Circle of Friends (37 page)

The “circus” Cohen complained about would only get crazier in the coming months. In fact it got so crazy that Sard couldn't possibly find any reporter whom he could get to bite on even a semi-positive yarn about the trader and the company that had so obviously become a leading figure in the eyes of the federal insider trading police.

Of course there were other players in the ever-unfolding enforcement drama, which the government agencies were fighting to take credit for no matter how lowly the analyst being arrested and charged. Some, of course, weren't so lowly. By October 2011, Rajat Gupta was finally arrested in what the feds were calling the most significant insider trading bust since the 1980s crackdown yielded junk bond king Michael Milken. Signing his indictment papers was one of the last major things Streeter did before going into private practice. Gupta's lawyer, Gary Naftalis, a former assistant U.S. Attorney in Manhattan and longtime white-collar attorney, proclaimed his client's innocence. Rather than antagonize the prosecution, he immediately reached out to his adversaries and promised a professional fight.

Gupta wasn't without his friends in high places, and they could, Naftalis promised, all testify to his unblemished record in the private sector and his substantial charitable acts during his long career, he told prosecutors. Unlike Rajaratnam, his client wasn't obsessed with making money. He received not a dime from Rajaratnam no matter how much talking they did. Gupta was a good man, and juries generally like good people.

By now the government team was touting Gupta as a bigger get than even Rajaratnam, who was a mere trader compared to one of the most prominent businessmen in the world. They would show that good people sometimes do bad things, and that juries don't take too kindly to Wall Street crooks no matter how much moral support they can get from UN chiefs or prominent businesspeople.

Gupta's trial was set for early 2012, and based on the government's record, the odds of a conviction were high. On Wall Street the question wasn't conviction—that was largely a foregone conclusion. The betting involved whether Gupta would serve jail time (and how much), or whether the judge would show leniency to someone whose profit motive in sharing inside tips was having friends in high places rather than earning direct returns from his illegal activities.

Meanwhile, the investigation was taking a much-needed break from its frenetic pace. Most of the bad guys from Perfect Hedge had been rounded up. The few who hadn't wouldn't make big headlines. The expert network business had been put on notice while Primary Global was shut down as its clients in the hedge fund business began to cut ties with dozens of experts under investigation.

And with good reason: Several, such as Tony Longoria and Walter Shimoon, were cooperating with the government to avoid jail time and to implicate others. The independent analysts who used the experts and their access to inside information, such as John Kinnucan, were just waiting for their arrest.

But that doesn't mean the investigation came to a halt, particularly when it came to SAC and Cohen.

“The way I understand the rules on trading on inside information, it's very vague,” Cohen explained one afternoon in early 2011 during a deposition taken not by any one of the federal agencies now investigating his activities, but by lawyers for a public company that believed he had broken the law.

Cohen was dressed uncharacteristically for him; gone were his trademark khakis and sweater. Today he was dressed in a dark suit and tie. He sat uncomfortably in the offices of his longtime outside counsel, Willkie Farr & Gallagher, flanked by his attorney Martin Klotz as the grilling began.

The deposition involved a case brought against SAC by an insurance company named Fairfax Financial Holdings. The lawsuit, filed in New Jersey Supreme Court, alleged that SAC conspired with the other hedge funds to drive shares of Fairfax down through rumors and other types of market manipulation to profit off a massive short position on Fairfax stock.

The details of the case were almost a second thought for officials at the SEC and the other regulatory agencies involved in the insider trading probe. They had already decided to drop an inquiry into Fairfax's claims, and in a few months a judge would dismiss the lawsuit against SAC altogether.

But what became must-reading among the government sleuths eyeing SAC and Cohen was his deposition and the parts where the SAC chief described his own belief system about what is or isn't a dirty trade.

In Cohen's mind, it seemed insider trading is a lot like pornography: You know it when you see it.

