Is Steve Cohen the real target in this trial?
The fate of Mathew Martoma, the former SAC Capital portfolio manager charged with the biggest insider trade in history — more than $275 million in profits and avoided losses, says the government — is now in the hands of a 12-person jury, which began deliberations in a Manhattan courthouse Tuesday afternoon.
But whatever the verdict for Martoma, the trial has been bad news for someone else: Martoma‚Äôs former boss, SAC head Steve Cohen. Given the slow, but relentless, nature of the government‚Äôs actions against Cohen, it might be worth remembering the old adage: It ain‚Äôt over til it‚Äôs over.
Cohen has, to date, famously avoided any criminal charges personally — despite a string of other government actions against both him and his firm. Last March, SAC agreed to pay more than $600 million to settle civil insider trading charges, brought by the Securities and Exchange Commission, involving Martoma‚Äôs trade. Then, on July 19, the SEC charged Cohen with failing to supervise his employees, alleging that he ‚Äúreceived highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades‚ÄĚ made by Martoma and another manager.
SAC quickly fired back. A 43-page internal white paper rebutting the SEC‚Äôs charges was leaked to the press. In it, SAC claimed that its compliance efforts were so fantastic that the SEC was just wrong, wrong, wrong in accusing Cohen of failing to supervise his employees.
Among other things, the firm‚Äôs lawyers wrote, ‚ÄúSAC‚Äôs compliance team, with Cohen‚Äôs full support, deploys some of the most aggressive communications and trading surveillance in the hedge fund industry.‚ÄĚ That included a ‚Äúreview of trading made around market moving events and corporate access events‚ÄĚ along with ‚Äúregular reviews of the firm‚Äôs most-profitable trades.‚ÄĚ SAC lawyers also asserted, ‚ÄúCohen has frequently forwarded to compliance staff communications he receives that caused him concern.‚ÄĚ
It‚Äôs long been clear that the government doesn‚Äôt agree with that picture of righteousness. The very next day, the Justice Department filed a criminal case against SAC, though not against Cohen, alleging that his firm ‚Äúfailed to employ effective compliance procedures.‚ÄĚ Prosecutors noted that six former SAC employees had pled guilty to insider trading, yet SAC‚Äôs vaunted compliance department had ‚Äúcontemporaneously identified only a single instance of suspected insider trading by its employees in its history.‚ÄĚ
Last fall, SAC paid more than $1 billion to settle the charges.
At that time, there was a lot of commentary, and rage, that Cohen himself had pretty much walked away. But that was never true.
If the SEC wins its failure to supervise case against Cohen, there could be more fines. More importantly, the SEC could try to limit his ability to be involved with public companies, and could seek to bar him from managing other people‚Äôs money for a long time. In addition, in December, a close Cohen lieutenant named Michael Steinberg was convicted of insider trading. It is wrong to think that the feds are done with their investigation of Cohen.
Fast forward to the Martoma trial, which has featured testimony from current SAC employees, including top traders Chandler Bocklage and Phillip Villhauer, and Peter Nussbaum, the longtime general counsel. At times, the thrust of testimony has veered dangerously toward Cohen — and not in a totally flattering way.
At one point, Bocklage called Cohen the ‚Äúgreatest trader of all time,‚ÄĚ and a defense lawyer began to ask what made Cohen so great. Judge Paul Gardephe warned, ‚ÄúGeneral questions about how Steve Cohen conducted his trading I think are very dangerous — dangerous in the sense that they represent a risk of opening the door to a broader examination of how Steve Cohen did business.‚ÄĚ
But more important, Martoma‚Äôs defense has undercut some of the assertions in that strident white paper. Martoma is charged with using inside information to first help SAC amass big positions in two pharmaceutical companies, Elan and Wyeth, heading into a big meeting where critical data would be released, and then persuading Cohen to sell, and also short, the stocks based on confidential information that the data would be negative.
When SAC sold its shares in Elan and Wyeth, Cohen had the traders use ‚Äúdark pools‚ÄĚ and algorithms to limit how many people both inside and outside SAC were aware of the trade. In its white paper, SAC said that this was a ‚Äúcustomary trading practice‚ÄĚ and was ‚Äúreasonable‚ÄĚ — given how leaks about SAC unloading a large position could cause the stocks to fall.
Those are totally fair points.
But what no one said was that to limit visibility into the trades even more, they weren‚Äôt done in Cohen‚Äôs or Martoma‚Äôs account. Instead, Villhauer had the operations people use two additional accounts that even fewer people could access. The sales were done there. Later, they were transferred back into Cohen‚Äôs and Martoma‚Äôs accounts.
This does not seem to have been customary.
‚ÄúMr. Villhauer,‚ÄĚ one prosecutor asked, ‚Äúcan you recall another instance prior to July of 2008 in which the firm sold a large position using firm accounts and then transferred the sales later to the accounts that held the long position?‚ÄĚ ‚ÄúI cannot,‚ÄĚ Villhauer responded. Bocklage also testified that he did not learn about the sales until afterwards — and said that he could not recall any equivalent experience during his decade-plus at SAC.
That‚Äôs not all. The white paper also claims, ‚ÄúCohen has frequently forwarded to compliance staff communications he receives which cause him concern.‚ÄĚ Yet on the Elan and Wyeth trades, it does not appear that Cohen ever sought compliance‚Äôs input.
Prosecutor Arlo Devlin-Brown asked Nussbaum, ‚ÄúAnd compliance wasn’t informed that SAC sold $700 million of Elan and Wyeth in the week leading up to the ICAD announcement [where the pivotal data was released], was it?‚ÄĚ ‚ÄúNot by a special notice, no,‚ÄĚ Nussbaum answered. He continued, ‚ÄúI don‚Äôt think they were [aware of the trades]‚Ä¶because nobody came by and mentioned anything.‚ÄĚ Devlin-Brown emphasized, ‚ÄúNobody came by and mentioned anything?‚ÄĚ Answered Nussbaum, ‚ÄúCorrect.‚ÄĚ
From that testimony, it does not appear that SAC‚Äôs compliance programs, including surveillance supposed to pick up SAC‚Äôs most profitable trades and flag big trades around market-moving events, picked up on the Elan and Wyeth trades. Which is shocking, given not just the size of the trades, but the fact that Elan‚Äôs shares lost more than 40 percent of their value after the release of the negative data, and Wyeth‚Äôs shares lost 12 percent.
There may be an explanation as to why these huge trades were missed. But the argument that SAC‚Äôs compliance regime is so rigorous that it by definition exonerates Cohen is looking a little more suspect.
The irony of this is that SAC is paying for Martoma‚Äôs defense — standard company policy. Which might be a twist on another old adage: Be careful what you pay for.
PHOTO (TOP): Former SAC Capital employee Mathew Martoma exits the Manhattan federal court following an appearance on insider trading charges in New York, November 26, 2012.¬† REUTERS/Brendan McDermid
PHOTO (INSERT): Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisers, responds to a question during a one-on-one interview session at the SkyBridge Alternatives Conference in Las Vegas, Nevada, May 11, 2011. REUTERS/Steve Marcus