Circle of Friends (36 page)

Bharara was said to be angered by not being part of the media event. Later that day he held a meeting with Janice Fedarcyk, the head of the FBI New York bureau to discuss his concerns mainly with some of Chaves's comments during a briefing with reporters to unveil the Douglas spot. According to people close to him, Bharara was annoyed that Chaves appeared to have mocked him during the briefing. “Nobody over here would do that to you,” he told Fedarcyk. According to FBI sources, Fedarcyk said some people in the bureau believed Bharara's press office had planted stories that failed to mention the FBI's contribution to the case. Bharara said taking credit for the success of the investigation was never his intention.

In the end, both sides called for a truce in the publicity battle. The cheaply done video, meanwhile, had some impact; people at the FBI say they received a couple of dozen insider trading tips.

S
anjay Wadhwa was a mere spectator during the Rajaratnam trial and the publicity war that broke out between the FBI and Justice Department, but that didn't mean he wasn't busy. He was no longer a staff attorney. Thanks to his work on insider trading, he had been appointed an associate regional director in the New York office of the SEC, meaning he was one of a handful of officials in charge of various investigations.

His star was certainly rising. Wadhwa now held meetings with the new SEC chairwoman, Mary Schapiro, and with Bharara as well. His meeting with Bharara was said to be wide-ranging and included a discussion about how two South Asians like themselves handled the obvious fact that they were busting up criminal conspiracies that dealt with people of the same heritage.

Wall Street is a big place, and Wadhwa's teams looked beyond insider trading for white-collar crimes. He had a case brewing against the New York Stock Exchange for allegedly providing better access to information to big hedge funds that trade through the exchange than to other investors.

But his main focus was insider trading, where he had a laundry list of potential new targets that he hadn't even made a dent in yet, a list he once described by separating his hands a yard apart, a smile on his face.

Many of the cases related to mopping up what was left of the Rajaratnam circle and investigating the expert networks. Others involved SAC Capital and trades flagged by regulators as being suspicious, including some heavy trading in drug-company stocks.

Wadhwa's star was rising and it was his turn to get some good publicity for it. The normally understated investigator agreed to cooperate for a long profile in
BusinessWeek
. With that, the backstabbing that once was directed at Bharara from the Justice Department and the FBI now focused on Wadhwa. Some people inside the Justice Department openly began to downplay his role in the investigations, as if he and his team had never met Rajaratnam and had never brought his case to the FBI in the first place.

Truth be told, there would be no investigation without Wadhwa and people like Michaelson at the SEC, and many FBI agents and federal prosecutors owe at least part of their government careers to his efforts.

Add enforcement chief Robert Khuzami to that list. “Look what we did to [Angelo] Mozilo and Goldman Sachs,” Khuzami snapped after reading a column about how the SEC had focused on the low-hanging fruit of insider trading while bigger white-collar criminals went free.

Khuzami had come to the commission more than three years earlier vowing to restore the agency's former status as the gold standard in the federal regulatory system. In late 2012, he was now ready to step down and return to a highly lucrative job in the private sector, but the commission had barely made a dent on many key issues.

Khuzami did much to restore the SEC's
image
. The sin of missing the Bernie Madoff scam was still hanging over the SEC, and will never be fully expunged from its history, but Khuzami at the very least made it a sin of the past.

The new and allegedly reinvigorated SEC, with Khuzami leading the charge, raked in record numbers of enforcement cases. Khuzami's investigators took on Goldman Sachs and Angelo Mozilo, the former chief of the company that sold many of the toxic mortgages at the heart of the banking crisis, Countrywide Financial.

Yet the markets were still fractured, with technology issues more than occasionally disrupting the normal flow of trading. Facebook's IPO was a disaster after a trading meltdown on the Nasdaq stock market caused more havoc than any insider trading scheme. That fiasco was immediately followed by another trading malfunction at Knight Capital. The phenomenon known as a
flash crash
was a few years old by now but regulators at the SEC were no closer to figuring out how to stop them. Small investors appeared oblivious to how much time Rajaratnam was spending in jail; fearing the next meltdown, they kept buying bonds and gold.

