17-20 Segment 1: The Most Wanted Man on Wall Street: The Fed’s pursuit of SAC Capital

VPR FB 17-20A

 

The financial world was shocked when the FBI began investigating Wall Street big shot Steve Cohen and his company SAC Capital. We discuss what they were looking for, what they found, and what it all means going forward.

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Guest:

  • Sheelah Kolhatkar, author of Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

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The most wanted man on Wall Street: the Fed’s pursuit of SAC Capital

Gary Price: Corruption in finance is nothing new, between ENRON and Bernie Madoff, we have some proof that the people we trust with our money may not always have our best interests in mind. Just in the past few years we’ve watched true-life money misdeed play out in popular films like the “Wolf of Wall Street” and the “Big Short.” Sheelah Kolhatkar, a former hedge fund analyst and current staff writer for the New Yorker has another tale of greed gone awry in her non fiction book, “Black Edge: Inside Information Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street.”

Sheelah Kolhatkar: It begins with Steve Cohen who is a legendary figure on Wall street; a very very successful stock trader and he achieved enormous wealth, you know multi billion dollar fortune, almost entirely on his own steam as a trader. He was just very very skilled at sort of sitting at his desk, looking at his market monitors and following his gut and making money-trading stocks. And as a result of that he amasses an incredible fortune, he lives in a 36,000 square foot mansion in Greenwich, CT where he has an ice skating rink with it’s own Zamboni. He has spectacular artwork hanging around his home and his office – I mean the kind of pieces you would expect to see in a major art museum. And he really came from a really middle-class background and achieved all this success on his own.

Price: So while it looked for a while like the story of Steve Cohens firm was going to be one of capitalistic success, Kolhatkar says eventually, things began to seem… off.

Kolhatkar: The moment when I became really interested in this story was when it became clear, a few years ago, that the FBI and the Department of Justice had sort of put Steve Cohen in it’s crosshairs. They had been investigating insider trading on Wall Street for several years, they’d arrested a number of people, but one day they arrested a former portfolio manager who had worked at Steve Cohen’s firm, SAC, and there was a very dramatic moment where they sort of stormed up to this guy on his lawn in Boca Raton Florida where he lived at the time, and once that happened a light bulb went off for me and it became really clear that the government was going to go after Steve Cohen – one of the richest, most powerful men in the world.

Price: As a former hedge fund analyst, Kolhatkar said she’s well versed in the regulations surrounding hedge funds like the one Cohen ran. So she followed the story from day 1.

Kolhatkar: So you have these kind of scrappy, under resourced FBI agents, many of whom are very dedicated. And in this particular case the FBI made a decision in 2000 to go after insider trading and hedge funds, they realized this was sort of rampant and no one had really been policing it. And they made a decision they were going to approach it the way they’d approached mafia and organized crime cases in the past. So, this is a little unprecedented but they decided they were going to use wiretaps, they were going to try and find informants who worked at some of these hedge funds and flip them and turn them in cooperators. And slowly they tried to build their way up the hierarchy into some of these big powerful Wall Street firms and gather evidence implicating the most senior level people there who might’ve been involved in crimes. But this takes years, its painstaking, difficult, complicated work.

Price: And over those years Kolhatkar said it became abundantly clear that these scrappy detectives were working at a severe disadvantage.

Kolhatkar: You get a real sense of the resources available to the government by sort of walking into the office of the FBI and the FBI has an office in lower Manhattan. It has a securities fraud unit, so they’re responsible for investigating crimes in the financial market, and you go in there and the carpets are kind of ratty and the computers are ancient, there’s no state of the art technology in there. There are FBI agents sitting in this dark, sort of shabby room, listening to wiretapped phone calls. And then you walk into a top head fund and it’s a beautiful, sleek, modern office, it might be overlooking Central Park or the Long Island Found in Connecticut. There are hundred million dollar pieces of art decorating the office and they have state of the art technology everywhere. You know, the course of researching their investments they can hire spotters to go and watch trucks driving in and out of factories in China, to try to figure out when their particular companies are doing well in terms of manufacturing. They gain access to satellite imagery of parking lots of shopping malls, they can track how much business different companies are doing, they will spend any amount of money to gain any sort of advantage as they pursue their work of investing and finding information.

