“Yesterday’s decision took an eighteen-wheeler truck and drove it through the insider trading laws,” said Richard Holwell, the federal judge who presided over the Raj Rajaratnam trial. “It pushes so far back that it’s going to sweep within it activity that, until yesterday, most people working on the Street would say, ‘That’s wrong.’ ”
Bharara was outraged by the decision. He felt that it didn’t reflect how things work on Wall Street, where information can be as valuable as cash, exchanged between friends and colleagues in return for goodwill and unspoken promises of future gifts. He appealed the Newman decision to the Supreme Court. When the Court declined to take up the case, Bharara felt compelled to dismiss charges against seven people, including Michael Steinberg; after having his life turned upside down, Steinberg was free. In addition to Steinberg, his former analyst Jon Horvath, Horvath’s friend Jesse Tortora of Diamondback Capital, and the other key witnesses in the case had their guilty pleas dismissed. It was yet another measure of vindication for Cohen, essentially legalizing the don’t-ask-don’t-tell information-gathering model employed at SAC. Bharara said that the decision will affect only about 10 percent of the cases his office filed, but he believes that a large category of insider trading will now go unpunished and that the precedent creates yet another advantage for wealthy and well-connected people with access to valuable information. It basically grants permission to trade on material nonpublic information, as long as you don’t know too much about where it came from.
“This creates an obvious road map for unscrupulous behavior,” Bharara said. “I think people have to ask themselves whether that is good for the markets, whether that is good for the integrity of the markets.” Two years after the initial Newman decision, in December 2016, the Supreme Court ruled unanimously in an unrelated insider trading case that the Newman ruling had gone too far, and that valuable information given to a friend or a relative did count as an improper benefit, offering some measure of vindication to the Justice Department.
In February 2015, David Ganek sued Bharara and the FBI and charged them with violating his constitutional rights and illegally raiding his fund Level Global, which had shut down as a result of the legal scrutiny. Many lives and businesses were unjustly damaged in the course of the government’s pursuit of Cohen, Ganek believes, including his own. Both his fund, Level Global, and the fund where Todd Newman worked, Diamondback Capital, closed under the pressure of the investigation; after the Newman appeal, both companies’ settlements with the DOJ (in Diamondback’s case) and the SEC were reversed and the fines they had paid were refunded. Ganek’s case survived a motion filed by the U.S. Attorney’s Office to have it dismissed and, for now, is proceeding. In his opinion granting the case the right to proceed, a federal district judge wrote: ‘Discovery is now appropriate to ascertain whether this case is a simple misunderstanding or whether something more troubling was afoot.’ ”
The charges that the SEC filed against Cohen in 2013, accusing him of failing to supervise Steinberg and Martoma, were quietly settled in January 2016. The appeals court ruling in the Newman and Chiasson case had weakened the SEC, and the agency resolved the case with only one significant sanction against Cohen, which barred him from managing outside investor money for two years. The deal leaves him free to return to the hedge fund business in 2018. “I wouldn’t be surprised if he got $2.5 billion the day he opens up,” said one hedge fund investor, Don Steinbrugge of Agecroft Partners.
“People are going to be lining up out the doors,” said another, Brad Alford of Alpha Capital Management, who previously had money with SAC. “It’s a layup.”
The case Biovail filed against SAC and other hedge funds in 2006 alleging stock manipulation was also dismissed. Biovail was charged with fraud by the SEC, and the company later paid SAC Capital $10 million to settle vexatious litigation claims. Separately, the lawsuit filed by Fairfax against SAC and other hedge funds was dismissed in 2013. It is currently under appeal. The case filed by Cohen’s ex-wife, Patricia, against him was dismissed in May 2016; the district judge found that there was “no evidence that Steven concealed any assets from Patricia during the divorce.” The conviction of Mathew Martoma, who is serving his nine-year sentence in Florida, was under appeal at the time of this book’s completion.
