his daughters, “and some are going to be untrue.”

  The girls were understandably anxious. Was their father in trouble? Did he do something terrible?

  “People in the company have done things that are wrong, and they’re going to pay for what they did,” Cohen told them. “I didn’t do anything wrong.”

  CHAPTER 15

  JUSTICE

  Every weekday morning for the rest of the summer, Steve Cohen settled into the backseat of his black Maybach for the twenty-three-minute drive from his home in Greenwich to SAC’s offices in Stamford. He made a point of being there by 8 A.M., as he had always done. He took up his post behind his screens as if everything were normal. And he did the only thing he knew how to do: He traded. He was largely able to do this because major investment banks like Morgan Stanley, JPMorgan Chase, and Goldman Sachs, the ones that had earned hundreds of millions of dollars in commissions from Cohen over more than a decade, refused to abandon him during his time of darkness, even though his company had been branded a criminal enterprise and Cohen himself was still at risk of criminal prosecution. It was virtually unprecedented in the financial industry. Mainstream Wall Street looked at the agency that stood for law and order and ethics in their field and at the most profitable trader they had ever worked with and then pointed at Cohen and said, “We choose you.”

  “They’re an important client to us,” Goldman Sachs’s president, Gary Cohn, said days after the U.S. Attorney for the Southern District of New York declared SAC a “magnet for market cheaters” and said that the company had “trafficked in inside information on a scale without any known precedent” in the history of hedge funds. “They’re a great counterparty.”

  During discussions with Cohen’s lawyers prior to the indictment of SAC, the U.S. Attorney’s Office had made it clear that, in order to resolve the case, Cohen would have to shut his hedge fund down. Cohen would still have close to $10 billion of his own money, however, which he would be allowed to trade and invest as a private family office. The government could not stop him from trading his own money. Until he was convicted, Cohen and his army of traders would still command respect from Wall Street’s major investment banks and have access to the best IPO allocations. The $10 billion number was important to Cohen. It sent a signal to the world that nothing had really changed.

  Then, in the second week of September, Cohen’s lawyers got a call from Anjan Sahni, the co-chief of the securities unit at the U.S. Attorney’s Office. Sahni and his colleagues wanted to talk about settling the case against SAC. Not much had happened during the month of August, after the indictment. The prosecutors noticed, though, that business at SAC had gone on as if nothing unusual had occurred. There were no visible crises in the market, no layoffs or margin calls. Wall Street had absorbed criminal charges against one of the largest hedge funds in the world with barely any disruption.

  Settling the case was the only resolution that made sense; a trial was a risky proposition for both sides. For the government, losing the SAC case would have led to humiliation, a heavy blow to morale at the office. Mathew Martoma’s trial was approaching, and the FBI still hoped that he would decide to cooperate, in which case prosecutors would need all of their resources to develop that case.

  For Cohen, the calculation was similar. The idea that he would submit himself and his employees to months of discovery and take the stand to answer questions under oath about his trading activities if he didn’t have to was laughable. He was a trader without nerves, but a long, drawn-out court battle that threatened to expose all his secrets was one risk he did not have the stomach for. Plus, if he ended up being charged himself, he needed to reserve all his legal firepower to defend himself. In the end, after all the calculations, the case against SAC Capital came down to a question of how big a check Cohen would have to write in order for it to be over.

  Cohen’s lawyers made an opening offer of $100 million to $150 million. Bharara didn’t even take it seriously, it seemed so far from the figure he had in mind. The co-chief of the securities unit reminded Klotz and Cohen’s other attorneys that there were two very relevant trials coming up: those of Michael Steinberg, which was starting in November, and Martoma, in January. The cost of settling was only going to increase if Cohen dragged the negotiations out until both of those trials ended with convictions. Sahni didn’t have to mention the obvious point that if either of them decided to cooperate before then, the argument would become even more forceful.

  Two months later, on November 4, Bharara announced that they had a deal. The terms of the settlement were large and sweeping and intended to deliver a powerful message that Wall Street was not above the law. In the twenty-first century, when the financial industry had largely taken over the economy, the SAC case was supposed to prove that Wall Street excess had a price, that, even when up against the most powerful transgressors, the law can win. SAC had agreed to plead guilty and pay $1.8 billion—the company managed to negotiate credit for the $616 million it had already committed to pay the SEC, so in reality the new fine was $1.2 billion. The settlement would also include a guilty plea by SAC, an admission, in court, that the firm had done everything the government was accusing it of.

  Again, comparisons with Michael Milken, in many ways Cohen’s precursor, seemed appropriate. In 1989, Milken’s firm Drexel Burnham Lambert had pleaded guilty to securities fraud and agreed to pay a $650 million fine. The SAC deal was similarly impressive. For Americans who were still confused and upset about why nobody had been held legally responsible for the crimes that led to the financial crisis of 2008, the case against Cohen’s company was something different: a clear, unequivocal victory for the forces of fairness and integrity.

