For the previous year, Makol had been investigating an insider trading ring that was separate from the ongoing Raj Rajaratnam case. An analyst at a hedge fund called Chelsey Capital was allegedly getting inside information from a friend who worked on the investment review committee at the Swiss bank UBS. The friend was telling the hedge fund analyst about changes UBS analysts were making to their stock and bond ratings before the bank made them public, and the analyst, Makol believed, was trading on the information. The FBI was set to arrest him when the analyst flipped and agreed to give up the names of others he knew on Wall Street who were breaking the law. One of those he turned in was his colleague from Chelsey, a former Galleon trader named David Slaine.
When Slaine came to the door, Makol held out his badge. “I’m here to talk about insider trading,” he said. Makol described the evidence the FBI had against him and raised the threat of a long prison term. “You might never see your daughter again if you don’t cooperate,” he told Slaine, who was married with one child. By the time Makol was done, Slaine was badly shaken. After consulting with several lawyers, he agreed to cooperate.
Cooperation consisted of dozens of interview sessions with Makol, who questioned Slaine for hours about everyone he’d ever worked with and any criminal activity he might have seen. In order to avoid prosecution, Slaine had to prove to Makol that he wasn’t holding anything back. No one could be spared, not even the people closest to him.
Slaine seemed to be surrounded by people who were trading on inside information, some of it obtained from corporate lawyers, some from other traders. The FBI wanted to go after all of them. Slaine agreed to make recordings of his conversations, placing phone calls to his Wall Street friends and sources as Makol directed. Still, even after his efforts, the evidence felt anecdotal, not necessarily enough for criminal cases. In order to expand the investigation, the FBI agents and the prosecutors they worked with needed overwhelming evidence that couldn’t be beaten in court. How could they get it? Makol puzzled over this question during a meeting with his supervisor, David Chaves, and Reed Brodsky, the prosecutor who had taken the lead on the Slaine case.
“We need to take this to the next level,” Brodsky said.
Brodsky went to his boss, Raymond Lohier, the head of the securities unit at the Manhattan U.S. Attorney’s Office. He complained that they were having trouble moving the cases forward.
“Have you thought about getting up on a wire?” Lohier asked. “You need to find someone to ‘tickle’ the phone and get it dirty. You need to bring up fresh information to get permission.”
To persuade a judge to authorize a wiretap, prosecutors couldn’t just go on hunches or educated guesses. They essentially had to show that criminal activity was being discussed over a specific phone line—i.e., that it was “dirty.” Wiretaps hadn’t been used in insider trading cases before, but the insider trading rings were in many ways similar to organized crime. And like crime syndicates, many of the hedge funds the FBI was looking at were secretive and hierarchical, with the lower-level workers doing questionable things while the bosses at the top maintained intentional ignorance and reaped most of the benefits. The FBI felt that it needed the same tools it had used to investigate the Mob. Makol helped Slaine make a recording of a call with one of his best friends, a Galleon trader named Zvi Goffer, in which they discussed illegal information. Using this as evidence, the government got permission to wiretap Goffer’s phone. Soon, the FBI’s wire room came to life.
—
In spite of the dismal performance of the stock market that year, 2007 was a profitable one at SAC. Michael Steinberg’s group alone made more than $27 million, even after the losses in NetApp. Steinberg’s payout—the amount of the profit he got to keep—was 31 percent. It was his responsibility to pay bonuses to the analysts and traders in his group out of that based on how much he felt they contributed. Money was how a person’s value was articulated at SAC, and Steinberg sent a strong message to Horvath by giving him a relatively modest $416,084 bonus, compared to the $1.5 million that went to another analyst in Steinberg’s group. Horvath could tell that he was at risk of being fired. He rang in the New Year with a commitment to do better.