The abuse of credit default swaps—where traders could buy these contracts (a bet that a company might default on its debt), short a company's stock, and profit from the market fear it would produce—went unaddressed as if the financial crisis in which they played a part had never happened.

And for all the SEC's chest-thumping regarding the Goldman case and charging Mozilo, not a single major bank chief was charged in a financial-crisis-related crime. Even MF Global's Jon Corzine, whose bets on risky European debt led to $1 billion of his customers' money being lost, escaped prosecution.

But Khuzami had insider trading. In 2011, his division filed more enforcement actions than ever before, and came one shy of the record in 2012. Much of that spike was the result of insider trading, and Khuzami rarely missed an opportunity to tout how the SEC was back to being the tough cop on the beat of Wall Street, even if the cases could be traced to his predecessor, the allegedly listless Chris Cox.

And he may be doing it by expanding the definition of what constitutes a dirty trade. Many of the defense attorneys representing clients snagged in this probe say he has. They point to a 2012 speech by an associate director from the agency's New York office, David Rosenfeld, who, according to people present, put traders on notice not to have private, one-on-one meetings with company officials because of the chance that nonpublic information might be shared. Rosenfeld even suggested that any working relationship with an expert network—even one that doesn't involve swapping nonpublic tips—will raise suspicions among prosecutors and regulators.

An SEC spokesman said in response that Rosenfeld was just alerting people “to be careful,” as was his boss Khuzami, who in interviews with reporters explained how the SEC was cracking down on this vice “that is baked into the business model of many hedge funds.” Khuzami has made a good case that the SEC, being a government agency, has limited resources, so it can only file insider trading charges for activities that are clearly illegal.

Still, an even bigger perceived threat came in March 2011 during congressional testimony, when Khuzami appeared to set his own standard for what might prompt an investigation of suspicious trading. “We're now doing things like canvassing all hedge funds for aberrational performance.”

Khuzami had ordered his troops to be “proactive” in looking at fraud including suspicious trading after all the screwups in recent years, from Aguirre to Madoff. As a result, he defined such performance as when funds beat “market indexes by three percent and [are] doing it on a steady basis.”

He might as well have said, “Note to Stevie Cohen: That means you.”

CHAPTER 14

STEVIE IS WORRIED

I
've had a rough six months,” Steve Cohen told
Vanity Fair
magazine in a lengthy July 2010 piece written by veteran business writer Bryan Burrough, the author of
Barbarians at the Gate
. The best-selling book is considered a classic. It chronicled the epic takeover battle of RJR Nabisco, and the insanity of the 1980s takeover mania in all its gory details.

But Burrough was also the author of one of the worst business articles ever written about the 2008 financial collapse, a long
Vanity Fair
feature on the demise of Bear Stearns, the first firm to implode during the crisis. He pinned the firm's collapse not on its CEO, James Cayne, who spent much of his time playing golf, attending bridge tournaments, and smoking weed, nor on the firm's hyper-aggressive, risk-taking culture, or even its senior management team, regarded as the weakest on Wall Street.

In Burrough's opinion, Bear's implosion was the result of media bias: reporters (this author included) who were only too willing to report all the bad stuff about Bear, and none of the good things, until a market frenzy developed that crushed the firm's stock price, caused lenders to pull lines of credit, and drummed a once-great firm out of business.

This odd critique (Joe Nocera of the
New York Times
called it an “apologia” for Bear's feckless management) may have been the reason why SAC's media adviser Sard Verbinnen welcomed the news that Burrough wanted to do a profile of Cohen. Finally, Cohen's flacks had found someone who might accept the most positive spin on an increasingly difficult set of circumstances faced by the SAC chief.

