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

Spain is moving towards accepting European bailouts, even as protests in Madrid turned violent and politicians in the Catalonia region called for secession.

“It’s just amazing how Libor fixing can make you that much money or lose if opposite.” So said Tan Chi Min, a former Royal Bank of Scotland trader in a conversation with traders at other banks, in an affidavit reviewed by Bloomberg. “It’s a cartel now in London.” Tan is suing RBS in Singapore for wrongful dismissal after being fired for attempting to manipulate Libor.

SAC Capital hedge fund manager Michael Steinberg is said to be an unindicted co-conspirator in the government's insider trading case against hedge fund managers Anthony Chiasson and Todd Newman and technology analyst Jon Horvath. A Sept. 6 filing, prosecutors added four unindicted co-conspirators to their case; the names were blacked out in the filing, but one of the four was "the portfolio manager to whom Jon Horvath reported at his hedge fund." That person was Mr. Steinberg, according to unnamed sources cited by Bloomberg.

Part two of Reuters massive, massively awesome profile of Peregrine Financial Group founder Russell Wasendorf Sr., who pleaded guilty to stealing millions from clients at his Iowa-based futures brokerage. Part one is here.

Former Goldman Sachs programmer Sergey Aleynikov is suing the bank for $2.4 million in legal fees incurred while defending himself against charges that he stole code from the firm before leaving Goldman to join a high-frequency trading startup. Mr. Aleynikov was convicted by a federal jury in 2010, but won an appeal; he now faces charges in Manhattan.

Bureaucratic infighting has roiled government investigations into money-laundering charges at HSBC, according to Reuters.

Former UBS trader Kweku Adoboli told colleagues he was reporting fictitious trades, British prosecutors said. Mr. Adoboli is being tried on charges of fraud and false accounting over unauthorized trades on which UBS lost $2.3 billion.

Matt Levine on Securities and Exchange Commission charges against Hold Brothers On-Line Investment Services: "This is fundamental forces of some algorithms versus other algorithms, and each of those algorithms represents in some imperfect and abstracted way “supply and demand,” but not in a way a human could formulate in his mind or feel in his heart."

Germany is expected to enact legislation that would rein in high-frequency trading, according to The Times.

Have you heard the one about the British hedge fund manager (Crispin Odey) who's spending $210,000 on the stone to be used to construct a luxury chicken coop?

That's a question Elizabeth Bingham-Perry could answer. The Scarsdale resident filed a civil RICO action against her husband Jeffrey Perry in the U.S. Southern District's Westchester courthouse last week.

Mr. Perry, it so happens, is an executive at Third Point LLC, the hedge fund founded by Dan Loeb.

In the complaint, Ms. Bingham-Perry alleges that Mr. Perry lied on net worth statements submitted by mail in the divorce proceedings, concealing assets in excess of $1 million in offshore and other acounts. That's just the start. Mr. Perry's entire career, his wife alleges, "has been marked by repeated criminal activity in his quest to amass his fortune,” a claim she rests on Mr. Perry's alleged participation in a scheme to drive down the share price of a Canadian company called Fairfax Financial.

Which is a pretty nasty thing to say about your husband of 23 years, and a crude but potentially useful cudgel for hammering out a settlement.

A little background: RICO is the Racketeer Influenced Corrupt Organizations Act, passed by Congress in 1970 to allow the government to prosecute mafia godfathers for crimes committed by their organizations, but written broadly enough to apply to any person who uses an enterprise to engage in a continuous pattern of criminal activity.

"You see it a lot in divorce cases," said Jeffrey Grell, a lawyer at Grell & Feist who teaches a course on civil RICO at the University of Minnesota School of Law and has represented plaintiffs and defendants in civil racketeering charges. "Particularly when there have been efforts by one spouse to fraudulently conceal assets from the other."

Indeed, Ms. Bingham-Perry isn't the first hedge fund wife to play this hand.

In 2009, Patricia Cohen brought a civil RICO suit against SAC Capital founder and longtime ex Steven A. Cohen. A judge dismissed the case in March 2011, though it's currently under appeal.

Coincidentally, attorney Howard W. Foster, who's listed on Ms. Bingham-Perry's complaint as a pro hac vice counsel, also represented Ms. Cohen.

The first half of Ms. Bingham-Perry's complaint is fairly straightforward. She says that Mr. Perry used "U.S. mails and wires to perpetuate frauds and enrich himself in the divorce actions," wiring assets into secret accounts after hiring a divorce lawyer in 2005, then intentionally omitting those assets in documents mailed to Ms. Bingham-Perry and the New York State Supreme Court last year.

Whether the plaintiff's counsel—Clifford James, who once sued the Andy Warhol Foundation on behalf of the Velvet Underground—can convince a judge that the Mr. Perry's alleged actions support a civil RICO case is no sure thing, but there are clear incentives to filing claims like this one: Plaintiffs are entitled to three times the damages, plus lawyer's fees, in civil RICO suits.

“I sometimes like to challenge my students with the question, 'Is it professional malpractice not to characterize a claim as civil RICO?'” Sara Sun Beale, a law professor at Duke University, told The Observer, referring to the outsized damages available. "If nothing else, it moves the settlement needle closer to the plaintiffs."

And yet, it's the second half of her complaint that Ms. Bingham-Perry complaint that made us take note. In addition to Mr. Perry's alleged concealment of marital assets, she says, her hedge funder soon-to-be ex-husband participated in a conspiracy to drive down the share price of Fairfax Financial.

