David Chaves, David Makol’s supervisor
B. J. Kang, special agent, C-1 squad
David Makol, special agent, C-35 squad
Matthew Callahan, special agent
James Hinkle, special agent
Tom Zukauskas, special agent
THE SECURITIES AND EXCHANGE COMMISSION
HEAD OFFICE, WASHINGTON, D.C.
Mary Schapiro, chair, 2009–2012
Mary Jo White, chair, 2013–2017
Andrew Ceresney, director, Enforcement Division, 2012–2016
George Canellos, deputy director, Enforcement Division, 2012–2013; co-director, Enforcement Division, 2013–2014
NEW YORK REGIONAL OFFICE
Sanjay Wadhwa, assistant regional director for enforcement
Amelia Cottrell, branch chief
Charles Riely, staff attorney
Matthew Watkins, staff attorney
Joseph Sansone, head of the SEC’s Market Abuse unit
Daniel Marcus, staff attorney
Justin Smith, staff attorney
Neil Hendelman, analyst
Thomas Smith, staff attorney
Michael Holland, staff attorney
THE U.S. ATTORNEY’S OFFICE FOR THE SOUTHERN DISTRICT OF NEW YORK
Preet Bharara, U.S. Attorney
Richard Zabel, Deputy U.S. Attorney
Lorin Reisner, head of criminal division at the Southern District of New York
Antonia Apps, assistant U.S. attorney
Arlo Devlin-Brown, assistant U.S. attorney
Avi Weitzman, assistant U.S. attorney
Andrew Michaelson, special assistant U.S. attorney on loan from the SEC
Joshua Klein, assistant U.S. attorney
Raymond Lohier, chief of the commodities and securities fraud task force
Reed Brodsky, assistant U.S. attorney
Eugene Ingoglia, assistant U.S. attorney
Harry Chernoff, assistant U.S. attorney
Christopher Garcia, chief of the commodities and securities fraud task force
Marc Berger, chief of the commodities and securities fraud task force
Anjan Sahni, deputy chief of the commodities and securities fraud task force
ACKNOWLEDGMENTS
This book would not have been possible without the help and support of many people, from researchers to editors, employers and colleagues, fact-checkers and friends. I owe my deepest debt of gratitude to the many sources and subjects who shared their time and their insights as I sought to learn as much as possible about insider trading investigations at several hedge funds and endeavored to reconstruct events that occurred over the course of the last ten years.
This story began, for me, as a magazine feature assignment at Bloomberg Businessweek, which was my journalistic home through most of the reporting process, when many of the events depicted later in the book took place. Josh Tyrangiel, Bloomberg Businessweek’s editor, always had high standards that one felt motivated to try to meet. He and his deputy and successor, Ellen Pollock, were both tolerant of my long periods of distraction and generous with opportunities to write ambitious stories for the magazine. Bryant Urstadt, a Businessweek features editor and also a friend, first urged me to take on the SAC Capital case as a subject. I am also grateful to many other friends and colleagues from that period, including my editor Brad Wieners, as well as folks at Bloomberg Media.
Since leaving Businessweek I have had the privilege of working as a staff writer at The New Yorker, for David Remnick, who is a role model in so many ways. I’m also blessed to count Henry Finder, Vera Titunik, Susan Morrison, Nick Thompson, and many others as editors and colleagues.
My book landed in the hands of Andy Ward, one of the most patient and exacting book editors in the industry. From the moment I walked in to Penguin Random House to meet with Susan Kamil and Tom Perry, who referenced All The President’s Men during our first conversation, I knew that I was collaborating with publishers who understood and appreciated the importance of this story. Sally Marvin and London King have been both wise and energetic in their publicity guidance, and Kaela Myers, Melissa Sanford, Evan Camfield, and Joseph Perez were also incredibly helpful.
My agent, Gail Ross, has been a tireless supporter and advisor, as has her partner, Howard Yoon, who was a crucial source of editorial advice. Hugo Lindgren was an invaluable editor, advisor, and friend. Theodoric Mayer and Nadine Sabai were crack research assistants at different stages, and Andy Young played the important role of fact-checker. I am fortunate to have many friends and colleagues who were willing to read pages, offer reporting advice, listen and/or generally set an example through their own work, including Katrina Brooker, Steve Fishman, David Glovin, Suzy Hansen, Alexandra Jacobs, Patrick Radden Keefe, Kate Kelly, Peter Lattman, Devin Leonard, Duff McDonald, Bethany McLean, Miranda Purves, Anita Raghavan, Andrew Rice, Maria Russo, Gabriel Sherman, Jennifer Stahl, Nick Verbitsky, David Voreacos, and others. This book is also dedicated, in part, to Peter Kaplan, who taught me about being a journalist.
