Steve Cohen is not in jail.
He was not criminally prosecuted.
But Mathew Martoma is in jail.
Martoma worked for Cohen at SAC Capital.
And in one week in 2008, together they made $275 million for SAC Capital after dumping and shorting the stocks of Elan and Wyeth after Martoma learned in advance about the results of a drug trial for an Alzheimer’s drug they were developing.
Martoma was sentenced to jail for nine years. He’s appealing his conviction.
Federal prosecutors in New York decided against criminally charging Cohen. Instead, they charged SAC Capital. SAC Capital pled guilty and paid a total of $1.8 billion.
That leaves Cohen with about $10 billion and able to start another hedge fund in 2018.
New Yorker writer Sheelah Kolhatkar lays out the whole sordid tale in one of the best corporate crime books of the year — Black Edge: Inside Information, Dirty Money and the Quest to Bring Down the Most Wanted Man on Wall Street (Random House, 2017).
Steve Cohen was not criminally prosecuted for insider trading. Should he have been?
“That is the big question at the heart of the story and of the book,” Kolhatkar told Corporate Crime Reporter in an interview last week. “And of course, it depends on who you ask. Many readers who are not necessarily close followers of finance and hedge funds and Wall Street have written me letters — I have received dozens of letters from people — expressing outrage that he was not charged. Not only was he not charged, even after paying enormous fines to the government, he still has more than $10 billion. He is still one of the wealthiest men in the world. He still will be able to open another hedge fund in 2018, if he chooses to do so. And he is still out going to see his favorite basketball team play at Madison Square Garden and buying $100 million works of art. One of his underlings is in prison right now. And many people feel this is the story of our time, where the people at the top get away and make all of this money through troubled means and ultimately don’t pay any price of any substance for what they did wrong. There is that camp.”
“On the other hand, from a legal perspective, the government prosecutors working on this case did not feel they had the rock solid evidence that they needed to be sure that they would win if they took him to trial.”
“There is a dramatic moment that I recount in the book where Steve Cohen’s lawyers went down to the Southern District, the office of then U.S. Attorney Preet Bharara. They made a big presentation — this was in the summer of 2013 — where their goal was to persuade the government not to charge Steve Cohen with any criminal wrongdoing. They were there for four hours. They gave out binders. There were 17 government lawyers. Steve Cohen’s lawyers understood that the government did not want to take a big risk and lose this kind of case after a long, costly, high profile trial.”
“Cohen’s lawyers focused on the government’s weak spot — the fact that they did not have a witness who would testify on behalf of the government against Mr. Cohen, a witness who could say he had done anything wrong. They did not have a wiretap, which they did have in the Raj Rajaratnam case. In the Rajaratnam case, they had an embarrassment of wiretap evidence. That was not the case with Steve Cohen.”
“They really did not have the goods. If you ask the prosecutors — why did you not charge him? They were aware that people were expecting a prosecution. They would say — we can only do what the evidence leads us to do. They looked at the evidence and felt they didn’t have what they needed.”
Was that a reasonable judgement?
“There is no clear answer to that.”
You said it depends on who you ask. Do you believe he should have been criminally prosecuted?
“I have mixed feelings about it. It’s a controversial question. You could make the argument either way. It’s possible they could have persuaded a jury to vote to convict him. That is possible. On the other hand, there have been some huge setbacks to the government in insider trading rulings since this case. Even if they had convicted him, there is a good chance it would have been reversed.”
Prosecutors were focusing on trading around this Alzheimer’s drug.
“Let me explain this concept of edge,” Kolhatkar says. “It is used to refer to your information advantage in the market. If you have edge, you have figured something out through various means, proper and improper, that gives you an advantage in making a trade. You know something that the market doesn’t know in making a trade. Every hedge fund is out there trying to get edge.”
“There are different kinds of edge. Black edge refers to inside information — material non public information that will move a stock price. At one point in 2006, Steve Cohen’s hedge fund hired Mathew Martoma. He was an accomplished pedigreed guy who had gone to Stanford Business School and had an impressive resume.”
“He started tracking the drug trial of a closely watched Alzheimer’s drug called bapineuzumab — bapi for short. This drug was being developed by two public pharmaceutical companies — Elan and Wyeth. There is no cure for Alzheimer’s. There was hope in the market that this drug might be successful. And if that were true, it would have made billions of dollars for these two drug companies. There were many hedge fund investors closely tracking this drug trial to see if they could make the correct bet on the stocks of these drug companies and be well positioned for the result of the trial. Thousands of people were scrutinizing this drug trial — are things looking good or bad? What are the experts saying? What is the scientific consensus?”
