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

by Sheelah Kolhatkar

  he’d been telling people that a Wharton classmate had told him: Patricia Cohen v. Steven A. Cohen, et al., Statement of Facts, 2009.

  General Electric announced a takeover of the broadcaster: “General Electric Will Buy RCA for $6.28 Billion,” Los Angeles Times, December 12, 1985.

  Cohen made $20 million: Patricia Cohen v. Steven Cohen, et al., First Amended Complaint, No. 09 Civ. 10230 (WHP).

  Three months later, an envelope from the SEC arrived: Date of subpoena April 23, 1986, per Cohen SEC deposition testimony, In the Matter of: Trading in the Securities of RCA Corporation.

  The SEC wanted Cohen to come in and testify: In the Matter of: Trading in the Securities of RCA Corporation.

  “Don’t worry”: In the Matter of: Trading in the Securities of RCA Corporation.

  The SEC accused Levine: James B. Stewart, Den of Thieves (Simon & Schuster, 1991), p. 294.

  Around 6 P.M. on June 5, 1986: “Investment Banker Pleads Guilty to Insider Trading,” Associated Press, June 5, 1986.

  Gruntal had arranged for Cohen to be represented by Otto Obermaier: After representing Cohen in 1989, Obermaier was appointed U.S. Attorney for the Southern District of New York by President George H. W. Bush, replacing Rudy Giuliani. Obermaier held the post until 1993. “Otto Obermaier Is No Rudy Giuliani,” BusinessWeek, July 27, 1992.

  “taking the Fifth”: The Fifth Amendment to the Constitution, also known as the privilege against self-incrimination, provides that no person can be forced to be a witness against himself. For more on implications of taking the Fifth in SEC investigations, see Tom Hanusik, “Averse to Adverse Inferences? Rethinking the Scope of the Fifth Amendment Protections in SEC Proceedings,” Securities Regulation & Law Report, 41 SRLR 574, The Bureau of National Affairs, March 30, 2009.

  The testimony was over in twenty minutes: Cohen SEC deposition testimony, In the Matter of: Trading in the Securities of RCA Corporation.

  Patricia and the children would cower: “He used to come home beat up, impatient, at the end of his wits,” Patricia says. “He could be demanding, hypercritical, and a screamer.” Fishman, “Divorced, Never Separated.”

  “I’m just a stock trader”: SEC testimony of Brett K. Lurie, In the Matter of: Trading in the Securities of RCA Corporation.

  He had many short positions: Peter Lattman, “SAC Capital’s Cohen Opens Up,” The New York Times, February 15, 2011.

  Cohen moved out: Steven A. Cohen v. Patricia Cohen, No. 11 Cv. 1390, filed March 21, 1991; per Order to Show Cause for Modification Upward of Child Support, apartment was located at 120 East End Avenue, 10A.

  Around half of that, $8.75 million, had been invested in a real estate deal: Steven Cohen and SAC Trading Corp. v. Brett K. Lurie and Conversion Trading Corp., No. 9891/87, affidavit by Brett K. Lurie, May 12, 1987.

  which he said was worth $2.8 million: Mr. and Mrs. Steven A. Cohen Statement of Financial Condition, July 1, 1988.

  Cohen made more than $4 million that year: Steven A. Cohen v. Patricia Cohen, Cohen’s 1989 earnings of $4.3 million per 1989 form 1040, filed as an exhibit to Affidavit in Opposition, filed August 9, 1991; according to Patricia’s divorce filings, she believes that Cohen made $20 million in 1989 and $12 million in 1988. Cohen disputed this.

  $80,000 in Bergdorf’s bills: Steven A. Cohen v. Patricia Cohen, Affidavit in Opposition, filed August 9, 1991.