Sard Verbinnen was no stranger to media challengers. The firm, and its top executive George Sard was Martha Stewart's press adviser when she was charged and stood trial in 2004 for lying to investigators about her suspicious trade of ImClone stock. Based on the facts at hand, it was a pretty open-and-shut case. At least that's what the jury thought, convicting Stewart after a relatively short deliberation. But Sard's aggressive counterattack had much of the media coming to her defense, describing Martha as a successful businesswoman battered by prosecutors looking for some cheap headlines in the aftermath of the tech meltdown in 2000 and 2001.

It would be hard to make Steve Cohen a victim of a sexist vendetta, but the firm's advice to Cohen was along the same lines: Go on the offensive, start making some public appearances, and open up to a friendly reporter. Burrough became that reporter.

The PR problem Cohen had was pretty obvious. People who had heard of Cohen—including average people who sit on juries—would know the characterization of him mainly from what
60 Minutes
reported back in 2006: He was a shadowy, secretive multibillionaire who lived in a secluded mansion, collects art, and does sleazy things to make a buck.

The reality was somewhat different. He wasn't quite the recluse the media made him out to be, and he was far from greedy. He and his second wife, Alexandra, raised tens of millions of dollars to fund a pediatric wing for New York Presbyterian Hospital in the immigrant-heavy Manhattan neighborhood of Washington Heights, where Alexandra grew up. He has given millions more to the North Shore-Long Island Jewish Hospital to fund another pediatric care center.

This reality, and little else, is what Cohen's media handlers wanted portrayed in the article. Burrough is, of course, a smart and gifted writer, and his long piece contained a rare interview with Cohen as well as a few interesting revelations about SAC. Cohen's trading desk operates without telephones that ring (which would distract his traders) and the room is kept at a temperature of 68 degrees so traders remain alert. He also said that investors shouldn't expect those blowout years they had in the past, where SAC cranked out returns above 50 percent. “We're not going to generate those larger numbers now that we are bigger,” he said. After all, it's hard to crank out such large numbers when you're managing $14 billion in assets.

Maybe the biggest takeaway: Burrough made it clear that Cohen believes he has been made a scapegoat by a media gone mad over insider trading. Cohen told Burrough he hated being put in the same category as crooks like Rajaratnam, and rightly pointed out his fund's pristine regulatory record. If individuals at SAC have been responsible for bad conduct, that's because they violated company policy. The firm itself hasn't been touched.

“I could not understand it,” Cohen said, referring to the media interest in his firm's trading. “What the hell was going on. It was like a circus, a fucking circus.”

The article, however, was short on new details about the firm and how the various investigations were circling around SAC and the simple fact that regulators kept coming up with suspicious trades flagged out of the hedge fund, or even how Cohen's returns defied their logic—namely because it's impossible to beat the markets that consistently. Warren Buffett doesn't do it year after year, so why should Stevie Cohen?

Speaking about “Stevie,” Burrough quoted Cohen saying he hated the name by which he's been known during his nearly thirty-year Wall Street career. “I mean, they still call me ‘Stevie,' and I'm fifty-four years old. It drives my wife crazy.” The article also said that Cohen was thinking about getting out of the hedge fund business sometime soon—something that his PR people would later retract.

“There's a lot of other things I can do,” Cohen told Burrough. “I've been to the top of the mountain, and there's not much there. My dream is to liberate myself. So is that a midlife crisis? Or is it just being fucking smart? I don't know. But it's exciting.” It was a bizarre statement coming from a man known equally as a control freak and as obsessed with investing, somewhat reminiscent of the weird comments he made the last time he opened up to the press during his brief and unfortunate career in tabloid TV about twenty years earlier.

But if the intent of the article was to humanize Cohen enough to give regulators second thoughts about pursuing him, it failed miserably. In fact, it only whetted their appetites. The media only cared about Cohen and SAC because reporters' sources in the SEC and the Justice Department had made the hedge fund a priority in the insider trading crackdown.

His remark about returns now falling back to earth only suggested to prosecutors in the Southern District that SAC knew it had problems and was taking steps to ensure complete compliance with insider trading laws after years of ignoring them. The increased compliance meant fewer dirty and profitable trades.