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The Story of the Largest Insider Trading Investigation in History

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If you want to get the inside story on hedge fund manager Steve Cohen, read Black Edge by Sheelah Kolhatkar. What stood out to me was how retired teachers, and the collective billions they’ve saved through pensions, had their money managed by Stevie who, in essence, is a day trader. A very rich day trader.

What happens to the pensions when guys like Cohen run out of buyers? He’s not that far removed from being the next Long Term Capital Management, which went bankrupt and needed a bailout. Here’s a review by David McClintick of the WSJ that got me into the book and an interview with author Kolhatkar.

Anyone who knew Wall Street knew that SAC’s returns were suspiciously excellent. And Mr. Cohen didn’t exactly hide his wealth: His 36,000-square-foot home in Greenwich, Conn., had an ice-skating rink. But when the FBI went digging into the world of hedge funds in 2006, it wasn’t after SAC but the Galleon Group, a smaller fund run by a flamboyant trader named Raj Rajaratnam. A relentless FBI special agent, B.J. Kang, secretly listened to Rajaratnam on a wiretap for months. Those conversations tipped Mr. Kang off about SAC, where some Galleon traders had previously worked.

The agent was keen to flip Galleon suspects who might give evidence against Mr. Cohen. So on April 1, 2009, he drove to the California home of Ali Far, a former Galleon trader familiar with SAC. In front of Mr. Far’s wife, mother, daughters and mother-in-law, Mr. Kang confronted him with accusations of insider trading and a threat of prison. After a sleepless night, Mr. Far flipped and went on to record 244 calls for the FBI, many with Rajaratnam. Over the coming months, as Ms. Kolhatkar shows, Mr. Kang continued to flip traders at Galleon and other firms associated with SAC. Eventually he got to an SAC trader named Mathew Martoma.

Martoma was a Stanford MBA who specialized in health-care stocks; he had joined SAC in June 2006 and Mr. Cohen had given him hundreds of millions of dollars to invest. Martoma focused on two companies, Elan and Wyeth, which were developing a drug to treat Alzheimer’s. In doing so, he relied on insight from an eminent medical school professor: Sidney Gilman of the University of Michigan. Dr. Gilman, who was laden with confidential information from the companies, the government and other scientists, had at first insisted to Martoma that he could discuss only information in the public domain. But it didn’t take long for Martoma to push Dr. Gilman, who, according to the author, was being paid hundreds of thousands of dollars in consulting fees by SAC and other Wall Street clients, over the edge. After Dr. Gilman confided that Bapineuzumab, the new Alzheimer’s drug co-developed by Wyeth and Elan, was flawed, Martoma spent 20 minutes on the phone with Mr. Cohen. Little is known about their conversation, but SAC quietly liquidated stock and shorted more in the companies, netting more than $250 million, according to federal prosecutors, before the bad news was made public and the stocks collapsed.

Read more here.

‘Black Edge’ Author on Steven Cohen’s SEC, FBI Battles

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.