Circle of Friends (38 page)

Offstage, though, he was less self-assured, at least according to Dietl, who flew with Cohen to the conference on a private jet. It was somewhat of an odd admission because for the past year, he and his people, including his longtime president Tom Conheeney, have been assuring investors and selected reporters that they knew very little of the government's interest in SAC, and that whatever it was, the firm would survive because of its vaunted compliance program.

But Cohen, at least according to Dietl, knew the government's investigation into SAC was now real, and that there was considerable interest in flipping one of the handful of SAC targets who had either been arrested or had agreed to cooperate.

“One of those guys caught on tape” could easily “say something about me” to cut a deal, Dietl recalled Cohen telling him, and act not unlike a mob rat to save his own skin, even though, as Cohen explained, he “did nothing wrong.”

“That's why,” Dietl later said, “Stevie's worried.”

B
y early 2012 the various government agencies investigating insider trading had a pretty good idea of how SAC operated, thanks to the growing list of cooperators they had assembled during the past five years.

David Slaine, who didn't work at SAC, knew people who did, and investigators say he pointed them in the direction of at least one suspicious trade that involved the hedge fund. Investigators believed Jonathan Hollander provided great details about how SAC works on a day-to-day basis. The information provided by Richard Choo-Beng Lee was even better. He worked at SAC for six years earlier in his career and led investigators not just to the seedy world of expert networks but also to a compromised former SAC portfolio manager named Noah Freeman. Rather than face a long jail sentence, Freeman began cooperating as well by ratting out the best man at his wedding, another former SAC portfolio manager Donald Longueuil.

An ex-SAC analyst named Jon Horvath would soon join the cooperation club. He was indicted for suspicious trading in a number of stocks, including shares of Dell. The insider trading trail provided by Horvath led the government to one of the highest-ranking portfolio managers at SAC Capital, Michael Steinberg. Then there's Wesley Wang, a junior analyst at SAC who began cooperating in 2009 rather than face a similar long prison term for insider trading.

Still none of them had delivered evidence that led to charges against Cohen. Not even close.

T
here are people in our industry that are rogues,” Anthony Scaramucci said on the business channel CNBC. “I don't think Steve Cohen is one of them.”

As the world seemed to turn against Cohen and SAC Capital through 2011 and well into 2012, Scaramucci remained a loyal friend, not just as an investor in SAC (Scaramucci's fund of funds kept its money in SAC) but as an unofficial spokesman.

Amid the ever-intensifying media scrutiny, senior executives at SAC had grown increasingly frustrated with the work of Sard Verbinnen particularly after the Fox Business Network ran a chart of SAC that made Cohen look like Carlo Gambino, according to SAC insiders.

Scaramucci, a Harvard Law graduate and former Goldman Sachs broker, was now pitching in on the PR front. In recent years he had built SkyBridge into a formidable presence in the hedge fund business, which meant people listened to him. His message about SAC was straightforward: SAC's compliance wasn't lax at all. Based on his knowledge (and he monitors hedge funds for a living), it was one of the most robust systems in the business. SAC now employed more than two dozen compliance people to make sure that the rules were being followed by its traders. Seminars on exactly what kinds of information crossed the boundaries of illegality have been common for a number of years.

SAC was now monitoring trades around market-moving events in much the same way regulators do. When recommending trades to Cohen, traders and portfolio managers, known inside the firm as “PMs,” were pressed about their conviction level rated inside SAC on a scale of 1–10, with 10 being absolute certainty.

Aside from what Scaramucci said, people close to SAC described the beefed-up compliance system as a gradual system of improvements where SAC's in-house general counsel, Peter Nussbaum, and others began reacting to demands by the SEC—and the scrutiny over insider trading.

Regulation Fair Disclosure, an SEC edict, was passed in 2000, making it illegal for companies to give selective disclosure to just certain investors. Cohen himself conceded that what worked in 1992 from a regulatory standpoint wouldn't pass the smell test in 2012. “This was a learning process,” he told
Vanity Fair
. “You have to remember, we were smaller. Things were different then.”

