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

by Sheelah Kolhatkar

  Several other people also made remarks during the news conference. Oddly, though, no one mentioned SAC by name, referring to it only as “the hedge fund” or “the hedge fund firm” where Martoma worked. Steve Cohen was in the background, evident to everyone but mentioned by no one.

  Bharara left the job of publicizing Cohen’s involvement in the case to the dozens of reporters in the room, who quickly ran off and did just that. News of the charges against Martoma, the fact that he had worked at SAC and the connection the case had to Cohen personally, was covered widely.

  Just a few months earlier, Bharara had appeared on the cover of Time magazine, a close-up of his face, emblazoned with the words: “This Man Is Busting Wall St.” Now it appeared to be coming true.

  —

  The winter of 2013 was bitterly cold, leaving Manhattan encased in a layer of ice that lingered into early spring. On the morning of March 8, as he was rushing to work, Sanjay Wadhwa slipped and hit his head on the sidewalk. He had just dropped his son off at daycare and was running late, as usual. There wasn’t any blood, but he groaned as he pulled himself to his feet and hobbled to the office, where someone brought him an ice pack. He had an important call scheduled with Cohen’s lawyer that day. They were going to finalize one of the biggest monetary settlements in SEC history.

  “Are you sure you still want to do this?” his colleague asked.

  “I’m fine,” Wadhwa said. “Let’s get it over with.”

  Marty Klotz had contacted Wadhwa a few weeks earlier to say that Cohen wanted to “settle up” the cases involving the Mathew Martoma and Michael Steinberg trades. He wanted closure, without any worry of charges against him surfacing in the future. From Cohen’s perspective, it made sense to resolve the case before things got any worse—if Martoma flipped, for example. Not that there was any sign it was going to happen.

  The deal Klotz had worked out would settle only the SEC’s charges against SAC the company, resolving corporate liability for the illegal trades. Cohen himself, and other individuals for that matter, were still open to charges. Nonetheless, Cohen wanted to move forward.

  Wadhwa picked up the phone while holding the ice pack to his head. The SEC had proposed a fine of $601.7 million for the Elan and Wyeth trades and another $13.9 million for Dell. The fines were based partly on the illegal profits the SEC was alleging in each instance, which were $275 million in Elan and Wyeth and $6.4 million in Dell. In total, it would be one of the largest settlements the SEC had ever extracted, almost four times what Raj Rajaratnam had been forced to pay. As the sole owner of SAC, Cohen would be paying the fines himself.

  After Wadhwa outlined the penalties they were proposing, Klotz said that his client would agree. He knew, given all the legal scrutiny, that the alternative to paying could be much worse. Wadhwa hung up the phone and prepared to get the documents ready.

  For two years, Cohen had lived with a drumbeat of press leaks and news coverage suggesting that he was the real target of the government’s insider trading crackdown. Speculation centered on the question of whether he himself might be criminally charged. Now he was about to dispense with his legal problems by writing a check. He was confident that he was finally putting this nightmare behind him. Just as soon as he started making plans for how he would restore SAC’s reputation and make it stronger than ever, though, momentum for a whole other case against him took on new life.

  The separate team of SEC lawyers was racing to find out everything they could about the “2nd hand read” email about Dell’s earnings that had gone from Jon Horvath to Michael Steinberg. It was possible that the Dell trade would still lead to charges against individuals who had traded the stock. The SEC lawyers were feeling increasingly sure, based on the evidence they were gathering, that they were going to be able to charge Steinberg with insider trading. It was a huge development, another opportunity to penetrate the layer of people who were closest to Cohen.

  Anthony Chiasson and Todd Newman, two traders from the hedge funds the FBI had raided, had been convicted of insider trading the previous December. Jon Horvath had flipped and was helping the government build a case against Steinberg. Steinberg hadn’t been charged yet, but it was just a matter of time.

  The SEC lawyers on the Dell case had seen from the trading records that Cohen traded Dell shares at the same time Steinberg did in August 2008, right before the earnings announcement. It looked like Steinberg’s trades were motivated by what Horvath had told him, which the SEC believed was based on inside information. The question was, why had Cohen traded his Dell?

