Black Edge

by Sheelah Kolhatkar

  Bharara took a different approach. He brought in a professional media relations staff and tasked them with publicizing his accomplishments. He held press conferences and gave speeches. Suddenly, questions about how things would play out in the media started to creep into internal discussions about particular cases and how to handle them. In everything he did, Bharara made it clear that he saw himself moving on to bigger things.

  Hours after Rajaratnam was arrested, Bharara held a news conference. Television crews lined the back wall of a foyer on the first floor of 1 St. Andrew’s Plaza, and rows of folding chairs were filled with reporters scribbling on notepads. Bharara had rarely seen so many cameras. Standing at a podium emblazoned with the Department of Justice seal, Bharara announced that he was there to discuss an insider trading case that was “unprecedented” in nature, involving hedge funds managing billions of dollars and a handful of corporate insiders who leaked company secrets to them.

  “Today, we take decisive action against fraud on Wall Street,” Bharara said, his green eyes glinting, before outlining charges against Rajaratnam and five other people. “The defendants operated in a world of, ‘You scratch my back, I’ll scratch your back.’ ” He waited a second. “Greed, sometimes, is not good.”

  —

  Positioned at his trading station inside the New York offices of SAC Capital’s Manhattan office, Michael Steinberg couldn’t believe what he was reading. Raj ran a multi-billion-dollar hedge fund, and he was widely respected as an investor and a philanthropist. Raj’s brother Rengan had even worked at SAC in 2003, until Cohen fired him. It was hard to believe that the FBI could just show up at Raj’s doorstep without warning and take him away in handcuffs.

  He spotted Horvath walking by his office and gestured for him to come inside.

  “What’s up?” Horvath said, oblivious to the news that was rocking trading desks across the city.

  “Raj was arrested this morning,” Steinberg said.

  Horvath tried to remain calm. Inside, though, his stomach was churning.

  As soon as he was able to make a graceful exit, Horvath ran back to his desk and started scanning news reports about the arrest. He had to talk to Jesse Tortora right away. If there was a massive dragnet going on, their “fight club” emails had surely caught some regulators’ attention. SAC’s offices crackled with gossip about how the FBI had suddenly become aggressive about insider trading. The SEC had evidently started doing its job as well. So far, at least, few details about the extent of the investigation had been revealed. People could only speculate about who might be cooperating. A few days after the arrest, Horvath, Tortora, and Sam Adondakis met for an emergency lunch in Midtown Manhattan. They resolved to stop using email to communicate. They would have conference calls instead.

  Day by day, Steinberg seemed to Horvath to grow increasingly paranoid. “Don’t talk to other investors that you don’t really trust,” he told Horvath. “There are telephone conversations being recorded, and people are running around wearing wires.”

  —

  The street outside his office was noisy with Midtown traffic, as usual, but Michael Bowe fumbled to answer his cellphone anyway.

  “Yeah?” he said, a touch apprehensively.

  It had been a difficult few months for the forty-three-year-old Kasowitz Benson lawyer. Biovail’s lawsuit against SAC had been dismissed, which had been humiliating. The case had consumed most of Bowe’s time and energy for two years. But the far greater shame came from the fact that Biovail itself had fallen under scrutiny over its own accounting. The SEC had charged the company with fraud the previous year, accusing it of hiding losses from its investors. Biovail agreed to pay $10 million to settle the case. Bowe was catching a lot of flak for taking the case in the first place. Some of what the hedge funds had said about the company was right: It was a fraud. Bowe feared that it would be hanging around his neck for the rest of his career.

  It was Patricia Cohen on the phone, Steven Cohen’s ex-wife. Bowe hadn’t spoken with her in months. He wondered what had happened to her.

  She sounded excited. “Something big is going to happen,” she told him. “There’s going to be a RICO case filed against Steve.”

  Since they first spoke three years earlier, Patricia had been busy with her own investigation into her former husband’s activities, one that oddly paralleled what the FBI was doing. She was on a mission to make Cohen pay.

  Patricia’s kids were grown, and the project infused her with a sense of purpose. In 2006, she filed a Freedom of Information Act request with the SEC to obtain the files in the RCA-GE insider trading investigation from the mid-1980s. She got a copy of Cohen’s deposition in which he had taken the Fifth with the SEC, refusing to answer any questions. She had had no idea that the SEC’s investigation had gone as far as it had. She also called several of Cohen’s former colleagues from Gruntal to get a better sense of how much money he had been making when they were married—and what he had done with it.

  In the course of reading the SEC files about Cohen, she came across a mention of an old case file that the court had to retrieve out of storage, from 1987. It was another revelation.

  Unbeknownst to Patricia, Cohen had sued Brett Lurie, his former friend and real estate lawyer, over a real estate deal they had made in the 1980s. During their divorce, he claimed that the real estate investment with Lurie was worth nothing, which sharply reduced the amount of money he gave Patricia. Apparently there was a long and bitter litigation between Cohen and Lurie before they settled the case. At the end of it, Lurie was bankrupt, a wrecked man.

  Patricia was astonished by what she was reading. It looked to her as if Steve had definitely hidden assets from her. She was shocked by the way he seemed to have treated Lurie, his former friend. She also found a list of other accounts and mortgage loans that she never knew existed.

