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

by Sheelah Kolhatkar

  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.

  Riely woke up from his meditation a few minutes later, when Cohen pushed through the door. His attorney, Martin Klotz, was with him, along with Daniel Kramer, a member of Cohen’s expanding legal team from Paul, Weiss, one of the country’s top corporate law firms.

  Most of the attorneys who dealt with Marty Klotz had a fondness for him. Senior counsel at Willkie Farr & Gallagher, Klotz had been Cohen’s, and SAC’s, outside legal advisor for more than a decade. He had logged time as a prosecutor in the late 1980s and had a PhD in philosophy from Yale. His courtly demeanor and reluctance to raise his voice had won him a favored place in the defense bar. His colleagues at Willkie saw him as the intellectual in their midst, someone who could always be counted on to recommend the best opera to see at the Met that season.

  On the other hand, some people viewed Klotz as the Godfather’s consigliere, which made him less than trustworthy. And as was the case with many attorneys who were almost entirely dependent on one source of income, Klotz was scared of doing anything that might hurt his lucrative client.

  Cohen half-smiled and took a seat next to the court reporter. His attorneys arranged themselves beside him. Riely’s boss, Sanjay Wadhwa, didn’t usually sit in on depositions, but this was such an important moment in the investigation that he made a point of being there.

  One of the challenges of prosecuting white collar crime is the resource mismatch between the two sides, and this was on full display at the conference table. On Cohen’s side sat two silver-haired professionals, each of whom boasted thirty years in the industry as well as illustrious clerkships and Ivy League degrees. They were more experienced, more cynical, and, important, were making boatloads more money, working for a client with nearly unlimited funds. On the other side, Charles Riely and Amelia Cottrell were young, smart, and hardworking, products of fine colleges themselves. But they could have been associates at Klotz’s and Kramer’s firms if they hadn’t been working for the Securities and Exchange Commission.

  Riely was determined not to be intimidated. He would treat Cohen like any other witness.

  Before he could even get going, Cohen asked what time they’d be done. “I’m going to the Knicks game tonight,” he announced. He didn’t want to be late.

  Then he raised his right hand.

  “Do you swear to tell the truth, the whole truth, and nothing but the truth?” asked Riely.

  “I do,” Cohen said. He sat back in his chair, his dark eyes moving back and forth between Klotz and the SEC lawyers.

  “Mr. Cohen,” Riely said. “Do you understand that you are under oath?”

  “I do,” he answered.

  Riely started asking questions, beginning with SAC and Cohen’s role there. Cohen confirmed that he was the owner of SAC and that he also managed a stock portfolio there. He answered questions about how many employees SAC had and how they were paid. He explained that portfolio managers typically got to keep a percentage of the trading profits in their portfolios. He identified Tom Conheeney, Peter Nussbaum, Sol Kumin, Steve Kessler, and a few others as his management team.

  Then, as soon as the interview moved into questions about Martoma, Cohen couldn’t remember any details. He said he didn’t have any role in hiring Martoma and had no memory of when he came to work at SAC.

  “I’d like to talk about Elan and Wyeth and bapineuzumab,” Riely said.

  “Can we call it ‘bap’?” Cohen asked.

  “Sure,” Riely said.

  For the next three hours they went back and forth about bap, Wayne Holman, Martoma, why Cohen had invested in Elan and Wyeth in 2008, how large the position was, and whose advice he heeded. Cohen acknowledged that the trades were based on Martoma’s research, primarily. But when it came to specifics, the greatest trader of his generation, who could track the price movements of eighty different securities at a time, claimed not to remember. He said “I don’t recall” sixty-five times.

  Riely had expected that it would play out this way, but he still found it frustrating. Cohen kept acting as if he didn’t understand the questions, and Riely was pretty sure that the “confusion” was feigned. Cohen confirmed, again, that he had made the Elan investment based on Martoma’s advice, but he couldn’t or wouldn’t talk about what that advice was, or why it had given him enough confidence to ignore other experts inside SAC who disagreed with Martoma’s position.

  None of the SEC lawyers at the table believed that Cohen would have simply taken Martoma’s word for it on Elan, not with such a large and risky position. He must have had a good reason to disregard his more senior healthcare analysts. But when Riely started to probe the point, Cohen got testy. There was a round of questions about Cohen’s other healthcare analysts, David Munno and Ben Slate, who had beg
ged him not to invest so heavily in Elan and Wyeth. Cohen professed not to remember anything of the dispute.

