A Fascination of Wall St., and Investigators
By JENNY ANDERSON, PETER LATTMAN and JULIE CRESWELL
Published: December 22, 2012
YOU want the headquarters of Steven A. Cohen, one of the most successful financial speculators of our time, to look like Dr. Evil’s secret lair. But it is just another office-park building, a low-slung affair of tinted glass and red brick, on the southern fringes of Stamford, Conn.
Scott Eells/Bloomberg News, via Getty Images
At a time when hedge funds were making their mark on American finance, Steven A. Cohen's became one of the most successful in the world.
Related
The Trade: When Wall Street Investors Favor Performance Over Ethics (December 12, 2012)
DealBook: Trail to a Hedge Fund, From a Cluster of Cases(December 5, 2012)
Mr. Cohen was a talented soccer player at Great Neck North High.
Marilynn K. Yee/The New York Times
SAC Capital Advisors has its headquarters in an ordinary office park near Long Island Sound in Stamford, Conn.
Louis Lanzano/Associated Press
Donald Longueuil, a former portfolio manager for SAC Capital Advisors, was sentenced to prison last year after pleading guilty to insider trading charges.
Andrew Gombert/European Pressphoto Agency
Mathew Martoma, a former SAC employee, was arrested last month and indicted on Friday in a separate case; Mr. Martoma’s lawyer says his client is innocent.
Shannon Stapleton/Reuters
Jon Horvath, a former analyst, pleaded guilty in September.
From the outside, there’s nothing particularly special about this address, 72 Cummings Point Road. But inside — well, everyone on Wall Street has heard the stories.
Some of them are even true.
We are, after all, talking about the man known on the Street as “Stevie” — hedge fund magnate, multibillionaire, prodigious art collector and, of late, person of intense interest to federal authorities. Inside his offices, vast fortunes are won and lost. Careers are made and unmade. Type-A egos are inflated and crushed, sometimes in the space of hours. And there, Mr. Cohen, a trader with an almost preternatural knack for reading fear and greed in the marketplace, prowls relentlessly for an edge over everyone else.
Mr. Cohen, 56, today sits at the center of more concentric circles of money and power and worry and suspicion than perhaps anyone else in the hedge fund game. Neither he nor the private investment firm that bears his initials, SAC Capital Advisors, has been accused of wrongdoing. But over the past half-decade, as a vast federal investigation into insider trading has unfolded in stunning detail, the questions have returned again and again. In soft-carpeted executive suites, on fervid trading floors, in Park Avenue co-ops and on Connecticut back lanes, the same subject keeps coming up: Just what is going on inside 72 Cummings Point Road?
It is, perhaps, understandable. On Wall Street, Mr. Cohen is envied and feared in equal measure. Hedge fund managers like him have helped redefine what it means to be rich, even if most ordinary people don’t quite understand what they do or how they do it.
For years, the investigations had swirled around SAC, but that was about all. Then, on the afternoon of Nov. 28, the word went out across Wall Street: the Securities and Exchange Commission was warning that it might go after SAC, too. Elsewhere in the investigations, prosecutors have turned up damning evidence through F.B.I. wiretaps and reached into the boardrooms of some of the mightiest corporations. Seventy-one people have been convicted in a sweep that dwarfs the 1980s-era Wall Street scandals involving Ivan Boesky and Michael Milken.
But there is also this undeniable fact: The government inquiry has linked six former SAC employees to insider trading while at the fund; three have pleaded guilty. On Friday, a grand jury indicted Mathew Martoma, a former employee who was arrested last month on charges that he used inside tips about a clinical drug trial to help SAC earn profits and avoid losses totaling $276 million. (A lawyer for Mr. Martoma says his client is innocent.) In the Martoma case, prosecutors for the first time have tied Mr. Cohen to questionable trades.
And, of course, there are the stories. The mind-boggling investment returns. The office tantrums. The pressure-cooker environment inside SAC. The time that Mr. Cohen’s wife, Alexandra, gave him an A.T.M. for Christmas, because he kept borrowing cash from her. The time she gave him an Aston Martin sports car for his birthday, and he promptly sold it.
All of those are true.