  2. WHAT STEVIE WANTS, STEVIE GETS

  Gruntal had earned a reputation as a less than reputable firm: While the company was run by Howard Silverman from 1974 to 1995, Silverman’s two sons operated a firm that cleared all of Gruntal’s trades for the New York Stock Exchange, an arrangement that was legal but had the appearance, at a minimum, of a conflict of interest. At the same time, the son of another deputy of the firm, Edward Bao, cleared all the firm’s trades for the Amex stock exchange. Richard Behar, “The Shabby Side of the Street,” Fortune, March 3, 2003.

  Cohen started SAC with around $23 million: The number cited in some published accounts is $25 million; former employees I spoke with say it was $23 million or $24 million.

  especially those who’d played college sports: Jack D. Schwager, Stock Market Wizards (HarperCollins, 2001), p. 274.

  Steinhardt came into stock trading: Raised by a single mother in a gritty neighborhood in Brooklyn, Michael Steinhardt had both a brilliant investing sense and an unpredictable temper, which fueled his desire to make money. “I had an overriding need to win every day,” he once said. “If I was not winning, I suffered as though a major tragedy had occurred.” Sebastian Mallaby, More Money Than God (Penguin, 2010), pp. 55–56.

  George Soros and Paul Tudor Jones: The industry was dominated by a handful of men who had become semi-celebrities on Wall Street: Julian Robertson, who ran the Tiger fund and was known for breeding new hedge fund managers; George Soros, who was seen as an intellectual and, along with his partner Stanley Druckenmiller, ran the Quantum Fund, which made bets on broad economic forces; and the Memphis cotton trader Paul Tudor Jones, who started Tudor Investment in 1983 and who in 1988, at age thirty-three, was reported to be the highest-paid individual on Wall Street, with $80 to $100 million in earnings. Each had his own strategy for making money, usually based in a strong idea about investing. Alison Leigh Cowan, “Where the Money Is: Wall St.’s Best-Paid People,” The New York Times, June 4, 1988.

  to almost $100 million: SAC Capital Advisors marketing presentation, May 1, 2012.

  He signed up for a dating service: Bryan Burrough, “What’s Eating Steven Cohen?” Vanity Fair, July 2010.

  Cohen, who showed up thinking: Steven A. Cohen v. Patricia Cohen, Index No. 62593/90, Affidavit in Opposition, November 9, 1995.

  “A lot of these things occurred”: Alex and Steven Cohen appearance on The Cristina Show, July 29, 1992.

  Kiev’s other area of expertise was success: The son of a Bronx rabbi who’d gone to Harvard, Kiev wrote several books on depression and had been at the forefront of research into antidepressants, running clinical trials of Prozac and Zoloft. William Grimes, “Ari Kiev, Psychiatrist to Traders, Dies,” The New York Times, Nov. 30, 2009.

  some of his favorite phrases: Ari Kiev, M.D., Trading to Win (John Wiley & Sons, 1998).

  “You need to trade to win”: Schwager, Stock Market Wizards.

  Cohen called Kenny Lissak with some shocking news: The story of Lissak’s firing comes from Lissak, and was corroborated by several other people who were there at the time.

  SAC generated far more revenue: A version of this story is also recounted by Gary Sernovitz, “Edge and the Art Collector,” n+1, January 16, 2013.

  once housed heirs to the Rockefeller and J. Pierpont Morgan fortunes: Nina Munk, “Greenwich’s Outrageous Fortunes,” Vanity Fair, July 2006.

  Paul Tudor Jones was one of the first: Munk, “Greenwich’s Outrageous Fortunes.”

  raised his bid to $14.8 million, and bought the house with cash: Looking back on the incident, Steinberg said in an interview: “The property was magnificent—it was just a big beautiful home. I thought it was perfect the way it was, and he tore it apart.” Steinberg ended up buying another Greenwich mansion, which had previously been owned by Donald Trump, for $15 million.

  They built a nine-foot stone wall: Marcia Vickers, “The Most Powerful Trader on Wall Street You’ve Never Heard Of,” BusinessWeek, July 20, 2003.