Price: Despite their disadvantage, Kolhatkar says investigators did eventually dig up enough dirt to charge a couple of Cohen’s prominent employees with insider trading.

Kolhatkar: I think the government had hoped that one of them would flip and cooperate and perhaps help them build a case against Steve Cohen who was the founder of the hedge fund and the employer of these two gentlemen. However, both of the men were fighting their charges so the government couldn’t get either of them to agree to be a witness. And both of these gentlemen cases went to trial, now they’re both convicted and one of them is now serving a prison sentence although his case is on appeal. The other one had his conviction overturned later as a result of an appeals court decision. So, in the mean time, while that was happening a tremendous amount of tension and drama had built up in the press on Wall Street and Washington. And you know, was the government going to charge Steve Cohen with a crime? There was all this intrigue around that question and it seemed to be very clear from my reporting and just even reading accounts in the news media, seemed clear that they really were trying very hard to do that. There was a lot of pressure on the Justice Department to do that.

Price: Kolhatkar says after failing to get either man to flip, agents outlined all the evidence they had indicating Cohen had a hand in the insider trading and ultimately found that they did not have enough proof of wrongdoing to make an arrest.

Kolhatkar: What they did have was a lot of circumstantial evidence that suggested insider trading was happening at the company SAC Capital, which was Steve Cohen’s hedge fund. And it’s important to remember the hedge fund was a huge success and suddenly the government says, “well you know, we have enough evidence to indict SAC Capital the company,” so that’s what they ended up doing. And it was a sort of a big sort of case, they ended up through settlement process – Steve Cohen’s company agreed to pleaded guilty to the charges of insider trading and the company agreed to pay a fine in total of about $1.8B to the Justice Department and to the SEC. And in the end Steve Cohen was required, after paying that money, to close his hedge funds and agree to a number of conditions, including having a compliance monitor come in and watch over him and his activities. And he himself was never charged criminally with anything and he is in fact free beginning in 2018 to open a new hedge fund if he choses and there are indications that he’s at least considering that and he’s taken a number of steps to sort of try and cleanse his reputation and create distance between himself and the scandal. And you know, a lot of people are waiting to see whether he will get back into the business.

Price: In the end Kolhatkar says, while finance reform and Wall Street misdeeds can seem like they’re a world away, the reality isn’t so easy to ignore.

Kolhatkar: It’s important for people to pay attention to it because I think what happens on Wall Street has a very direct relationship to what’s happening everywhere else in the country. I think it’s directly connected to widening income inequality, I think it explains a lot of the dynamic that has led to the situation in Washington, a lot of what’s happening there. Hedge funds in particular what they do effects everyone, most people now have at least some chunk of their retirement money in the stock market and increasingly the stock market is really being seen by people as a sort of an unfair playing field where you have two separate markets. You have a stock market where the wealthy and well connected and people with the good information are trading and investing, and then you have everyone else who just sort of cluelessly putting their retirement money there and how can you really be confident that it’s a fair and transparent market, when you have insiders who have their own sort of set of rules – that’s not really fair. I think it’s very interesting that now that we have a president who campaigned on this very populist message of “help the little guy” and “Wall Street is rigging the system” was the big part of his message and now we have a handful of very wealthy financiers who are going to be making a lot of the decisions. And they all come from the Wall Street world and I just think it’s really interesting and important for people to pay attention to what’s going on in that world.

Price: Sheelah Kolhatkar’s boo, “Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street,” is available now. For more information about all of our guests visit our site at, Viewpointsonline.net. You can find archives of past programs there and on iTunes and Stitcher. I’m Gary Price.

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