I am grateful for my family, including my parents, Frank and Rowena; my sister Amanda; my relations-in-law, including Carlota and Patsy; and, most important, the people who share four walls with me, Seth, Wyatt, and Lola, whom I love more than anything and who somehow tolerated it all.
New York City, November 2016
NOTES AND SOURCES
I began reporting this story on November 20, 2012, the day that Mathew Martoma was arrested, and that reporting continues to this day. This book is based on hundreds of interviews with more than two hundred people, as well as voluminous court transcripts, exhibits, deposition testimony, SEC interview notes, notes taken by FBI agents during witness interviews—known as 302s—diary entries, written correspondence, and other documents. Additionally, many of the cases and characters herein were covered in detail by the press, by reporters who did fine work at The New York Times, Reuters, Bloomberg News, The Wall Street Journal, Institutional Investor, Fortune, Vanity Fair, New York, CNBC, and The New Yorker, as well as in books, among them Anita Raghavan’s The Billionaire’s Apprentice, which is the definitive retelling of the Raj Rajaratnam case. James B. Stewart’s Den of Thieves, which is a crucial account of the insider trading that overtook Wall Street during the Michael Milken era, was also an important resource.
Many of the people I was writing about, or who were witnesses to the events I describe, were facing the possibility of criminal prosecution or regulatory sanction at the time I was conducting interviews; others had signed nondisclosure agreements with their employers—which is standard in the financial industry—or worked for departments of the government that forbade them from speaking openly about their work. For those reasons and due to the sensitive nature of the subject matter, the vast majority of the interviews were conducted on a background basis, which meant that I could use the information, including character’s states of mind and dialogue, but that I could not attribute it to a source by name. It should not be assumed that my reporting of a character’s state of mind or dialogue or any other fact means that that individual was the source; in some cases, such passages are drawn from documents, transcripts, witnesses, or people who were briefed on what occurred. In order to write certain passages, I was forced to rely on memories of events that took place many years in the past. I made a great effort to corroborate facts and versions of events conveyed by different people with multiple sources and documents wherever possible. Every effort was made through reporting and rigorous fact-checking to make sure the story as depicted is as accurate and complete as possible. It is also worth noting that the legal cases involved dramatic twists and surprises; some people who were convicted or pleaded guilty later saw their convictions or guilty pleas reversed, and some who looked like they might be charged never were.
Nearly every person mentioned in this book was given an opportunity to comment. Steven Cohen did not cooperate in the reporting process, in spite of multiple requests over a three-year period, one of them co
nducted through an in-person encounter at Christie’s. Cohen tried to prevent members of his closest circle from speaking with me, and at one point, a press representative working for Cohen threatened to have me followed. Cohen (still) exerts tremendous influence on Wall Street and beyond, and people are generally afraid of him.
In spite of many obstacles, dozens of people did choose to speak to me as I worked on this book, for their own reasons and because it was understood that this is a story of public interest and historical significance. This book would not have been possible if it weren’t for them.
PROLOGUE: THE FLIP
“They’re gonna guide down”: David Glovin, Patricia Hurtado, and Bob Van Voris, “Chiesi Told Rajaratnam She ‘Played’ Friend Like ‘Piano,’ ” Bloomberg News, April 4, 2011.
an $800 million Internet company: “Akamai Reports Fourth Quarter 2008 and Full Year 2008 Financial Results,” company press release, February 4, 2008.
“I played him like a finely tuned piano”: U.S. v. Rajaratnam, No. 09 Cr. 1184 (RJH), Government Exhibit (hereafter GX) 532T, transcript of call between Rajaratnam and Chiesi, July 24, 2008.
to Kenya for a birthday safari: Anita Raghavan, “Power and Pleasure,” Forbes, September 23, 2010.