But there are other stories, too, like the one about how Mr. Cohen engaged in insider trading back in the 1980s, before hedge funds like SAC burst onto the scene. That claim was made by Mr. Cohen’s former wife, in a 2009 lawsuit in which she sought $300 million. A judge dismissed her claims as little more than rumor and speculation.
And then there is the one about how Mr. Cohen and a cabal of other hedge fund managers waged a campaign of dirty tricks in the early 2000s to sink the share prices of several companies. Judges tossed out those cases, too. (SAC maintained that the various lawsuits were groundless, and one of the companies ended up issuing an apology.)
Mr. Cohen declined to be interviewed for this article. But a spokesman for SAC reiterated what the firm has been saying all along: SAC and Mr. Cohen acted appropriately.
Friends stand by Mr. Cohen. Several point to his charitable works.
“A lot of people will write a check. He goes beyond that,” says Kenneth G. Langone, a co-founder of Home Depot, who has worked with Mr. Cohen on a number of philanthropies.
Paul Tudor Jones, another hedge-fund giant and a founder of the Robin Hood Foundation, says: “There has been no greater friend or benefactor to people in need in New York City over the last decade.”
SAC employees are far more reluctant to discuss their boss publicly. So are former employees, in no small part because SAC requires everyone to sign unusually strict nondisclosure agreements. Even those in the broader financial world don’t want to be quoted by name, for fear of incurring Mr. Cohen’s wrath and jeopardizing lucrative business with him.
But interviews with dozens of current and former business associates, hedge fund investors, Wall Street executives and personal acquaintances, as well as an examination of the regulatory record associated with Mr. Cohen’s 34 years of Wall Street trading, paint a complex portrait. Mr. Cohen, all agree, is a masterful trader, perhaps one of the greatest. He is quick to take profits, quicker to cut losses. He is obsessed with trading, and he trades to win. If he cruises the Caribbean or flies off to London, an SAC advance team races ahead of him to set up trading screens.
INSIDE 72 Cummings Point Road, Mr. Cohen has created a tense, unpredictable atmosphere. Beyond the bright reception area (a showcase for Mr. Cohen’s collection of contemporary art) and the pantry (a stockpile of chips and bottled water) the trading floor stretches out.
Row after row of traders, analysts and money managers — mostly youngish men dressed in hedge-fund casual khakis, expensive shirts and SAC fleeces — peer into computer screens. The place is weirdly quiet. The telephones never ring; instead, they flash. Mr. Cohen doesn’t like to be disturbed. On his orders, the temperature is kept cool to help keep people alert. Off to one side is his office. Like the rest of the place, it is nothing special: a desk, some couches, a conference table.
In this setting, Mr. Cohen pits his money managers against one another in daily cage matches for his attention and money. Mr. Cohen wants investment ideas — lots of them — and he cherry-picks the best ones for his personal portfolio. (SAC oversees a total of $14 billion in assets, roughly $8.4 billion of which belongs to Mr. Cohen and his employees.)
The rules here are simple: Win and you get rich. Lose and you get fired. In fact, Mr. Cohen, a mercurial master, has been known to fire money managers for making one bad trade, even if they had made him millions before.
“He liked putting a team together and watching them destroy each other,” a former SAC employee says. “It’s like the ‘Hunger Games.’ ”
On good days — the days when Mr. Cohen is making money — he tends to be fairly low-key, even a bit awkward. On bad days — when he is losing — he can seem like a tyrant, a schoolyard bully.
One former SAC employee recalls a time he mentioned a stock that he liked to Mr. Cohen.
“What’s wrong with you? Are you a freak?” this person recalls Mr. Cohen as saying.
“I don’t think I’m a freak,” the employee said.
“O.K., because you’re weird.”
One day, according to someone then at SAC, when a money manager lost money, Mr. Cohen stood up and slowly clapped: Clap ...clap ...clap.
“It was vicious,” this person says.
Still another former SAC employee recalls how Mr. Cohen seized on one of the employee’s investment ideas and turned a quick profit. The employee encouraged Mr. Cohen to hold on, arguing that the company’s business was growing, that this was a good long-term investment.
“It’s just a stock,” Mr. Cohen retorted, adding an expletive, according to this former employee.
