Black edge Inside information, dirty money, and the quest to bring down the most wanted man on Wall Street

Sheelah Kolhatkar

Book - 2017

"Steven A. Cohen is a Wall Street legend. Born into a middle class family in a decidedly upper class suburb on Long Island, he was unpopular in high school and unlucky with girls. Then he went off to Wharton, and in 1992 launched the hedge fund SAC Capital, which grew into a $15 billion empire. He cultivated an air of mystery and reclusiveness -- at one point, owned the copyright to almost every picture taken of him -- and also of extreme excess, building a 35,000 square foot house in Greenwich, flying to work by helicopter, and amassing one of the largest private art collections in the world. But on Wall Street, he was revered as a genius: one of the greatest traders who ever lived. That public image was shattered when SAC Capital bec...ame the target of a sprawling, seven-year criminal and SEC investigation, the largest in Wall Street history, led by an undermanned but determined group of government agents, prosecutors, and investigators. Experts in finding and using "black edge" (inside information), SAC Capital was ultimately fined nearly $2 billion -- the largest penalty in history -- and shut down. But as Sheelah Kolhatkar shows, Steven Cohen was never actually put out of business. He was allowed to keep trading his own money (in 2015, he made $350 million), and can start a new hedge fund in only a few years. Though eight SAC employees were convicted or pleaded guilty to insider trading, Cohen himself walked away a free man. Black Edge is a riveting, true-life thriller that raises an urgent and troubling question: Are Wall Street titans like Steven Cohen above the law?"--

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Subjects
Genres
True crime stories
Published
New York : Random House [2017]
Language
English
Main Author
Sheelah Kolhatkar (author)
Edition
First edition
Physical Description
xx, 344 pages ; 25 cm
Bibliography
Includes bibliographical references (pages 307-336) and index.
ISBN
9780812995800
  • Prologue: The Flip
  • Part I.
  • Chapter 1. Money, Money, Money
  • Chapter 2. What Stevie Wants, Stevie Gets
  • Chapter 3. Murderers' Row
  • Part II.
  • Chapter 4. It's Like Gambling at Rick's
  • Chapter 5. Edgy, Proprietary Information
  • Chapter 6. Conflict of Interest
  • Chapter 7. Stuff That Legends Are Made Of
  • Part III.
  • Chapter 8. The Informant
  • Chapter 9. The Death of Kings
  • Chapter 10. Occam's Razor
  • Chapter 11. Undefeatable
  • Chapter 12. The Whale
  • Chapter 13. Karma
  • Chapter 14. The Life Raft
  • Part IV.
  • Chapter 15. Justice
  • Chapter 16. Judgment
  • Epilogue
  • Cast of Characters
  • Acknowledgments
  • Notes and Sources
  • Index
Review by New York Times Review

