Steven A. Cohen

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.

editorial@observer.com

The numbers, which have been closely followed in political circles, showed unemployment rising to 7.9 percent from 7.8 percent last month, hitting the average estimate of economists surveyed by Bloomberg. In a separate Bloomberg survey, economists estimated the U.S. would gain 125,000 jobs after adding 114,000 jobs last month.

While the jobs report has been overshadowed in recent days by the storm that rocked the East Coast, halting U.S. markets for two days and raising the specter of a delayed report, job stats have been a focal point amid a presidential campaign that has often focused on the slow pace of recovery in the U.S. economy.

Last month, after the unemployment rate dipped below 8 percent for the first time since 2009, former General Electric CEO Jack Welch questioned the validity of the numbers on Twitter, implying that the numbers had been doctored by the federal government to aid President Obama's re-election campaign.

The Bureau of Labor Statistics revised the non-farm payroll jobs gained in September upward to 148,000, from 114,000, and said that Hurricane Sandy didn't have a material affect on this month's report.

Mr. Welch has yet to tweet on the October job numbers.

Elsewhere on Wall Street:

Royal Bank of Scotland said it would probably face fines over charges it manipulated inter-bank lending rates such as Libor.

The eight "systemically important" U.S. banks: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo.

America's midsize banks, including U.S. Bancorp and PNC Financial, are opening their own lobbying shops, according to Bloomberg, in a nod to their differing imperatives from larger Wall Street banks.

Rhode Island is suing Barclays, Wells Fargo and former Boston Red Sox pitcher Curt Schilling over inadequate disclosures pertaining to a $75 million loan the state facilitated for Mr. Schilling's video game company, 38 Studios.

"What can we make of this Barclays FERC thing? Besides, like, ha ha ha Barclays you sure like manipulating things?"

Market Folly has notes on David Einhorn's Iron Ore short idea.

The Times’sPeter Lattman on the Bruce-Bharara Bromance: "Before ripping into “Death to My Hometown,” a rollicking Celtic-inspired anthem, Mr. Springsteen shouted, “This is for Preet Bharara!” (Mr. Springsteen name-checks Mr. Bharara a YouTube clip about 22 seconds in.)"

Gilberto Valle III. (Facebook)

Manhattan U.S. Attorney Preet Bharara announced the Halloween-worthy arrest of 28-year-old NYPD officer Gilberto Valle III today. Mr. Valle, who was stationed at the 26th Precinct, has been charged with kidnapping, conspiracy and illegal use of a federal law enforcement database.

Those charges aren't strange at all, considering the crimes were allegedly committed as part of a plot with co-conspirators to kidnap and cannibalize as many as 100 women.

According to U.S. Attorney Bharara, Mr. Valle's plans were detailed and gruesome. In a press release, Mr. Bharara said that Mr. Valle "planned to kidnap women so that they could be raped, tortured, killed, cooked, and cannibalized."

The officer's plans "shock the conscience," said Mr. Bharara.

In the complaint against the officer, investigators detailed plans that allegedly went far beyond the talking stages. Mr. Valle may have thoroughly investigated targets and meticulously studied their lives.

In chat sessions held in July 2012 with someone referred to in court documents as CC-1 (Co-Conspirator 1), Mr. Valle and his associate allegedly discussed the best ways to kidnap, cook and eat an unnamed victim.

Authorities say the cop even created a document titled "Abducting and Cooking [Victim's name]: a Blueprint." The document contained the woman's name, birth date and physical details like height, weight and bra size. Investigators allege Mr. Valle even included a list of items needed, which read,

• Car (I have it)
• Chloroform (refer to website for directions)
• Rope (Strongest kind to tie her up)

Creepier still, Mr. Valle allegedly agreed with another co-conspirator to kidnap a different woman whom he would deliver bound, gagged and alive. Court documents contained a chilling transcript of an online exchange regarding the second would-be victim:

(Co-Conspirator 2): I definitely want her and how much again, I'm sorry to ask but I don't remember.
VALLE: $5,000 and she is all yours.
CC-2: Could we do 4?
VALLE: I am putting my neck on the line here. If something goes wrong somehow, I am in deep shit. $ 5,000 and you need to make sure she is not found. She will definitely make the news.

The U.S. Attorney says federal investigators found evidence of how closely Mr. Valle may have watched intended victims--cellphone data allegedly revealed the cop made and received calls while very close to the second target's Manhattan apartment. Investigators say interviews with "victim 2" revealed that she'd never had Mr. Valle over to her place and didn't know him very well.