One analyst who worked with Mr. Cohen says: “He’s a speculator fundamentally. He doesn’t care if a stock is worth $10 or $100. He wants to know if it is going from $10 to $11 or $10 to zero.”
If the risks at SAC are great, so are the potential rewards. In good years, the firm’s top portfolio managers earn tens of millions of dollars annually. Mr. Martoma, the former SAC portfolio manager indicted on Friday, was paid a $9.4 million bonus in 2008. He was 34.
And Mr. Cohen himself enjoys the trappings of wild success. He lives in a Gatsby-esque mansion in Greenwich, Conn., with his wife and seven children. Two summers ago, he spent time with Rupert Murdoch on a yacht off St. Martin. But Mr. Cohen hardly looks like a Wall Street slicker. He is bald and slightly paunchy, and his daily wardrobe tends toward baggy jeans and zip-up sweaters.
If Mr. Cohen is worried, he isn’t showing it publicly. Last October, as investigations simmered, he took in a private Katy Perry concert sponsored by NetJets, the private-jet concern, at the Best Buy Theater in Times Square. He also was at the 12/12/12 benefit concert at Madison Square Garden. (Mr. Cohen has donated $500,000 to a relief fund for victims of Hurricane Sandy.)
Mr. Cohen was seated, naturally, right near the stage.
PLENTY of smart people head to Wall Street with dreams of getting rich. But how does anyone scale such lofty heights? Mr. Cohen’s story begins in a simple house on Lawson Lane, in Great Neck on Long Island. That house, with its crescent driveway and small backyard, is only about 20 miles as the crow flies from Wall Street. It is many billions of dollars, and a world away, from Mr. Cohen’s life today.
It was here that he grew up, the third of eight children. His father ran a company in the garment district in Manhattan that made women’s dresses. His mother taught piano. The centerpiece of the house was her Lucite piano. She also collected Lucite figurines.
Steven Cohen told The Wall Street Journal in 2006 that his mother, who died in 2005, thought he was “smart but lazy.” She viewed his younger brother, Donald Cohen, as the financial success of the family. He is now an accountant.
No one in Great Neck could have predicted Mr. Cohen’s future success. But early on, there were inklings. He was a fiercely competitive soccer player at Great Neck North High School. According to the 1974 yearbook, he scored 10 goals during his senior year and made the All Division team.
While at Great Neck North, he worked at a local grocery store but quit when he realized he could make more money playing poker — hundreds of dollars at a time, his brother Donald once said. Among the local youths who played soccer and poker with him was Kenneth Cole, the designer. Mr. Cole and other high-school friends don’t recall that Mr. Cohen talked about Wall Street. But Mr. Cohen told an audience at an investment conference at the Waldorf-Astoria hotel last year that his love of trading started in high school. Even then, he was reading stock tables in the newspaper and watching the stock ticker scroll by at a local brokerage firm.
There “was something in my blood, something that I loved,” Mr. Cohen told the crowd, according to several people who attended the conference.
By the time Mr. Cohen arrived at the Wharton School of the University of Pennsylvania in 1974, it was clear that he had his sights on Wall Street. He studied economics and pledged Zeta Beta Tau, alongside several other young men who would go on to make a mark in finance: Joel Greenblatt, the head of the hedge fund Gotham Capital, and Marc Utay of Clarion Capital, a private equity firm.
But even at Wharton, Mr. Cohen stood out. He often wore a sports jacket around the fraternity. He read The Journal every morning, three of his fraternity brothers recall. And, as at Great Neck North, there was poker. Four, five nights a week, Mr. Cohen would preside over a game. And, more often than not, he won.
“They were playing for what I thought were extraordinary stakes for a bunch of college students,” recalls Brad Gordon, a Zeta Beta Tau brother. “I’m the world’s worst poker player and Steve, who was quite the shark, would have me for lunch.”
AS his friends expected, Mr. Cohen took off for Wall Street as soon as he collected his degree in 1977. But the Wall Street of that era was almost unrecognizable from the Wall Street of today. Yes, traders traded and bankers cut deals. But the computer-driven trading that now dominates the markets was still in its infancy.