WHEN JAMES B. STEWART'S groundbreaking narrative about insider trading, "Den of Thieves," was published in 1991, it pulled back the curtain on a culture of corruption that pervaded high finance. Stewart's book brought the reader inside the room of the most private meetings and discussions among the likes of the famed arbitrageur Ivan Boesky and the financier Michael Milken, as well as those prosecuting them, led by Rudy Giuliani. "Den of Thieves" crackled with memorable one-liners that became Wall Street lore. "Your bunny has a good nose" - code for a piece of illegal inside information that was accurate - quickly became a catchphrase. Now, Sheelah Kolhatkar, a staff writer at The New Yorker, has sought to present a modern-day version of "Den of Thieves," this time with prosecutors focused on Steven A. Cohen, perhaps the most successful hedge fund investor of the modern era, who amassed wealth of some $13 billion. Her book, "Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street," is a richly reported, entertaining tale about the cat-andmouse game between the government and Cohen - much of which played out in the news media - for the greater part of the last decade, if not longer. "Black Edge," which at times reads like a thriller, is a fascinating look at Cohen, whom Kolhatkar portrays as an obsessive and ruthless investor. After he divorced his first wife, Kolhatkar reports, Cohen told his staff: "I just got ripped off by my wife. I'm going to make it all back by cutting your payouts." Her book is also a deep examination of a culture within hedge funds that demanded employees find an "edge," and seemingly continued to rely on illegal tips by insiders - information that was called "black edge" in Cohen's firm - for far too long. If you've kept up with the headlines about Cohen over the years, you know the ending of Kolhatkar's tale in advance: The government never brings a case against him. That reality, to some degree, gets in the way of an otherwise good story - and in the end makes it not nearly as satisfying as "Den of Thieves." Cohen is never proved guilty of breaking the law, despite a litany of circumstantial evidence presented by prosecutors and the author. The reader is left asking: Why not? In many ways, "Black Edge" is the story of a trial that never happened, a case that was never brought. It illuminates just how difficult it is to prosecute white-collar crimes. Kolhatkar describes in great detail meetings among F.B.I. agents and government lawyers all seeking to find enough evidence to prosecute Cohen. This book works, to the extent that it does, because Kolhatkar piles detail after detail upon one another. That's how she gets a reader to feel like he is in the room. However, too much of the time the reader seems to be in the wrong room, and that's a major problem. Kolhatkar never spoke with Cohen, and many of his closest associates appear to have been scared off talking to her. "Steve Cohen did not cooperate in the reporting process," she writes, "in spite of multiple requests over a three-year period, one of them conducted through an in-person encounter at Christie's. Cohen tried to prevent members of his closest circle from speaking with me, and at one point, a press representative working for Cohen threatened to have me followed." There is also very little from Preet Bharara, the United States attorney for the Southern District of New York - who, in Kolhatkar's telling, seemed as if he was on a life mission to put Cohen away. As a result, Kolhatkar is left relying on a string of F.B.I. agents and lawyers as sources to accomplish what amounts to a sleight of hand: She layers enough juicy little anecdotes and descriptions - "I want his pickled shark. I want to put his shark up in the office," she quotes Richard Zabel, one of the prosecutors, saying - to make you feel you're getting an insider's look. But if you're paying attention, when any given chapter is over you realize that far too often you have never gleaned what Cohen or Bharara was doing - or thinking - at the most pivotal moments. And given that the prosecutors never get their man, understanding how Cohen personally mounted a stealth defense that kept him from ever stepping into a courtroom was the mystery that required solving. At one point, Kolhatkar gets close to an explanation for the gaps in her narrative. She recounts a fascinating meeting in which Cohen's lead lawyer, Martin Klotz, explains to prosecutors how he would defend his client if they bring a case. Surprisingly, the lead prosecutor in the room seems nonplused by the lawyer's arguments, which raise questions about whether his client had actually read an email about a piece of inside information or, indeed, whether the material could legally constitute inside information. Describing the defense's strategy, the prosecutor sarcastically says: "I might have been in the bank, and I might have had a mask, and I might have had a gun, but that doesn't mean I robbed the bank." Yet moments later, Kolhatkar writes that "hearing Klotz lay it all out, much the way he would in front of a jury, was a hard dose of reality. After years of agonizing work, they didn't quite have the evidence they felt they needed to convict Steve Cohen. Not in a criminal case, anyhow." Huh? it is such missing pieces that undermine what is otherwise a well-told story. What's more, if you're looking for a great revelation or a headline, you will be disappointed. Kolhatkar doesn't find anything more than what's already out there, and she seems to acknowledge as much. In explaining why one of Cohen's lieutenants, Mathew Martoma, refused to turn on him rather than go to jail, she is left speculating: "Perhaps Martoma simply could not accept the idea of being an informant," she writes. "Perhaps Martoma believed he would face some kind of retribution if he crossed Cohen." Then she adds "another hypothesis." Maybe "Martoma harbored a desperate hope that Cohen would repay his loyalty." Ultimately she concludes, "For now Martoma's motivations remain a mystery." The best i nsider fly-on-the-wall books work on two levels: They appeal to the layman with a passing interest in the subject because of the sheer drama of the story. But they also wow sophisticated insiders (excuse the wordplay) with new details that make them rethink what they knew about the topic. This book may work on the first level, but it doesn't work on the second. ? In many ways Sheelah Kolhatkar's book is the story of a trial that never happened. Andrew ross sorkin is a financial columnist for The Times, the author of "Too Big to Fail" the co-creator of Showtime's "Billions" and the co-anchor of CNBC's "Squawk Box."

Copyright (c) The New York Times Company [January 1, 2017]
Review by Booklist Review

In 2013, the Wall Street hedge fund SAC Capital Advisors pleaded guilty to insider trading the purchase or sales of stocks using nonpublic information and cut a deal with the U.S. Securities & Exchange Commission to pay $1.8 billion in penalties. New Yorker staff writer and former hedge-fund analyst Kolhatkar ably traces the roots of the case, one of the largest of its kind in U.S. history. She follows the fascinating story of virtuoso trader and SAC Capital founder Steven A. Cohen, whose talent for making money made him one of the richest men in America. Possibly the most gripping portion of this part business, part legal drama is Kolhatkar's coverage of the case against Cohen's employee Mat Martoma, who was sentenced to nine years in prison for his role in SAC's insider trading. With close perspectives from individuals working for the FBI and SEC and a flowing, narrative style, Kolhatkar offers an utterly absorbing look at how Cohen pushed his traders to the limit that black edge and how he mostly insulated himself from the potential ramifications. This fast-paced, true-life thriller will leave readers enraptured and troubled.--Bostrom, Annie Copyright 2017 Booklist

