Is This Big Fish Worth Catching?

While the government closes in on hedge fund titan Steve Cohen, Wall Street’s true villains go unpunished.

By William D. Cohan


Preet Bharara started work as the U.S. Attorney for the Southern District of New York on Aug. 13, 2009, less than a year after the most harrowing days of the financial crisis. Bharara’s office is known for prosecuting crime on Wall Street; his predecessors include Elihu Root, Henry Stimson, and Rudy Giuliani. In three and a half years on the job, Bharara has won convictions against Times Square bomber Faisal Shahzad, accused arms trafficker Victor Bout, and multiple corrupt New York politicians. But his claim to fame — the one that earned him the cover of Time last February — is his single-minded devotion to eliminating an insider-trading epidemic that seems to be rampant at certain hedge funds in and around New York City.

Two days before Thanksgiving, Bharara, who has already won some 70 convictions for insider trading, collected another pelt. At his direction, the Federal Bureau of Investigation arrested Mathew Martoma, a 38-year-old former hedge fund manager at SAC Capital Advisors, at Martoma’s 8,000-square-foot Boca Raton (Fla.) mansion. In a statement, Bharara described Martoma’s alleged crime as “cheating coming and going — specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent.” Conspicuously absent from Bharara’s statement was any mention of Martoma’s former boss, Steven Cohen, the founder of SAC Capital. But Wall Street is rife with speculation that Cohen is Bharara’s ultimate target.

The possibility that Cohen might share the fate of fellow hedge fund billionaire Raj Rajaratnam, who was found guilty of conspiracy and securities fraud in May 2011 and sentenced to 11 years in prison, has caused a frisson of anticipation in the financial world. On Nov. 28, the president of SAC Capital, Tom Conheeney, told investors that the Securities and Exchange Commission is considering filing a civil suit against the firm.

Yet Cohen may prove to be an elusive prey. And it’s worth asking whether relentlessly hunting insider-trading suspects like Cohen is a wise use of the government’s resources — especially considering that the people responsible for the worst financial crisis since the Great Depression continue to get off scot-free.

Cohen himself is no small fish. He grew up in Great Neck, Long Island, the third of eight children. His father owned a clothing manufacturer in the Bronx; his mother was a piano teacher. After graduating from the University of Pennsylvania in 1978, Cohen took a job at Gruntal & Co., a small Wall Street brokerage. An amazingly successful if restless trader, he made millions for himself and for Gruntal. In 1992, hungry for a bigger platform, he set up a hedge fund with a $25 million grubstake — half of which was his own money. In the first year, the fund was up 17 percent; the next year it was up 51 percent. The rest is the stuff of Wall Street legend, as are his $1 billion art collection and his 36,000-square-foot mansion in Greenwich, Conn. SAC Capital now has some $14 billion under management.

Bharara has been circling Cohen for years, pursuing a slew of additional insider-trading charges against seven former SAC traders. But he hasn’t snared Cohen. And the Martoma gambit may fall short as well.

The gist of Bharara’s complaint against Martoma is that between 2006 and 2008, Martoma obtained material, nonpublic information from Dr. Sid Gilman, now 80, a neurologist at the University of Michigan, who was a paid consultant to two health-care companies, Elan and Wyeth Pharmaceuticals (now part of Pfizer), working together to develop a new Alzheimer’s drug. At first, Gilman shared with Martoma the good news that the drug trial was going well. As a result, Martoma and SAC amassed around a $700 million stake in Elan and Wyeth. In March 2008, when other executives at SAC Capital were questioning the large investment in the two companies, Cohen defended it by writing that Martoma “anticipated positive news” from the drug trial and he was the person “closest” to it.