He thought about everyone he knew, trying to figure out who might be in a position to help him get the kind of information his bosses at SAC wanted. All sorts of relationships could potentially be useful—his parents, his friends’ parents, neighbors, doctors, ski partners, anyone he came into contact with might have access to valuable corporate information, even if they didn’t know it. In some cases it might come from an obvious place, like an analyst at another hedge fund who was out looking for edge himself. One friend of Horvath’s in particular, an analyst named Jesse Tortora, seemed eager to share.
Tortora was the opposite of Horvath—polished, confident, connected, or at least he seemed so on the outside. He had followed a common route into the hedge fund world. After getting an engineering degree, he worked at Intel for three years before becoming a technology analyst at Prudential Securities. From there, he was able to use his former Intel colleagues as sources of information about the semiconductor industry, information he then passed on to analysts at a bunch of mutual funds and hedge funds, including Galleon and SAC, which were clients of Prudential. When Prudential shut down its stock research division, Tortora lost his job. He relocated to the East Coast and interviewed for an analyst position at a hedge fund called Diamondback Capital. His connections at technology companies helped get him hired.
Tortora sensed instinctively that you needed inside information to make money at a hedge fund. Good information wasn’t easy to get, though; securing it took months of building trust and relationships with employees who had access to the internal goings-on at big companies. Tortora had some of those contacts in place already, but he was always on the hunt for more. He figured that he and his friends could make the most of the intelligence they got if they shared it with each other, a sort of “fight club” of inside information. He suggested the idea to Horvath, who readily signed on. Then Tortora invited a few others to join, people he knew and trusted, including Sam Adondakis, an analyst at a hedge fund called Level Global Investors with whom he’d worked at Prudential, and Ron Dennis, another SAC analyst who was a former client from Tortora’s Prudential days. Dennis said yes, on one condition: He told Tortora never to email him the information, he only wanted to communicate by phone.
The caution expressed by Dennis about using email should have given Tortora a reason to stop and question what he was doing, but it didn’t. Instead, he went ahead, putting everything down in writing. “Rule number one about email list,” Tortora wrote to Horvath, Adondakis, and three others when he introduced them to one another. “There is no email list (fight club reference).” He added: “Enjoy. Your perf will now go up by 100%…and your boss will love you.”
—
The economy was officially in a recession by early 2008, and real estate prices across the country were collapsing. The drops were most extreme in places like Las Vegas and Miami, where speculators had flooded the market, but the rest of the country was suffering, too. For the first time since 2000, home prices in ten major U.S. cities fell more steeply than they had at any time since 1987. All the banks that owned those home loans were in trouble. On January 11, Bank of America announced that it was buying Countrywide Financial, saving the huge mortgage company from bankruptcy. That was just the beginning of a series of rescues and bailouts of financial institutions whose insolvency threatened the financial system.
Just as the financial crisis hit, SAC reached its peak, with close to 1,200 employees and almost $17 billion in assets, half of which belonged to Cohen and his employees. Since its founding in 1992, the firm had gone through several reinventions: first a day-trading shop staffed with Cohen’s college friends; then a more professional operation with Ivy League types; and finally a research and intelligence-gathering machine filled with analysts who specialized in different industries. It
s final expansion had been the most ambitious. Cohen had pushed the company into every corner of the market, opening offices in Asia and Europe, launching a private equity unit to take stakes in private companies, and starting a bond trading group, an area he knew little about but that now accounted for a quarter of his fund. SAC’s returns had averaged 30 percent over the previous eighteen years, an impossibly high level of performance that was several times greater than the average market return. Cohen was one of the richest men in the world, worth nearly $10 billion.
He and his traders made little effort to conceal their good fortune. For evidence of the firm’s success, you didn’t need to look any farther than the SAC parking lot in Stamford. One portfolio manager drove a Mercedes with gull-wing doors, another had a Maserati, while still another, who had started as an intern not long before, drove a brown Bentley Continental. The president of the firm, Tom Conheeney, commuted to work on a Ducati motorcycle and sometimes parked his cigarette boat in the lot. SAC traders were known to travel to weekend golf games by helicopter.