From Booklist, Copyright (c) American Library Association. Used with permission.
Review by Library Journal Review

Kolhatkar's (staff writer, The New Yorker) book provides the most details about the Securities and Exchange Commision and FBI investigations into insider trading in New York in the past ten years, coming after Charles Gasparino's Circle of Friends, Anita Raghavan's The Billionaire's Apprentice, and the PBS Frontline documentary To Catch a Trader. The "black edge" of the title refers to insider information used by hedge fund traders to cheat. The subject of this book is Steven A. Cohen's former firm, SAC Capital, which pled guilty in 2013 to criminal insider trading and paid a $1.2 billion settlement. Cohen avoided personal liability. Organized chronologically, this volume starts with the FBI -investigation into convicted billionaire Raj Rajaratnam. It ends in 2015 with Cohen emerging unscathed and ready to return to trading other people's money. Unlike Circle of Friends, which covers the same ground, this book benefits from Kolhatkar's access to the post-2013 criminal trials and government investigators. She notes wryly that the attorneys who pursued Cohen have moved into representing the industry, which is now more complex and successful than before. -VERDICT Well-written, with pointed characterizations of the ambitious players and their motives, this book is highly recommended for readers interested in finance, crime, and politics. [See Prepub Alert, 8/26/16.]-Harry Charles, St. Louis © Copyright 2017. Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.

(c) Copyright Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.