  On Wednesday, March 13, 2013, two days before the $600 million Elan settlement was scheduled to be signed by Cohen and the SEC, Wadhwa was sitting at his desk, contemplating what was about to happen. He had been up until 1 A.M. working and was exhausted. They were about to make history with their SAC deal, and he expected that it would get a lot of attention. And for once, the U.S. Attorney had nothing to do with it. No one else would be stealing their glory. Then his phone rang.

  It was Marty Klotz. “Hi Sanjay,” Klotz said. “We’ve been continuing to dig for the most recent documents you requested, and we discovered something that we wanted to let you know about as soon as possible….” Klotz was referring to the SEC’s most recent batch of subpoenas. His voice trailed off. There was a long, painful silence. “We found out that the Dell email actually made its way to Steve.”

  Wadhwa was now very much awake. They had been haggling with Klotz for weeks over getting access to SAC’s old emails. The SEC had been asking specifically about the August 26, 2008, “2nd hand read” email, trying to determine exactly who inside the firm had received it. Based on SAC’s trading records, it appeared that multiple traders had been moving in and out of Dell right around the time Horvath had sent the message warning Steinberg and others that Dell’s earnings were going to be a disappointment.

  SAC had been offering different excuses as to why it couldn’t find the emails. As a firm policy, the fund hadn’t retained copies of the email messages on its servers until after September 2008. The SEC lawyers had always found it strange that a firm of SAC’s size, transacting in such tremendous volume each day, didn’t keep a record of everything just in case. Klotz kept finding new backup tapes with different batches of emails on them. Each time there seemed to be a different reason why it had taken so long. The deadlines were approaching for the government to bring charges for trades from 2008. They were running out of time and Klotz knew it.

  Klotz launched into an explanation as to why the Dell email reaching Cohen wasn’t important, anyway. It was almost as if he were reading Wadhwa’s mind.

  “I think there are any number of reasons why Steve probably did not see it,” Klotz said. “It was the middle of the summer, he was in the Hamptons….”

  Wadhwa felt like he was going to scream. SAC must take them for idiots to try to pull a stunt like this, he thought, revealing such a crucial piece of information two nights before signing a huge settlement. It was infuriating. He told Klotz that he needed to discuss the matter with his colleagues and hung up the phone.

  —

  The question of how, and when, to disclose such a significant piece of information was tricky. If he never mentioned it, and Cohen went ahead and signed the $616 million SEC settlement, there was a good chance the SEC staff would find the email later on their own, in which case they’d be justifiably angry and unlikely ever to trust him again. It could lead to bigger problems in the future. After so much work had been done to get the settlement ready, waiting to reveal it until right before was masterful, in a certain way. Klotz would gain some credibility for bringing it to their attention, while leaving them so little time to react that they might just choose to go ahead with the settlement anyway. Klotz’s goal, as always, was the best possible outcome for Cohen.

  That night, the SEC staff attorneys debated whether they should move forward with the settlement in light of the new information. It seemed like Klotz was trying to get away with some
thing.

  Of course there was also the possibility that SAC really had just found an email going to Cohen potentially containing inside information about Dell on a backup server no one had looked at until the day before the company was set to enter into one of the largest securities fraud settlements in the history of Wall Street. It would have been an incredible coincidence, but it was possible.

  In any event, the settlement did not close off the possibility of charges against individuals at SAC, something the SEC had been adamant about throughout the negotiation. All the settlement would resolve was SAC’s corporate liability for the Elan, Wyeth, and Dell trades. The agreement did not name specific people who were involved, only the companies. It was a strange omission, as Cohen owned the companies outright and made all of the major decisions. But as far as the SEC was concerned, this was only the first step. They decided to go ahead and finalize the settlement.

  An SEC enforcement attorney, a key member of the Dell team named Matthew Watkins, spent most of Thursday going through all ten copies of the agreement, making every final change by hand. The following morning, March 15, 2013, the SEC blasted out a press release: “CR Intrinsic Agrees to Pay More than $600 Million in Largest-Ever Settlement for Insider Trading Case,” it read.

