Key Messages
The Unjust Reality Of Wall Street: How Steve Cohen Made Billions Illegally And Escaped Punishment
In Black Edge, investigative journalist Sheelah Kolhatkar reveals how fat cat Wall Street investor Steve Cohen got rich from illegal activities, such as insider trading.
Cohen used confidential information to get an unfair edge over his rivals and gain exceptional profits from stock investments.
This wealth acquired by Cohen was gained from manipulating stock prices, exploiting a drug that helped Alzheimer’s patients, and facing multiple criminal proceedings without any real punishment for his actions.
It’s unacceptable that somebody can make billions of dollars this way and still remain a free man.
What readers will learn in this book is how Cohen systematically used illegal information to bring him so much wealth at the cost of the hard work of others who were investing in the same companies but didn’t possess the same advantage.
The Rise And Fall Of Wall Street Titan Steve Cohen: The Story Of A Rogue Trader
Steve Cohen was a talented trader who had early success in his career, but he also didn’t shy away from taking risks.
In 1985, the Securities and Exchange Commission (SEC) looked into his transactions to investigate whether they involved insider trading.
It turned out that Steve had invested heavily in shares of RCA after receiving inside information about an imminent takeover by General Electric.
His investments resulted in profits of $20 million, which drew further investigation from the SEC.
Though the criminal case against him was dropped, it served as evidence that Steve Cohen was willing to take risks with his investments and wasn’t afraid to flout regulations for personal gain.
Thus although he achieved great success early in his career, his streak of risks led him to be investigated for insider trading which ultimately revealed a somewhat unorthodox approach to financial trading.
The Rise Of Steve Cohen And His Quest For Inside Information In The Stock Market
In 1992, Steven Cohen founded his own investment firm, SAC Capital Advisors.
Starting out with just $23 million and nine employees, Cohen used the company’s initials to name it—and success followed suit.
Over the course of three years, assets rose to over $100 million and just two years later that amount had doubled again.
But how did he do it?
Cohen relied on short-term trading strategies in order to generate profits.
He studied market movements each day with the intention of buying large amounts of stock before reselling them as soon as their prices increased.
However, this was not enough to keep a consistent flow of money coming in.
So instead of simply relying on quick trades alone, Cohen opted for another method: utilizing inside information to make more successful investments.
To build up profits even further he started hiring traders who had a “fundamental edge” meaning they had industry knowledge or personal connections which gave them an advantage over others when it came to trading stocks and shares.
If a potential hire happened to live in the same neighbourhood as an executive from the same industry then this could be an opportunity for SAC Capital Advisors to gain access to valuable intelligence that would help increase their profits.
The Shady Culture Of Stock Manipulation Exposed By Sac Capital’S Fraudulent Practices
It was inevitable that with SAC’s huge profits, something shady would eventually be revealed.
In 2006, Biovail and Fairfax accused the trading firm of manipulating stock prices by spreading false and negative reports that caused their stocks to drop.
Anonymous voices even talked up myths about Fairfax being fraudulent, while also pointing to comparisons between them and Enron – a company which had experienced massive fraud revelations.
The SEC and FBI quickly took notice of these unfounded accusations.
Simultaneously, insiders spoke freely about SAC’s culture which purposefully sought out inside information in order to gain an edge on the market.
They targeted short-term stock prices, leveraging connections such as expert networks, who technically weren’t allowed to share sensitive information but they often dropped valuable hints to the traders at SAC.
Such information was handled carefully but put to good use all the same – so much so that it helped fuel the success of this extraordinary hedge fund.
Martoma Uses Insider Knowledge To Make A Fortune On Alzheimer’S Drug Bapineuzumab
In 2008, traders at SAC Capital Advisors used inside information to execute massive insider trading on stocks of two pharmaceutical companies–Elan and Wyeth.
These companies were in the process of trying to develop medication to treat Alzheimer’s disease, a disorder which affects almost 5 million people in the U.S.
alone and has yet to have an effective treatment discovered.
The SAC trader, Matthew Martoma had built strong relations with Dr.
Sidney “Sid” Gilman who was working as chair of Elan’s safety monitoring committee for the drug trial for Bapi–the potential Alzheimer’s medication.
Martoma managed to persuade Gilman into discussing confidential trials that he signed an agreement not to disclose, resulting in SAC amassing more than $700 million in Elan and Wyeth stock investments–a move that allowed them to reep a huge financial reward just prior to the public announcement of Bapi’s result–resulting in a loss for investors when news broke that it was only suitable for a small number of patients.
