Circle of Friends (43 page)

The SAC bodies were now piling up. Steinberg had been waiting nervously for his status as an “unindicted co-conspirator” to change for the worse through a chunk of 2012 and well into 2013. He moved into a hotel room alone off and on so his wife and kids didn't have to witness him being handcuffed and led off to jail. His lawyer, Barry Berke, offered to have his client turn himself in, but the request was denied. What Berke didn't know was the behind-the-scenes drama between Bharara's people and FBI agents, mainly Chaves, over how to handle the pending arrest and how to get the maximum publicity for it.

A little more than a year earlier, lawyers for Anthony Chiasson offered the government the same deal, which was denied just before a team of FBI agents, accompanied by a camera crew, showed up one morning at Chiasson's Manhattan apartment. One witness said the feds appeared to dramatize the scene. After the camera was in place, the FBI car sped around the block once more and came to a screeching halt. That's when five agents in FBI windbreakers jumped out, entered the building, and accompanied the doorman to Chiasson's apartment so they could lead the moneyman out in handcuffs in full view of the camera.

There was just one problem: Chiasson had already moved to a hotel and when he got word that the FBI was looking for him, his attorney simply brought him to the government so he could be arrested, albeit privately.

Fast forward about a year, and Bharara's people didn't think the shock-and-awe approach was necessary. Steinberg, after all, wasn't a terrorist. FBI officials, apparently still stinging over the Chiasson flop, argued that there was a deterrent value in letting fat-cat traders know the consequences of their alleged crime, particularly those like Steinberg who were refusing to cooperate. In any event the FBI argued, agents do the arresting and they'll do it as they see fit.

With that, Steinberg's wait came to an end early one Friday morning, just before the Easter weekend and during Passover, when FBI agents showed up at his Manhattan apartment and placed him under arrest for five counts of securities fraud involving insider trading. His wife and kids were out of town for the ensuing media circus. Yet another leak to the
Wall Street Journal
had allowed a reporter to show up and film the arrest on her iPhone. A few hours later, no longer handcuffed, Steinberg pleaded not guilty and was released on $3 million bail.

He is regarded as the highest-ranking SAC employee to be snared during the inquiry, and immediately SAC's public relations team at Sard Verbinnen began spinning the least harsh interpretation of the move, its impact on the fund and on Cohen himself. “Steinberg is not a top adviser to Cohen,” said Gasthalter, who described him as a long-time SAC portfolio manager, albeit a very good one.

What Gasthalter couldn't deny was Steinberg's personal relationship with Cohen. They are close friends, and Cohen had in the past used him as a sounding board on trading strategies, which is why the feds are eager to cut a deal with Steinberg for information that could help build a case against the man at the top of the SAC food chain.

Cohen's legal team viewed the situation as difficult, but not disastrous. The government had a perfect record in trying cases. But legal experts quickly concluded that the one against Steinberg could be difficult. One of the defenses used by targets is that even if they traded on inside information they didn't know it was inside information. In other words, they didn't intentionally break the law.

So far that defense hadn't worked, but in Steinberg's case it might. The insider tips Steinberg allegedly used were filtered through several different layers. They began with a hedge fund manager at a different shop, who passed along the information to Jon Horvath, the SAC analyst who passed the information to Steinberg, the government alleges. Even with Horvath's cooperation, the government may face difficulties proving that Steinberg knew what he was trading on was inside information because whatever came his way was passed along through so many sources he could have plausibly believed it was public.

Even before Steinberg's arrest, Martoma had pleaded not guilty, and his lawyer Stillman vowed to fight the charges to the end. That was also good news for Cohen, legal experts said, since the circumstances surrounding the trades were now running up against the statute of limitations.

And the feds still didn't know exactly what had been said during that twenty-minute call between Cohen and Martoma. In fact, Martoma could have told Cohen plenty of stuff without revealing the source of his information. “Conviction levels” hardly make criminal insider trading cases, particularly when you're going up against Steve Cohen.

