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NEW YORK (Reuters Breakingviews) - Steven Cohen is a litmus test of people’s views about finance and its role in society. Is the billionaire hedge-fund manager a supremely gifted trader or a pathological rule-breaker? Is he a self-made man or an avatar of the ultra-wealthy? Is he an art connoisseur or a crass arriviste?
All these traits are on display in “Black Edge,” Sheelah Kolhatkar’s riveting account of the U.S. government’s decade-long failed attempt to bring Cohen down for insider trading. As the title makes clear, the author favors the darker interpretation.
Cohen’s secretiveness – he has given only a handful of on-the-record interviews in nearly four decades – has helped stir the media’s fascination. Countless column inches and pixels have been devoted to the outsized returns earned by his SAC Capital, speculation that the hedge-fund manager traded on inside information, and the record $1.8 billion settlement Cohen's firm struck with U.S. Attorney Preet Bharara in 2013, under which SAC pleaded guilty to securities and wire fraud and agreed to stop managing outside money.
Yet with meticulous research and a keen eye for detail, Kolhatkar finds plenty fresh to say. She describes Cohen’s rise in the late 1970s and early 1980s at New York brokerage Gruntal & Co, where he went from the options desk to earning millions of dollars a year running his own proprietary fund. “It wasn’t so much that Cohen was smarter than other traders, but he had conviction in his instincts and he acted quickly,” she writes.
Cohen personified the rise of the hedge-fund industry. Striking out on his own with just $23 million in 1992, he built SAC from a glorified day-trading shop staffed by a handful of gruff traders with Long Island accents to a $16 billion firm with hundreds of Ivy League-trained analysts and portfolio managers.
As the firm and the industry grew, so did the competition for trading ideas, or "edge." At first Cohen wielded the firm’s clout – its trades accounted for up to 3 percent of the daily volume on the New York Stock Exchange – to demand a first look at investment banks’ best ideas. When former New York State Attorney General Eliot Spitzer cracked down on Wall Street research in 2002, the focus shifted to so-called expert networks. These organizations enabled industry insiders to pass valuable information to traders in return for payment, and SAC was among their biggest clients.
“When the incentives were so huge, and you had so many funds competing to the death, how else could you rise above everyone else and beat the market year after year?” Kolhatkar writes.
Federal investigators were asking the same question. Bharara’s team convicted Galleon Group chief Raj Rajaratnam of insider trading in 2011. But Cohen insulated himself from anything his traders were doing with a system that required portfolio managers to share their best ideas and rate their conviction on a scale of one to 10. The unspoken assumption, according to Kolhatkar: a rating of nine or 10 signaled a manager had inside information, the “black edge” of the title.
Drawing on exhaustive court records, Kolhatkar gives her tale an authentic feel unlike the imagined dialogue of many business books. An FBI agent confronted former Galleon trader David Slaine at his front door one morning in a bid to persuade him to become a witness. “I’m here to talk about insider trading,” the agent said. “You might never see your daughter again if you don’t cooperate.” The tactic worked as often as not. Mathew Martoma, the portfolio manager who was central to the government’s case against SAC, fainted in his driveway after being confronted by another agent.
Martoma had spent two years cultivating a doctor for details about clinical trials of a drug for Alzheimer’s that was being developed by pharma giants Elan and Wyeth. That information was worth $275 million to SAC, the government contended. Martoma was convicted and is serving a nine-year sentence, but refused to implicate Cohen. Bharara had to settle for prosecuting the firm rather than its boss. That and a later deal between Cohen and the Securities and Exchange Commission left him temporarily restrained from managing other people's money - but not handcuffed.
There are few financial-industry struggles as titanic as the one portrayed in these pages. In 2014 an appeals court threw out insider-trading convictions against Anthony Chiasson and Todd Newman, two traders nabbed as part of the SAC investigation, and made it much harder for prosecutors to bring fresh cases. Meanwhile, President Donald Trump’s administration is looking to roll back financial regulation.
Though Bharara still polices the Wall Street beat, many have changed sides. Lorin Reisner, who helped negotiate SAC’s fine, now works at the law firm that supplied Cohen’s legal defense. Bharara’s deputy on the Cohen case, Richard Zabel, works for a hedge fund, Elliott Management.
Cohen, meanwhile, earned an estimated $2.5 billion in 2014 running his family fund, Point72 Asset Management. He will be free to manage outside money next year and has already launched a new firm, Stamford Harbor Capital. News reports suggest he's spending heavily on tools that analyze big data. The new information edge is digital, and Cohen appears as determined as ever to win.