  It took 283 dump-truck loads: Matthew Purdy, “Our Towns: In Greenwich, More Is Just Too Much,” The New York Times, December 5, 1999.

  “I feel that it’s not a home”: Purdy, “Our Towns: In Greenwich, More Is Just Too Much.”

  3. MURDERERS’ ROW

  returns were getting harder to find: “It’s hard to find ideas that aren’t picked over, and harder to get real returns and differentiate yourself,” Cohen said. “The days of big returns are gone.” Susan Pulliam, “The Hedge-Fund King Is Getting Nervous,” The Wall Street Journal, September 16, 2006.

  He had recruited Lee from a brokerage firm: U.S. v. Choo-
Beng Lee, et al.

  One of the things SAC looked for in new traders was personal connections: James Sterngold and Jenny Strasburg, “For SAC, a Shift in Investing Strategy Later Led to Suspicions,” The Wall Street Journal, July 24, 2013. See also U.S. v. SAC Capital Advisors, No. 13 Cr. 541, filed July 25, 2013, Sealed Indictment.

  The art market offered a way to transform wealth: A version of this idea was expressed by Jonathan Jones, “Art and Money: The Sharks Behind the Showpieces,” The Guardian, October 12, 2011.

  “It is not even cool to be a billionaire anymore”: Rebecca Mead, “The Daredevil of the Auction World,” The New Yorker, July 4, 2016.

  paying $8 million for a shark: Carol Vogel, “Swimming with Famous Dead Sharks,” The New York Times, October 1, 2006.

  4,360 gallons of formaldehyde: Roberta Smith, “Just When You Thought It Was Safe,” The New York Times, October 16, 2007.

  the casino magnate Steve Wynn had bought it: Account of Wynn cocktail party: Nick Paumgarten, “The $40-Million Elbow,” The New Yorker, October 23, 2006.

  “This is the most money ever paid for a painting”: “Steve Wynn to Keep Picasso He Damaged,” Associated Press, October 18, 2006.

  the collectors Victor and Sally Ganz: Geraldine Norman, “Life with Picasso,” The Independent, September 27, 1997.

  “terrible” ripping sound: Nora Ephron, “My Weekend in Vegas,” The Huffington Post, October 16, 2006.

  the sale was off: Paumgarten, “The $40-Million Elbow”; some details from Stephen and Elaine Wynn v. Lloyd’s of London, No. 07 Civ. 00202, filed January 10, 2007.

  Martoma would have a portfolio of about $400 million: U.S. v. Martoma, January 20, 2014, Timothy Jandovitz testimony.

  base salary of $200,000 and a signing bonus of $2 million: U.S. v. Martoma, GX 570, introduced January 13, 2014, Mathew Martoma SAC job offer from June 2, 2006.

  He fit the new SAC image: David Kaplan, et al., v. SAC Capital, et al., No. 12 Civ. 9350 (VM) (KNF), filed September 3, 2014, Elan Shareholder Second Amended Complaint.

  he stayed up late working another shift, reading research reports: U.S. v. Martoma, Mathew Martoma Sentencing Memorandum, Exhibit 1, letter from Rosemary Martoma.

  he volunteered in the Alzheimer’s wing: Patrick Radden Keefe, “The Empire of Edge,” The New Yorker, October 13, 2014.

  Bapi had a less complex structure: U.S. v. Martoma, January 17, 2014, testimony of Dr. Sidney Gilman.

  an “expert network” or “matchmaking” firm: Laurie P. Cohen, “Seeking an Edge, Big Investors Turn to Network of Informants,” The Wall Street Journal, November 27, 2006.

  “We thought it was kind of ridiculous”: Steve Bodow, “Investing; It’s Not What They Know, but Whom,” The New York Times, December 23, 2001.

  $1.2 million annual subscription: U.S. v. Martoma, GLG SAC Subscription Agreement, GX 630, introduced January 16, 2014.