T
hey're going to pay a large fine like Goldman did and put this to rest,” Anthony Scaramucci began assuring his clients in early 2013. “And Steve is protected.”

Scaramucci was one of Cohen's closest friends on Wall Street, which is why he now called Cohen “Steve” instead of the more common “Stevie,” which Cohen's wife and now Cohen himself had come to detest. He also ran a “fund of funds” with substantial holdings in SAC, and he wasn't pulling out. For Scaramucci, staying with SAC was a no-brainer. The fund didn't beat the 13 percent return in the S&P (one of the few years it didn't beat the market), but after fees, Cohen still earned a respectable 12 percent return, which wasn't bad considering his growing legal distractions.

If only there were more people like Scaramucci, Cohen must have thought, as his troops began to dial for dollars and beg investors to give them another chance. If the history of these investigations were any guide, investors would soon be running for the exits with their money in hand—or, in hedge fund speak, “redeeming their shares.” But SAC held a better hand than most; so much of the fund's assets were made up of Cohen's own money—now around $9 billion out of the $14 billion SAC managed. Even if all the money from outside investors were redeemed, Cohen would still be trading one of the largest portfolios in the world.

SAC, of course, wasn't just any hedge fund. Its investor base was incredibly loyal after having dined on Cohen's massive returns for so long. But the reality of the hedge fund business is that law trumps loyalty. SAC manages a significant amount of money from pension funds, which under charter cannot be associated with an outfit under regulatory scrutiny. Money supplied by so-called funds of funds—hedge funds that invest in other hedge funds—was perhaps more stable, but some of that would certainly flee as well because it was just easier to simply pull the money out than to take the risk that the feds would close SAC and lock away its assets. Big banks like Citigroup and private equity firms like Blackstone would face similar choices as they weighed an uncertain future.

That is why Scaramucci's support was so vital. It was one thing for Cohen's own people to assure clients that all is well inside SAC. It was something else for someone outside SAC to do it.

The Goldman-like fine was a reference to the $550 million that the Wall Street firm paid the SEC to settle charges that it failed to disclose the risk in several pools of bonds it sold to its clients at the time of the financial crisis. But more than that, it was a talking point among Wall Street lawyers for the best way to handle a crummy situation. The settlement sounded like a lot, which made the feds sound like they were punishing the evil Wall Streeters—that is, until you consider it was being paid by a multibillion-dollar, deep-pocketed company that just wanted the bad publicity of the case to go away. That's exactly what happened, as shares of Goldman Sachs surged after announcing the settlement.

Indeed, Scaramucci's predictions proved amazingly accurate. SAC never bothered to respond to the Wells Notice from the SEC, a move that would have delayed the proceedings for months. It just decided to settle the case, offering to pay a Goldman-like penalty that ultimately came to $616 million. The SEC took its victory lap, as was expected, hawking the deal as the “largest insider trading settlement ever.” (Michael Milken paid $1.1 billion back in 1991, but that was to settle both civil and criminal charges over a multitude of securities fraud charges that ended up not including insider trading.)

“Happy, relieved, excited about the future” was how one investor described the mood inside SAC. Even if he had to pay the settlement from his pocket, Cohen was still left with his $9 billion net worth largely intact. He appeared to celebrate days later, according to the
New York Post
, by shelling out $155 million to purchase Picasso's
Le Rêve
from another billionaire “Stevie”—casino mogul Steve Wynn—and purchasing waterfront property in the Hamptons for $60 million. The general feeling among key clients like Blackstone was relief as well; if the SEC had a case against Cohen they would have brought it. The firm's PR flacks told reporters that the “settlement is a substantial step toward resolving all outstanding regulatory matters and allows the firm to move forward with confidence.” The redemptions did come in February, but at $1.7 billion it was far less than what was feared, even if another redemption date looms as this book goes to press.