The questioning was being done by attorney Michael Bowe of the Manhattan law firm Kasowitz, Benson, Torres & Friedman. Bowe and the rest of the firm had by now made a small fortune representing companies that had a beef with SAC, namely Biovail and Fairfax. He and a PR handler named Michael Sitrick were behind the unflattering
60 Minutes
portrayal of Cohen.

Now they were ready for round two. Bowe knew of the feds' long-standing interest in SAC and had met with both government cooperators and with B. J. Kang at the FBI to share what he had found in discovery. The case being alleged by Fairfax didn't involve insider trading per se. But the company was ready to argue it was all part of a business model that makes money by playing dirty.

Bowe interviewed a number of people with knowledge of SAC's operations including Jonathan Hollander. Aside from their largely uniform description of how SAC was run like a money-making machine, with Cohen calling the shots either directly or through a few trusted people, what struck Bowe was how in awe they were of “Mr. SAC.” He was described in almost superhuman terms as a man who knew everything, and could do just about everything. Bowe had never met Cohen, but as the two shook hands just before the deposition began, he was completely underwhelmed at least by his physical appearance: The bald head, the glasses, and the pudgy physique hardly equated with his reputation as a master of the universe.

Bowe began the deposition by trying to rattle Cohen, calling him “Stevie,” which prompted an angry outburst by Klotz, who called Bowie's choice of words an “obnoxious, deliberate use of Stevie in addressing Mr. Cohen.” Bowe said it was a “mistake” before moving on to the heart of the case: SAC's alleged manipulation of Fairfax stock.

Bowe had reviewed SAC's marketing material, boasting of the alleged SAC “edge” it has in the markets. SAC describes this edge in company marketing documents as the sum total of its ability to find talented traders, analysts, and portfolio managers to cover various industries, execute different trading strategies, and leverage its research.

The marketing materials also didn't hide the fact that SAC's advantage is derived at least in part because the hedge fund is a “major commission generator” for Wall Street firms. As a result, it receives “priority treatment” from Wall Street. Being everyone's biggest customer has its advantages in terms of market knowledge and insight.

But regulators increasingly believed the edge also involved the use of inside tips to profit—and Bowe wasted little time pressing Cohen on what turned out to be a sore subject. “I hate that word,” Cohen explained, even as his spokesman conceded that he approved the use of the word for SAC's promotional brochures. (The word
edge,
I'm told, no longer appears in such material.) Bowe pressed the obvious hot-button question, namely what does having an “edge” really mean. Does it mean SAC knows “something everyone else doesn't”?

“You know, I think that's an over—I think that's an incorrect characterization of the word.”

In Cohen's mind, at least during the deposition, having an edge is far less nefarious. It simply means “somebody believes that in a particular situation. . . that somehow their expectations are different than either investors' expectations or Wall Street's expectations.”

For the remainder of the three-hour deposition Cohen appeared more annoyed than rattled, that is, until he explained that he wasn't all that familiar with something every SAC employee is supposed to be familiar with: his firm's own compliance manual and what it says about insider trading.

“The answer is when you're trading securities, it's a judgment call,” Cohen explained, adding that “whatever the compliance manual says, it probably doesn't take into account every—every potential situation.”

Bowe, sensing an opening, pressed Cohen even further, and Cohen's answers became more convoluted—and potentially more problematic. He said that while he had read the firm's compliance manual, which strictly forbids insider trading, he didn't “remember exactly what it says.”

He explained correctly that there are times that legal trades can be made based on nonpublic information—and that he leans on his legal staff, not his compliance manual, for the final say. In Cohen's view there are “circumstances” where utilizing information that some might consider confidential is perfectly legal, which is true given the murky nature of the insider trading rules.

Cohen, who never went to law school, said one such instance occurs “where if you believe that even if you were trading on the same side as a—as a recommendation, if you felt or if you knew that would have no impact on the stock, then I can theoretically suggest that trading on that stock, even—while I might refrain from trading on that stock, if you believe that would have no impact on the stock, that therefore, I—theoretically, you might be able to trade on that stock if you knew that was coming out.”