One day a consultant trying to leave after a company visit accidentally put his car into the wrong gear in the parking lot and backed into a $150,000 Mercedes, a Series 7 BMW, and a Ferrari owned by an SAC trader. The consultant was aghast and started apologizing, certain he’d be fired or worse. Although the owner of the BMW, a woman, screamed at him, the men whose expensive toys were affected remained calm. The trader who owned the damaged Ferrari shrugged and said, “I’ll just drive the other Ferrari.” Even by the money-obsessed standards of Wall Street, SAC’s extravagance stood out.
Between 2006 and 2008, SAC had doubled in size, and the firm’s top traders and analysts were pampered like Thoroughbreds. Three masseuses were on the payroll to work on their tense muscles. Crystal was their favorite; she was a specialist in Thai massage who walked on traders’ backs, working their IT bands with her heels. Masterpieces from Cohen’s personal art collection, which by then was valued at $1 billion, adorned the walls. In his office he showcased a quirky piece titled Self, by the conceptual artist Marc Quinn, which prompted a few snickers around the office. It was a sculpture of the artist’s own head, made from eight pints of his blood that had been poured into a mold and frozen. Cohen had a custom refrigeration system installed to keep the sculpture at the necessary temperature. He had purchased the work in 2005 from Charles Saatchi for $2.8 million, a few months after he’d paid $8 million for another flashy showpiece from Saatchi’s collection, Damien Hirst’s shark suspended in formaldehyde, called The Physical Impossibility of Death in the Mind of Someone Living. People made jokes about the shark, an ironic ode to Cohen himself, the ultimate predator.
There was almost no time in a twenty-four-hour day Cohen didn’t use for a moneymaking purpose, and he attributed much of SAC’s success to this work ethic. Cohen got up early and studied the market at home before being driven to the office by 8 A.M. by a bodyguard in a gray Maybach. He arrived to find a bowl of hot oatmeal wrapped in cellophane waiting on his desk. His station at the center of the trading floor resembled a cockpit, with twelve monitors mounted in front of him. Because Cohen’s time was so valuable, most activities—from haircuts to meetings—were scheduled so as to not distract him from his screens between 9:30 A.M. and 4 P.M. “Everything happened at his desk,” said one trader who sat at his elbow for years. “Everything.”
Cohen was so focused on making sure that he had access to every piece of available information that he hired research traders to filter through his messages and make sure that he saw the important ones. Any time he traveled to Las Vegas to visit his parents, or to Brown University, where Cohen was on the board of trustees, or on his yearly summer vacation with Alex, an advance team of consultants made the journey ahead of him. He rented an extra room wherever he was staying and used it as a staging area where his staff re-created his trading station in such detail that he could hardly tell he was away from his office.
Every Sunday around noon, Cohen sat down at his desk in his home office with a yellow notepad in hand. His portfolio managers called in one by one to pitch their best trade ideas for the upcoming week. It was called the Sunday Ideas Meeting, and it was a source of constant anxiety among SAC’s employees. Each conversation typically lasted five minutes, with Cohen’s research trader also joining them on the line to take notes. Portfolio managers were expected to have a moneymaking idea to pitch him and an accompanying “conviction rating”—a way of conveying how sure they were that the investment would pay off.
The traders who worked directly for Cohen, executing the trades in his own book, were called “execution traders,” and they, much like actual executioners, did what they were told and did not ask questions. They were known around Wall Street as Cohen’s “henchmen,” because they had the thankless task of burning other people in the market each day on behalf of their boss. At the same time, they had to try to maintain good relationships with those same people so that they could get access to information and the flow of trading activity each day. It was an awkward job.
A typical weekday morning in the life of a henchman might hypothetically go as follows: After the oatmeal was consumed and the market opened, Cohen would shut off the “Steve-cam,” an audio and video feed that broadcast his movements and his conversations to everyone on the trading floor, and take a phone call. After a few minutes he would hang up. Because he was in “private” mode, his staff could only guess what was being said. Then he might turn to one of his execution traders with an order: “Short 500,000 Nextel.”
