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

by Sheelah Kolhatkar

  The SEC’s case against Cohen for failing to supervise Martoma and Steinberg was still unresolved. The agency wanted to bar him from the securities industry for life, but Cohen was fighting it. He hired the celebrity defense lawyer David Boies to join the legal team working on the SEC case. He told friends that he expected to run another hedge fund in the not-too-distant future, something that would likely be impossible if the SEC won its case. In the meantime, Cohen’s “family office” was earning him hundreds of millions of dollars a year. He was still trading billions, he was still buying art—eight years and every resource the government could direct at him couldn’t stop him.

  —

  Over the course of the three years in which I conducted the reporting for this book, I was in and out of contact with Cohen’s office, attempting to arrange an interview with him. I called and wrote letters and had meetings with his representatives. There had been hints that he might eventually speak to me, but he never came through. I was determined to talk to him. I knew that he would be at Christie’s that evening in the spring of 2015, so I went to see him there.

  The night of the auction, the Christie’s building was overflowing with women of multinational identity whose cheekbones could have sliced a wheel of Brie and men who looked too rich to possibly care about the financial crisis in Greece, which was dominating international news headlines. It was a feverish atmosphere. A glamorous game was about to be played, one whose winners would be parting with enormous sums of money.

  Around 6:30 P.M. Cohen’s former trader David Ganek glided through the lobby with his shirt unbuttoned to the middle of his chest, looking as if he had just stepped off of a yacht. Then, just minutes before the auction’s 7 P.M. start time, Cohen walked in.

  He was short and slightly pear-shaped, in a gray zip-neck sweater and khaki pants, and he appeared to be by himself. His cheeks were pink, and he was smiling his gap-toothed smile as he waded into the crowd. He looked like a kid who had just entered FAO Schwarz. It was the ultimate power move, arriving five minutes before the scheduled start time of one of the most hotly anticipated art auctions of the season. Cohen knew they couldn’t begin without him.

  I stepped in front of him as he entered the hallway leading to the table where the bidders collected their paddles. “Hi,” I said, introducing myself. By this point, I had done hundreds of interviews with his former colleagues, employees, and confidants. I felt like I knew him as well as anyone did.

  “Oh, it’s you,” Cohen said. He froze.

  “I’d really like to talk to you,” I said, grabbing his hand and shaking it.

  “I bet you would like to talk to me, I bet you would,” he said. He started looking around for a way to escape.

  “You won,” I said. “I think you have a great story to tell.”

  “I don’t think I can talk to you,” he said, moving away. “But never say never….”

  As he slipped off into the crowd, I squeezed in one last question: “Are you buying or selling tonight?”

  “Oh, selling,” he said. “Selling.”

  He walked up the two flights of stairs to the packed gallery, where the auction was about to begin. Fifteen minutes later, another of Alberto Giacometti’s bronze sculptures, L’homme au doigt (Pointing Man), came on the block. It is widely considered one of the artist’s greatest works.

  For Cohen, who had just come through a challenging time, the sculpture was a sign of his own future, which was brightening again after several years under a legal shadow. The government had made its best effort to bring one of the wealthiest men in the world to justice and left him largely in the same condition he had been in before. Cohen was a survivor, a symbol of his time in history in more ways than he would likely want to acknowledge. Free from fear, he could buy anything he wanted. After several rounds of aggressive bidding, he placed the winning bid for the Giacometti, at $141.3 million. It was the most money anyone has ever paid for a sculpture at auction.

  —

  After Preet Bharara led the investigation into hedge funds that turned him into a national celebrity, the legal system delivered a stunning rebuke. In December 2014, an appeals court overturned the convictions of Todd Newman and Anthony Chiasson, from Diamondback and Level Global, respectively, funds that had strong ties to SAC. The judges reprimanded Bharara’s office for being too aggressive in charging traders who were getting inside information indirectly, from friends or employees, rather than from the company insider himself. In what came to be known as the “Newman decision,” the court said that in order for a trader to be prosecuted for trading on material nonpublic information, he or she had to be aware of the benefit the original leaker of the information had received. In many of the insider trading rings, traders got earnings or revenue numbers from other traders, knowing that they originated with someone inside the company and little else. The court also ruled that the benefit the leaker received in exchange for sharing the information had to be something tangible, akin to money. Friendship or favor-trading on its own was not enough.

  “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 Co
hen 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 o
f 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