Meanwhile, the prosecutors and regulators involved in building the case against Cohen and SAC have moved on to more lucrative careers. Lorin Reisner, the head of Bharara’s criminal division who helped negotiate SAC’s $1.8 billion fine, became a partner at Paul, Weiss, the same law firm that supplied Cohen’s legal defense team. Antonia Apps, the prosecutor who tried the Steinberg case, left the government for a partnership at Milbank, Tweed, Hadley & McCloy, another corporate law firm where she does white collar defense work. Bharara’s deputy, Richard Zabel, announced that he was taking a job as general counsel at a hedge fund called Elliott Management, which is run by the prominent billionaire political donor Paul Singer. After twenty-five years with the FBI, B. J. Kang’s former supervisor, Patrick Carroll, joined Goldman Sachs as a vice president in its compliance group. Arlo Devlin-Brown, who led the Martoma prosecution, became a partner at Covington & Burling.
The most startling move of all, however, came from Amelia Cottrell, a senior enforcement attorney at the SEC who oversaw the agency’s Martoma investigation. At the end of June 2015, she shocked her colleagues by announcing that she was joining Willkie Farr, the firm where Cohen’s longtime defense counsel Marty Klotz worked. It turned out that leading the most powerful case the government assembled against Cohen was the best possible audition for a job working for his consigliere.
The financial industry has evolved to be so complex that large parts of it are almost completely beyond the reach of regulators and law enforcement. Wall Street’s most successful enterprises are constantly pushing into the frontier; every time the law looks like it’s catching up, they move farther away. There is a perception that in the years after the Milken era, and especially since the financial crisis of 2008, it has become almost impossible, due to a lack of will or expertise, to prosecute corporate criminals who operate at the highest levels. The fear of suffering embarrassing losses after long, expensive trials has led to a kind of paralysis in law enforcement. The Justice Department was unable, or unwilling, to bring any senior Wall Street figures to face criminal charges for the widespread fraud that swept the financial system prior to 2008. Instead, it extracted billions of dollars in fines from the world’s largest banks. In 2015, in response to criticism regarding the lack of individual prosecutions, the Justice Department announced aggressive new policies on financial crime that would focus on holding individuals accountable, although as of this writing, little seemed to have changed.
The hedge fund industry created unprecedented fortunes for a new generation of Wall Street traders whose primary innovation was to find ways to make more aggressive bets in the stock market. Cohen was a pioneer, the creator of a trading empire designed to gain an edge over less sophisticated investors. Years later, after paying the largest fines in the history of financial crime—and seeing a dozen of his employees implicated in insider trading—Cohen emerged from the crisis that engulfed his company as one of the world’s wealthiest men. In the end, the evidence against him that the government spent nearly ten years assembling was never presented to a jury. All that was left was for Cohen to spend his billions and to plan for his return.
Now Cohen is making more money than ever. In 2014, trading only his own fortune, he earned $2.5 billion in profit, more than paying back the fines he was ordered to hand over to the U.S. government. Then, on November 8, 2016, Donald Trump was elected president, vowing to usher in a new era of financial deregulation. The general counsel for Point72, Cohen’s private investment firm, was appointed, briefly, by the incoming Trump administration to recruit candidates for the new Justice Department during the tumultuous transition. In the meantime, Cohen is making plans to reopen his hedge fund as soon as possible.
