An article in the New York Times’ Dealbook shines a spotlight on a situation I’ve been keeping a close watch on for some time now: billionaire Steven A. Cohen and his group/company/fund, SAC Capital Advisors. This is the hedge fund that was found to have achieved 30% investment returns for the past two decades, or, as I put it, too good to be legal. Last November, charges were filed against a former portfolio manager at a unit of SAC Capital. Martoma had made more than $276 million in what the U.S. Attorney described as “the most lucrative insider trading scheme ever charged.”
The tactic used by Martoma was almost offensive in its bold disregard of securities laws aimed at preventing insider trading. Martoma used an “expert networking firm” to “consult” with individuals with experience of “niche subjects.” In Martoma’s case, it was the “niche subject” of drug trials being run at the University of Michigan by the very same expert Martoma paid to “consult” with. According to the complaint, that doctor, Dr. Gilman, just happened to tip Martoma off to the fact that the drug trials weren’t going so well. Martoma dumped a bunch of stock and made $276 million through illegal profits - avoiding substantial losses. Dr. Gilman, on the other hand, was paid $108,000 in cold hard cash.
This type of insider trading scheme is simple and lucrative. It went on at SAC Capital (ok, a unit of SAC Capital, but the same man was in charge of both). So why hasn’t the DOJ charged the big fish, Steven A. Cohen, with anything? It seems that Mr. Cohen is not only an expert at making a lot of money in the stock market (no guarantees about doing so legally), he is also an expert at making sure that everyone charged with insider trading is at least one step removed from him. A New York Times’ graphic depicts the six (Mathew Martoma, Noah Freeman, Donald Longueuil, Jon Horvath, Michael Steinberg, and Richard Choo-Beng Lee) traders who have been either charged or suspiciously close to being charged with securities law violations.
It isn’t because the DOJ isn’t trying. An article in today’s Dealbook talks in detail about how the FBI approached a former SAC Capital trader, Jonathan Hollander, only weeks after he left. The agents questioned him and “compared Mr. Cohen to a Mafia boss who sat atop a criminal enterprise[.]” But using lower-level employees of SAC Capital simply has not provided the government with the quality or quantity of information it needs thus far. Meanwhile, as the SEC and DOJ continue to seek a way to shed light on precisely what is going on, it is becoming clearer and clearer to Wall Street and the public that something is really rotten at SAC Capital.
So why hasn’t Wall Street turned against Cohen, SAC Capital and the tactics employed by them? Why haven’t SAC Capital investors pulled out their millions? Are people really content to support and further insider trading – as long as they are the ones whose accounts are bigger at the end of the month? Unfortunately the answer appears to be yes. And that is the problem. It isn’t just SAC Capital that government regulators should be going after; it’s the culture of Wall Streetthat puts profits ahead of regulatory compliance.