  Or at least that was the idea.

  All that was left was for SAC to register its guilty plea before a federal judge a few days later. While TV networks beamed news of the settlement onto trading floors around the world, Cohen sat glowering at his desk in Stamford. He wasn’t happy about it, but he had known this day might be coming, and he had an aggressive crisis PR firm on retainer ready to go into counterattack mode the second Bharara made his announcement. “The tiny fraction of wrongdoers does not represe
nt the 3,000 honest men and women who have worked at the firm during the past 21 years,” SAC’s public relations handler said in a statement. The last line read: “SAC has never encouraged, promoted or tolerated insider trading.”

  Bharara couldn’t believe it when he read it. SAC had just signed a guilty plea admitting that it had, in fact, been built on a culture of insider trading. Cohen had admitted as part of the agreement that his company had fostered a culture of securities fraud for over a decade. The chief of Bharara’s securities unit called Cohen’s lawyers and ordered them to retract the statement, which they did. Then they released a new one that stated: “We greatly regret this conduct occurred.”

  —

  On November 8, one of the highest-priced teams of defense lawyers in the country filed into a courtroom at 500 Pearl Street in lower Manhattan, wearing their best pinstripes and shiny cuff links. The spectator’s gallery was packed with reporters, prosecutors, SEC attorneys, FBI agents, law students, and curious gawkers, all crammed in on benches like passengers on a train. Tabloid photographers lurked outside. Incredibly, Cohen didn’t have to show up in court himself. He would be paying the $1.8 billion out of his own funds, but he was barely going to notice that the money was gone.

  The judge, Laura Taylor Swain, placed a stainless steel coffee cup on the desk in front of her and peered down at the herd of lawyers assembled below. The room fell silent.

  “Mr. Nussbaum, it is my understanding that you need to remain seated today,” she said, blinking through her glasses.

  A hundred heads turned to look at Peter Nussbaum, SAC’s legal counsel, who was sitting, uncomfortably, at the defense table.

  “That is my preference, yes, your honor,” said Nussbaum, wincing a little. He was doubled over in pain from an emergency appendectomy three weeks before which had been exacerbated by extreme stress. He stood halfway up to be sworn in and then do what he had come here for, to surrender on behalf of Cohen.

  “Do you understand the charges that SAC Capital is pleading guilty to?” the judge asked.

  “Yes.”

  “Are you under the influence of any drugs or alcohol?”

  “I’ve taken some antibiotics for my condition,” he said.

  “Do you want me to read the indictment out loud?” Swain asked, holding up a forty-page document.

  “No thank you, your honor,” Nussbaum said.

  Laughter rippled through the gallery. In an instant, Swain had brought out just how odd the whole ceremony was, a burial without a body.

  Nussbaum knew the charges by heart. His employer of thirteen years was about to admit that it had been run like a criminal empire for more than a decade, amassing hundreds of millions of dollars in illegal profit and making its founder one of the richest men on earth.

  Judge Swain described the agreed-upon penalty in the case, $900 million in criminal fines and $900 million in civil forfeiture, as well as a five-year probation period during which a compliance monitor to be approved by the Justice Department would watch over the fund’s activities. The hedge fund would be shut down.

  Nussbaum sighed and looked up at the judge. “On behalf of SAC I first want to express our deep remorse for the misconduct of each individual who broke the law while employed at SAC,” he said. “This happened on our watch, and we are responsible for that misconduct.

  “We have paid and are paying a very steep price,” Nussbaum continued. “We are chastened by this experience, but we are determined to learn from it and emerge from this as a better firm.”

  The judge stared at Nussbaum. A few droplets of sweat had appeared on his forehead.

  “How does SAC Capital plead?” she asked.

  Nussbaum pulled himself halfway out of his chair.

  “Guilty,” he said.

  “Are the defendants pleading guilty because they are guilty?” the judge said.

  “Yes, your honor.”

  With a tap of her gavel, Judge Swain said, “We are adjourned.”

  It took a while for the two hundred or so people in the courtroom to squeeze their way through the single door in the back. Outside on the curb, SAC’s group of defense lawyers waited, unable to find the black Escalade that was supposed to whisk them away. They stumbled around as a pack of photographers and TV reporters swarmed around them like gnats, trying to corner them for a statement.

  Finally the lawyers spotted their car and ran over to it. They climbed in, the doors closed, and it sped off.

  A man with a backpack exiting the building looked after them, bewildered. “Who’s the crook they’re following?”