At bottom, he said that his understanding of “the rules on trading on inside information, it's very vague.”

It's unclear if Cohen knew how his convoluted definition fit with what was being professed by the SEC or Justice Department or the FBI, where the use of any nonpublic information was at the very least something that might touch off alarm bells with the government.

But the feds obviously picked up on the difference. The SEC subpoenaed the deposition as part of its ongoing investigation into trading at the hedge fund, and Bowe shared it with just about anyone else interested in SAC. Simultaneously, Senator Grassley was back on the insider trading trail, this time demanding an accounting as to how many referrals Funkhouser at FINRA had made to the SEC about suspicious trades, and how many were acted upon.

The message to the SEC was direct: Get moving on an SAC case or be ready for more bad publicity. And the message was received. The SEC started to look deeper at nearly 100 SAC trades flagged by FINRA as suspicious. Investigators turned up the heat on Cohen as well. Within a year after Grassley began making noise about SAC, the commission decided to find out exactly what Cohen knew about some of the trades. For the first time in more than two decades, he was deposed.

During the deposition, Cohen didn't recall much about the events in question, according to people with knowledge of the matter. The FBI wiretap on Cohen's home telephone was largely a bust as well, or in the words of one investigator with direct knowledge of the matter, “It didn't turn up shit.”

But by now investigators had begun to change tactics. Their modus operandi was to nail enough people around Cohen with the hope that someone facing lots of jail time would flip and explain how the guy at the top knew about the insider trading of his underlings, and either condoned it or possibly took part in it.

The possibility of someone talking to investigators was something that Cohen himself openly worried about to friends, including Bo Dietl, then-retired New York City police detective and private investigator.

Amid the frenzy that surrounded his firm, Cohen wasn't about to do another media interview, but he needed to make a public statement in order to at least give the appearance that things at SAC were running close to normal. Aside from the whispers about the various legal probes, his investment returns were strong—around 15 percent in 2011, but that only goes so far. One large hedge fund targeted in the probe, Level Global was on the verge of being shuttered as investors feared losing their money and began redeeming shares.

Cohen's fear was that if the government scrutiny intensified, the same might happen at SAC. After all, Cohen was more than a casual spectator in Level Global's demise. That fund was run by David Ganek and Anthony Chiasson, both former SAC traders and both under intense government scrutiny.

For that reason, even Cohen who had defied the media for so long, and who tried to ignore it except under very controlled settings, knew that out of necessity, appearances mattered. That's why he agreed to attend and participate in a high-profile hedge fund conference sponsored by his friend Anthony Scaramucci, founder of the investment company SkyBridge Capital.

SkyBridge is a “fund of funds” company, meaning that it invests in other hedge funds on behalf of its own clients. SAC was one of those funds offered by SkyBridge, and its conference is known in hedge fund circles as possibly the most important single event, at least from a media standpoint, of the year. Aside from nearly a thousand guests—most of them high-profile traders and investors—Scaramucci signs up an A-list of speakers from the political world. The 2011 attendees included President George W. Bush and former Secretary of State General Colin Powell.

But the marquee name for this Wall Street crowd was Stevie Cohen.

Being interviewed by Scaramucci and not a reporter meant Cohen was in friendly territory. Other than explaining how “nobody likes that type of media scrutiny” and that SAC takes “compliance very seriously and the reality is we are going to cooperate with any and all investigations,” Cohen didn't make much news. He sat with his legs crossed, dressed in a dark suit and tie. He seemed poised and at ease, explaining how he plans to be doing what he's doing for a long time, just the opposite of what he said the year before in Bryan Burrough's
Vanity Fair
piece.

Cohen also seemed to downplay the chatter about the government's interest in his activity. Among his biggest concerns involved stuff like the growing federal budget deficit, which the markets will demand fixing, he said.