135: Sheelah Kolhatkar – How Mastermind Trader, Steven Cohen, Bent Rules and Made Billions

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Hey there, what's good team? Thanks very much for plugging in to episode 135. Now featuring on this episode is Sheila Kolhartkar. Sheila is a writer at The New Yorker, who was previously a journalist at Bloomberg Business Week, and prior to that, a hedge fund analyst. But the reason I asked Sheila to come on the podcast is because she's also the author of the New York Times bestseller titled Black Edge.

which has the tagline, Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street. Of course, the most wanted man being referred to is hedge fund legend Stephen Cohen of S. A. C. Capital Advisors, someone who Sheila has become very familiar with through much of her own strenuous and tireless research.

So from this conversation I had with Sheila, you'll learn about where Stephen started out in life and how he became an ultra wealthy multi billionaire with an elaborate art collection, might I add, how SAC became the target of one of history's greatest insider trading investigations, and ultimately how it all played out.

I do hope you'll find this episode interesting and if you'd like more on the subject, you can grab a copy of Sheila's book, Black Edge, by going to chatwithtraders.com slash black edge. That will redirect you straight to BlackEdge on Amazon. With that being said, I'm your host Aaron Firefield, and coming to you from New York City, here is Sheila Kohlhartkar.

You know, tell me a little bit about your background prior to doing this book. You used to be a hedge fund analyst, correct? I was, yes. I was a risk arbitrage analyst for five years at two Small small hedge funds. Um I was not terribly happy doing that, but it was it was a very interesting

you know, sort of stretch of my career, but um I kind of fell into it by accident. And um but that did teach me about hedge funds. I mean I I came to completely understand That industry through my job trying to just research. uh arbitrage opportunities for these two small funds and um that way I mean it was fascinating. It was sort of an anthropological experience. So why were you not particularly happy doing that role?

Well, I think that I am just temperamentally not well suited to the kinds of quick uh decision making that Uh you really have to do uh uh when you're a hedge fund trader and analyst, especially doing the kind of investing that we were doing. Um often sort of something would get announced or some piece of news would come out and you'd have to make a trading decision pretty quickly.

And I'm the kind of person who likes to study and read books and talk to people before I make a big decision. Yeah. I am not good at just sort of doing a quick scan of the market and then going with my gut and just going for it. It's just not at all my personality. So and I just found it extremely stressful because you're investing with other people's money, your investors' money.

And if you lose your investors' money, that's a terrible thing. And I just didn't like the responsibility of that. Sure. I can understand that. Yeah. Yeah. But I mean obviously some people enjoy that and they enjoy the risk taking and they find it thrilling.

But it did not thrill me. It it made me very anxious. So you worked at these two hedge funds as analyst for a little while. I mean, what happened between there and you actually writing this book, which we're gonna spend a lot of time talking about?

uh Black Edge. Um what actually happened in between and and what actually inspired you to write this book? Well, if you fast forward a few years, so I I left the hedge fund world and I went into journalism and ended up in two thousand and twelve and twenty thirteen working at Bloomberg Business Week, which is uh a weekly business magazine owned by Bloomberg.

And that was a very fun, interesting job. And um you know the government had started investigating this big insider trading rig, and they were making arrests you know, periodically and it would it would be in the news and the Wall Street Journal and C N B C would kind of cover it. But then at the end of 2012, there was sort of a break in the case and Some FBI agents went down to Florida and they arrested a former portfolio manager named Matthew Martoma who had worked for Steve Cohen.

And that was kind of a big deal because Steve Cohen's hedge fund, SAC Capital, is one of the biggest, most well-known hedge funds uh in the world. He was um someone who was really widely I I don't know if admired is quite the right word, but there was a lot of envy of his success on Wall Street

He was just a famous, well known, very wealthy investor. So when the government went and arrested this former employee of his that you know, they filed um papers indicting this employee, accusing him of insider trading. And it was really clear from the government's filing and what they disclosed about the case that they were kind of interested in Steve Cohen himself.

Actually my editor, Business Week, said to me, Sheila, this is going to be a really big story and an interesting, dramatic story, and you should kind of get on this right now. It's perfect for you, it's about hedge funds.

There's a lot of drama, controversy, all things that I like. And um you know, I was reluctant at first'cause it seemed really hard and like it'd be really difficult to kind of find anything out and to get inside it, but I started to follow the story and it just got more and more interesting, I thought.