Chapter 1 Money, Money, Money There tend to be two types of people who seek out jobs on Wall Street. The first are those with wealthy parents who were sent to the right prep schools and Ivy League colleges and who, from their first day on the trading floor, seem destined to be there. They move through life with a sense of ease about themselves, knowing that they will soon have their own apartments on Park Avenue and summer houses in the Hamptons, a mindset that comes from posh schooling and childhood tennis lessons and an understanding of when it is appropriate for a man to wear seersucker and when it isn't. The second type call to mind terms like street smart and scrappy. They might have watched their fathers struggle to support the family, toiling in sales or insurance or running a small business, working hard for relatively little, which would have had a profound effect on them. They might have been picked on as children or rejected by girls in high school. They make it because they have a burning resentment and something to prove, or because they have the ambition to be filthy rich, or both. They have little to fall back on but their determination and their willingness to do whatever it takes, including outhustling the complacent rich kids. Sometimes the drive these people have is so intense, it's almost like rage. Steven Cohen came from the second group. As he reported for work one morning in January 1978, Cohen looked like any other twenty-one-year-old starting his first job. He could hear the roar of the trading floor, where dozens of young men were chattering away on the phone, trying to coax money from the people on the other end of the line. The room was alive with energy. It was as if a great oak tree were shaking in the middle of an autumn forest and leaves of hundred-dollar bills were raining down. To Cohen it felt like home, and he ran right in. Gruntal & Co. was a small brokerage firm located around the corner from the New York Stock Exchange in the gloomy canyons of lower Manhattan. Established in 1880, Gruntal had survived the assassination of President McKinley, the crash of 1929, oil price spikes and recessions, largely by buying up other tiny, primarily Jewish firms while also staying small enough that no one paid it much attention. From offices across the country, Gruntal brokers tried to sell stock investments to dentists and plumbers and retirees. When Cohen arrived, the firm was just starting to move more aggressively into an area called proprietary trading, trying to make profits by investing the firm's own money. For an eager Jewish kid from Long Island like Cohen, Wall Street didn't extend an open invitation. Even though he was freshly out of Wharton, Cohen still had to push his way in. Gruntal wasn't well-respected, but he didn't care about prestige. He cared about money, and he intended to make lots of it. It happened that a childhood friend of Cohen's, Ronald Aizer, had recently taken a job running the options department at Gruntal, and he was looking for help. Aizer was ten years older than Cohen, had an aptitude for math, and had autonomy to invest the firm's capital however he wanted. On Cohen's first day, Aizer pointed at a chair and told his new hire to sit there while he figured out what, exactly, he was going to do with him. Cohen sank down in front of a Quotron screen and became absorbed in the rhythm of the numbers ticking by. The stock market distills a basic economic principle, one that Aizer had figured out how to exploit: The more risk you take with an investment, the greater the potential reward. If there's a chance that a single piece of news could send a stock plunging, investors expect greater possible profit for exposing themselves to those potential losses. A sure, predictable thing, like a municipal bond, meanwhile, typically returned very little. There's no reward without risk--it was one of the central tenets of investing. Aizer, however, had found an intriguing loophole in this mechanism, where the two elements had fallen out of sync. It involved stock options. The market for options at the time was far less crowded than regular stock trading--and in many ways, more attractive. Options are contracts to either buy or sell shares of stock at a fixed price, by a specific date in the future. A "put" represents the right to sell shares of stock, which means that the owner of a put will benefit if the stock price drops, allowing him or her to sell the underlying shares at the agreed-upon higher price. "Calls" are the opposite, granting the holder the right to buy a particular stock at a specific price by a future date, so the owner of the call will benefit if the stock rises, as the option contract allows him or her to buy it for less than it would cost on the open market, yielding an instantaneous profit. Investors sometimes use options as a way to hedge a stock position they already have. At Gruntal, Aizer had implemented a strategy called "option arbitrage." It was based on the idea that in a properly functioning market, the price of a put option, the price of a call option, and the price at which the stock was trading should be in alignment. Because options were new and communication between markets was sometimes slow, this equation occasionally fell out of line, creating a mismatch between the different prices. By buying and selling the options on one exchange and the stock on another, for example, a clever trader could pocket the difference. In theory, the technique involved almost no risk. There was no borrowed money and relatively little capital required, and most positions were closed out by the end of the day, which meant that you didn't develop ulcers worrying about something that might send the market down overnight. The strategy would be rendered obsolete as technology improved, but in the early 1980s it was like plucking fistfuls of cash off of vines--and the traders at Gruntal enjoyed bountiful harvests. All day long, Aizer and his traders compared the prices of stocks to their valuations in the options market, rushing to make a trade whenever they detected an inconsistency. "You could have IBM trading at $100 on the New York Stock Exchange floor," explained Helen Clarke, who worked as Aizer's clerk in the early 1980s, "and the options that equal IBM at $100 trading at $99 in Chicago, so you'd run to Chicago and buy it and sell it at the NYSE." If done enough times, it added up. Without the benefit of computer spreadsheets, the traders had to keep track of everything in their heads. Aizer set up a system that required minimal thinking. You didn't have to be good, he liked to say, you just had to follow the formulas. It was tedious. A trained monkey could do it. On Cohen's first day, he watched Aizer work with a trading assistant, scouring the market for $0.25 or $0.50 they could make on their idiot-proof options schemes. During a lull in activity, he stared at the market screens. Then Cohen announced that he was looking at a stock, ABC. "I think it's going to open higher tomorrow," he said. Even brand-new on the job, Cohen was confident in his abilities as a trader. Aizer snickered. "All right," he said, curious to see whether the new kid with bushy brown hair and glasses had any clue what he was doing. "Go ahead, take a shot." Cohen made $4,000 that afternoon, and another $4,000 overnight; in 1978, this was a meaningful profit. Watching the price