The short story: In 2006, Toronto-based Fairfax filed suit against an array of parties including Third Point, Mr. Loeb and Mr. Perry, alleging that a group of hedge funds—including Mr. Cohen's SAC Capital and James Chanos' Kynikos Associates—spread false rumors about Fairfax in an attempt to drive down the share price, and that those hedge funds profited by shorting Fairfax stock. (Mr. Perry, as well as Mr. Loeb, Mr. Cohen, Mr. Chanos and their respective firms, have all been dismissed from the Fairfax case.)

Ms. Bingham-Perry's suit alleges: "Jeffrey conspired to commit many instances of disseminating false information about Fairfax in order to harm it and enrich himself from 2003-2006."

Now, dear reader, is when you might wonder what in the hell this has to do with divorce.

While that allegation doesn't relate directly to the plaintiff's claim that her husband concealed assets, the complaint argues that the Fairfax scheme establishes "that Jeffrey has committed or conspired to commute a pattern of racketeering activity in the last decade."

Bankster is as bankster does, the argument might go, and what's hiding marital assets offshore to someone who's conspired to bring down an entire company?

At any rate, that's one way to read the complaint, and at face value, not an implausible one. Wall Streeters have been concealing assets from their spouses as long as there's been a such thing as divorce. Another theory, of course, is that Ms. Bingham-Perry is trying to drag the Fairfax case into her divorce to influence the settlement.

Which, not surprisingly, is the point of view Mr. Perry's counsel is taking.

"It's a completely frivolous lawsuit," said attorney Robert Stephen Cohen, noting that the RICO action was filed just before a judge awarded Mr. Perry sole custody of the couple's two minor children. "It was an attempt to intimidate him. As we speak, papers are being drafted to dismiss the case."

Neither Mr. James nor Mr. Foster, the plaintiff's attorneys, responded to email and telephone requests for comment. But there's at least one part of their client's case that doesn't appear to track: "You don’t have a claim until you have a final result," Mr. Grell told The Observer, which is to say that until a spouse shows damages derived from the concealment of assets, the racketeering law may not apply. But the financial part of the Perrys divorce won't be contested for several months. "To have a RICO complaint, you almost have to have a crappy divorce result."

After months of speculation, his mercurial hedge fund, SAC Capital, is near a deal to take 66,000 square feet, or the second through fifth floors, multiple sources said. Rumors of the deal have been swirling for months, but a lawsuit by Mr. Cohen's ex-wife, which included allegations of insider trading, are said to have held up the signing. A judge threw out the case yesterday, and sources said the deal could now be signed in a matter of days.  

The huge lease—which earlier media reports said could include coveted naming rights to the building—would be a turning point for the glimmering Club Med of office towers, built and lost by Harry Macklowe to Mort Zuckerman's Boston Properties in September 2010 for $275 million. The building, with a pool and health club, has a sole tenant: Senator Investment Group, which took the 28th floor for a rent above $100 a foot in November. 

SAC Capital is currently spread over multiple floors at nearby 540 Madison and is headquartered in Stamford, Conn.

More details to follow. For now, Boston Properties declined to comment and CB Richard Ellis' Paul Amrich, the broker for 510 Madison, did not return calls for comment. SAC Capital's broker, Newmark Knight Frank's Neil Goldmacher did not respond to requests for comment. 

lkusisto@observer.com 

SAC said in the letter, dated Nov. 23, that the government served identical "extraordinarily broad" subpoenas on a number of investment managers of different sizes and descriptions, including SAC. The subpoena does not focus on particular individual securities, sectors or strategies, SAC added. The firm said the subpoenas don't "shed much light on whom or what the government may be investigating."

SAC also told "Neither the subpoena nor any other information of which we are aware suggests that anyone at SAC has engaged in any wrongdoing." Bloomberg puts it this way: "No allegation of wrongdoing has been made against Stamford, Connecticut-based SAC."

Assorted dotted lines have been pointing to Cohen since Monday morning, when the feds searched the offices of two SAC offshoots, Level Global and Diamondback Capital Management. Both companies were founded by people who used to work for Mr. Cohen.

(via Dealbreaker)

mtaylor [at] observer.com | @mbrookstaylor

• Someone at the Securities and Exchange Commission had the bright idea to stop targeting specific insider trades and instead try to bring down entire communities of Wall Street lawbreakers. This notion has been at play in last year's massive Galleon case and also yesterday's government raids on three big hedge funds. [WSJ]
• There have been no formal allegations against Steven A. Cohen's giant SAC Capital hedge fund. The FBI does, however, seem pretty interested in people who used to work for Cohen. [Bloomberg]
• The Federal Reserve is trying to implement policy without being too political. This is proving difficult. [NYT]
• Richard Bernstein, a guy who used to say the economy was doomed to collapse, is now saying the economy is stronger than people think. Funny how it switches like that. [AP]
• Also, commercial real estate prices have been rising, which is nice. [FT]

mtaylor [at] observer.com | @mbrookstaylor

John Kinnucan says he was sipping wine on his front porch in Portland, Ore., on Oct. 25 when a gray sedan pulled up and two men in business suits jumped out, identifying themselves as FBI agents.

Just because John Kinnucan enjoys the occasional glass of vino doesn't mean he's soft, and he sure isn't a snitch. After the Feds barged in and asked him to cooperate with an investigation, Kinnucan dashed off an email to his friends on the Street to warn them that the heat is on. He wrote:

Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information.... We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web.

Kinnucan sent this tidy little missive to some big-deal firms, including SAC Capital, Citadel, Janus, Wellington and MFS. Is Goldman Sachs a figure in this story? Yes!

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.

People who tread in these potentially extralegal circles probably didn't start out on burgundy, but now may be a good time to switch to the harder stuff.

mtaylor [at] observer.com | @mbrookstaylor