Super Bowl party on Star Island: Robert A. Guth and Justin Scheck, “The Man Who Wired Silicon Valley,” The Wall Street Journal, December 30, 2009.
Six days after that phone call: U.S. v. Rajaratnam, GX 44, “Galleon Tech Profit from Trades in Akamai Technologies Beginning on July 25 2008.”
Raj, who was short 875,000: U.S. v. Rajaratnam, GX 42, “Galleon Tech Daily Closing Position in Akamai Stock,” June 1 2008–July 30 2008.
Chiesi, made $2.5 million: U.S. v. Rajaratnam, GX 45, “New Castle Profit from Trades in Akamai Securities Beginning on July 25 2008.”
“It’s a conquest”: U.S. v. Rajaratnam, GX 543T, transcript of call between Raj Rajaratnam and Danielle Chiesi, from July 30, 2008.
Raj shorted 138,550 shares: U.S. v. Rajaratnam, GX 42.
Kang had wires going on Rajaratnam’s friends: David Glovin and Patricia Hurtado, “Chiesi Swaps Cell for Halfway House,” Bloomberg News, May 18, 2013.
SAC Capital Advisors: From here on, the more common reference “SAC Capital” or “SAC” will be used to refer to Cohen’s company, SAC Capital Advisors.
“Ali Far?”: U.S. v. Ali Far, No. 09 Cr. 1009 (RPP), Ali Far Sentencing Memo. Far was an electrical engineer by training. Born in Iran, he moved to the United States as a teenager in 1978, in the midst of the Iranian Revolution. After graduating from Berkeley, he worked at Plantronics, a Silicon Valley firm that made computerized phone headsets, among other things, while studying for his master’s degree at night. He became a semiconductor analyst at Prudential Securities, impressing Rajaratnam, who hired him at Galleon. His career there was bumpy, though, and in 2008 he left.
Far’s wife, two daughters, mother, and mother-in-law cowered in the background: U.S. v. Far, Far Sentencing Memo, letter from Far’s mother, Esmat Akhavain.
Lee was a technology analyst: U.S. v. Richard Choo-Beng Lee, et al., No. 09 Cr. 0972 (PKC), Richard Choo-Beng Lee Sentencing Memo, November 18, 2015. Before becoming an analyst at SAC, Lee worked at Monolithic Memories, a chip company in Silicon Valley that eventually became Advanced Micro Devices, as well as at Sun Microsystems.
Far placed a call to his partner: U.S. v. Choo-Beng Lee, et al., Richard Choo-Beng Lee Sentencing Memo.
“I know people”: U.S. v. SAC Capital Advisors, et al., No. 13 Cr. 541 (LTS), Sealed Indictment, July 25, 2013; some details of Lee’s call to Cohen.
“We heard he’s wearing a wire”: Fairfax Financial Holdings Ltd. and Crum & Forster Holding Corp. v. SAC Capital Management LLC, et al., MRS-L-2032-06; Superior Court of the State of New Jersey, videotaped deposition of Steven A. Cohen, February 22, 2011. More details on this conversation from Matthew Goldstein, “Cohen Said to Have Warned Friend About Possible Federal Investigation,” The New York Times, December 23, 2013.
Before earning anything for his or her investors: Nina Munk, “Greenwich’s Outrageous Fortunes,” Vanity Fair, July 2006.
Paul Tudor Jones and Ken Griffin: Tudor Jones founded Tudor Investment Corp.; Griffin founded Citadel Investment Group. See Sebastian Mallaby, More Money Than God (Penguin, 2010).
a more traditional Wall Street career: One of the most alluring aspects of the hedge fund business was the fact that a hedge fund manager could easily expand his or her annual bonus from millions a year to tens of millions or more just by bringing in more investor money and making the fund larger, often with little extra work. Most hedge funds charge a management fee of 2 percent of assets, which is intended to cover expenses and salaries, as well as 20 percent of the profits generated by the fund at the end of the year. A fund managing $300 million of other people’s money, then, would take $6 million in fees, plus its 20 percent cut of the profits. If the fund grew to $3 billion in assets, the management fee would jump to $60 million. If a fund of that size returned just 6 percent that year, it would generate $180 million in profits, $36 million of which the fund managers could keep. All of this could be done by only a handful of employees.
the twenty-five highest-paid hedge fund managers: Mallaby, More Money Than God, p. 3. See also “The Top 25 Moneymakers: The New Tycoons,” Institutional Investor’s Alpha, April 24, 2007.
almost $3 trillion in assets around the world: “HFR Global Hedge Fund Industry Report: Year End 2015,” Hedge Fund Research.