Instead, young men — and it was mostly men — brayed for money over the telephone. Traders scrawled “buy” and “sell” tickets by hand, and by the closing bell, the floor of the New York Stock Exchange was slick with slips of paper. Many ordinary Americans were only beginning to discover mutual funds. The great bull markets of the 1980s and 1990s were still years off.
One thing, however, hasn’t changed: information was, and still is, the most precious commodity of all.
It was into this milieu that Mr. Cohen stepped in 1978. For all his smarts and ambition, he didn’t land at one of Wall Street’s premier investment houses — a Goldman, a Morgan, a Merrill. He ended up at Gruntal & Company. At the time, Gruntal, which traced its history back to the 1880s, was pushing aggressively into a business that seemed tailor-made for Mr. Cohen: proprietary trading. Gruntal wanted to wager its own money in the markets and had created a proprietary trading desk. Mr. Cohen was the desk’s second employee.
Despite his apparent savvy, Mr. Cohen almost was fired shortly after he joined Gruntal. One spring day in 1978, as the stock market fell and Mr. Cohen was losing money, he was so harried that he wrote every trading ticket incorrectly, recalls Andrew Redleaf, who worked with him at Gruntal and today runs a hedge fund in Minneapolis. A trading boss wanted Mr. Cohen let go.
But the next day, and then the next, the market bounced back.
“They made a few hundred thousand dollars,” Mr. Redleaf says. “And the rest was history.”
Mr. Redleaf, who collected two mathematics degrees in three years at Yale, says Mr. Cohen’s talent for sensing changes in trading volumes — “reading the tape,” in Wall Street parlance — was “supernatural.” While Mr. Redleaf would leave to get lunch and stretch his legs, Mr. Cohen often stayed glued to his desk, his suit jacket slung over his chair, his tie hanging low.
Mr. Cohen was so focused that he often wouldn’t pick up the phone, even when his boss was calling, Mr. Redleaf recalls. Before long the prop desk and its star, Mr. Cohen, had been given $2 million of Gruntal’s money to trade with — an enormous sum, considering that the firm had just $10 million in capital. On a good day, Mr. Cohen and his fellow traders might make $50,000 to $100,0000 for the firm. By the time Mr. Redleaf left Gruntal, in 1980, Mr. Cohen was collecting 60 percent of any profits he made on his own trades.
“He was always going to make more money,” Mr. Redleaf says. “I do consider it one of the mistakes of my career not watching longer and more carefully.”
BUT through the 1980s, as the merger mania of the junk-bond era presaged the scandals to come, controversy dogged Gruntal. Some on Wall Street wondered if the brokerage was playing square.
Mr. Cohen’s former wife, Patricia Cohen, claimed that Mr. Cohen got a tip in 1985 about the impending takeover of RCA by General Electric and used it to make a quick, $20 million profit, according to a suit she filed in 2009. When Mr. Cohen was questioned about his trades by the S.E.C., he took the Fifth Amendment. A judge dismissed Ms. Cohen’s case in 2011, and no charges were ever brought against Mr. Cohen. He, however, was censured by the New York Stock Exchange, and barred from the stock market for four weeks, for a trade in 1991. The Big Board panel determined that he had executed a trade that was designed to inflate the price of a stock he already held. That trade, for 100 shares, turned a $220,240.50 loss into a $120,178 one, the exchange said.
By this time, Gruntal had also become embroiled in an embezzlement fraud. A former executive vice president was sent to prison. Mr. Cohen wasn’t implicated.
New management was brought in and decided that Mr. Cohen’s prop desk had to go.
“It was the Wild West, and he was the biggest gunslinger,” says one senior Wall Street official, who was a trader at the time.
And so Mr. Cohen took his winnings and struck out on his own to start a hedge fund, SAC Capital Advisors. To raise additional capital, he sought out Peter Kellogg, a legendary trader who ran Spear, Leeds & Kellogg, a major brokerage firm on the New York Stock Exchange floor. Over breakfast at Spear Leeds offices, the two discussed the markets and Mr. Cohen’s plans. Mr. Kellogg came away impressed, and he and his firm invested $2 million in the fledgling SAC, according to an executive involved in the negotiations. SAC went online with $25 million, roughly half of which was Mr. Cohen’s, and fewer than a dozen employees.
