If you’re a fan of magic, one of the most enjoyable evenings available in New York City is a wonderful little show put on by one Steve Cohen out of a suite at the Waldorf Astoria several evenings a week. Mr. Cohen, known as “the millionaires’ magician,” thrills with sleight of hand and a witty banter that evokes the old-school parlor magicians of yore. But the highlight of his show is a segment in which he tells members of the audience things about themselves that he really shouldn’t know. Go see for yourself; it’s mind-boggling. Mr. Cohen has made quite a career out of his talent—he even had a special on the History Channel last week—but he may be in the wrong line of work.
See, there’s another man named Steve Cohen who has also made quite a career out of seemingly knowing things he shouldn’t know. Call him “the billionnaire magician.” I’m speaking of Steven A. Cohen, the hedge fund manager and founder of SAC Capital, the $14 billion behemoth known for its lightning-quick trading. This Steve Cohen has racked up one of the most enviable records on Wall Street, delivering a 30 percent annual return to his investors over more than two decades. He’s been so successful, in fact, that the Feds have been circling him for years now, convinced—as are many others—that his record defies logic, that the only explanation for his success is that he is a cheater, an insider trader.
The reason for the disbelief is simple. Some Wall Street players make their fortunes by finding the right companies to invest in at the right price and then sticking with them over long periods of time. Think Warren Buffett. That Mr. Buffett has pulled off this feat again and again demonstrates a rare skill indeed, but not an unbelievable one. Others have made immense fortunes by taking a huge risk on a big trade and going all-in. Think John Paulson, who cleaned up when the housing bubble burst. There aren’t too many people who notch repeat wins with such big bets—Mr. Paulson himself hasn’t been able to replicate his spectacular success, and an avalanche of investors who threw money at him after his singular call have most certainly been disappointed with his recent results.
There’s a reason most traders don’t enjoy long-term success. Trading—as opposed to investing—is a capricious business. To be successful betting against the market day after day and year after year by trading in and out of stocks strikes even the most egotistical Wall Streeters as a near impossibility. And yet that’s exactly what Steven A. Cohen has done. Ergo, something is amiss. Think of it like a bit of prestidigitation—even those of us who love magic shows know deep down that a trick is just that. There’s another explanation than the one the guy in the tux waving a wand around would have you believe.
The man currently focused on solving the riddle of the hedge fund manager’s unlikely string of wins is Preet Bharara, the U.S. Attorney for the Southern District of New York. Mr. Bharara is in the midst of his own improbable winning streak—he and his team of able prosecutors have secured 69 convictions or guilty pleas out of 73 people charged with insider trading in the past three years alone. The most high-profile to date have been Raj Rajaratnam, another hedge fund manager, and Rajat Gupta, the former managing director of consulting powerhouse McKinsey & Co.
The latest target, though, makes even the impressive Mr. Rajaratnam seem like a punter by comparison. Mathew Martoma, who used to work for an affiliate of Mr. Cohen’s SAC called CR Intrinsic, has been accused of making profits (and avoiding losses) totaling a staggering $276 million by trading in and out of two health care companies using confidential information supplied by a doctor involved in clinical trials for an Alzheimer’s drug in mid-2008.
Leading up to July of that year, the SAC affiliate had built a position worth $700 million in a company called Elan. On July 20, the doctor advised Mr. Martoma that a drug trial had run into problems. Mr. Martoma then had a 20-minute phone call with Mr. Cohen and told him of his newfound concerns. The next day, SAC began unloading its shares of Elan. When they’d dumped everything, they went short. Elan announced the poor results on July 29, and the stock promptly fell by 42 percent. Mr. Martoma later earned a $9 million bonus as a reward for the profits SAC made from his “insights.” The fund pocketed the rest. Mr. Martoma has now been charged—he is mounting a defense—but speculation abounds that the real target here is Mr. Cohen.
According to The Wall Street Journal, the Feds even tried to flip Mr. Martoma to help them nail Mr. Cohen. To this point, they’ve been unsuccessful. But give them time. As the prospect of a prison term becomes more real to Mr. Martoma, the appeal of playing the loyal soldier might just wear off for the guy. He’s facing almost 20 years inside if convicted, and he’s married with kids. Who takes 20 years for the team, especially one that fires you for being “a one-trick pony” shortly after making a quarter-billion-dollar windfall? Gratitude needs to be a two-way street.
Before I go on, allow me to state one thing clearly: Steven A. Cohen has not been charged with any crime, nor has he been named in any criminal complaints. He’s been referred to as a “Portfolio Manager A” in government filings, but still … no charges as of yet.
Almost two years ago, I asked Mr. Bharara, a little wishfully, if all of his insider trading targets were part of one gigantic insider trading ring. Wishful because, as a journalist, the narrative allure of a Mafia-like conspiracy would make for a better story than a bunch of unrelated if contemporaneous insider trading crimes. Mr. Bharara replied that no, they weren’t really related, except for the fact that people of poor ethical constitution do tend to run in the same circles. (Or rings.) So even if there weren’t one big insider-trading ring, there were still a remarkable number of dotted lines between the smaller and arguably independent conspiracies.
Look closely, though, and its clear that a great many of those dotted lines seem to emanate from SAC Capital. And that is why the Feds just won’t let this one go: the more convictions that come out of the place (three hedge funders have copped to insider trading while under Mr. Cohen’s employ), the more it does look like an organization devoted to cutting legal corners in order to bank profit. Mr. Martoma is the fifth person formerly associated with SAC to be tied to the investigation.
Even Mr. Cohen’s investors seem a little concerned by the relentlessness of the Feds. Reuters reported that the fund recently changed its investor agreements to indemnify them from liability in the case of an insider trading conviction. You know the heat’s been turned up a notch when your own investors are getting squirrely.
I have often wondered out loud why Steve Cohen hasn’t retired by this point. He’s rich, he’s a legend, and Mr. Bharara (or his successor) is obviously never going to let up. But Stevie’s still at it. One theory is that he’s insulated himself so well from actual wrongdoing—he provides the capital while other people like Mr. Martoma cut the corners—that he’s not especially worried. And maybe he never even knew what was going on under his nose.
But there’s little doubt prosecutors are licking their chops at the idea of nailing him. They received permission to tap Mr. Cohen’s home phone in 2008. They must have presented the judge with a pretty convincing argument to win approval in the first place, though there’s no indication as yet that the wiretaps came up with any evidence of wrongdoing.
Another explanation for Mr. Cohen’s lack of concern might just be that he’s picked up a few magic tricks of his own. Steve Cohen the hedge fund manager has actually been to see Steve Cohen the magician. And who knows what Cohen No. 1 told Cohen No. 2? Mr. Bharara and his team might want to head over to the Waldorf themselves. There’s no telling what they’ll turn up.