In the latest game of Whack-A-Mole, the United States Securities and Exchange Commission (SEC) is hot on the heels of one of Wall Street’s more significant scumbags—the hedge fund operator Steven Cohen, whose SAC Capital Investors LP has been making clients (to nothing of Cohen) rich for decades. Like Lance Armstrong, almost everybody around Cohen has been nailed for cheating. Like Lance used to, Cohen insists that he’s clean. That sound you hear is the strap being prepared for a slap on the wrist. By RICHARD POPLAK.
We’ll say this much—in the five years since the US economy imploded and government officials did close to nothing to ensure that such a calamity would never happen again—nobody expected Steven Cohen to go down. Not because he was clean—you’d have to be the most credulous, functionally illiterate swamp-dwelling mouth breather to believe that Cohen wasn’t the LeBron James of insider trading. It’s just that the SEC, toothless as ever, never seemed close to inviting him to spend time in a rent-free, state-funded (but privately contracted) facility. It still isn’t—if Cohen goes down, as one commentator put it, it will be “a little like catching John Dillinger entering a bank with a submachine gun and charging him with double parking.” And double parking doesn’t get you jail time.
How much of a cheat—sorry, alleged cheat—is Cohen? Let’s look at a snapshot of SAC, which is one of those Wall Street stories so perfect that, if were a Hollywood rom-com, it would star Tom Hanks, Meg Ryan and an adorable Labrador. SAC isn’t an American company, per se—it’s incorporated in Anguilla, British West Indies. The fund is known for charging the highest fees in the business—3 percent of assets under management, and 50 percent of annual returns. SAC does this because it routinely posts the highest kickbacks in the business. Everybody in the Street knows that Steve Cohen beats the market.
Just how he does that is possibly the worst kept secret in history. SAC has been accused, over the years, of manipulating the market to drive down the price of stocks it had shorted, most notably in biotech. But the real issue with SAC has always been those heavenly returns. How is it that the company—except for that lone, outlying year of 2008—was always able to beat the market, and make its clients fatter and happier than they were before they entered its Wall Street offices?
That’s what the SEC would like to know, and specifically how the patented SAC prescience pertains to one case in particular: the wholesale dumping of a long position of Elan and Wyeth (now owned by Pfizer) stock, right before the release of unsuccessful Phase II data for a highly anticipated Alzheimer’s drug called bapineuzumab, or bapi. “Successful” investing in Big Pharma is, of course, total bullshit—there is simply no way for the average punter, to say nothing of Steven Cohen and his minions, to know whether a big trial for a big drug is going to end well. Take a long position on a pharma company, and you’re betting that more drugs will work out than not (which is, of course, in the drug company’s best interest). Take a short position on a previously held long position, and it means that you suspect something that the rest of the market doesn’t. Which makes you either a psychic, or a scumbag.
In the case of Elan and Wyeth, it seems that that an 80-year-old doctor named Steven Gilman leaked details of the clinical trials to an SAC trader, called Mathew Martola, who used those illegal tips to make SAC roughly $276 million, while avoiding the losses that shredded through the market. This is classic, cut-and-dried insider trading: scumbag A inside the company sells information to scumbag B at a trading firm, and both become rich. Gilman and Martola were connected through an “expert network firm”, which paid Gilman $108,000 between 2006 and 2009 to engage in 59 consultations with analysts at portfolio management companies like SAC. Martola found himself at 42 of those meetings.
“Expert network firms”—another of Wall Street’s grey areas. This is like speed dating between those inside an industry, and those looking to make money from said industry. How this doesn’t devolve into illegal activity before the first coffee break is anyone’s guess, but nonetheless, the practice thrives.
In mid-2008, two managers repeatedly contacted Cohen about the SAC’s position in Elan and Wyeth, urging him to shift positions. But Cohen held fast, insisting that he was sticking with Martola as his point man on the stock. By the end of June, SAC owned roughly $373 of the Big Pharma stock. Gilman was still suggesting that the outcome of the Alzheimer drugs trials was looking “largely positive”. That, too, was bullshit—a few weeks later, Gilman received information noting that bapi users got “markedly worse over the 18-month drug trial, rather than getting better or stabilising.” Naturally, Martola received all of this information from Gilman.
On the following Monday, after a 20-minute chat between Martola and Cohen, SAC began surreptitiously divesting themselves of 10 million Elan and Wyeth shares. After the dump, SAC began shorting. When data from the bapi trials were released on July 28, Elan shares tumbled 42 percent, and Wyeth shares 12.
There you have it. Martola will go on trial in November, and Steven Cohen will not. Instead, the SEC is nailing him for failing to properly supervise his underlings—he is being done in for being an inattentive boss! “Faced with red flags of potentially unlawful conduct by employees under his supervision, Cohen allowed his traders to execute the recommended trades and stood by,” the SEC said, following a detailed legal filing. While an FBI case can’t be ruled out, the SEC is bringing a civil suit against Cohen that will be adjudicated within the SEC as an administrative proceeding. No jail time, no criminal record, although Cohen could be permanently banned from the financial industry—an opportunity for him to take a load off, and enjoy some of his purported $9 billion fortune.
Investors have begun fleeing the sinking ship—the fund has shrunk by $6 billion of late. But Cohen owns 100 percent of the company, a sprawling decentralised entity run not entirely different from the mob. He is merely another of example of how rotten the system is, how rigged it is against the little guy, and how little has changed over the course of the past five years. You read it here first: the next burst bubble will be worse than the last. Cohen may not be around to enjoy the fruits. But we wouldn’t hedge against him. DM
Photo: Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, listens to a question during a one-on-one interview session at the SkyBridge Alternatives (SALT) Conference in Las Vegas, Nevada May 11, 2011. REUTERS/Steve Marcus
"The soul is known by its acts" ~ Thomas Aquinas