In a statement about the arrest, NYPD Commissioner Ray Kelly said, "This is a bizarre case. We suspended the officer immediately upon his arrest, and a review is now underway to determine whether there was anything in his background that should have alerted the department to his alleged proclivities."

The complaint and warrant for the arrest of Gilberto Valle III is embedded below.

Greg Coffey, the co-chief investment officer of Moore Capital Management's European business, is stepping away from the trading floor, according to Bloomberg. Mr. Coffey lost money for clients in the last two years amid tumultuous European markets. He joins Brevan Howard co-founder Chris Rokos and energy trader John Arnold among big players to walk away from hedge funds in the last year.

New Citigroup CEO Michael Corbat's experience running the bad bank which disposed of toxic assets in the wake of the financial crisis, will likely come in handy. According to The Wall Street Journal: Citi Holdings accounts for 24 percent of the bank's assets under new capital rules.

Worst-case scenario projections for the Spanish economy used in a stress test of the nation's banks looks increasingly likely, according to some banking analysts.

A lawyer for Rajat Gupta, the former McKinsey & Co. chief executive officer convicted earlier this year of insider trading, said his client should be sent to Rwanda, not prison. Gary P. Naftalis suggested that Mr. Gupta should be sentenced to probation and allowed to spend the time conducting humanitarian work in the African nation, according to The Times. Prosecutors recommended a sentence of eight to 10 years.

Also from The Times article on Gupta: imagine the indignation when Preet Bharara, the U.S. Attorney whose office prosecuted Mr. Gupta, arrived to speak to one of his daughter's Harvard Business School classes.

Morgan Stanley beat analysts' estimates, posting profit of 28 cents a share excluding accounting adjustments, according to a press release today.

Bank of America eked out a small profit in the third quarter, the firm said yesterday.

When states attorneys general agreed to a $25 billion settlement with the nation's largest mortgage servicers, the deal included direct payments totaling $2.5 billion to states themselves. The expectation was that state governments would use the funds for mortgage initiatives, according to The Wall Street Journal, but much of the money is being used to plug budget holes.

The FBI arrested a Bangladeshi man and charged him attempting to detonate a 1,000-pound bomb on the Federal Reserve Bank of New York.

The superseding indictment adds new charges against Daniel Bonventre, who worked for Mr. Madoff for 40 years, eventually rising to the position of director of operations, as well as Annette Bongiorno and Joann Crupi, and brings charges against BLMIS computer programmers Jerome O'Hara and George Perez for the first time.

"We will not rest until all the alleged participants and enablers are made to answer for their conduct," U.S. Attorney Preet Bharara said in a statement.

Mr. Madoff was sentenced in 2009 to a maximum sentence of 150 years.

In February, U.S. Attorney Preet Bharara charged Kareem Serageldin, a former global head of the Swiss bank's collateralized debt obligation business, with masterminding a scheme to mismark positions in asset-backed securities, helping Mr. Serageldin and his traders meet targets linked to annual bonuses.

Mr. Sergaldin expressed surprise at the time of the indictment, noting through a lawyer that he'd been cooperating with the law. Nonetheless, prosecutors requested his presence in New York, threatening extradition if he refused. That now seems likely, according to The Journal:

Mr. Serageldin, a dual U.S.-U.K. citizen, is expected to appear in court in the U.K. on Thursday and the U.S. will likely to seek his return to the U.S. to face charges of criminal conspiracy, filing false books and records, and wire fraud. Sean Casey, a lawyer for Mr. Serageldin, declined comment Wednesday.

This news after former UBS executive and Belgian citizen Peter Ghavami was arrested at Kennedy Airport in 2010 on charges he helped rig bids on municipals bonds—and after Dealbook cited Mr. Ghavami's case to warn Libor manipulators in the employ of foreign banks to consider keeping out of the country—leaves us to wonder: Is there no place safe?

Mr. Whitman was charged with making illegal trades on technology companies such as Polycom and Google, and faces up to 25 years in prison at a sentencing hearing scheduled for Dec. 20. His conviction, which comes three days after baseball hall-of-famer Eddie Murray agreed to pay more than $350,000 to settle charges that Mr. Murray traded on an illegal stock tip provided by former teammate Doug DeCinces, brings the total defendants to plead guilty or be convicted of insider trading since 2009 to close to 70.

