Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

by Sheelah Kolhatkar

  “Steve was the mad scientist and Kenny was the people person,” said Warren Dempsey, a trader who joined SAC in the early 1990s to help it build a presence investing in IPOs in Europe. “They were running the place. Kenny had real authority there. At least in my time there, I don’t think Steve did much without talking to Kenny.”

  Two years later SAC moved to a new office at 520 Madison Avenue, a block away from the Museum of Modern Art. Cohen sat at the center of a T-shaped desk, with his traders seated in front of banks of monitors that stretched out to either side of him. San Pietro, a glitzy Italian restaurant with frescoes on the walls, was located downstairs. The SAC traders became some of its best patrons.

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  While SAC was prospering, nearly doubling every twelve months, Cohen continued to struggle with his own well-being. Even though he had achieved his life’s dream of running his own firm, he was still unhappy, and he had become dependent on a psychiatrist named Ari Kiev to help him manage his moods.

  In addition to treating depression, Kiev’s other area of expertise was success and how to achieve it. He had worked as a psychiatrist and coach with Olympic basketball players and rowers trying to improve their performance and overcome their fear of failure. His background building athletic champions appealed to Cohen’s unrelenting need to dominate in every transaction he entered into, and he started asking Kiev to spend entire days at SAC’s offices, tending to his staff. Kiev was tall, with a bushy mustache and a portly midsection, and he would often appear silently at a trader’s side and ask him how he was feeling. Sometimes the trader would be so startled to see Kiev there he’d practically jump out of his seat. Cohen asked Kiev to give motivational speeches to his employees, to help them get over their anxieties about losing money.

  Basically, Kiev was there to teach them to be ruthless.

  Once a week, after the market closed, Cohen’s traders would gather in a conference room and Kiev would lead them through group therapy sessions focused on how to make them more comfortable with risk. Kiev had them talk about their trades and try to understand why some had gone well and others hadn’t. “Are you really motivated to make as much money as you can? This guy’s going to help you become a real killer at it,” was how one skeptical staff member remembered Kiev being pitched to them. Kiev’s work with Olympians had led him to believe that the thing that blocked most people was fear. You might have two investors with the same amount of money: One was prepared to buy 250,000 shares of a stock they liked, while the other wasn’t. Why? Kiev believed that the reluctance was a form of anxiety—and that it could be overcome with proper treatment.

  Kiev would ask the traders to close their eyes and visualize themselves making trades and generating profits. “Surrendering to the moment” and “speaking the truth” were some of his favorite phrases. “Why weren’t you bigger in the trades that worked? What did you do right?” he’d ask. “Being preoccupied with not losing interferes with winning,” he would say. “Trading not to lose is not a good strategy. You need to trade to win.”

  Many of the traders hated the group therapy sessions. Some considered Kiev a fraud.

  “Ari was very aggressive,” said one. “He liked money.”

  Patricia, Cohen’s first wife, was suspicious of Kiev’s motives and believed that he was using his sessions with Cohen to find stock tips. From Kiev’s perspective, he found the perfect client in Cohen, a patient with unlimited resources who could pay enormous fees and whose reputation as one of the best traders on Wall Street could help Kiev realize his own goal of becoming a bestselling author. Being able to say that you were the trading coach to one of the most powerful traders on Wall Street was an amazing way to sell books and attract clients.

  Kiev also served another purpose for Cohen, or so some of SAC’s traders thought, as a sort of internal spy. He would target particular employees, wanting to know what was bothering them. Having practiced as a therapist for decades, he was skilled at drawing intimate confessions out of people, making them comfortable and earning their trust. But few at SAC felt comfortable opening up to him because it was understood that everything they said was reported back to the boss.

  The economics of hedge funds are extremely favorable to the people running them, largely due to the exorbitant fee structure that they employ. Cohen made the decision early on to exploit this as much as he could. If investors wanted the best—him—they were going to have to pay for it. SAC was doing so well that he was able to charge higher fees than almost any other fund, keeping 50 percent of the profits at the end of the year. Most hedge funds charged 20 percent. But Cohen’s investors did not complain. In fact, they fought to get in.

  At the same time, Cohen grumbled constantly about the idea that other people were unfairly benefiting from his success. Almost every penny he gave to someone else, whether a commission to a broker or a bonus to a partner or a dollar in taxes, annoyed him. Finally, he decided that New York City’s taxes were too high and Manhattan office space was too expensive. The firm needed to expand, and it would be much more cost-effective to leave the city. He told his employees that they were relocating SAC to Connecticut. He had already chosen the space, in the GE office park in Stamford. The economics of it made a lot more sense.

  In addition to his taxes, some of the business arrangements he’d negotiated years earlier started to seem overly generous. Cohen would fire people who suddenly started to make what he regarded as disproportionately large sums of money, or he’d refuse to pay them what they thought they were owed. Eventually, he turned his resentment onto his partner.