Trading on it is also usually illegal: Recent court decisions have loosened the definition of what constitutes illegal insider trading; for more, see Jon Eisenberg, “How United States v. Newman Changes the Law,” K&L Gates LLP, May 3, 2015.
1. MONEY, MONEY, MONEY
Established in 1880, Gruntal had survived: Richard Behar, “The Shabby Side of the Street,” Fortune, March 3, 2003.
Aizer had implemented a strategy called “option arbitrage”: The options department at Gruntal had been started in 1964 by Carl Icahn. Icahn and Aizer, and Cohen for that matter, had much in common. Even though Icahn was several years older than Aizer, they were all kids who’d spent their youths admiring the skyline of Manhattan from the outer boroughs and plotting to triumph over their middle-class upbringings. At the time, if someone wanted to trade a stock option, they had to call up a broker at Gruntal or a handful of other firms, explain what kind of bet they wanted to make and over what time horizon, and basically accept whatever price they were given. By 1968, Icahn’s department at Gruntal was bringing in commissions of $1.5 million and was one of the most profitable at the firm. Icahn left that year to start his own company. Connie Bruck, The Predators’ Ball (Penguin, 1989), p. 151.
so he could study the stock tables: Jack D. Schwager, Stock Market Wizards (HarperCollins, 2001), p. 269.
the area became partial inspiration: Judith S. Goldstein, The Great Gatsby: Inventing Great Neck: Jewish Identity and the American Dream (Rutgers University Press, 2006), p. 3.
Cohen would stumble home early in the morning with bundles of cash: Bryan Burrough, “What’s Eating Steve Cohen?” Vanity Fair, July 2010.
The culture at Wharton: Several Wharton graduates of the era were indicted (see “Wharton Producing Its Share of Criminals on Wall Street,” Boca Raton News, September 26, 1988), the most famous being Bruce Newberg, a classmate of Cohen’s who received his bachelor’s degree in 1979 and an MBA from Wharton in 1980. Newberg went on to become a star trader for Michael Milken at Drexel Burnham and was indicted for racketeering and securities fraud as part of the takedown of the junk-bond king’s empire in 1989. Milken also had an MBA from Wharton.
He thought he had no chance of competing: “I was dead on arrival at Penn,” Cohen says. “All these prep-school kids, they were ready, they had read all the books. Me, well, it was a real struggle.” Burrough, “What’s Eating Steve Cohen?”
“I’d just stand there and stare”: Burrough, “What’s Eating Steve Cohen?”
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Gruntal’s CEO: Howard Silverman ran Gruntal from 1974 to 1995.
Silverman drove sports cars: Lawrence Van Gelder, “Long Islanders: Driving Hard on Wall Street,” The New York Times, May 3, 1987.
She and Cohen ended up talking for hours: Some details about Cohen and Patricia’s first meeting from Steve Fishman, “Divorced, Never Separated,” New York, March 28, 2010.
But in fact there was a tiny wedding: Patricia Cohen v. Steven A. Cohen, et al., Complaint Under the Racketeer Influenced and Corrupt Organizations Act, No. 09 Civ. 10230 (WHP), December 9, 2009; the date of marriage was December 7, 1979. Another divorce filing has the date of marriage as December 12, 1979.
The pace of mergers and acquisitions increased: Between 1981 and 1988, more than 1,500 publicly traded American companies were taken private. Mallaby, More Money Than God, p. 113.
He abandoned Aizer’s riskless options strategy: “It occurred to me that I was more right than wrong on the direction of stocks,” Cohen later said. “So I thought, Why hedge them? Why not just buy stocks?” Burrough, “What’s Eating Steve Cohen?”
Cohen was making $5 to $10 million a year: Burrough, “What’s Eating Steve Cohen?”
This brought him one step closer to his dream: Patricia Cohen v. Steven A. Cohen, et al., Statement of Facts, 2009.
“I heard there might be a restructuring going on”: In the Matter of: Trading in the Securities of RCA Corporation, SEC File No. HO-1793.
Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street Page 34