oscillate like a sine wave, placing the bet, taking the risk, absorbing the payoff--his body surged with adrenaline, and Cohen was hooked. Trading was all he wanted to do. Aizer was stunned. How could someone so inexperienced, someone who couldn't even be bothered to iron his shirt, be this good at predicting whether stocks would go up or down? "I knew he was going to be famous within a week," Aizer said. "I never saw talent like that. It was just staring at you." On Sunday afternoons, inside a four-bedroom split-level house in Great Neck, a little boy stood watch by his bedroom window, waiting for the sound of tires on asphalt. As soon as the Cadillac pulled up outside, he came flying down the stairs. He wanted to be the first of his siblings to reach the door when his grandparents arrived. Walter and Madeline Mayer, Steven Cohen's maternal grandparents, lived partly off an investment portfolio of inherited money, and they came to see their grandchildren once or twice a month. They led an alluring life in Manhattan, one that involved fancy restaurants and Broadway shows. They represented escape and abundance and excitement, and when Steve was growing up, their visits were his favorite moments of the week. They were always talking about money, and Cohen listened carefully to the lessons that emerged, the idea that once you had money, banks would pay interest on it, and that money could be invested and it would grow, requiring little or no work on the part of the investor, who was left to be envied and admired by others. The freedom that his grandparents enjoyed was a sharp contrast to the pinched and pedestrian existence of Cohen's parents. When his father walked in the door after work each night, Cohen grabbed his New York Post so he could study the stock tables like his grandfather. Born in the summer of 1956, Cohen was the third of Jack and Patricia Cohen's eight children. Great Neck was twenty miles from New York City, an affluent suburban enclave of progressive-minded Jewish professionals who expected their children to do well in school and go on to careers as doctors and dentists. F. Scott Fitzgerald settled there in 1922, and the area became partial inspiration for The Great Gatsby, which was set in the fictional "West Egg," based on Kings Point, Great Neck's northernmost tip on the Long Island Sound. Many of the fathers of Great Neck lived separate Long Island and Manhattan existences, which involved a lot of drinking and long train commutes and extended hours away from home. There were synagogues and good schools and grand estates. In Great Neck, the Cohens were on the low end of the financial spectrum, which Steve was aware of from an early age. At a time when the Garment District still produced garments, Cohen's father, Jack, took the train every morning to one of his showrooms in Manhattan, where he ran a business called Minerva Fashions, which made twenty-dollar dresses for chains such as Macy's and J. C. Penney. Minerva was always on the verge of going bankrupt, so Jack was rarely home. Cohen's mother, Patricia--Patsy--was a self-employed piano teacher. She advertised in the local Pennysaver for clients, mostly neighborhood children, and taught strictly popular music--"Hello, Dolly!" rather than Beethoven or Brahms. She was a harsh, uncompromising woman who dominated the family, known for a sense of humor that could cut like a blade and for periodically berating her husband: "Jackie, you gotta fuck them before they fuck you!" Money was a constant source of stress in the Cohen household. Cohen's mother and father spoke openly about the inheritance they hoped was imminent from Patsy's parents, which they planned to use to introduce more comfort into their lives. Although he was small, Cohen was a gifted athlete, pitching for the baseball team, playing point guard in basketball. But his parents didn't have the means to help him make the most of his athletic potential--there wasn't much money for private lessons or time to drive him around to games. The junior high soccer coach ran a lakeside summer camp in Maine where several of the neighborhood children went. Cohen attended in 1968 and loved it. Camp was an enchanted world, a great equalizer where all the kids wore the same T-shirts and slept in little pine cabins, everyone on equal footing. There were no parents around fighting about the bills and telling the kids they couldn't do things. After that one summer, however, Steve's parents never sent him back; his classmates believed it was because they couldn't afford the fees. Still, Steve was doted upon. His grandmother marked him as the brightest of the eight siblings and referred to him as the "sharpest pencil in the box," which made him glow with pride. He got good grades without spending a lot of time studying. Cohen's older brother Gary remembers their mother fixing steak for Steve while the rest of the kids got hot dogs. "I used to complain," he recalled, "and my mother said, 'Your brother Steve is going to support us someday.' " In high school, Cohen discovered the one extracurricular activity that ignited true passion in him: poker. "A group of us, we started playing cards at each other's houses, all day, then all night," Cohen remembered. "The stakes started at, like, a quarter, fifty cents. Eventually we got up to five, ten, or twenty bucks a replacement card, and by tenth grade you could win or lose a thousand dollars in a night." All this card-playing helped Cohen learn an important lesson about capitalism. There were relatively difficult ways to make money, like working as a stock boy at Bohack supermarket for $1.85 an hour, which he did one summer and found to be excruciating. And there were much easier ways to earn a buck, like beating his friends at the poker table, which he found to be quite enjoyable. Cohen would stumble home early in the morning with fistfuls of cash, making sure to return his dad's car keys in time for his father to make his morning commute to work. Watching his father trudge off to work each day, Cohen had one thought: This life is not for me. Cohen was admitted to Wharton, and his parents were overjoyed. They had inherited some money from Jack's parents, freeing them from the burden of student loans, although Steve would still have to work to earn money for books and going out. As soon as he arrived on campus, he noticed that the parking lot was filled with BMWs and Mercedes that belonged to his fellow students. Once again, Cohen was in an environment where most everyone around him came from wealthier families than he did and he was shut out of the most elite social circles. His fraternity house became the center of his life. The culture at Wharton was driven by the worship of money. Cohen's fraternity, Zeta Beta Tau, or ZBT, was the wealthier of the two Jewish fraternities on campus. Its nickname was "Zillions Billions Trillions." Cohen spent most of his nights in ZBT's living room, which was transformed into a gambling den, with a dozen guys around a table. At the center of the table sat Cohen, leading the game, intensely focused amid clouds of smoke and clinking beer bottles. He was part of a core of five or six young men who dominated the table, while a rotating cast of losers filled the extra seats. Excerpted from Black Edge: The Inside Story of the Most Wanted Man on Wall Street by Sheelah Kolhatkar All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.