  One evening in October 1997, Cohen called Kenny Lissak with some shocking news: His wife, Alex, had accused Lissak of trying to instigate an affair with her. Alex told Cohen that he had to choose between his business partner and his marriage, according to Lissak, who said he was stunned by the allegation. Lissak denied it and said that he was happily married. He had just recovered from a series of medical crises and was physically weak. A year earlier, he had checked in to the hospital for routine back surgery after a series of injuries incurred playing basketball. While he was there, he contracted an E. coli infection in his spine that almost killed him and kept him bedridden in the hospital for a month. He had lost a hundred pounds.

  During Lissak’s absence, Alex had taken a more prominent role around the office. She issued memos to Cohen’s employees and picked her husband up after the market closed. “It was clear that she was the queen and Steve was the king, that was the way it was,” said a former trader. “I wouldn’t want to have crossed her, let’s put it that way.” Another trader described her as a troublemaker. Some employees went out of their way not to make eye contact with her.

  There had been an increasing amount of tension between her and Lissak, almost as if they were two girlfriends competing for Cohen’s attention. But this was different.

  After accusing his best friend and business partner of trying to have an affair with his wife, according to Lissak, Cohen told him to leave immediately. He barely seemed angry, he was just cold. Lissak says that he insisted that the story wasn’t true and tried to persuade Cohen that he was making a mistake by firing him, but Cohen was unmoved. In a fog, Lissak packed up a box and walked out of the office, his office. He was in a state of anguish. Cohen never explained Lissak’s departure to his employees, who were unsettled by it. But people soon heard about what had happened.

  Afterward, Lissak found himself shut out of other Wall Street firms. It was understood by companies that wanted to keep Cohen as a client that they couldn’t do business with both of them.

  “That was the first sign of Steve’s truly ruthless side,” said a former trader. “When he dumped Kenny.”

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  One Monday morning in 1998, a group of Goldman Sachs employees gathered for their division’s weekly meeting an hour before the market opened. The man preparing to address the crowd was a Goldman securities salesman, the person responsible for keeping some of the firm’s most importan
t trading customers happy. He had urgent information to share about his most lucrative account.

  “SAC Capital,” he announced, “is now the single largest generator of commissions to the equity division.”

  The equity division was responsible for all of the stock trading on behalf of Goldman’s clients, and during the technology boom of the late 1990s, this trading generated a significant amount of profit for Goldman. It was halfway through Bill Clinton’s second term as president, and the country was in the midst of a stock market boom that had practically turned every New York City cabdriver with a copy of Barron’s into a day trader. There seemed to be big IPOs for new dotcom companies every day, creating new millionaires who were lionized on magazine covers. Senior citizens were gambling their Social Security checks on the stock market. CNBC anchors eagerly reported that stock prices of technology companies like Qualcomm and Rambus were breaking new records on an hourly basis. It was as if the entire world was getting rich.

  Up until that point, the hierarchy on Wall Street that determined who took whose phone calls and who got paid what had been clear. Huge mutual funds such as Wellington, Fidelity, and State Street, which managed trillions of dollars in retirement accounts, were the industry’s most important customers. They were not in the business of lightning-quick trading. Their business was longer-term investing, incremental gains. They would build up large positions in stocks and hold them for months or years at a time, aligning their economic interests with those of the company. Firms like Goldman and Morgan Stanley and Salomon Smith Barney assigned salespeople to work with these fund managers by providing stock research compiled by the banks’ analysts and by taking them out to Yankees games and sushi dinners. It was a comfortable arrangement, easily characterized, as one former investment analyst put it, as “fifty-year-old white guys getting research from other fifty-year-old white guys.”

  The Goldman securities salesman who was handling the SAC account was about to turn all of that upside down. SAC was a hedge fund, he explained to the confused Goldman employees, some of whom had never heard of the company. They don’t just buy blocks of IBM to hold for months at a time while playing golf and collecting dividends, they trade. And they don’t just trade. They trade hundreds of stocks a day, hundreds of thousands of shares at a time. They were not interested in a company’s long-term health or whether the new products it had under development would enable it to hire more people in five years. SAC was interested in one thing: short-term movements in the stock price that it could exploit for profit.

  For every one of those shares that Goldman might buy or sell on SAC’s behalf, it collected six cents of commission. It didn’t take a PhD to understand the implications. Although Fidelity was much bigger, SAC generated far more revenue, based purely on volume.

  In exchange for giving Goldman Sachs millions of dollars of its business, SAC wanted something in return, the salesman said, something that was commensurate with its importance to the company. It wanted preferential treatment, particularly when it came to moves Goldman’s analysts made that might affect a company’s stock price. “If you change a penny or two on your estimates, you call SAC first,” the salesman said. If an analyst was going to recommend that investors buy or sell shares in a company he or she covered, or revise the amount of money he or she estimated the company would make next quarter, SAC would like to know before anyone else. And when a Goldman analyst offered to jump on the phone for a “huddle” with important investors to help them interpret company events, why not do it first with SAC? Was that so much to ask?

  A stock salesman at a rival brokerage firm who was responsible for the Cohen account described the dynamic this way: “If he was going to trade with you, he wanted the best price. He was willing to pay a lot of commissions. And he was willing to do so, so he could get the first call, any piece of information that could help him make money from you or your firm.”