  Wadhwa and his colleagues spent the day responding to congratulatory emails and phone calls from colleagues and friends who worked in the hedge fund industry, thanking them for finally sanctioning a company that many in the business had long suspected was breaking the rules. But everyone on the case knew that this was no time to stop what they were doing. They now had an email that connected Cohen directly to inside information. They had gotten a huge fine out of him, but the goal was to see if they could charge Cohen himself and put him out of business for good. They had originally planned to go out for a celebratory lunch right after the announcement. Instead, the SEC team took the elevator down to P. J. Clarke’s on the ground floor of their office building, had a quick beer, and then rushed back up to their desks. There was work to do.

  —

  That night, at 7:33 P.M., the “2nd hand read” email that had gone to Cohen came in to the SEC’s Central Processing Unit in Washington. The first thing the SEC lawyers wanted to know was whether the receipt of the email by Cohen lined up with the sales of his Dell shares. Obviously, if he had sold them before he got the email, then the whole thing was irrelevant.

  According to the metadata on the email, the SAC analyst Jon Horvath had sent it at 1:09 P.M. on August 26, 2008, to Michael Steinberg and Gabriel Plotkin. One of the SEC staff attorneys, Justin Smith, also noticed a new name on the email chain: Anthony Vaccarino. Apparently Plotkin had forwarded the email to Vaccarino at 1:13 P.M., four minutes after Horvath sent it. Smith excitedly typed out a message to his colleagues, alerting them to this new fact.

  The SEC was not familiar with Anthony Vaccarino. They were familiar with Plotkin’s name—he was a star portfolio manager, someone Cohen looked to for trading ideas, especially in large consumer companies. Vaccarino was identified on an SAC staff list as a “research trader.” He worked directly for Cohen. At 1:29 P.M., Vaccarino had forwarded the Dell email to Cohen’s personal and office email addresses.

  The SEC rushed to get Vaccarino’s phone records. Sure enough, there was a call to Cohen’s cellphone from Vaccarino at 1:37 P.M. It lasted less than one minute. Two minutes later, Cohen sold 200,000 shares of Dell. He kept selling over the course of the afternoon and was out of his entire 500,000-share position by the end of the day. Two days later, Dell announced disappointing earnings—just as Horvath had predicted.

  Because the SEC was only working off of phone bills, there was still uncertainty about whether Cohen had actually answered the phone when Vaccarino called at 1:37 P.M. Presumably, Vaccarino would have told Cohen about the Dell email and made sure that he looked at it. The bill showed a call occurring, but forty-eight seconds wasn’t a long time. Cohen could easily say that he hadn’t picked up. After several days pleading with AT&T, the SEC received a letter verifying the company’s policy of billing customers only for calls that were answered. The company sent over an Excel spreadsheet showing all of the calls in question, down to the fraction of a second.

  The SEC had more questions. Was it possible that someone else had ordered the sales of the Dell shares? Could Cohen have put in the sell orders before 1:29 P.M.? Was there a delay between putting in an order and the order being executed? The SEC hypothesized a likely scenario: Horvath found out important information about Dell’s earnings from Jesse Tortora. Horvath then emailed the news to Steinberg and Plotkin. Plotkin then told Vaccarino, who, in turn, told Cohen. Cohen then sold off all of his shares before the bad news became public. Any other explanation involved a more convoluted set of assumptions. Occam’s razor again.

  Everything they had learned about Cohen suggested that he was fanatical about his stocks. He had built SAC into the most sophisticated and powerful information-gathering operation in the financial industry. He had an incredible memory and a voracious appetite for new intelligence that might drive his trading. He hated it when his portfolio managers made a move without telling him first. In fact, he was known to berate people on the trading floor for doing just that. Surely, they reasoned, he’d be up to date on anything his portfolio managers, like Steinberg, were doing with their Dell positions and why.

  Still, Klotz argued that Cohen hadn’t necessarily seen the “2nd hand read” email. He was doing everything he could to delay and distract them and waste their time.

  —

  Steven Cohen was not in hiding. He was eager to project confidence and reassure his investors about SAC’s future, and he made a point of being visible during the early months of 2013. He attended the World Economic Forum in Davos in January and made a rare appearance at a hedge fund conference in Palm Beach, in part to show the world that he wasn’t daunted by the enormous payment he had just agreed to hand over to the SEC.

