BOOK REVIEW: How plausible deniability helped Steven Cohen beat the rap
Sheelah Kolhatkar shows in her book how Steven Cohen, Exhibit A for Wall Street sceptics, made plausible deniability work for him, writes John Gapper
Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street, by Sheelah Kolhatkar
A lot of people do not trust Wall Street. They regard it as a money-making machine for those who work there, which has little interest in practice in its stated aim of channelling capital into businesses and helping them to grow for the broader benefit of society. For such sceptics, Steven Cohen is Exhibit A.
Cohen’s former hedge fund, SAC Capital, came to dominate share trading on Wall Street before it pleaded guilty to insider trading charges in 2013 and paid $1.8bn in penalties. Cohen escaped criminal indictment, despite being the living, breathing heart of SAC Capital (its name came from his initials) and now runs a private fund with $11bn in assets.
He may be down, but he has not disappeared. The signs are that he will re-enter the hedge-fund business next year, after settling a civil action. "I feel I’m a very blessed person, a very happy guy, and when I look at my career in totality, I wouldn’t trade it for anything in the world," the billionaire responded flatly in a recent interview when asked about SAC’s downfall.
Sheelah Kolhatkar, a New Yorker writer who has doggedly followed the SAC Capital story — the biggest Wall Street insider trading scandal since Ivan Boesky was jailed in the late 1980s — sheds plenty of light on how the hedge fund became "very blessed".
It’s a murky tale that reflects extremely badly both on Cohen and on investment banks such as Goldman Sachs that enabled him.
Prosecutors and regulators could not nail Cohen, although they tried extremely hard. The closest they got was to jail for nine years Mathew Martoma, a close lieutenant who gained inside information about an Alzheimer’s drug from a doctor running trials on it. There was insufficient evidence of any criminality by Cohen, although SAC profited hugely by trading in the companies involved.
No reader of this book would conclude that Cohen is exactly innocent. He built a vast machine that relied on a web of data, some of it illicit. Even the way he gained legal insights leaves a nasty taste in the mouth. He paid big commissions to banks to let him know first of any new information so he could beat other hedge funds and investors to the trade. It gave SAC what Cohen craved: an "edge" on competitors. There were various sorts of edge, one SAC trader decided. "White edge" was expertise and insight that created legitimate trading opportunities; "grey edge" might be when a company executive dropped hints about its results — a nod and wink that did not quite amount to illegality. Then there was Martoma’s "black edge".
Cohen put huge pressure on traders to produce edge, but avoided knowing what shade it was. He demanded trading strategies accompanied by a "conviction rating" of one to 10, rather than an explanation of where they came from (Martoma gave his Alzheimer’s trade nine). This shielded SAC’s founder from legal jeopardy like "a moat around the company’s most valuable asset".
The quality that protected him most was the fact that he was, and always had been, a brilliant trader. He rose up the scrappy side of Wall Street, at a trading shop called Gruntal, rather than a glossy firm such as Goldman or Morgan Stanley. He was "exceptionally better than anyone else", said a former colleague: original, instinctive, brazen and eager for risk.
Kolhatkar tells lucidly how Cohen started off as an outlier — a profane and disruptive figure who had no interest in economics, strategy, or even the companies whose shares he traded — and inexorably pulled Wall Street in his direction. He was in the vanguard of the shift in power from banks to hedge funds, the lightly regulated, freewheeling exploiters of capital.
Along the way, he changed the notion of what "investment" meant. He bought shares not to hold them, like traditional mutual and pension funds, but to trade in and out of them rapidly. It was highly profitable, but it stripped away Wall Street’s cover story of being an engine of growth for the economy. Legal or not, it was unambiguously dubious.
Cohen’s enforced absence from the industry has coincided with a tougher period for hedge funds. The question is whether humans can match computers: the growing force in finance is the exchange-traded fund that mimics indices and investment strategies at a fraction of the cost. He will be competing with a robot if he returns, and the robot has my support.
• Gapper is the FT’s chief business commentator
© The Financial Times 2017