To Scaramucci and SAC defenders, all of this was proof that Cohen wanted to do the right thing. The evidence to them was pretty clear: SAC's compliance department was enormous and aggressive and states upfront to its entire staff of investment professionals—more than 300 portfolio managers, traders, and analysts—that there is no tolerance for cheaters. The trades that have aroused suspicions were old—most of them occurred five to ten years ago. And given the fund's size—it does more than a million trades a day—a few bad ones coming from a few bad people is understandable.

Others saw it differently. Was having a “ten-level” conviction on a trade based on the best research in the world, or was it simply code for knowing something based on nonpublic information? That's what investigators were now wrestling with. Despite the beefed up compliance, Hollander claimed to regulators that the prevailing sentiment given to him by managers was a don't-ask-don't-tell policy when it came to using information, even the illegal variety—all designed to protect the man at the top.

Freeman, for example, explained to government investigators how he purposely evaded the various compliance procedures at the firm, in one instance receiving an inside tip from Jiau about Marvell Technology. It's a point SAC officials have referred to repeatedly in trying to show how the firm does the right thing even if some of its employees don't. He also told investigators how he would secretly share insider information with another fund manager, also out of the sight of the compliance department.

But investigators were now looking at these same facts differently. In the end, insider trading didn't lead to Freeman's firing. According to a spokesman at SAC, poor performance did. In the meantime, Freeman appeared to just work around the safeguards. Even more, the insider trading seminars and trades based on conviction levels seemed contrived, at least in the opinion of government regulators, to protect the fund's hierarchy from the bad stuff that might be happening below.

Regulators also looked at the firm's document retention policy. Most big Wall Street firms keep emails and other key documents for months at a time. But as a hedge fund, SAC was not subject to the same regulations. It maintained a thirty-day policy. After that point, emails were mostly deleted (though the firm said it had taken “snap shots” of some of its emails particularly around the time of the financial crisis because of litigation).

Of course, a lot has changed in Steve Cohen's business life since he launched SAC nearly a quarter of a century ago, and it went beyond expanded compliance systems. When he first started SAC it was just a band of trading brothers, a group of like-minded souls who shared Cohen's enthusiasm for rapid-fire trading and outguessing key events, like mergers or earnings announcements. It had a little more than Cohen's money invested in it, though the word was spreading of his genius, and profits as well as investor cash were beginning to grow.

For years, Cohen bristled at his reputation as a day trader who simply read the tape and made his billions rapidly buying and selling stocks in hopes of earning “teenies,” or small incremental gains. “We have strategies around here,” Cohen told investors. SAC, he said, was more than a day-trading shop, albeit one that traded billions of dollars of stocks.

He created new units to employ different sophisticated strategies, such as his CR Intrinsic division, with the CR standing for
cumulative return.
Intrinsic allowed him to boast that SAC was a thinking man's trading shop, using advanced research methods and analytics to make market bets even if, as government investigators suspected, some of its traders really spent much of their day figuring out how to game the system.

Cohen wasn't intent on transforming SAC into a geek squad, but the geeks were starting to play a bigger role at the big hedge fund. Ping Jiang, the trader who was accused of forcing one of his subordinates to take female hormones, earned $100 million in 2006. Best of all he was doing it well under the radar screen of the media, that is, until the lurid details of the sexual harassment suit appeared first on CNBC and then in the tabloids, prompting an investigation by the U.S. Equal Employment Opportunity Commission (EEOC) into whether Cohen ran a hostile workplace.

Cohen was livid when the stories broke and he saw his smiling mug in the
New York Post
, which ran a fairly long exposé of the incident under the headline “Trading Places.”

Jiang eventually left SAC to start his own hedge fund, a move SAC officials insisted was unrelated to the controversy, even though his returns were strong and traders rarely leave SAC if they are making money. The lawsuit was thrown out of court, and the EEOC decided to drop the case, but to this day Cohen bristles when he hears the phrase “female hormones.”

