SAC Faces the Music: Preet Bharara Goes Nuclear on Hedge Fund—Is Cohen Next?

Preet Bharara.

Preet Bharara.

Last Thursday, when the government charged SAC Capital with perpetrating an insider-trading scheme from 1999 through 2010, the move answered a lot of questions people had been asking of late. The main one: given the fact that the Feds had yet to charge SAC’s founder, Steven Cohen, with any crimes, was he going to get off scot-free while an ever-growing number of his henchmen were charged with—and convicted for—crimes committed under his watch? Was it the same old story, in which another of Wall Street’s powerful avoids punishment for something he quite likely encouraged and most definitely profited from? The refreshing answer: not this time. The U.S. attorney for the Southern District, Preet Bharara, plays hardball, and he just threw a fastball right at Mr. Cohen’s chin.

Of course, the answer comes with a couple of caveats. For one, Mr. Cohen has not been personally charged with a crime. So he’s not facing jail time, at least not yet. What’s more, the firm has only been charged; there’s no guarantee it will be convicted. And don’t ask me if SAC (or Mr. Cohen) is guilty. I’m no judge and jury, after all, and I’m also wary of being sued. (For good reason. Conrad Black sued me in 2011 for calling him a thief when he’s only a fraud in the eyes of the law.) But one thing is clear, and it is this: Mr. Bharara is aiming to destroy SAC Capital and, by extension, Mr. Cohen himself.

The announcement occasioned a field day for business writers. It’s particularly good news for my pal (and onetime Observer writer) Sheelah Kolhatkar, who’s got a book on Mr. Cohen in the works. We’ve since been treated to some solid second-day analyses, such as Peter Eavis’s excellent New York Times piece on how breaking SAC will rob Wall Street’s top players of a hell of a lot of rapid-trading commission lucre—The Wall Street Journal once calculated that SAC was responsible for a shocking 2 percent of all stock trading. They’re all going to act as if they’re shocked at the charges, of course, but they had to know too, didn’t they? Of course they did, but on Wall Street, morals tend to be pragmatically applied.

Still, many questions remain. That’s where I come in. I’m going to ask—and try to answer—those that strike me as the most baffling.

Why on earth did SAC’s lawyers agree to a $616 million civil settlement with the Securities and Exchange Commission if this was a possibility? Short answer: they underestimated Mr. Bharara. Which is ridiculous, if you think about it for five seconds. But the whole idea that Mr. Cohen had an information buffer around him that protected him from personal prosecution had worked so well up to this point that his crack legal team signed off on one of the biggest civil settlements in history without getting some sort of guarantee that it was the end of things. If somebody hasn’t been fired for that mistake, he or she will be soon.

Why hasn’t Mathew Martoma flipped? Mr. Martoma, you will recall, is the latest of Mr. Cohen’s minions to get busted with his hand in the insider-trading jar. He’s pleaded innocent to the charges against him, so if we go the whole assumption of innocence route, the short answer might be that he’s got nothing that would implicate Mr. Cohen. You never know. But I’m more inclined to look at the suspicious 20-minute phone call between Mr. Martoma and Mr. Cohen in 2008, which resulted in Mr. Cohen selling the stocks of Alzheimer drug makers Wyeth and Elan the next day, as a smoking gun akin to Rajat Gupta’s calling Raj Rajaratnam after that Goldman Sachs board meeting and Mr. Rajaratnam immediately selling shares in the bank. Without wiretaps, they’ll obviously deny a criminal conversation, but come on, people. The somewhat longer answer, then: because Mr. Martoma is a fool. While engaging in insider trading wasn’t exactly a foolish decision a few short years ago—nobody got caught, everybody got rich—it’s become more risky since Bharara & Co. made their intentions clear in 2009. Poor Mr. Martoma. His trades were in 2008. Ergo, the man just has colossally bad timing. (Unless he’s innocent, of course. Then he’s an angel.) But give him time. The guy has kids, after all.

Why didn’t Mr. Cohen clamp down on this kind of questionable behavior years ago? It’s not like he didn’t know that the Feds were gunning for him. Everybody knew they were. (As my friend Regan put it, last week’s developments didn’t exactly raise her skirt: “It’s no shocker.”) Short answer, then: hubris. When you get away with something for long enough, I guess, you just keep doing it—kind of like Anthony Weiner. (Or, in Mr. Weiner’s case, you keep doing it even after you’ve been caught.) The main difference between Mr. Cohen and Mr. Weiner, though, is that Mr. Cohen has several billion dollars on the line. The government is said to be planning to seek $10 billion in forfeiture from SAC. That would pretty much wipe Mr. Cohen out. And the firm itself is probably done as well. No major Wall Street firm has ever been the subject of a criminal indictment and lived to tell the tale—not E.F. Hutton, not Drexel Burnham Lambert; even Kidder, Peabody and Salomon Brothers, which both narrowly avoided indictment after scandals, ceased to exist shortly thereafter.

Why does anyone still work at SAC? Before last week, that was an easy one: because the firm pays extremely well. After last week, it’s more nuanced: because who’s going to hire someone from SAC now? As Mr. Bharara said in a press conference last week, “When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence. It is instead the predictable product of pervasive institutional failure.” But don’t expect many of the firm’s 1,000-plus rank-and-file to cop to complicity. This is going to be Bear Stearns all over again, and they’re all going to ask for our sympathy when they’re unemployed because they “unknowingly” worked for a morally bankrupt enterprise. Not buying it.

Why don’t they change the laws to make it easier to prosecute this kind of crime? For one, it’s hard to pass laws that put corporate criminals in jail, especially with a Republican majority in Congress. I’d say the SEC should stop settling civil suits with Wall Street malefactors by fining them while allowing them to “neither admit nor deny wrongdoing,” but my esteemed editor makes the point that those settlements are more about reimbursement than deterrence anyway. Not only that: if the SEC didn’t allow it, there would surely be far fewer settlements. (For more on that, see question No. 1 above.)

How come so many people are willing to compromise their morals for money? Just kidding. That’s a dumb question. A more interesting one might be why so many people are willing to put themselves in the position of potential fall guy for crimes conceived by their Wall Street overlords. Guys like Richard Lee, Jon Horvath, Noah Freeman, Donald Longueuil, Todd Newman and Anthony Chiasson, all of whom have pleaded guilty to insider trading either before or after they worked for SAC. Answer: while most of the people who get caught up in this kind of business had to be smart enough to get their high-paying jobs in the first place, the possession of wisdom has never been a job requirement. Only greed. And as the bard once wrote, “Shame on your greed, shame on your wicked schemes.”