  At Goldman Sachs, at least one analyst who heard the salesman’s speech that morning was shocked by the brazenness of the arrangement. Nobody was proposing anything that was against the law, exactly. But it made the analyst uncomfortable. It gave SAC a huge advantage in the market. With early information about a new “buy” or “sell” rating that was coming on a stock, SAC could anticipate what other investors were going to do in response to the news and buy or sell a split second before anyone else, accumulating tiny crumbs of profit that could add up to significant sums. Sleazy might have been too strong a word for it; it was more like distasteful. Yet at the same time, the analysts and salespeople understood that their priority was to serve the firm’s clients. Investment banks are hierarchies structured much like the military, where everyone must salute the person with the most stripes—or the department that brings in the most money.

  The Goldman salesman’s directive reflected an important shift on Wall Street, although its most entrenched players took a long time to recognize it. The new way to command power in the financial industry was to start a hedge fund. Doing so at the right time could turn someone who might have accumulated millions over the course of a twenty-year career at Goldman Sachs or Morgan Stanley into a billionaire almost overnight. In a matter of a few years, hedge funds went from a peculiar subculture on Wall Street to the center of the industry. They were far more demanding and difficult (and almost certainly more clever) than the Fidelitys and State Streets of the world, and the Goldmans and the Morgans had to go to a lot of trouble to keep them happy. But in the end, they were paid for it. If a hedge fund that generated hundreds of millions of dollars in revenue wanted the best access to the best research or the first call, you gave it to them. Or they’d take their business elsewhere.

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  On a clear, bright day in the spring of 1998, Cohen and Alex spent a few hours driving around Greenwich, Connecticut, with a real estate agent, looking for a new home that befitted their rising status. The couple was already living in Greenwich, in a refurbished six-thousand-square-foot ranch house that Cohen had purchased for $1.7 million in 1993, and they’d happily hosted many Thanksgiving dinners there. But Alex was pushing for more space. One person close to them at the time claimed that her intense interest in real estate was partly driven by a detail in the couple’s premarital agreement stipulating that in the event of a divorce, Alex would receive the primary residence as part of her settlement. At least, that’s what Cohen intimated when he joked about it at the office. “This is the carveout,” he allegedly told a colleague. “This is her payout when she wants to get rid of me.”

  The couple also had a growing family to shelter. There was Alex’s son from before she met Cohen, as well as her aging parents; Cohen’s children from his first marriage visited on weekends; and Cohen and Alex now had three daughters of their own, including a set of young twins. When Alex first saw 30 Crown Lane, a large colonial on fourteen acres that had previously belonged to Sy Syms, founder of the Syms discount clothing chain, she gasped.

  Greenwich was the obvious place for them to live. Since the 1920s, it has been home to men with more money than they knew what to do with, consistently ranking as one of the wealthiest zip codes in the country. It sits at a comfortable, leafy remove from Manhattan and once housed heirs to the Rockefeller and J. Pierpont Morgan fortunes, whose mansions were tucked discreetly behind hedges and stone walls, at the ends of long pebbled driveways. Eventually, the old money began to be supplanted by the new, as hedge fund moguls moved in, each one seeking to build his own Buckingham Palace. Paul Tudor Jones was one of the first, and one of the most ostentatious, when in 1994 he and his Australian-model wife bought a pretty mansion overlooking Long Island Sound for $11 million, tore it down, and replaced it with a much larger house that included a subterranean garage that could accommodate twenty-five cars. From the water, people frequently mistook it for the Belle Haven yacht club.

  Although 30 Crown Lane had been sitting on the market for close to two years, it had recently drawn the interest of another financier, a partner at the old-line
Wall Street investment bank Bear Stearns named Robert “Bobby” Steinberg. There was nothing particularly unique about the house, according to Jean Ruggiero, the real estate agent who was working with Steinberg, but there were very few properties on the market of that scale, with so much land attached. Steinberg was the head of Bear’s risk arbitrage department. He and his wife, Suzanne, had a large family and had decided to make an offer on the house. That night, after contacting the selling broker with the Steinbergs’ offer, Ruggiero called Steinberg back.

  “You’re not going to believe this,” she said, “but someone else also made a bid on the house.” This was a highly unusual situation. There were few houses on the market at that price level, and bidding wars over $14 million properties were practically unheard-of.

  Steinberg suspected that something perverse was going on; after failing to attract any interest for months, another offer had suddenly materialized at the exact same moment as his? He raised his offer anyway, and the other bidder raised as well. Ruggiero went back to deliver the news to Steinberg, who said that he was still determined to buy the house. He told Ruggiero to call the seller’s broker again and relay that he would pay $25,000 above any other competing bid, irrespective of what it was. Ruggiero was sure that would settle the matter. But when she made the new offer, the seller’s agent just laughed; the other bidder had apparently told the seller’s agent that he didn’t care what the amount was, and that he was paying cash. He’d specifically said: “I’m standing here in Stamford with my checkbook, and I’ll write out a check right now.”