  A few weeks after her call to Bowe, Patricia filed a lawsuit charging Cohen, SAC Capital Advisors, and Cohen’s brother Donald with violating the Racketeer Influenced and Corrupt Organizations Act by conspiring to defraud her over a period of years. She included everything she had found in her complaint: her interviews with Cohen’s former Gruntal colleagues, the Lurie deal that had gone so bad, the documents she had acquired from the SEC. She alleged that her husband had confessed to trading in RCA based on inside information that he’d gotten from Bruce Newberg, a Wharton buddy who had worked as a trader for Michael Milken at Drexel Burnham Lambert until he was charged with securities fraud. Newberg, she alleged, had gotten the information from Dennis Levine, another Drexel executive who was later convicted. RICO was a federal law that had been passed in 1970 specifically to target organized crime. Patricia was using it to claim marital fraud. As part of her suit she demanded $300 million in damages. It was a bombshell. Cohen strenuously denied the allegations.

  Bowe shook his head as he read through it. He still couldn’t believe that rather than paying his ex-wife some money Cohen had chosen to fight her over it.

  —

  Dozens of people—drug company executives, board members, lawyers, bankers, investor relations staff, and doctors—were involved one way or another in the bapi drug trial. These were the so-called insiders, people at Elan and other companies who had access to closely guarded nonpublic information, such as details about how the trial was going. Charles Riely intended to track them down. He didn’t care how long it took. In order for this case to go anywhere, he needed to figure out who could have tipped off someone at SAC about the trial results.

  In late 2009, Riely began issuing subpoenas for each of the insiders’ phone records. Then he looked carefully through them, trying to figure out who had contacts inside the investment community. With the help of Neil Hendelman, an SEC investigator who specialized in analyzing phone data, they built a spreadsheet that quickly grew to dozens of pages.

  Riely’s childhood had prepared him for this sort of labor. He was the son of a nurse and a fighter pilot who flew a C-130 in Vietnam, and his upbrin
ging in North Dakota was something out of a made-for-television movie. His father had died in a training mission when Riely was six; his mother raised four boys on her own, filling them with a deep commitment to Catholicism, hard work, and personal discipline. Riely ran track at Yale before attending law school at the University of Michigan and working as an associate at the law firm Akin Gump Strauss Hauer & Feld. His older brother had gone to medical school at Johns Hopkins and his younger brother was a pilot, as their father had been, and Riely felt that he had a lot to live up to. Since joining the SEC in 2008 he had developed a reputation as a hard worker and an unwavering follower of rules. He did everything, even minor tasks, strictly as he was supposed to.

  As Riely squinted at the list of names on his computer screen, two people stood out. Both were doctors. One was Sidney Gilman, the presenter of the information at the medical conference that had prompted the Elan and Wyeth stocks to plunge in July 2008. The other was Joel Ross, one of the clinical investigators who had participated in the trial. From looking at Ross’s phone records, Riely and Hendelman were able to see numerous conversations with someone at an SAC number. Still, the records didn’t indicate which portfolio manager or trader at SAC Ross had been talking to. Riely started cross-referencing the mystery SAC number with other numbers of SAC employees the SEC had in its database. He googled incessantly and ran the numbers through directories. It required hours and hours of tedious work.

  Who was the trader? The question nagged at him. There had to be a way to find out.

  —

  As the SEC was gathering more details of the Elan and Wyeth trades, Mathew Martoma was struggling to repeat his spectacular success at SAC. His bet on bapineuzumab had been one of those once-in-a-lifetime accomplishments, one naturally followed by a severe case of performance anxiety. Martoma had received a $9.38 million bonus that year. Finding that level of success again wasn’t going to be easy.

  Cohen was eager to see whether his bapi trade could be replicated. Martoma had the potential to be one of the most valuable portfolio managers at the firm, ascending to the ranks of those whom Cohen relied on for ideas year after year. Martoma felt the weight of his colleagues’ expectations as he worked to come up with an investment idea as profitable as bapi.

  In 2010 he seized on InterMune, a biotechnology startup in California that didn’t have a single product on the market. What it did have was a drug in development, called Esbriet, that was designed to fight pulmonary fibrosis, a disease that afflicted roughly a hundred thousand people in the United States. An investment in InterMune was almost entirely a bet on whether Esbriet would obtain FDA approval. There were clinical trials under way and a great deal of hype, with analysts predicting that the drug could reach $1 billion in annual sales if it worked.

  Martoma aggressively recommended InterMune to Cohen. By the end of April, SAC and Cohen had accumulated almost 4.5 million shares. When, on May 4, the FDA announced that it would not be approving Esbriet, the effects were immediate and devastating. After closing at $45 the night before, the stock plunged to $9 the morning after the news came out as hedge funds sold their shares in a panic. Cohen owned more than 8 percent of the company. It was the kind of calamity that could end a trader’s career.