“Martoma was among these investors, aggressively tracking these drug trials. He developed a relationship with a doctor — Dr. Sid Gilman — who was playing a role in the trial itself. He was a high level researcher at the University of Michigan, a decorated Alzheimer’s expert. He had devoted his life to try and find a cure for Alzheimer’s disease. He offered papers, monitored other drug trials, taught medical students. He was a storied figure in the medical research field.”
“He had started doing consultations with hedge fund investors on the side — moonlighting. And he would get paid on an hourly basis. He was not supposed to disclose confidential information on anything he himself was working on. He was reminded of this repeatedly.”
“According to the government, Mr. Martoma spent months cultivating a relationship with Dr. Gilman and pressuring him and pumping him for information about how this drug trial was going.”
“Ultimately, the government amassed evidence suggesting that Martoma had been shown the confidential final results of the drug trial before they were public. He was alleged to have flown out to Michigan, visited Dr. Gilman in his office on the crucial weekend in 2008, looked at the presentation that Dr. Gilman had on his computer. Dr. Gilman was going to be presenting the final results in a public conference in a week. Martoma flew back home. And the government alleged that Martoma made a phone call to his boss the following day, which was a Sunday in the morning. They spoke for twenty minutes. And then on Monday SCA Capital, which had almost $1 billion invested in these two drug stocks, started to liquidate its position.”
“Not only did they sell off their enormous long positions, they ended up shorting the stock in the two companies. They went from having a huge bet in favor of this particular drug to betting that it would fail.”
“And one week later, Dr. Gilman presented the final trial results at a big conference in Chicago. And of course, the drug stocks plunged. The results were disappointing to the market.”
“The crux of the government’s case was that Martoma knew all of this and was able to make $275 million in profits and avoided losses for SAC Capital.”
Martoma went to jail for that and he’s still in jail right?
“He is in jail in Florida although his case is on appeal.”
The U.S. Attorney in New York proceeds criminally against SAC Capital. They get a guilty plea against the company.
“Instead of charging Cohen, they indict SAC Capital. To settle that case, they extracted about $1.2 billion. SAC also agreed to pay about $600 million to the SEC for a related charge. In total, it was around $1.8 billion. SAC had to plead guilty.”
Toward the end of the book on page, Kolhatkar has a section on the revolving door.
Lorin Reisner, the head of Bharara’s criminal unit who negotiated the $1.2 billion fine against SAC Capital, went to work at Paul Weiss, one of the firms representing Cohen.
Antonia Apps, who prosecuted the Steinberg case, went to work at Milbank Tweed.
Bharara’s deputy, Richard Zabel, went to work for a large hedge fund on Wall Street.
Arlo Devlin-Brown, who led the Martoma prosecution, went to work for Covington & Burling.
And Amelia Cottrell, the SEC attorney who oversaw the Martoma investigation, went on to work with Willkie Farr, home to Cohen’s defense attorney, Marty Klotz.
“For starters, it looks bad,” she says. “I’m very sympathetic to government employees who would like to make more money or that they are burned out on public service and want to work in the private sector. That is their right. I’m sympathetic to it.”
“But it just looks bad when you have almost every single person in a case like this going to the other side and joining the very defense firms who were involved in defending these people. It undermines public confidence in the system.”
“It just doesn’t sit well with the public. It leaves prosecutors open to the criticism that the reason they are not pursuing these cases is because they are looking out for their next job.”
“It’s going to fuel this sense that the system is broken and not fair. That perception expressed itself most obviously in the Presidential election. People have lost faith in institutions, the government and the Justice Department. They feel the system is tilted against them and someway corrupt. Even though on an individual level I feel these moves are defensible, on a whole it looks bad and it’s going to undermine confidence.”
“It’s a hard problem to solve. Is the government going to legislate who is going to work where? That is going to affect the caliber of people you have. Judge Jed Rakoff made the argument to me that it would be better if these attorneys did this government work later in their careers.”
“Now they are young, establishing themselves and making their names. There isn’t a lot of appetite for taking on risky cases that might not lead anywhere. There are a lot of dead ends you need to pursue before you get to a big case. People need to have incentives to go down a path before they give up on something. That’s a real problem. There are others who suggest that they should be paid a lot more money to do these government jobs so that the price differential between a private sector job and public sector job is smaller. That’s going to be a tough thing to make happen.”
“Maybe there should be different rules on where you can go work afterwards. These are all controversial changes.”
“One of the reasons that kind of government work attracts the caliber of people it does is because there is this potential at the end to get a really great high paying job in the private sector. If you take that away, it’s going to alter who wants to do those jobs in the first place.”
[For the complete q/a format Interview with Sheelah Kolhatkar, 31 Corporate Crime Reporter 13(11), March 27, 2017, print edition only.]