"Mr. Whitman had a hedge fund with his name on the door, with rules against insider trading," said U.S. attorney Preet Bharara in a statement. "He flouted those rules, tarnished his name and now is a convicted felon facing imprisonment."

That led to Ms. Bensam being summoned from the courtroom by U.S. Marshals,who instructed the eager law student that her correspondence (read the letters here) could be construed as an attempt to influence the case. At least, so go the press accounts of the incident.

Well. Ms. Bensam didn't take her treatment at the hands of U.S. Marshals lightly, and earlier this month filed a complaint against U.S. Attorney Preet Bharara, assistant USAs Reed Brodsky and Richard Tarlowe, the U.S. Marshal Service. Her beef: Upon entering the courthouse, Ms. Bensam checked her cell phone at the door. Upon exiting, marshals refused to return her phone. Thus: "Unreasonable search and seizure."

Above the Law breaks down the complaint, which you can read in its entirety here. A taste:

Ms. Bensam doesn't ask for concrete damages in her complaint, though she offers one remedy that might provide a start: "Collection of personal electronic devices should be ordered stopped and other less compromising means may be adopted for ensuring no disruptions in the courtrooms."

Which holds a certain amount of appeal to this occasional visitor to the courthouse, though it may be a little like running for class president on a promise to reduce homework. At any rate, we're glad to see that Ms. Bensam is still keeping busy.

Think of the fees! Somewhere a lawyer is drooling over the possibility that Wall Street firms that don't participate in setting Libor will start suing the firms that do. Asked about such a legal stance during Goldman Sachs' second-quarter earnings call, Chief Financial Office David Viniar demurred. The more banks enter settlements like Barclays $451 million pact with regulators, the higher the likelihood of interbank lawsuits, Bloomberg reports.

Soon to be Libor-ated? Bloomberg has the names of three traders—Michael Zrihen at Credit Agricole, Didier Sander at HSBC and Christian Bittar at Deutsche Bank—said to be under investigation for manipulating interbank lending rates.

So you'll have to share..."I have to apologize that there are so many people in the audience I don't have enough subpoenas for all of you," U.S. attorney Preet Bharara told a room full of investors yesterday at the Delivering Alpha conference. Also: “If you have open and aggressive and fair and proper and proven cases that you bring, and you show that in the kinds of cases that I’ve brought, that’s the kind of thing that over time gives people more confidence in the market.”

Rebound: How Martha Coakley, the Massachusetts attorney general who lost a 2010 Senate seat to Scott Brown, declared war on Wall Street's role in the collapse of the housing market.

Not so golden: The foreclosure rate among Americans over 50 is rising faster than in previous years, according to the AARP.

Whither Europe: Spain is paying more to borrow on 5-year bonds than it has at any point since 1996.

CFPB strikes: Capital One will pay $210 million to settle charges that call-center contractors pressured customers into buying products such as identity-theft monitoring. The settlement included a $25 million fine paid to the Consumer Financial Protection Bureau, in what has been touted as the year-old agency's first major enforcement action.

Will travel: Lloyd Blankfein would not waive his magic wand over Dodd-Frank and make it disappear, he said at the Economic Club of Washington, D.C. He also joked that he'd like to be courted for a political appointment when his career at Goldman ends. “By any president," he said. "I didn’t mean to limit it to the United States.”

Missed: Morgan Stanley reported second-quarter earnings of 16 cents per share, well short of Wall Street's expectations for 29 cents.

Bharara.

A former marketing executive at AT&T pled guilty to insider trading charges after providing sales data for the Apple iPhone and RIM's Blackberry to a so-called expert network, said U.S. Attorney Preet Bharara in a statement.

Alnoor Ebrahim, 57, of Alpharetta, Georgia, pled guilty to one count of conspiracy to commit securities fraud and wire fraud. According to a press release, Mr. Ebrahim was paid more than $180,000 between 2008 and 2010 for providing nonpublic information on handset sales to investors. The charge carries a maximum sentence of five years.

The guilty plea comes after Mr. Bharara's office obtained a guilty verdict in the insider trading trial of Rajat Gupta, the former McKinsey & Co. chief executive charged with passing corporate secrets to now-imprisoned hedge fund manager Raj Rajaratnam.

Mr. Ebrahim's guilty plea marks the government's 63rd insider trading conviction since October 2009.

Updated to correct the number of insider trading convictions obtained by the government in recent years.