  —

  Almost two weeks later, on November 20, Michael Steinberg’s trial began. The prosecutors had never felt confident that he would choose to cooperate—he was intensely loyal to Cohen, for one thing, and because his trades were so small, the leverage the government had against him was weak. Still, they had hoped that some sense of honor or civic-mindedness, perhaps the entreaties of his wife, might bring him around to their side.

  As Antonia Apps strode into the courtroom and took her place behind the prosecution table on the first day of trial, however, it was clear that it wasn’t going to happen. All the prosecutors could try to do was punish Steinberg. Apps turned toward the twelve men and women seated in the jury box.

  “Members of the jury,” she began. “Michael Steinberg got stolen business information and then used that information to make money—lots of money—by trading in the stock market.” Steinberg was sitting with his lawyers at the defense table with a pained look on his face. “He got secret financial information from people inside companies before that information was made available to the public. He did it to get an illegal edge over ordinary investors who played by the rules. And when Michael Steinberg traded on that illegal inside information, he broke the law.”

  Apps was known as someone who, when presented with the choice between going out for drinks with her colleagues and staying late preparing for a trial, almost always chose the latter. Tall and fit, she was a former national figure skating champion who had left a lucrative partnership at a white shoe law firm to prosecute securities cases at the U.S. Attorney’s Office. She wanted to be here.

  Her job was to take a vastly complicated case and turn it into the simplest story possible: Michael Steinberg was a rich Wall Street guy who had cheated. “He wanted to make big money for himself and for the hedge fund for which he worked,” Apps said. “That, ladies and gentlemen, is called insider trading, and it’s a serious crime.”

  In an environment where the average person harbored unfocused but intense anger toward Wall Street, Steinberg was a juicy target. Privileged, arrogant, he lived on another plane from most Americans. He was not Steve Cohen, but he was close.

  The job of saving Steinberg from this characterization fell to his defense lawyer, Barry Berke. Where Apps was meticulously rehearsed, Berke was willing to improvise, with the affect of a congressman who knew how to turn on the charm. Berke had wanted to be a defense attorney since he was in law school at Harvard, when he had stumbled into the glare of TV news cameras on the courtroom steps after defending a wrongful conviction case as a student.

  He loved that moment in the spotlight. “This better not be the last time there are cameras for one of my cases,” he had thought.

  Berke smoothed his tie and turned toward the jury, gripping the sides of the podium. To test out his arguments, Berke had staged two mock trials and recorded the proceedings so that he and his partners could analyze their performances. He had researched every juror on the case, scouring their social media footprints for any sign of their views about Wall Street or the government. He knew the facts of the case better than anyone. As in the Martoma defense, SAC was paying the bills.

  He flashed the jurors a smile and launched into a parable that was meant to illustrate the core of Steinberg’s defense: that Horvath, Steinberg’s former underling, was only testifying against Steinberg to save himself. Not everyone in the room understood the point h
e was trying to make with the parable, which involved a farmer falling into a well, but Berke went ahead anyway. “He needed to point the finger at somebody to get a deal,” Berke said, referring to Horvath. “So he pointed it at Mike Steinberg.”

  Berke’s first task was to undermine Horvath and portray him as a dishonest person who was trying only to save himself. His second job was subtler and, given the political environment, far more difficult. He had to humanize Steinberg. He had to show the jury that Steinberg was a generous, warm family man, not simply another greedy hedge fund millionaire who spent his summers in East Hampton. It was not going to be easy.

  Berke tried to explain what it was that Steinberg did for a living in the plainest terms possible. “SAC is a fund,” he said in his most obsequious voice. “It’s kind of like a mutual fund….”

  There was some snickering in the room. Describing SAC as similar to a mutual fund was sort of like describing the New York Yankees as a group of kids who played baseball.

  “He worked hard to become a portfolio manager,” Berke continued. “He was someone who was known as successful, steady….He was dependable, and he was paid well for it.”

  Steinberg’s wife, Elizabeth, had taken it upon herself to try to push back against what she felt were unfair perceptions of her husband. She had encouraged a group of supporters to attend the trial, and they filled almost the entire left side of the courtroom. She had even instructed them on how they should look so it wouldn’t backfire on her husband. “Dress conservatively,” she wrote in an email to the group. “We request that women wear no jewelry or furs, and no designer scarves, handbags, etc.”

  Liz herself wore a black sweater, black slacks, and flat shoes, like an Italian widow, and sat in the front row between Steinberg’s parents and her own. Behind them were several more rows of men and women in dark clothes—assorted uncles, aunts, and cousins and another dozen or so friends, several of whom were regulars in the Manhattan society pages. Sandy Heller, Cohen’s art advisor and Steinberg’s childhood friend, was in attendance, along with his twin brother, Andy, who ran his own hedge fund. Other defendants in insider trading cases had tried to do the same thing; the idea was to show the jury that this was not some amoral, greedy trader but a good neighbor who donated to charity and had people who loved and believed in him.