The Insider Trading Investigation That Almost Brought Down Billionaire Steve Cohen
From insider trading allegations to owner of the New York Mets, this hedge fund manager has managed to defy all odds
Steve Cohen began his investment career at Gruntal & Co. in 1978, working as an options arbitrage trader after graduating from University of Pennsylvania’s Wharton School of Business.
It was at Gruntal where Cohen developed his aggressive, short-term style of trading that led to impressive returns and a promotion to the head of the options arbitrage desk in 1983. His former boss Ronald Aizer attested that he was netting around $100,000 per day after gaining experience at the firm. Plus, Cohen was directly incentivized because Gruntal allowed its traders to keep a large percentage of their profits.
“Gruntal as a firm encountered a number of regulatory issues. They were people sanctioned for insider trading, there were a whole bunch of issues with the management of the firm, and it seemed like no one would was even paying to what the traders were actually doing.”
-Sheelah Kolhatkar, Bloomberg
By 1985, Cohen had grown even more ambitious and set out on his own to found SAC Capital Advisors with $25 million in initial seed capital.
SAC Capital Advisors
From 1985 to 1992, Cohen only experienced 3 losing months. That means in 84 months, returns were only negative for 3 months, demonstrating a monthly success rate of 96.42%. The largest decline in those 3 months was a minimal 2% drawdown.
The rumor on Wall Street was that Cohen paid sky-high commissions and fees to brokers and other financial firms so that he could receive the first notice on actionable information, such as stock upgrades/downgrades and trading flow.
According to former SAC traders, other strategies that Cohen used included the “reverse desk” and “take the Street” tactics. Reverse desk involves purchasing a relatively small amount of stock and then subsequently selling it off through various brokers.
“When word gets out that SAC is selling, the Street goes nuts and also starts unloading big blocks,” said a former SAC trader. These big blocks would then cause a plunge in price, which opens up an opportunity to buy at a lower price.
In take the Street, SAC would buy large blocks of a stock through several brokers at the same time in an attempt to empty their inventory. Some of these brokers would then have to buy back the shares on the open market to refill their inventory, thus lifting up the price.
“Stevie can take 8 desks in 10 minutes. The more guys he has doing what he’s doing, the more he can move stocks.”
-Former SAC trader
By being a major customer to Wall Street firms and brokers through commissions and trading fees to the tune of $300 million per year, as well as buying up secondary offerings, SAC would receive preferential treatment in receiving information. SAC would then use its information advantage to capitalize on trading strategies, such as long/short equity, event-driven, and convertible and statistical arbitrage.
Expert Networks
SAC also utilized information from expert networks, which charges clients for information from its web of consultants. Some of these consultants worked at publicly traded companies.
One of these expert network firms which SAC had close connections to was Primary Global Research (PGR). Of course, it was illegal for these firms to provide material, non-public information (MNPI). That doesn’t mean it didn’t happen.
Following a massive crackdown, several of PGR’s employees and consultants were charged with crimes involving insider trading and sharing MNPI.
In 1992, SAC became the first ever hedge fund to manage more than $1 billion. In 1999, it became the first hedge fund to manage over $10 billion, and in 2006, the first fund to manage over $20 billion. Throughout this stretch, SAC was often responsible for as much as 3% of all daily trading volume on the New York Stock Exchange. The firm also charged a 3% management fee and 50% performance fee, compared to the standard 2% and 20% fee.
Then, the SEC came knocking.
Cohen Charged with Failure to Supervise Employees
Cohen’s first scramble with an insider trading allegation occurred in 1986 when the SEC became suspicious that Cohen had used MNPI to bet that General Electric would take over RCA, the parent company of NBC. The SEC contacted the fund manager, who reserved his fifth amendment right against self-incrimination and refused to talk. The regulatory agency eventually found no signs of wrongdoing and dropped the investigation.
However, the SEC isn’t an authority that easily backs down. In July of 2013, the SEC concluded a six-year long investigation and charged Cohen through a civil lawsuit with failing to supervise Portfolio Managers Mathew Martoma and Michael Steinburg from using insider trading to benefit SAC. Steinburg eventually had his insider trading charges dropped in 2015. Martoma wasn’t so lucky.