  At the end of March, he received a call from the art dealer William Acquavella. Steve Wynn, the casino owner and prodigious art collector, was ready to sell Picasso’s Le Rêve; seven years had passed since Cohen’s original deal with Wynn had had to be canceled due to Wynn’s expensive bout of clumsiness. During the intervening period, Wynn had devoted significant resources to restoring the painting. Might Cohen still be interested in buying it? Cohen and his art advisor rushed to Acquavella’s gallery the next morning.

  Cohen’s art collection was world-renowned. In 2005, he’d made several significant purchases, including a painting by Van Gogh and one by Gauguin, which he had allegedly bought for $110 million. In 2006 he acquired a $137.5 million de Kooning. In 2012, he had paid $120 million for four bronze sculptures by Henri Matisse, and he owned dozens of other masterpieces, including canvases by Pollock, Monet, and Manet. Gallery owners loved him for his willingness to pay whatever it took to acquire the best. As in other areas of his life, Cohen could usually buy whatever he desired. But, thus far, Le Rêve had eluded him.

  After the accident, Wynn had sent Le Rêve to Terrence Mahon, one of only two art restorers in the United States seen as capable of repairing the painting in such a way as to not diminish its value. Mahon had set about realigning the threads of the canvas from his studio on Park Avenue South, sewing them together using an interface of acupuncture needles. He was then able to gently apply paint over the newly merged threads.

  “Fortunately, there wasn’t a lot of damage once the tear itself was realigned,” Mahon said. “There was minimal paint loss. It wasn’t like there was a hole or void in the canvas. The space I had to fill up with new paint was only about the width of a pencil tip.”

  It was work that required a jeweler’s eye and the steady hand of a vascular surgeon. Mahon completed the assignment on December 11, 2006, at a total cost of $90,493.12. Then the painting began its reputational laundering and was put on display at William Acquavella’s gallery on East Seventy-ninth Street. Then Acquavella called Cohen.

&n
bsp; “In three minutes we had a deal,” Cohen’s art advisor said. “This is a painting that has haunted Steve for nearly a decade.”

  “When you stand in front of it, you’re blown away,” Cohen said of the piece.

  When news of the purchase, for $155 million, appeared, it immediately caught the attention of the prosecutors, FBI agents, and SEC attorneys who were still trying to assemble cases against Cohen after several years of investigations. What defense lawyer would possibly allow his client to make a purchase of such ostentation and scale when there was a criminal investigation going on? It was almost as if Cohen was trying to antagonize the government.

  After the Picasso sale, Richard Zabel, Preet Bharara’s deputy, started making jokes about Cohen’s art collection around the office. “I want his pickled shark,” he said, referring to Cohen’s $8 million Damien Hirst installation. “I want to put his shark up in the office.”

  Cohen was acting like a man who was celebrating, while the government was far from finished with its investigation. The $616 million he paid the SEC was nothing, Cohen seemed to be saying. He could find that in the cushions of his Maybach.

  CHAPTER 14

  THE LIFE RAFT

  Early in the morning, before the sun rises over Manhattan, the sidewalks of the Upper East Side are illuminated by little pools of light that spill out of the lobbies of gracious limestone buildings. Just before 6 A.M. on March 29, 2013, at the corner of East Seventy-eighth Street and Park Avenue, a group of armed FBI enforcement agents were gathered near one of the building entrances.

  Inside the building, in a co-op apartment on the eighth floor, Michael Steinberg was sitting on the couch with his hands resting in his lap. Typically, the FBI liked to surprise people when agents came to take them into custody, but Steinberg’s lawyer, Barry Berke, had found out ahead of time that his client would be arrested that day. Steinberg had left his family behind in Florida, where they were visiting his wife’s relatives for Spring Break, and flown home to New York in order to be there. Berke, head of the litigation department at Kramer Levin Naftalis & Frankel, joined him at his apartment at 5 A.M. They intended to make the arrest as friction-free as possible. Steinberg dressed in khaki pants and a navy V-neck sweater and made a point not to wear a belt or shoelaces—potential instruments of suicide, which Berke had advised him were not permitted in federal detention. Steinberg unlocked the front entrance. Then he and Berke waited.