The trader would turn to the guy in charge of stock-loan, the department responsible for borrowing shares of a stock from another firm so that SAC could sell them short: “Get me a borrow on 500 Nextel.”
The trader would then make a call to, say, his Bear Stearns broker with an order to short the stock. “I’m a seller of 500 Nextel.”
The Bear broker would know that the order was coming from Cohen and, for self-preservation reasons, would try to find out as much as he could about the motives behind it before responding. “What are you thinking?” the Bear guy might ask.
“You know where it’s coming from,” Cohen’s trader might reply. Translation: “Stevie is selling, that’s all you need to know.”
The Bear broker then had a decision to make: Either take the 500,000 shares off of Cohen’s hands and try to get rid of them, knowing full well that the greatest trader on Wall Street, Stevie Cohen, was selling them short for a reason. Or refuse what was certainly the crappy end of a transaction—taking the opposite side of a trade with Cohen—and risk alienating one of the firm’s most valuable customers.
In all likelihood, Bear Stearns would buy the stock, and Cohen’s trader would report back to his boss: “Sold 500 Nextel.”
“You get the best price you could get?” Cohen would ask. Yes, the trader would say, he got the best price. Great, Cohen would say, now go short 500,000 more.
Then Cohen’s trader had a dilemma. “Do you call Bear Stearns again?” said a trader at a rival fund who was familiar with the strategy. “No, ’cause they’re going to ask what the fuck you’re doing. So you call Morgan Stanley.”
So Cohen’s trader would call Morgan Stanley and say, “I’m a seller of 500 Nextel. It’s gotta be tight,” meaning, it’s got to be for the best possible price. Morgan Stanley might offer to buy it at $21¾. The trader would say, No, it’s got to be $22. Morgan would go through the same calculus Bear had, take the shares, and then turn around and try to sell them in the open market, and that would push the price down even more.
Suddenly Bear Stearns, which had managed to sell only 200,000 shares out of the 500,000 it just bought from SAC, would want to know what the hell was going on. The SAC trader would stall—he didn’t fucking know, he was the execution trader and he was doing his job: executing. Then the SAC trader would have to go to his other brokers and keep selling Nextel, shorting more shares until Cohen said he didn’t want to sell any more.
After the ma
rket closed, Nextel might preannounce negative earnings, warning Wall Street that its next quarter would be a disappointment. The stock would dive $3. Cohen would have made $3 million, while the Bear trader lost $900,000, Morgan $1.5 million. Cohen’s trader promised to pay them back with future commissions.
Every day it was “I’m going to destroy you today and make it up to you later.” Year after year, Cohen’s employees would watch in astonishment as this same scenario played out again and again with different stocks and different situations. No one ever got the better end of a deal with Stevie Cohen.
—
As the financial crisis gathered strength, even some of the richest people in the world started to worry about whether their fortunes were secure. Cohen, who was normally impervious to feelings of panic, started warning his traders and portfolio managers against taking too much risk in the market. For years, Wall Street had made billions of dollars off the booming housing market and the baffling array of mortgage products and derivatives that emanated from it. Certain that the value of their homes would only go up, millions of Americans borrowed recklessly against them, aided and abetted at every step by the financial industry. Between 2000 and 2007, Wall Street had made more than $1.8 trillion worth of securities out of subprime mortgages. Now all of that looked suspect.
By 2009, three powerful forces began to converge on SAC. One was the larger economic climate, which was looking more unpredictable with each passing day, making traders desperate for a sure way to make money. The second was Cohen’s own personal ambition, as strong as ever but morphing in nature. His days as a cowboy investor were over. He wanted more substantial investment ideas, produced by the kind of research and connections that smaller, less sophisticated rivals couldn’t mimic. Finally, there was the government. Wall Street regulators were beginning to understand that if they wanted to bring order to the financial industry, funds like SAC would have to come under far more intensive scrutiny.
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