In November of 2013, SAC, as well as several of its affiliates, such as CR Intrinsic and Sigma Capital Management, pled guilty though a plea-deal to securities fraud and wire fraud in connection with insider trading.
“Specifically, the Indictment charges the SAC Companies with insider trading offenses committed by numerous employees, occurring over the span of more than a decade, and involving the securities of more than 20 publicly-traded companies across multiple sectors of the economy.”
-SEC Press Release, Nov. 2013
In total, SAC and its affiliates were forced to pay a record $1.8 billion in fines. On top of that, SAC agreed to shut down and return all external capital.
Cohen settled his civil lawsuit with the SEC in 2016, agreeing not to manage outside capital until 2018. Under the terms of the settlement, Cohen neither admitted nor denied the SEC’s allegations.
“Inevitably, some will ask why I agreed to settle. The longer the pending litigation lingered, the more it distracted from the world-class firm that we are building.”
-Steve Cohen, 2016
Point72 Asset Management
In March of 2014, Cohen transferred SAC’s remaining assets to his new family office, Point72 Asset Management. By 2018, the fund had opened its doors to outside investors, raising about $5 billion that year.
“I did only 10 or 15 meetings. I made one trip overseas to see one client and my staff did an amazing job and we raised probably $5 billion.”
-Steve Cohen, 2018
By 2020, Point72 had raised $10 billion and halted the process of raising outside capital. Its total AUM had climbed to $17.2 billion, $7 billion of which was Cohen’s own money.
Despite Cohen’s spotty background, investors were more than happy to hand him their money. Today, Point72 has over $32 billion in 13F AUM with a top ten holdings concentration of 14.96% and an average holdings period of 2.70 quarters.
Mathew Martoma
In 2012, former SAC Portfolio Manager Mathew Martoma was charged in what federal prosecutors characterized as the most profitable insider-trading scheme in history. Martoma, a Duke-graduate who was expelled from Harvard for creating illegitimate grade transcripts, received tips from two doctors involved in Phase II clinical trials of Wyeth LLC and Elan Corp’s Alzheimer’s disease drug, bapineuzumab, in 2008. Martoma first became acquainted with the doctors through an expert network firm.
After receiving disappointing news that was not yet released to the public, Martoma pressured Cohen to sell his stakes in Wyeth and Elan, to which he obliged, resulting in $276 million in profits and avoided losses. Brazenly, SAC also took short positions in the two companies.
“Martoma bought the answer sheet before the exam - more than once - netting a quarter billion dollars in profits and losses avoided for SAC, as well as a $9 million bonus for him. In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty.”
Preet Bharara, U.S. Attorney, Southern District of New York
In 2014, Martoma was convicted of conspiracy and two counts of securities fraud, becoming the eighth present or former SAC employee to be plead guilty or be convicted of criminal insider-trading. Two other present or former employees faced civil insider trading charges.
He was sentenced to nine years in prison and was released early in July of 2021. Cohen did not face any charges from the case.
Cohen’s Miraculous Escape
Criminal negligence laws that cover some industries do not carry over to insider trading. In other words, you can’t be held criminally liable for your company’s illegal trading activity if you technically, in the eyes of the law, weren’t aware of it.
To Cohen’s defense, SAC was a massive entity, consisting of 40 separate portfolios managed by 1 to 15 traders, each with a unique strategy. With 40 strategies going on at once, it may have been a difficult task to keep a close eye on the intricacies of each portfolio.
However, with so many of SAC’s employees being accused of insider trading, there becomes a point where one questions if the contagion has run rampant throughout the entire organization, and to its leader as well.
Today, Cohen is once again living lavish. With an estimated net worth of $13.2 billion, the once embattled hedge fund manager now spends his days presiding over Point72 and the New York Mets while maintaining his $1.17 billion art collection.
“It doesn’t matter who you are, how much money you have, who you’re connected to. You have to play by the same rules as everyone else. Rules and rules and the law is the law.”
Preet Bharara, U.S. Attorney, Southern District of New York
Hedge Vision - Institutional Insights
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Billions by Showtime. One of the main characters, Bobby Axelrod, is based on him.
And in terms of books, Black Edge by Sheelah Kolhatkar.
That was a great read. 👌 Are you aware of any related movie? It would be interesting to watch this.