For Seth
CAST OF CHARACTERS
At the time of the events depicted
SAC CAPITAL ADVISORS, STAMFORD, CONNECTICUT
THE EXECUTIVES
Steven A. Cohen, Founder and Owner
Peter Nussbaum, General Counsel
Solomon Kumin, Chief Operating Officer
Tom Conheeney, President
Steven Kessler, Chief Compliance Officer
CR INTRINSIC, AN ELITE RESEARCH-DRIVEN UNIT OF SAC
Matthew Grossman, head of CR Intrinsic
Mathew Martoma, portfolio manager
Jason Karp, director of research
David Munno, portfolio manager
Benjamin Slate, portfolio manager
Jonathan Hollander, analyst
Timothy Jandovitz, healthcare trader
SIGMA CAPITAL, A UNIT OF SAC BASED IN MANHATTAN
Michael Steinberg, portfolio manager
Jon Horvath, analyst working for Michael Steinberg
Gabriel Plotkin, portfolio manager
Richard Grodin, portfolio manager; co-founder of Stratix Asset Management
Richard Choo-Beng Lee, technology analyst working for Grodin; co-founder of Spherix Capital
OTHERS AT SAC
Wayne Holman, healthcare portfolio manager; founder of Ridgeback Capital Management
Phillipp Villhauer, head trader
David Ganek, portfolio manager; co-founder of Level Global Investors
Richard Schimel, financial-stock trader; co-founder of Diamondback Capital; was married to Steven Cohen’s sister Wendy
Larry Sapanski, energy trader; co-founder of Diamondback Capital
Donald Longueuil, portfolio manager
Noah Freeman, portfolio manager
Ken Lissak, executive during early days; independent trader
Dr. Ari Kiev, psychiatrist and “trading coach”
THE DELL TRADE
Todd Newman, portfolio manager, Diamondback Capital
Anthony Chiasson, co-founder with David Ganek of Level Global Investors
Jesse Tortora, analyst under Newman at Diamondback Capital
Sam Adondakis, analyst under Chiasson at Level Global Investors
Sandeep Goyal, analyst, Neuberger Berman
Chandradip “Rob” Ray, Dell employee
GRUNTAL & CO., NEW YORK
Ronald Aizer, head of options department
Jay Goldman, Steven Cohen’s friend; founder of J. Goldman and Company
MATHEW MARTOMA’S LAWYERS
STILLMAN & FRIEDMAN, NEW YORK
Charles Stillman, partner
Nathaniel Marmur, partner
GOODWIN PROCTER, NEW YORK
Richard Strassberg, partner and co-chair of Securities Litigation and White Collar Defense
Roberto Braceras, partner
MICHAEL STEINBERG’S LAWYERS
KRAMER LEVIN NAFTALIS & FRANKEL, NEW YORK
Barry Berke, partner and co-chair of Litigation Department
STEVE COHEN’S LAWYERS
WILLKIE FARR & GALLAGHER, NEW YORK
Martin Klotz, senior counsel, Litigation Department
Michael Schachter, partner
PAUL, WEISS, RIFKIND, WHARTON & GARRISON, NEW YORK
Theodore V. Wells Jr., partner and co-chair, Litigation Department
Michael Gertzman, partner and co-chair, Litigation Department
Daniel Kramer, partner and co-chair, Securities Litigation and Enforcement Group
Mark Pomerantz, of counsel
BOIES, SCHILLER & FLEXNER, NEW YORK
David Boies, chairman
FAIRFAX AND BIOVAIL CASES
KASOWITZ BENSON TORRES & FRIEDMAN, NEW YORK
Michael Bowe, partner
THE NEW YORK FIELD OFFICE, FEDERAL BUREAU OF INVESTIGATION
WHITE-COLLAR CRIME UNIT
Patrick Carroll, B. J. Kang’s supervisor
David Chaves, David Makol’s supervisor
B. J. Kang, special agent, C-1 squad
David Makol, special agent, C-35 squad
Matthew Callahan, special agent
James Hinkle, special agent
Tom Zukauskas, special agent
THE SECURITIES AND EXCHANGE COMMISSION
HEAD OFFICE, WASHINGTON, D.C.