Well, that's one of the things I was gonna ask you, is that, you know, doing this, it must have been a really huge task to do all the research to actually be able to put this book together. I imagine that there would have been a lot of people who Uh probably didn't really want to speak to you about this particular case. Am I right? Yes, that's absolutely correct. So who were some of the people you were able to interview for the book?

Well, I have this sort of disclaimer in the book where I describe my reporting process and most of the people I spoke to I agreed not to identify them as sources in the book. A lot of nonfiction books are kind of written this way because Otherwise it's true people are nervous about talking to you. Um while the case was still going on, I went around to everyone on all sides of it, the hedge fund side, the legal side, the government side and I

I explain to people I'm doing this book, this is a long term commitment, this is gonna be a a sort of an historical record of a really important series of cases that you are involved in. You know, we wanna get it right and I'm gonna be fact checking the book.

I wrote letters to people. Uh I begged people I knew for introductions. It's very painstaking process, you know, it's a painstaking process and takes a lot of time and you run into a lot of dead ends. But over time, as I continued to work on it, people did start to agree to talk to me on this basis that I would not

sort of reveal how I knew certain things, I would be using the information I got from people to kind of construct a narrative of what had happened. And there was also an enormous court docket about this case. I mean there were deposition transcripts and trial transcripts and FBI notes. I mean just voluminous filings uh from the government. that really allowed you to f you know, fill in a large part of the story.

Uh but then yes, it was it was conversations and interviews with people and those those were those took a lot of work. I mean I had to build trust with people and um show them that I was really serious and that I wanted to tell the real story and and m not you know not make mistakes and that this would be the the account, the final account of what happened. And yeah, it's it's hard work but but worthwhile, fruitful. Of course, yeah. And

Correct me if I'm wrong here, but you actually met Steve Cohen one time. Can you tell us how that played out? Yes, well, I had been trying to I knew it was very unlikely that he would agree to do an interview with me. I mean

He was under a tremendous amount of legal pressure. There was a possibility during most of the time I was working on this book that he might be charged or go to jail possibly. I mean I'm sure he was very nervous and there's no way his lawyers would have allowed him to sort of sit down with this author and you know, speak openly about what had happened. But um even though he had he had been sort of saying no or just avoiding me, I f I felt that I had to kind of make a final pit to him in person?

uh about the book and just sort of hear it directly from him that he he didn't want to participate. So I knew that he was going to be at an art auction at Christie's auction house in Manhattan on a particular night. It was a very high profile auction. It was sort of one of the one of the kind of big social events of the art world and um he's a big uh major art collector.

Um he has one of the most well known private art collections in the world. It's valued at over a billion dollars. So he it was known that he was going to be selling a painting at this particular auction, so I knew he would come. So I I just waited for him in the lobby of Christie's auction house there.

And I had my business card and like a little notepad and I saw him coming and I just sort of jumped right in into his path and I introduced myself and he as soon as he heard my name, he uh he knew who I was and he said, Oh God, you know, I can't talk to you. You know, I I said w I said, Well listen, you have a really good story to tell. I I wanna hear your side and I wanna hear about how you're changing your firm and trying to

you know, improve the culture of the company. And he said, Oh, I'll think about it and then he's sort of trying to get away from me as quickly as possible and then I said, Well, um, are you going to be buying art tonight or uh selling? And he said, Oh selling, I'm selling.

And I knew that he was selling this one piece. Um and then he kind of disappeared into the crowd. And then literally, you know, thirty or forty minutes later he he bought a Giacometti sculpture for a hundred and forty one million dollars, I think it was. So I just loved that the my my one face to face interaction with him involved in telling me he was there to sell, but he was in fact there to buy. And I thought that was just sort of perfect.

Yeah, I mean not to mention he bought a hundred and forty one million dollar sculpture. I mean, that's uh that's pretty badass. Yeah, oh yeah. He wasn't messing around. Yeah.

Wow. Okay, so many people have probably at least heard of Steve Cullen. Mostly probably for the wrong reasons. But many what many people probably don't know is that Steve was actually a a really good trader. in his early days. Um, he was he was almost like a gun trader from the outset. I mean, what sort of background

Did Steve have before he actually got into trading? And then we'll talk a little bit about his early days. But I mean, what sort of background did Steve Cohen come from? I mean, these days he's worth upwards of ten billion dollars or whatever it may be. I mean, did he come from a wealthy beginning? I mean, what was his childhood and uh upbringing like? He came from a very uh very middle class family. Um he grew up in Great Neck Long Island, which at the time was a fairly affluent

kind of commuter town, uh, outside of New York City. And there was a lot of wealth there at the time and his uh there were eight kids in his family. And um they were not wealthy. I mean they were very middle class, money was a little bit tight at times.