A month later, Mr. Cohen returned Spear Leeds’s money, along with a handsome profit. Having an investment from a brokerage firm placed constraints on SAC, like limiting his ability to participate in lucrative initial public offerings. “He didn’t want to give up any game,” said a trader who worked with SAC early on.
If Mr. Cohen’s business was looking up, so was his personal life. Two years after his divorce in 1990, he married Alexandra M. Garcia, a single mother who had grown up in the Washington Heights section of Manhattan.
Her influence on him was immediate. The year they were married, Mr. Cohen — a famously private man — landed in the tabloids after appearing on a television talk show. He told the host, Cristina Saralegui, that he had slept with his ex-wife while dating Ms. Garcia. The divorce, he explained, had been messy.
“It wasn’t a clean separation,” Mr. Cohen told the TV audience. “We went back and forth for a while.” Although Mr. Cohen was already rich by most standards, he didn’t flaunt his wealth. He and Alexandra, known as Alex, rented an apartment on 79th Street and First Avenue — the Upper East Side, but not Park Avenue. They later moved to Greenwich, and SAC would move its headquarters from Madison Avenue to the General Electric building in Stamford. Most days, Mr. Cohen got his lunch at the G.E. cafeteria and ate at his desk, a SAC employee recalls.
During these years, Mr. Cohen planted the seeds of a culture that has endured as the firm has grown. Mr. Cohen, for instance, instituted a Sunday call with his team. Traders would cut short family time and trips to the Hamptons for the conversation with Mr. Cohen. He wanted to hear their best ideas for the week ahead.
“I hated Sundays. I dreaded Sundays,” a former employee says.
Mr. Cohen urged his traders to be bold. Every January, he had Ari Kiev, a psychiatrist who had built a career helping athletes and Wall Street traders achieve peak performance, and whom Mr. Cohen had met while at Gruntal, ask SAC traders to project their funds’ performance for the year ahead. Mr. Kiev would work through their worries — about a big loss, for example, or the mercurial Mr. Cohen — and try to get them to think bigger. (SAC stopped the practice after Mr. Kiev died in 2009.)
Mr. Cohen certainly knew how to use incentives. “The numbers were off the charts, and the compensation was unmatchable,” says a portfolio manager who worked with Mr. Cohen and considers him a friend.
By the mid-1990s, SAC was on fire. It was around that time that analysts and salespeople at the mighty Goldman Sachs convened and were told that Wall Street was changing, in part because of people like Mr. Cohen. A senior institutional salesman at Goldman told the assembled crew that big clients like Fidelity Investments, the mutual fund giant, were still important. But he added that the balance of power was tipping toward hedge funds, which traded heavily and, in the process, generated huge commissions for Goldman.
At the time, SAC was Goldman’s No. 1 stock-trading client. And Mr. Cohen, the salesman said, wanted something in return for those commission dollars: to be notified first when Goldman changed its recommendations on stocks. Such a call was then perfectly legal — and, for any investors, potentially lucrative. If Goldman called a stock a “buy,” you wanted to know about it, and fast.
THE SAC crew was in the crowd, toasting their boss at Mr. Chow, a Wall Street hangout on the East Side. It was the summer of 2006, and they were there to celebrate Mr. Cohen’s 50th birthday. Along with the traders and money managers was Larry Gagosian, the New York art dealer, who had become a go-to specialist for Mr. Cohen as he built his formidable collection.
Some stood up and thanked Mr. Cohen for all the money they had made while working for him. Alex Cohen made a joke about the size of “the rock” on her finger. By the standards of the era, the party wasn’t a blowout. Many people just stood around talking about the markets, according to two people who attended.
Yet, at that very moment, Mr. Cohen was on top of the world. The stock market was booming, and so was SAC. In 2003, he had personally made $350 million, a combination of compensation and investment gains. In both 2006 and 2007, he made $900 million, according to estimates from Institutional Investor’s Alpha magazine. SAC was looking to expand. It even considered going public.
Mr. Cohen was turning heads in the art world, too. He had become a sought-after client for top dealers like Mr. Gagosian. He paid $8 million for “The Physical Impossibility of Death in the Mind of Someone Living,” a 13-foot tiger shark in a tank of formaldehyde, by Damien Hirst. At one point, Mr. Cohen told an acquaintance that he was eyeing paintings of Mao Zedong by Andy Warhol. He figured that they would be good investment. The thinking was, “there will be a lot of Chinese billionaires someday,” a former SAC trader says.