  “Are any of these docs in your database?”: U.S. v. Martoma, GX 262, email sent on August 30, 2006; also David Kaplan, et al., v. SAC Capital, et al., Elan Shareholder Second Amended Complaint, filed September 3, 2013.

  “I am Chair of the Safety Monitoring Committee”: U.S. v. Martoma, GX 660, January 16, 2014; Gilman email to Noopur Batsha dated August 23, 2006.

  4. IT’S LIKE GAMBLING AT RICK’S

  accusations of each side rifling through the other’s garbage: Michael Orey, “Corporate Snoops,” BusinessWeek, October 9, 2006.

  Biovail, a Canadian drug manufacturer: The company specialized in taking established drugs, such as the commercially successful antidepressant Wellbutrin, and getting licenses to produce them in new form, with time-release delivery mechanisms it had developed that made the drugs more efficient.

  Biovail’s CEO, Eugene Melnyk: For more details, see Leonard Zehr, “Biovail and the Analyst’s Secret Account,” The Globe and Mail, June 22, 2002.

  a piece in BusinessWeek: Marcia Vickers, “The Most Powerful Trader on Wall Street You’ve Never Heard Of,” BusinessWeek, July 20, 2003.

  The SAC call came a few minutes before: The SAC trader was never accused of any wrongdoing with regard to ImClone. Vickers, “The Most Powerful Trader on Wall Street You’ve Never Heard Of.”

  Biovail filed a lawsuit against SAC: Biovail Corporation v. SAC Capital Management, et al., No. 06 Cv. 01413, filed February 23, 2006.

  from close to $50 to $18 in Canadian dollars: Jenny Anderson, “Claiming Stock Manipulation, Biovail Sues Hedge Fund,” The New York Times, February 23, 2006.

  “SAC places extreme pressure on its traders”: Biovail Corporation v. SAC Capital Management, et al.

  the SEC launched its own investigation: Stunningly, the Biovail suit against SAC was dismissed in 2009 by a judge in New Jersey. In February 2010, SAC sued Biovail, which had been taken over by Valeant Pharmaceuticals, accusing it of vexatious litigation. Valeant and SAC settled the case in November 2010, with Valeant agreeing to pay $10 million to SAC to compensate it for legal expenses. On March 24, 2008, the SEC sued Melnyk and Biovail, accusing the company of engaging in accounting fraud. The company paid $10 million to settle the charges and another $128 million to settle a class-action lawsuit filed by its shareholders. “Biovail Settles with SAC Capital,” The New York Times, November 4, 2010.

  60 Minutes aired a segment about the litigation: Leslie Stahl, “Betting on a Fall: On One Company’s Lawsuit Against a Hedge Fund,” 60 Minutes, CBS News, March 24, 2006.

  “When you see a tidal wave coming”: Stahl, “Betting on a Fall.”

  “never ending quest to poison my relationship”: Steven A. Cohen v. Patricia Cohen, Index No. 62593, Affidavit and Affirmation in Opposition, November 9, 1995.

  a sleazy place: Richard Behar, “The Shabby Side of the Street,” Fortune, March 3, 2003.

  who made close to a billion dollars that year: Peter Lattman and Ben Protess, “$1.2 Billion Fine for Hedge Fund SAC Capital in Insider Case,” The New York Times, November 4, 2013.

  Bowe hoped to prove that the hedge funds were insider trading: Fairfax Financial Holdings Ltd. and Crum & Forster Holding Corp. v. SAC Capital Management LLC, et al., Fairfax Appeal Brief.

  “Save yourself!”: Bethany McLean, “A Wall Street Battle Royal,” Fortune, March 6, 2007.