  After adding up the losses, Cohen met with his top deputies to discuss what to do with Martoma. He had hit his “down-and-out,” the amount of loss his portfolio could sustain before it triggered an automatic termination. But Martoma had goodwill in reserve because of the incredible profits he brought to the firm in 2008, an otherwise disastrous year for SAC. David Atlas, SAC’s chief risk officer, argued that they should fire him immediately; Tom Conheeney and Sol Kumin, who had recruited Martoma, thought that they should let him stay and try again. They eventually persuaded Atlas to their view. Cohen agreed to give Martoma another chance. But he was clear that this would be it.

  Ecstatic to hear the news, Martoma wrote an effusive email to Cohen. “I want to THANK YOU again for your decision last week,” it began. “I realize the outcome could have been different. Clearly, there is a long road ahead for me to restore your faith in my process, performance and risk management. I will do everything in my power to bounce back quickly.” He went on to explain that he had “debriefed” the CEO of InterMune, who had explained that the FDA’s decision was tipped in the “negative direction” at the last minute, the result of some sort of unusual intervention by a senior official.

  “SAC is a special place to me,” Martoma continued. “Having attended graduate and undergraduate programs at Harvard, Stanford and Duke; founded/sold my own healthcare company; and worked as a Director at the largest federally funded science initiative in the last 3 decades, I have a variety of experiences to compare against my time at SAC. Through it all, it’s clear to me that I am in my element here at SAC….I want people outside the firm to realize how inspiring this place is.” He went on: “This week’s events were extremely disappointing to me, but I believe they are just a speed bump on my path here. I still have a lot to offer, and am thankful that you are giving me a chance to prove it. Respectfully yours, Mat.”

  His painful attempts at flattery would get Martoma only so far. He soon learned how SAC was structured to punish portfolio managers who lost money. The firm reduced the amount of capital he could invest, which made it more difficult to make up for his losses; it created a sort of self-fulfilling vortex that was almost impossible to get out of. Martoma quickly hit his loss limits again.

  Finally, in May 2010, Atlas again recommended that Martoma be let go. This time, Conheeney agreed. Martoma was “expendable,” Conheeney argued, and SAC had plenty of other portfolio managers who did what he did, only more consistently and without the big losses. Conheeney also pointed out that, aside from the bapi trade, Martoma hadn’t suggested any other profitable ideas during his almost four years at the firm. In an email to Cohen, Conheeney wrote: “He’s really been a one trick pony with Elan.”

  —

  Just after 10 P.M. on Friday night, November 19, 2010, The Wall Street Journal posted an article on its website that would appear in the newspaper the next morning. “U.S. in Vast Insider Trading Probe,” the headline read. It was like the setup to a legal thriller.

  “Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter,” it began. “The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.”

  The article had a shocking number of details about what the FBI and the SEC were doing—things that up until then had been completely secret. It identified the expert network firm PGR as one of the main targets of the investigation. It mentioned a handful of drug companies the government was looking at. It also reported that Richard Grodin, C. B. Lee’s former boss at SAC, had received a subpoena.

  For the government, it was a devastating leak that would alter the course of the investigation. Wall Street was now on notice that the Justice Department was waging a campaign that was much bigger than anyone had suspected. The Raj Rajaratnam case was only the beginning.

  A former SAC portfolio manager named Donald Longueuil reacted to the story with particular alarm. He had been fired from SAC for poor performance the previous April. He was looking for another high-paying hedge fund job, and his wedding was only three weeks away. Now he had this to deal with.

  Longueuil was intensely competitive, a mindset he brought to his work. Tall and lean, with a shaved head, he spent most of his free time training for cycling races. He was also a winter sports enthusiast and had tried to make the 2002 U.S. Olympic speed-skating team after graduating from Northeastern University. In 2008 he joined SAC as a technology portfolio manager.
During his time there, he became friends with another SAC portfolio manager in Boston named Noah Freeman, a Harvard graduate whom he’d met competing with the Bay State Speedskating Club. Both men were in their early thirties and driven by an obsession with winning their various athletic endeavors. Freeman was so intense about it that one triathlon group, known as “Team Psycho,” kicked him off for being unsportsmanlike.

  At home in Midtown Manhattan with his fiancée, Longueuil read the article again. It was as if the piece were about him and his hedge fund friends. He looked at his fiancée, wondering if his life was about to blow apart. He still couldn’t quite believe that she was marrying him. In addition to being blond and just about perfect-looking, she had a biology degree from Princeton and an MBA from Wharton, where she’d been a competitive rower, and she now had a great job at the Boston Consulting Group. Freeman was going to be his best man.

  During his eight years on Wall Street, Longueuil had built an extensive network of information sources, including at Apple and Texas Instruments. He seduced them with expensive dinners and golf outings, as well as the occasional night at a strip club. And they, in turn, supplied him with inside information that he had traded on while he was at SAC.

  Because the material he got from his sources was so voluminous, he’d become a diligent note-taker, saving details from every conversation so that he could track the quality of the information over time. He and Freeman shared the information and traded on it together, along with another friend of theirs, Samir Barai, the manager of a small hedge fund. Still, even with that extra boost, things had been difficult at SAC. Longueuil used to complain that even with all the cheating going on, you still couldn’t make that much money because the market had gotten so competitive. Hence the firing by Cohen.