But for all of SAC’s money and power, storm clouds were already gathering. The first rumbles came in 2003, when a trader at SAC came under scrutiny from the S.E.C. for possible insider trading violations. Regulators wanted to know if he had been given early access to Wall Street research reports. He was never charged.
Two more blows came in 2006, when two separate companies — the pharmaceuticals concern Biovail and Fairfax Financial, a Canadian insurance company — filed lawsuits against SAC and other hedge funds, essentially accusing them of spreading lies in order to profit from a decline in their share prices. The Biovail case was featured on a “60 Minutes” report, which cast the company as the victim and the hedge funds as predators. Both lawsuits were dismissed and Biovail, in 2011, paid $10 million to SAC and issued an apology.
But not even Mr. Cohen could dodge the financial crisis. On one particularly dark day in 2008, one SAC trader recalls, Mr. Cohen said: “I lost a billion dollars today. And probably $250 million in art.” It turned out to be SAC’s worst year ever, the only year it lost money. Its flagship fund plummeted 19 percent in value. Mr. Cohen personally lost $750 million, according to Alpha magazine.
Former employees say Mr. Cohen was furious about the big paychecks he awarded the previous year. He immediately began cutting expenses. SAC dismissed roughly a third of its money managers. For those who stayed, there were no more monthly birthday cakes.
BUT as much as anything else, Mr. Cohen is now grappling with the confluence of powerful forces. The proliferation of hedge funds over the past decade has made spotting winning trades much more difficult. Many funds simply crowd into the same investments, reducing the potential payoff for everyone.
On top of that, changing rules, particularly one barring corporate executives and research analysts from disclosing information to select investors, have dulled SAC’s edge in information. SAC and others have increasingly leaned on so-called expert networks, which match industry specialists with financial players hungry for information. SAC, for instance, was a top client of the Gerson Lehrman Group, a top expert network firm.
Then, of course, there are all those investigations. In one case, a former SAC fund manager who pleaded guilty told investigators that he thought trafficking in corporate secrets was part of this job description. In another case, the government says Mr. Martoma had a 20-minute phone conversation with Mr. Cohen the day before SAC dumped $700 million in two pharmaceutical companies and proceeded to make a big bet against them. Prosecutors said Mr. Martoma had secret information about the companies’ drug trials from a doctor.
In sworn testimony with an S.E.C. lawyer last summer, Mr. Cohen said he sold the stocks after the analyst told him that he had lost conviction about the investments, according to a person briefed on the case. Mr. Cohen said he could recall little else. In late November, amid all the headlines, the S.E.C. warned that it might file a civil fraud lawsuit against SAC related to the Martoma case.
Mr. Cohen has made a lot of people unimaginably rich, including himself. One question today is whether his investors — who have profited handsomely from his trading prowess over the years — will stand by him now. He has had a solid year, up 12 percent through November. Yet private bankers at Citigroup have advised clients not to invest more money with SAC. Investors who want to pull their money at their first chance, next March, have until Feb. 15 to advise SAC of their intentions. Inside 72 Cummings Point Road, the troops are worried. SAC employees have begun working the phones on weekends, exploring other job opportunities, says the chief executive of a bank that does business with Mr. Cohen’s firm.
As for Steve Cohen, he could walk away tomorrow, return every dime to his investors. And, barring the worst, he would be left, in quiet splendor, to trade with a fortune few can even fathom.
Scott Eells/Bloomberg News, via Getty ImagesSteven A. Cohen, the founder of SAC Capital Advisors.
When Wall Street Investors Favor Performance Over Ethics
BY JESSE EISINGER, PROPUBLICAScott Eells/Bloomberg News, via Getty ImagesSteven A. Cohen, the founder of SAC Capital Advisors.
To have one employee tied to insider trading may be regarded as a misfortune. But, with apologies to Oscar Wilde, to have six looks like carelessness.