  Around 1 P.M., they broke for lunch.

  The SEC lawyers retreated to Wadhwa’s office to eat sandwiches and share their impressions. They all agreed that Cohen was being evasive. He had to be lying. The idea that he couldn’t remember anything was ridiculous.

  “We have to keep pushing him,” Wadhwa said, but he could sense they weren’t going to get what they needed. Disappointment was already setting in.

  The deposition picked up again an hour later. After more circular talk about Munno and Slate, Riely asked about the critical day, Sunday, July 20, 2008. The day when Martoma and Cohen spoke on the phone, before Cohen gave the order to sell all his Elan and Wyeth shares. This was the conversation everyone on the SEC side of the table was dying to know about. What did Martoma tell Cohen before he decided to sell SAC’s position?

  Cohen was starting to look tired. Klotz asked an associate to fetch him a cup of coffee.

  Then Riely placed a copy of the email Martoma had sent that Sunday morning on the table: “Is there a good time to catch up with you this morning? It’s important.”

  “Do you remember getting this from Martoma?” Riely asked.

  There was a long pause. “I believe so,” Cohen replied, shifting in his seat.

  “Did you speak to him?”

  “Yeah, that morning he called me,” Cohen said. “I remember him saying that he was getting uncomfortable with the Elan position.”

  One of the SEC attorneys asked why.

  “I must have asked him how come, or—because he repeated back to me, ‘I am just getting uncomfortable with the Elan position,’ ” Cohen said.

  “Did he give any reasons?” Riely asked.

  “He might have,” Cohen answered. “I just don’t remember.”

  They went around and around, with Cohen insisting that he didn’t remember anything about why one of his traders had suddenly convinced him to undo a $1 billion investment that he had stubbornly defended in the face of significant internal opposition. One of Riely’s superiors, Amelia Cottrell, watched the exchange with growing incredulity.

  “When Mr. Martoma said that he was getting uncomfortable, you don’t recall saying to him, ‘why’?” she interjected.

  Cohen said that he believed that he did ask him.

  “And you don’t remember any substantive response that he gave you?”

  “I just don’t remember,” Cohen said.

  Riely tried to remind himself that they had anticipated this. Steven Cohen was never going to walk into the SEC’s testimony room and admit that he had received inside information from Mat Martoma. Just getting him into the room was a victory. They tried. Still, they hadn’t gotten anything out of him at all.

  The deposition ended at 6 P.M. on the nose. Cohen was courtside at the Knicks game by tipoff.

  CHAPTER 13

  KARMA

  The golden ring of defense lawyering is obtaining something called a non-prosecution agreement. It guarantees that your client won’t be charged with a felony, or even a misdemeanor, in exchange for fulfilling certain obligations, which might include testifying for the government. It is almost the best deal a defendant can get, and Preet Bharara’s office did not give them out freely. Marc Mukasey intended to secure one for Sidney Gilman. He was confident that he could make it happen because Gilman was so important to the case against Martoma.

  With this goal in mind, Mukasey called the SEC with some news. Gilman had something important to say. It was August 2012, and he suggested a date for a meeting, at 6 P.M. on a Friday. Riely and his colleagues laughed. They suspected this was yet another delaying tactic, and that Mukasey assumed they wouldn’t want to meet on a Friday night, right before a summer weekend.

  “Sounds great!” Riely told him.

  When Gilman walked in, it was immediately clear to the SEC staff attorneys that his attitude had changed. He sat down at the conference table and announced that he was there to make a statement. He then admitted that he had given Martoma inside information about bapi. Not only that, but he had done it repeatedly. He knew he had done something seriously wrong.

  The SEC investigators and the prosecutors in the room had an urgent question. The PowerPoint presentation—the one that Gilman had received from Elan two weeks before the ICAD meeting. This was critical. It was hard evidence, a document, with all of the confidential information that Martoma had used to make his trades. Presenting electronic evidence showing how Martoma got it would be crucial to a jury. Arlo Devlin-Brown, one of the prosecutors, asked Gilman: Did he send the presentation to Martoma? If so, how?

  “Yes,” Gilman said, he was sure he had sent it. The trouble was, he didn’t exactly remember the conversation. He had an unformed memory of going over the slides with Martoma over the phone.