Mary Schapiro, chair, 2009–2012
Mary Jo White, chair, 2013–2017
Andrew Ceresney, director, Enforcement Division, 2012–2016
George Canellos, deputy director, Enforcement Division, 2012–2013; co-director, Enforcement Division, 2013–2014
NEW YORK REGIONAL OFFICE
Sanjay Wadhwa, assistant regional director for enforcement
Amelia Cottrell, branch chief
Charles Riely, staff attorney
Matthew Watkins, staff attorney
Joseph Sansone, head of the SEC’s Market Abuse unit
Daniel Marcus, staff attorney
Justin Smith, staff attorney
Neil Hendelman, analyst
Thomas Smith, staff attorney
Michael Holland, staff attorney
THE U.S. ATTORNEY’S OFFICE FOR THE SOUTHERN DISTRICT OF NEW YORK
Preet Bharara, U.S. Attorney
Richard Zabel, Deputy U.S. Attorney
Lorin Reisner, head of criminal division at the Southern District of New York
Antonia Apps, assistant U.S. attorney
Arlo Devlin-Brown, assistant U.S. attorney
Avi Weitzman, assistant U.S. attorney
Andrew Michaelson, special assistant U.S. attorney on loan from the SEC
Joshua Klein, assistant U.S. attorney
Raymond Lohier, chief of the commodities and securities fraud task force
Reed Brodsky, assistant U.S. attorney
Eugene Ingoglia, assistant U.S. attorney
Harry Chernoff, assistant U.S. attorney
Christopher Garcia, chief of the commodities and securities fraud task force
Marc Berger, chief of the commodities and securities fraud task force
Anjan Sahni, deputy chief of the commodities and securities fraud task force
ACKNOWLEDGMENTS
This book would not have been possible without the help and support of many people, from researchers to editors, employers and colleagues, fact-checkers and friends. I owe my deepest debt of gratitude to the many sources and subjects who shared their time and their insights as I sought to learn as much as possible about insider trading investigations at several hedge funds and endeavored to reconstruct events that occurred over the course of the last ten years.
This story began, for me, as a magazine feature assignment at Bloomberg Businessweek, which was my journalistic home through most of the reporting process, when many of the events depicted later in the book took place. Josh Tyrangiel, Bloomberg Businessweek’s editor, always had high standards that one felt motivated to try to meet. He and his deputy and successor, Ellen Pollock, were both tolerant of my long periods of distraction and generous with opportunities to write ambitious stories for the magazine. Bryant Urstadt, a Businessweek features editor and also a friend, first urged me to take on the SAC Capital case as a subject. I am also grateful to many other friends and colleagues from that period, including my editor Brad Wieners, as well as folks at Bloomberg Media.
Since leaving Businessweek I have had the privilege of working as a staff writer at The New Yorker, for David Remnick, who is a role model in so many ways. I’m also blessed to count Henry Finder, Vera Titunik, Susan Morrison, Nick Thompson, and many others as editors and colleagues.
My book landed in the hands of Andy Ward, one of the most patient and exacting book editors in the industry. From the moment I walked in to Penguin Random House to meet with Susan Kamil and Tom Perry, who referenced All The President’s Men during our first conversation, I knew that I was collaborating with publishers who understood and appreciated the importance of this story. Sally Marvin and London King have been both wise and energetic in their publicity guidan
ce, and Kaela Myers, Melissa Sanford, Evan Camfield, and Joseph Perez were also incredibly helpful.
My agent, Gail Ross, has been a tireless supporter and advisor, as has her partner, Howard Yoon, who was a crucial source of editorial advice. Hugo Lindgren was an invaluable editor, advisor, and friend. Theodoric Mayer and Nadine Sabai were crack research assistants at different stages, and Andy Young played the important role of fact-checker. I am fortunate to have many friends and colleagues who were willing to read pages, offer reporting advice, listen and/or generally set an example through their own work, including Katrina Brooker, Steve Fishman, David Glovin, Suzy Hansen, Alexandra Jacobs, Patrick Radden Keefe, Kate Kelly, Peter Lattman, Devin Leonard, Duff McDonald, Bethany McLean, Miranda Purves, Anita Raghavan, Andrew Rice, Maria Russo, Gabriel Sherman, Jennifer Stahl, Nick Verbitsky, David Voreacos, and others. This book is also dedicated, in part, to Peter Kaplan, who taught me about being a journalist.
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