And I think Steve Cohen wanted to be rich from an early age. That was just a goal he had from almost from childhood. And um His brothers told me a funny story, which is included in the book about how how everyone in the f in the family sort of felt that Steve would be s you know was special. their mother his brother remembered their mother cooking uh steak

for little Steve and making hot dogs for all the other children. And I just thought that was very funny, uh as sort of a memory um that his brother had. Now I found it hard to believe that any mother would treat her children so differently, but y who knows. But just the fact that Steve Cohen's brother remembered this happening was really telling. I mean there was a real sense that Steve was special, he was really smart, he was gonna make a lot of money.

Um and so he was treated he was treated a little differently. He started playing poker in high school and then he went to uh the Wharton School at the University of Pennsylvania, which is a very famous business school. And that's where a lot of Wall Street Titans go to college. And he went there and he he finished his semester early. And uh immediately rushed to get a job as a trader at a small brokerage firm. And that was that was his goal to get onto Wall Street as quickly as possible.

Okay, so can you tell us a little bit more about his uh his trading in those early days? Like How did he perform? What sort of strategies he was trading, uh, where he worked, you know, how he performed. Yes. Yes. So he his first job was at a small, not terribly well respected brokerage firm. It was called Gruntel and Company. And it was located in right close to the actual Wall Street in lower Manhattan.

You know, it was the place where there were a lot of misfits. It wasn't sort of a slick establishment corporate environment. It was it was a little bit wild and a lot of what was going on there consisted of brokers calling kind of individual investors and trying to sell them. sell them on different stock investments. But uh Steve was hired by a family friend who was also from Great Neck who had started um an options arbitrage desk at Gruntel.

So this was nineteen seventy eight and the options market was um very new and There weren't very many people trading options. I think a lot of people probably had no clue what they even were. Uh n nothing was electronic or digital. So for people who did take the time to figure out the options market, there was actually a lot of opportunity to make money because

It was sort of what you what what what they might say was a relatively illiquid market. You just didn't have a lot of competition in doing options trades. And so um Ron, who was Steve's boss at Gruntel, had had devised an option strategy where you could You would either buy and sell options on different uh exchanges, different markets, or you would buy or sell options and buy or sell the underlying stock and basically lock in a spread based on the price differential between the two.

And it was just sort of a simple mathematical calculation. You could just do it on a spreadsheet. and it was a no risk uh trade and most of the trades would be closed out at the end of the day. But um You know, if they did this in high volume, they could over you know, the course of many days and weeks accumulate all these tiny little spreads of twenty five cents or whatever it was they were making on each of these. You know, over time that would accumulate into a decent uh profit.

And um considering that it was all it was almost like a no risk strategy, this was a remarkable thing. It was like free money. And so Steve joined this very small group um of of mostly guys from Long Island who Ron had assembled there to do this. And Right from the very first few days he was there, he he kind of said, Listen, I want to just be trading and I want to do this option stuff. And gradually his bosses

gave him more opportunities to just trade the market, almost like a day trader would do now. And he was incredibly good at this. He developed a reputation as a tape reader, uh you know, someone who can look at the physical ticker tape, which is what they had back then. Uh when trades were consummated you would see it on a physical tip ticker tape running through the office.

He could kind of look at the at the trades coming in and out of the market and just somehow be able to tell which way a stock price is going to move and and he started kind of day trading uh this way. And he was also very good at uh di determining how pieces of news would affect stock prices. And he was very good at managing risk. He didn't get emotionally attached to his trades.

He was very good about sort of pulling the plug and selling something if it just started to go against you. And um, you know, the kinds of situations where a lot of people will end up just losing more and more money'cause they don't want to acknowledge that they made a mistake.

He w he was, according to everyone who worked with him at the time, he was very good at just being kind of dispassionate and analyzing risk in this very cool, detached way. And he just started to make um you know, a lot of money, millions of dollars very quickly. He did this for several years and it was interesting because a lot of his early period on in the financial industry took place during uh the nineteen eighties sort of stock market boom.

when there was a lot of um mergers and merger and acquisition activity. There was a lot of trading going on based on rumors of mergers and takeovers. There were a lot of kind of corporate raiders going after companies and building up stakes in companies and then trying to sell those stakes. Um leveraged buyouts, all these things were going on at the time. So the market was just kind of shooting up and uh stock prices were going up and down based on all these rumors.