The two were obtaining great rewards from their action with over $276 million being made before the official release date on July 28th, 2008 at the International Conference on Alzheimer’s Disease in Chicago.
How Sac’S Insider Trading Tripped Up Its Billionaire Owner Steven A
By the late 2000s, US regulatory authorities had their sights set on insider trading occurring within Wall Street hedge funds.
Even though these funds were relatively new and relatively unaware of the law, they had become notorious for engaging in this shady practice.
What’s more, they had been able to evade detection from the regulators until now.
In 2009, the FBI began to investigate SAC’s business model which obviously relied heavily on insider trading.
To gather evidence against SAC executives, they approached implicated junior analysts and slowly worked their way up the chain of command.
At that same time, the U.S.
Securities and Exchange Commission (SEC) also started their own investigation into suspicious trades by SAC and analyzing anomalous stock movements in companies like Elan and Wyeth prior to bapi trial results being released.
The cover was eventually blown when an article detailing both investigations was published on November 19th, 2010 by The Wall Street Journal – leading traders to fearfully begin destroying all evidence left behind on their hard drives before it was too late.
How Mathew Martoma And Dr. Sidney Gilman Helped To Unravel Alleged Insider Trading Schemes
In 2011, Mathew Martoma and Dr.
Sidney Gilman came to the attention of US authorities as potential suspects in a case involving insider trading of Elan and Wyeth shares.
After the Wall Street Journal released information suggesting such activity, the FBI and SEC moved swiftly to investigate the matter.
The SEC identified Gilman as someone with information regarding the trial results, prompting them to subpoena his phone records.
Upon closer inspection, they discovered a mysterious phone number belonged to one of SAC’s portfolio managers, Mathew Martoma – better known now as Ajai Thomas.
At this point, the FBI believed that Martoma had contacted Cohen shortly before SAC sold its shares in Elan and Wyeth.
He was already on their radar as “known to the Bureau”, so when further digging revealed that Mathew wasn’t even his real name (Ajai Thomas), they knew they were onto something significant.
The Record Fine: How Steven Cohen’S Greed Put An End To Insider Trading
In late 2012, the FBI had enough evidence to arrest Mathew Martoma for insider trading.
This was based on the confession of Dr.
Sidney Gilman who admitted that he had given Martoma inside information regarding a drug trial called bapi.
Martoma’s decision to plea the Fifth Amendment, combined with his refusal to implicate Steven Cohen and SAC Capital, incensed the FBI agents.
Nevertheless, in order to avoid worse circumstances from arising, Cohen agreed to pay a record fine of over $600 million in the spring of 2013 in order to settle all cases involving insider trading.
This allowed Cohen and SAC Capital to move beyond any potential legal issues without having to face prosecution themselves.
The Mystery Of Cohen’S Insider Trading Unsolved: Cohen Walks Away A Rich Man Despite Facing Serious Charges
The SEC’s confrontation with SAC and Steven A.
Cohen ended in a victory for SAC, but not a total one.
The Commission secured another hefty fine of $1.2 billion but were left unable to convict Cohen himself due to the lack of tangible evidence.
Matthew Martoma was made an example of instead; he was sentenced to nine years in prison, despite his repeated opportunities to cooperate and reduce his sentence significantly in exchange for testifying against Cohen.
Martoma revealed nothing, leaving authorities in the dark as to why he refused their offer.
Cohen, however, walked away without so much as a slap on the wrist, with all charges dropped against him.
He went on to rebrand SAC Capital Advisors into Point72 Asset Management and soon after earned an astounding $2.5 billion.
It seems authorities have been unable to stop him from amassing personal wealth and running his own firm without any further wrongdoing on his part that could be proven in court.
Wrap Up
The Black Edge, by Sheelah Kolhatkar, presents a fascinating look into the life of Wall Street investor Steve Cohen and his investment firm SAC Capital Advisors.
It recounts how Cohen made billions of dollars through insider trading that ultimately led to the convictions of some of his traders.
However, while Cohen was never found guilty of any criminal charges, the illegal activity that he participated in can’t be overlooked – and this book serves as an excellent account of what went down.
In short, The Black Edge is an entertaining yet Educational read that explains the dark reality behind financial success.