  Devlin-Brown rephrased the question, hoping Gilman would remember some of the details. Finally, Gilman said he thought he had a memory of emailing it to Martoma after he asked for it.

  With that, the government finally had the element it needed to seal the case against Martoma. They didn’t yet have the email showing that Gilman had sent the PowerPoint to Martoma, but it had to exist on a server somewhere. Riely was already thinking about how he would track it down.

  In the face of such irrefutable evidence, Martoma’s only way out would be to turn on Cohen. The FBI started planning to arrest him.

  —

  Three months later FBI agents pulled up outside Martoma’s house in Boca Raton. This time, they weren’t there to talk. Special Agent Matt Callahan marched up to the door and knocked loudly.

  Martoma looked shocked when he answered.

  “Did you think you would ever see me again?” Callahan asked.

  “Honestly, no,” Martoma said.

  Callahan had a plan. If Martoma indicated that he might be open to cooperating, then notions of charging him formally would be put on hold. But when Callahan asked him about cooperating, Martoma shook his head no. Callahan then put Martoma in handcuffs.

  Rosemary’s parents were visiting for Thanksgiving week. They watched with outrage as Martoma was led away and placed into the back of a dark sedan. His three children looked on, terrified and confused.

  By midday, Martoma’s arrest was being covered by every major news organization. The next morning, The New York Times ran a story on the front page: “Over the last half-decade, as federal authorities secured dozens of insider trading convictions against hedge fund traders, they have tried doggedly to build a case against one of Wall Street’s most influential players,” it read. “The billionaire stock picker Steven A. Cohen.”

  One after the other, Martoma’s former colleagues saw the news and started to put the pieces together: the enormous, risky positions in Elan and Wyeth; the arguments and evasiveness surrounding them; the eerie way Cohen had listened, almost exclusively, to Martoma; the comment from a colleague about how Martoma had “black edge.” Martoma’s former trader at SAC, Tim Jandovitz, had left Wall Street and was living in Chicago, where he’d started a high-concept sandwich shop that was based around a special waffle bread he had developed. He hoped it would become the next Chipotle.

  Jandovitz was startled when he saw the headlines about Martoma being arrested. As he read through the news reports detailing the accusations that Martoma had paid a drug researcher for inside information, all the bizarreness and secrecy that had surrounded the Elan and Wyeth trades back in 2008 made sense.

  He typed out an email to a friend: “Karma is a bitch.”

  —

  Now that Gilman was beginning to work productively with them, the government was feeling confident about its case against Martoma.

  The prosecutors had made an unusual move in the way they filed the charges. Rather than charging Martoma through an indictment—a formal criminal charge that comes after a federal grand jury has heard evidence against the defendant—Bharara’s office had charged Martoma only
with a complaint. A complaint was the first step in a prosecution. An indictment meant that a grand jury had already found probable cause for the U.S. Attorney’s Office to go ahead with a prosecution. The prosecutors could have gone directly to the indictment, but they hoped that delaying that step would serve as an effective pressure tactic. It was like giving Martoma a warning about what was likely coming: Are you sure you want this? There is another way.

  Still, they didn’t ask him directly to cooperate against Cohen. They didn’t want to seem desperate.

  “If Martoma didn’t do this alone, we’d like to hear about it,” Arlo Devlin-Brown told Charles Stillman, Martoma’s lawyer. “He shouldn’t feel like he needs to have something that’s 100 percent specific….”

  Preet Bharara announced the arrest of Martoma at one of the biggest press conferences yet. He was a natural master of ceremonies, holding these triumphant-but-serious affairs on the ground floor of 1 St. Andrew’s Plaza. To prepare, he usually turned up the air-conditioning in his office to arctic levels and blasted Bruce Springsteen.

  As Bharara reviewed the charges, standing at a podium in a black suit and red tie, he maintained a somber expression that sometimes edged into a knowing smirk. “The charges unsealed today…describe cheating coming…AND going,” he said. “Specifically, insider trading first on the long side, and then on the short side, on a scale that has, really, no historical precedent.” He described Martoma’s Elan and Wyeth trades as the most lucrative insider trading scheme in history, “allegedly resulting in an illegal windfall to the hedge fund of a quarter of a billion dollars.” He paused. “That’s ‘billion,’ with a ‘B.’ ”