While SAC traders exhaled, government investigators went back to building a case against Cohen, beginning with an unusual statement that, despite the settlement, Cohen remained a suspect. That warning shot came from George Canellos, now the acting head of the SEC's enforcement division after having taken over for Robert Khuzami. During a briefing with reporters, Canellos said the settlement wouldn't “preclude the future filing of additional charges against any person, including Steve Cohen, who is not named as a defendant in these cases.”

It's difficult to recall a similar instance of an SEC official referring to a suspect by name. Still, as this book goes to press, government investigators continue to press Martoma into agreeing to cooperate against his old boss. One reason they are confident about Martoma as a potential witness against Cohen is the timing of their telephone conversation about the drug-stock sales in question. It occurred in 2008, before news of the wiretaps had been disclosed, when traders talked more freely on the phone about why they were buying and selling stocks.

With “each and every day that he doesn't cooperate, that's got to be a good day for Steve Cohen,” one former prosecutor involved in the investigation said, referring to the statute of limitations that runs out in the summer. And, the theory goes, without Martoma cooperating the government has relatively little on Cohen beyond hearsay from emails and Martoma's self-professed level-nine conviction.

All of that sounds good if you're a Steve Cohen fan (or Cohen himself), until you consider the following: Prosecutors generally don't walk away from cases (unless of course you run a bank that is “too big to fail”). Eric Holder, the attorney general of the United States summed up the double standard during testimony in early 2013. “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

Holder's remarks, of course, underscored the irony of Perfect Hedge and the entire insider trading crackdown: For all the hard work of people like Wadhwa, Kang, Makol, Chaves, and their supervisors, the country remains somewhat unimpressed that the government went wild on insider trading while the banking fat cats—who took such outrageous risks that they brought the global financial system to its knees—continue to walk around free. Average people don't like insider trading, but many of these same average people believe it is beside the point. Holder was merely providing an awkward rationale for why the government seemed neutered when it came to busting the crime that brought down the U.S. financial system as opposed to the one that may have made some hedge fund traders a bit richer.

Holder would have probably done better to say nothing so as not to further demoralize the investing public. Even as the Dow cruised to new record highs, small investors remained wary. They certainly don't feel it's safer to invest because Raj Rajaratnam is in jail and Steve Cohen may be next. The best evidence for this is the fact that investor money still remains largely on the sidelines of the stock market, tucked away in gold or bonds, which eke out minuscule returns. To be sure, some investors are jumping back into the market, but only because they feel they're missing out on the party. Talk to financial advisers and they'll tell you that their clients have bigger concerns than SAC's market edge. Flash crashes, the botched Facebook IPO, and the belief the Fed has artificially inflated the market has scared many retail investors out of stocks.

But that has hardly deterred our insider-trading police from their mission. Cohen's spending spree on expensive art and the Hamptons home didn't go unnoticed by the feds, even if the purchases were in the works for a while, as Cohen's PR handlers say they were. Still, news of the sale suffered from very poor timing. It came as SAC was looking for a deal to end all the investigations through a settlement with Bharara's Manhattan US Attorney's office—a deal that would have “deferred” the prosecution of Cohen, possibly shuttered SAC in its current form, but allowed Cohen to restart the hedge fund at some later date.

When Scaramucci heard about the possible deal, he was ecstatic, remarking, “I'll even help Steve raise money.”

The deal fell apart, and not just because the artwork purchase irked prosecutors. Bharara believes there is at least one major insider-trading case left, and all signs point to that case being SAC and Cohen. In May, it was learned that the US attorney's office sent grand jury subpoenas to SAC officials, including Cohen, over the trades under scrutiny. Legal experts say Cohen is likely to exercise his Fifth Amendment right against self-incrimination to avoid the perjury trap that snared Martha Stewart. His lawyers have told clients that the hedge fund, which has continuously stated it was cooperating “fully” with any and all investigations, will no longer do so on an “unconditional” basis.