On July 17, 2008, just days before he was to share his confidential findings at a health-care conference, Gilman told Martoma there were problems with the drug trial. Martoma then e-mailed Cohen: “Is there a good time to catch up with you this morning? It’s important.” One hour later, Cohen responded with his cell-phone number. According to the sworn affidavit of the FBI agent investigating the case, the two men talked for 20 minutes. At Cohen’s direction, during the next four days, SAC Capital dumped most, but not all, of its stock in the companies. It also put on a large short trade — betting the companies’ stock would fall.

On July 30, after the public announcement about the drug trial at the industry conference, the shares of Elan and Wyeth fell, 42 percent and 12 percent, respectively. According to Bharara, SAC Capital not only made profits of about $83 million on its short trade but also avoided losses of about $194 million had it not sold its stock in the two companies a few weeks earlier — a $276 million swing. (Bharara called it “The most lucrative inside tip of all time.”) In 2008, SAC paid Martoma a $9.3 million bonus. In 2010, Martoma was fired from the firm after two years of unsatisfactory performance and because he appeared to be “a one-trick pony with Elan,” according to an SAC e-mail. (His lawyer said in a statement that Martoma is innocent.)

In exchange for his cooperation, Dr. Gilman and the U.S. Department of Justice have entered into a non-prosecution agreement. According to the Wall Street Journal, the FBI and Bharara tried for a year to get Martoma to flip and cooperate with them against Cohen. Unlike the Rajaratnam case, there are no recordings of incriminating conversations involving Cohen and his portfolio managers or outside tipsters. The New York Times described the evidence compiled by the FBI against Cohen as “entirely circumstantial.”

Among other things, Cohen is a brilliant poker player — which means he’s adept at not tipping his hand. In a rare interview with Vanity Fair’s Bryan Burrough in July 2010, he brushed aside the implication that he had done anything like what Rajaratnam was accused of. “I look at my firm, and I don’t see any of that. In some respects I feel like Don Quixote fighting windmills,” he told Burrough. “There’s a perception, and I’m trying to fight that perception. I find it offensive that they lump SAC into these articles. I really do. The press, I mean, they don’t understand what the hell — they don’t understand what they’re writing about.”

When it comes to winning a conviction for insider trading, the law requires not only proof that material, nonpublic information was exchanged but also that the exchange of that information constituted “a breach of duty” to someone — say, shareholders or a board of directors. When Bharara won the conviction of Rajat Gupta, the former McKinsey senior partner who was on the board of directors of Goldman Sachs, the jury found that Gupta had both shared insider information about Goldman with Rajaratnam and violated his duty to Goldman’s shareholders not to do so. That could be a snag in any case against Cohen. To whom did Cohen “breach” his “duty”? Certainly not his fund investors, who benefited tremendously from the trade. Still, the one journalist who has spoken to Cohen in recent years, Burrough, predicted in an e-mail to me, “They’re gonna get Cohen. They wouldn’t be building this pyramid if they didn’t intend to.”

If Cohen and his firm are nothing more than a criminal enterprise engaged in widespread insider trading, then Bharara is absolutely right to spend his time and his office’s resources going after them. Insider trading is justifiably illegal because the proper functioning of the capital markets depends on people having confidence the market is not a rigged game.

The bigger question for government prosecutors, though, is why none of the traders, bankers, or executives at the Wall Street banks who caused the 2008 financial crisis has been brought to justice. After the savings and loan scandal of the 1980s, some 3,500 bankers ended up criminally prosecuted and behind bars. This time around, no one on Wall Street has done jail time. In a June 2011 speech, Bharara said, “We too want to hold accountable anyone who deserves to be punished. ... Any case we make, however, will be because it is appropriate and deserved, not because there is overwhelming public pressure to do so.”

It’s true that the only thing worse than allowing the bankers to get away unscathed is prosecutorial misconduct. There’s a world of difference, however, between being meticulous and careful in bringing cases and appearing to do nothing at all when trillions of dollars have been lost and not a soul has been held accountable. That doesn’t mean the government should stop looking into the misdeeds of the likes of Steve Cohen. But it shouldn’t ignore those who did worse.


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