  Traders at various hedge funds shorted the stock: Fairfax Financial Holdings Ltd. and Crum & Forster Holding Corp. v. SAC Capital Management LLC, et al. In 2012, a New Jersey state judge dismissed Fairfax’s case against SAC and the other funds. Fairfax refiled the case in 2013. See David Voreacos, “SAC Dismissal from New Jersey Lawsuit Appealed by Fairfax,” by Bloomberg News, June 4, 2013.

  Spitzer launched an investigation of research departments: “SEC Fact Sheet on Global Analyst Research Settlements,” Securities and Exchange Commission, April 28, 2003.

  The classic case was Henry Blodget: “SEC Sues Goldman Sachs for Research Analyst Conflicts of Interest,” SEC press release, April 28, 2003.

  The hedge funds demanded service in return: Many services the banks provided could be paid for in what were called “soft dollars”—basically IOUs that were repaid in the form of trading commissions.

  gambling at Rick’s: This phrase comes from a scene in the film Casablanca, when Captain Renault, a regular patron of Rick Blaine’s nightclub and gambling den, Rick’s Café, must find an excuse to shut the place down: “I’m shocked, shocked, to find that gambling is going on here.”

  5. EDGY, PROPRIETARY INFORMATION

  he majored in philosophy in college: U.S. v. Michael Steinberg, No. 12 Cr. 121 (RJS), filed May 2, 2014, Michael Steinberg Sentencing Memorandum, letter from Rebecca and Kenneth Roban.

  Steinberg was put in charge of the portfolio on his own: U.S. v. Steinberg, November 21, 2013, testimony of SAC CFO Dan Berkowitz.

  Each had been worth more than $20 billion: Kate Kelly, Serena Ng, and David Reilly, “Two Big Funds at Bear Stearns Face Shutdown,” The Wall Street Journal, June 20, 2007.

  To Horvath, it was clear what his boss wanted him to do:
U.S. v. Steinberg, testimony of Jon Horvath. During the trial, Steinberg’s defense lawyers disputed this account, and the charges against Steinberg were later dismissed for unrelated reasons as a result of an appeals-court ruling.

  FBI Special Agent David Makol: The son of a forklift driver who grew up in Springfield, Massachusetts, Makol had had obsessive work habits that brought him into the office at 5 A.M. most days. His first big case was the Martha Stewart investigation, based on allegations that she covered up a sale she made of four thousand shares of ImClone Systems in 2001 after getting a tip from the company’s founder, Sam Waksal, who was a social friend. From there, Makol moved on to the Reebok–Adidas case, in which a young Goldman Sachs analyst traded options in Reebok after learning in advance that Adidas was taking it over; he placed the trades through the account of his aunt, a sixty-three-year-old retired seamstress in Croatia. For more, see Susan Pulliam, Michael Rothfeld, and Jenny Strasberg, “The FBI Agent Who ‘Flips’ Insider-Trading Witnesses,” The Wall Street Journal, January 20, 2012.

  he agreed to cooperate: Susan Pulliam, “Wired on Wall Street: Trader Betrays a Friend,” The Wall Street Journal, January 16, 2010; also David Glovin and David Voreacos, “Dream Insider Informant Led FBI from Galleon to SAC,” Bloomberg News, December 2, 2012.

  Slaine agreed to make recordings of his conversations: U.S. v. David Slaine, No. 09 Cr. 1222 (RJS), January 9, 2012, government’s Sentencing Memorandum; Slaine’s evidence led to prosecutions of Zvi Goffer and Craig Drimal, both Galleon traders, as well as to the prosecution of many others. U.S. v. Goffer, No. 11 Cr. 3591 (2d Cir. 2013).

  the amount of the profit he got to keep: U.S. v. Steinberg, GX 2004, Sigma Capital Management, LLC 2007 Year-End Payout Calculation.

  Steinberg sent a strong message to Horvath: U.S. v. Steinberg, GX 2064, Jon Horvath performance review 2007.

  He relocated to the East Coast: U.S. v. Steinberg, testimony of Jesse Tortora.