Another, less public new hire was Mathew Martoma, a brainy Stanford University MBA grad who spent a year at Harvard Law School and had a background in science, before turning to the hedge fund business to make his fortune. Because of that background in science (an undergraduate degree from Duke in biomedicine), Martoma specialized in health care stocks. He seemed to know what he was talking about, when it came to two stocks in particular: drugmakers Elan and Wyeth.

In fact, Martoma was now trading Elan with such regularity and success that he was known as “Mr. Elan” at SAC's Stamford headquarters.

Being “Mr. Elan” paid off. He got to share some of his winning trades with Cohen himself, an honor inside SAC since the guy at the top only interacts with traders who have hot hands. In 2008, Martoma earned more than $9 million.

Martoma's hot hand with Elan and Wyeth wouldn't last however. He left SAC in 2010 because of poor performance. He was, according to one SAC official, a “one-trick pony with Elan.”

But he was now a rich one-trick pony, and a target of regulators, who detected the suspicious trading patterns near key events for several drug stocks, including the ones Martoma had been trading at SAC.

Meanwhile, Cohen's lawyers maintained a perfect record both in fending off serious regulatory inquiries and lawsuits coming from companies like Biovail and Fairfax. SAC's attorney Klotz was so successful on such matters that he got a New Jersey court to force Biovail to cough up $10 million to settle a case of “vexatious litigation.”

D
espite all this, federal investigators continued to dig. Among regulators, several schools of thought developed about the inner workings at SAC and why a guy who looked so guilty on paper in terms of insider trading was still walking around free.

Yet mostly people inside the Justice Department and the SEC believed all the extra compliance was an elaborate cover for all the bad stuff they believed was going on at the firm. SAC was now under more pressure than ever before to produce returns, given the amount of competition in the hedge fund space, and its “information edge” was coming under assault from new market rules. Thus, the only way to get the edge necessary to crank out market-beating returns was by gaming the system, in other words, insider trading.

One thing is certain: Cohen knew he and his business model were under regulatory assault, and he needed to respond in kind to protect the fund and his enormous wealth. As the investigations began to heat up, SAC even began to tell its investors that in addition to its new and improved compliance system, it also had secured a new insurance contract.

The insurance deal, as SAC officials portrayed it to their clients, would protect investor holdings from regulatory actions—fines, penalties, and clawbacks of illicit gains made through illegal trading, which the government often demands as part of settlement deals.

Investors seemed impressed. Money continued to flow into SAC up until the point in 2011 when Cohen no longer accepted new cash. And despite all the negative headlines they remained committed to leaving their money with the trader and the fund that almost never had a losing year.

Meanwhile, investigators also grew concerned. The five-year statute of limitations on some of the most obvious instances of insider trading was coming up. Cohen may have outsmarted the smartest investigators in the world by instituting all his new compliance systems at just the right time.

“He insulated himself,” said one former prosecutor, and “if I were a betting man I'd say we're never going to get him.”

P
reet is a well-known pedophile, with a particular predilection for young black boys, which his wife is active in procuring for him. After Preet takes these young black boys up the ass, his wife is known to then lick clean Preet's limp Indian dick—which is appropriate, since that is what Preet is: A limp dick Indian piece of shit. . . .”

John Kinnucan sent this ludicrous assessment of the Southern District chief one night in late October 2011. It was emailed to an eclectic group of recipients, including journalists and former clients of his company, Broadband Research—or what was left of it. It included famed criminal defense attorney Gerry Spence, and even a victim of Preet Bharara's crackdown on insider trading, Walter Shimoon, a former technology industry executive who had worked for Primary Global.

Shimoon had recently pled guilty to passing along insider tips and begun cooperating with government investigators. He implicated others who had benefited from illegal inside tips, including John Kinnucan.