Poor Steven A. Cohen, the powerful hedge fund manager who heads SAC Capital Advisors. People he employs just keep getting swept up in a sprawling insider trading investigation that has spanned years. In addition to the six who have gotten in trouble for activities when employed at SAC, at least six others have been ensnared by insider trading ivestigations after leaving the firm. The latest arrest, of the pharmaceutical industry analyst Mathew Martoma, is the first that ties Mr. Cohen to trades the government says were illegal.
An investment manager has defended Mr. Cohen as the Michael Jordan of the investing world. But what if he is the Lance Armstrong?
While Mr. Cohen has not been accused of any wrongdoing, you have to wonder whether his returns have been generated not only through his trading brilliance but also through a culture of cutting corners and pushing employees to the point where they break the law. In the United States, you are innocent until proved guilty, and nowhere can that be seen more than for a man who can generate amazing investment returns.
Astonishingly, investors don’t seem to mind terribly. They added as much as $1.6 billion in new capital to SAC’s flagship fund from 2010 to the end of 2011, when the insider trading investigation was in full bloom, according to Absolute Return, an industry trade publication.
“Insider trading isn’t acceptable in our culture of compliance, and we don’t give a wink or nod to the contrary,” said a SAC spokesman, who declined to make Mr. Cohen available for comment.
Hedge Fund Inquiry
Graphic: Behind the Libor
At least some big institutions have begun to contemplate thinking about perhaps withdrawing money from Mr. Cohen. Congratulations. What took them so long? Citigroup’s private bank has told its clients not to put in new money, according to Bloomberg. What about getting their clients out? Why hasn’t bank given that advice before this?
A Citigroup spokeswoman explained that the private bank “typically puts funds on watch when there is significant news around a company; that is not a recommendation to move or keep money in the fund.” She declined to comment on Citigroup’s relationship with SAC.
Blackstone is thinking hard about it, according to reports. Think think think. That firm declined to comment.
Several prominent funds-of-funds still have money with him. Société Générale, the big French bank, decided to redeem its money only after the latest allegations. Given all that we know, how in the world do major institutional investors still have any money with Mr. Cohen?
The biggest, most sophisticated investors certainly put an enormous amount of pressure on hedge funds. But almost none of it is about ethics and clean culture. It’s about performance. A fund that runs a few ticks lower than its peers for several months running can get put out of business.
But investors seem to demonstrate little interest in whether the person is ethical and trustworthy. Shouldn’t their threshold be a wee bit higher? After all, these institutions are mainly investing other people’s money. Investing money isn’t quite a sacred trust, but it’s a trust nonetheless.
Many institutional investors have so perfected the art of looking the other way that they make bystanders on a New York City subway platform look like models of social responsibility.
The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.
This is a long-standing Wall Street custom. Citigroup and JPMorgan played handmaiden to help Enron commit fraud, according to the Securities and Exchange Commission. The two banks didn’t admit or deny guilt in settling with the regulator.
There is a point where willful blindness turns to complicity. Investors profit from any added juice that SAC might gain, whatever its source. And if Mr. Cohen were to face charges, they would pay no price.
Major banks and investors around the world shoveled money to Bernard L. Madoffdespite doubts about his purity. Some thought that Mr. Madoff was using his brokerage firm to front-run. In other words, they thought he was cheating on their behalf, not ripping them off. And that was an enticement.
The arrests and bad trades are finally hitting close to SAC, but there is nothing new about the questions surrounding Mr. Cohen’s business. He was always one of the most aggressive traders on Wall Street. Speculation that he may have tapped into legally dubious information wasn’t just whispered in private but splashed across the pages of The Wall Street Journal in a 2006 profile that raised questions about whether his firm traded improperly.
In SAC’s defense, a person familiar with the firm pointed out that two of the employees charged with insider trading started their scheme before joining the fund and had admitted taking extraordinary steps to circumvent SAC’s procedures while another was trading in his personal account.
“We expect our people to play by the rules and act with integrity,” the SAC spokesman said.
The firm has more than 30 legal and compliance officials in addition to a dedicated technology team devoted to compliance, says the person familiar with the firm.
But given how forgiving institutional enablers are, one wonders why Mr. Cohen even bothers.
Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email:jesse@propublica.org. Twitter: @Eisingerj
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