“I don’t understand,” Zabel said. “We’ve been moving in lockstep. Why would you do this?”
The SEC enforcement chiefs defended themselves by saying that they were worried about the statute of limitations deadline on the Elan trades, which was only a few days away. They went forward on their own and charged Cohen with failing to supervise his employees. The SEC announced the case with a news release. There was a storm of media attention.
Six days later, on the morning of July 25, an alert went out from the U.S. Attorney’s Office to members of the news media: “1:00 P.M.—A press conference will be held on a securities fraud matter.” Bharara was ready to unveil his indictment of SAC Capital Advisors, with all of the pageantry and stagecraft that such a significant legal action required. Around lunchtime, camera crews started setting up tripods along the back wall of the ground-floor atrium at 1 St. Andrew’s Plaza. The room grew so crowded that people had to stand in the aisles. At 12:59 P.M., Preet Bharara stepped out from behind a dark curtain and took his familiar spot behind the podium. “Today, we announced three law enforcement actions relating to the SAC group of hedge funds,” he said, against a soundtrack of popping camera flashbulbs. Bharara outlined three sets of charges that his office was making against Cohen’s company: insider trading and wire fraud charges; civil money laundering charges seeking forfeiture of assets tied to the illegal trading; and a guilty plea of another portfolio manager at SAC, named Richard Lee (not Richard C. B. Lee)—the eighth SAC employee charged with insider trading so far.
“When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence. It is, instead, the predictable product of substantial and pervasive institutional failure,” Bharara said. “SAC trafficked in inside information on a scale without any known precedent in the history of hedge funds.” The indictment painted a devastating portrait of Cohen and his company. Bharara described the scope of illegal trading at SAC as “deep” and “wide,” spanning more than ten years and involving at least twenty different securities from different industries, resulting in illegal profits of “at least” hundreds of millions of dollars.
Still, the key question went unaddressed: What about Cohen? For Bharara, indicting SAC had crystallized an important point: Now more than ever, they needed Martoma to cooperate. That was the only thing, at this point, that would allow them to put the man responsible for everything behind bars.
Once he finished with his prepared remarks, Bharara said that he would take a few questions from the dozens of reporters in the room. “Do you plan to criminally indict Steve Cohen?” a woman shouted.
A hint of irritation could be detected on Bharara’s face. He knew, of course, that rather than focusing on the triumph of his SAC Capital case, the media would fixate on the lack of charges against Cohen. The press had its familiar storyline, about catching the “big fish,” and reporters would be eager to cast the indictment of SAC as a failure. Bharara intended to make it clear that they were not yet done. Steven Cohen was still a target, and they planned to continue to investigate and, eventually, to bring him to justice. “Today, we’re bringing the charges that I’ve described,” Bharara said, hoping that he was making himself clear. “I’m not going to say what tomorrow may or may not bring.”
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 represent 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 th
at 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.”
Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street Page 29