And this is the environment that he was in, immersed in, when he really learned learned the trade, as they say. So at what point did he branch out onto his own to start SAC? Well he had had a goal for a number of years to have his own fund because he he did eventually, as he became more and more profitable, he started to feel a bit resentful that he had to share his profits with Gruntel because Gruntel was providing all his kind of his overhead and his office space and his

um back office services and all that that. So he said, Well I don't want to g I don't want to share with them. They're not they don't deserve it. You know, I want to go out on my own. I want to be my own fund manager. In nineteen ninety two he cobbled together twenty four to twenty five million dollars of his own money and also of his his sort of core group of traders who were going to be starting the fund with him and just friends and family. And they started SAC Capital, his hedge fund.

You know, when it began, obviously it was just a tiny one room operation. Um they had an office in Manhattan where they were all sitting in in the same room and they would all kind of day trade together. Uh Steve would often kind of set the the trading plan for the day and all his his traders who were sitting around him would just follow along whatever he was doing.

Again, i the the market was less mature than it is now and it was easier to make money doing this. And um hedge funds just generally were were newer type of investment vehicle, there weren't so many hedge funds, there was a lot less competition for the good trades and the good ideas. But eventually, you know, as SAC grew and he made more and more money

uh his reputation really grew on Wall Street and people started to really watch what he was doing because he he was known to be somebody who was always on the right side of a trade. Traders I spoke with all had stories of of hearing, you know, about how a company would

announce disappointing earnings and the stock would get killed and oh it turned out Steve was short right before that earnings announcement. You know, there were constantly things like this going on where it seemed like he'd somehow got in at the right time before some event, news event, moved a stock price.

And so people started to try and um copy him. And I think this was really frustrating to him because obviously when everyone else is trying to do this, you know, imitate your trades, that that sort of Makes it impossible for you to do the trades. All the all the profit you were hoping to scoop up for yourself gets So he he no he became very secretive and spent a lot of time trying to trying to prevent the rest of the Wall Street community from imitating what he was doing.

And um but but very quickly his fund grew to over a billion dollars. Just for a little context, can you tell us a bit about the performance of SAC? Like how well did the fund actually perform? It performed extremely well almost from the get-go. I mean in the early years the returns were higher than they tended to be later when the fund became so huge. I mean at its peak it had uh over fifteen billion dollars in assets. That's under management. So that's a very large fine. And it's hard to

post, you know, kind of double digit returns when you ha you're managing that much money. But when he was small, yes, he was he was posting fifty, sixty, seventy per percent returns easily every year. And over time, as people learned about this, investors would fight to get in. And eventually he started charging you know, he he started charging higher fees than most other hedge funds.

Instead of taking twenty percent of the profits, he would take fifty percent. But investors didn't mind paying because the returns were so good. You just couldn't find those returns anywhere else. And it was very consistent. Um I think in its entire uh lifetime S T C C Capital had only one year where it lost money and that was two thousand and eight, which was the year of the big financial crisis.

And um I mean everyone lost money that year. But he r it it was really remarkable. Every single other year the fund posted positive performance. I mean statistically I think that is really difficult. I mean people eventually started to become a bit suspicious about it because the chances that you can do that so consistently beat the market are very, very um slim.

Yeah, well let's let's speak about that. Okay, so the fund SAC became infamous for insider trading and and using insider information. Uh, was it always the case from the get go? That it became known for that, you mean? Yeah. I mean, were they using inside information from the outset? Or was it something that they began seeking out, you know, a few years into this venture? Well, it depends on who you ask. Some some people believe there was possibly illegal activity going on there from early on.

Um there are others who believe it really became more of a problem in the later years when the fund got so big and started kind of expanding into other strategies. that were more vulnerable to that type of thing. I mean one one thing I do admire about Steve Cohen um is just was his ability to Um you know, he was a businessman. He was an entrepreneur, he was managing SAC uh as a as a business and he was very good at anticipating changes in the hedge fund world and sort of

adjusting what he was doing and changing SAC capital strategy to respond and to try and keep out a bit ahead of what what the market was doing. And at one point in the early two thousands He made the decision to become a much more research intensive shop. And he did not want to.

rely on outside sources to get good research information about his stocks. And, you know, to that point they had been speaking to a lot of analysts at big banks and He said, No, I want to have my own in house team of analysts who are going to analyze all our investments. And especially as they started to make more investments in sort of biotech and technology stocks, it's very hard to understand all these industries.

So he went a r on a real hiring spree trying to hire very aggressive, ambitious, well educated, well pedigreed traders and analysts who could really understand and research and become experts. in these different industries and these different stocks they were trading. During that period when the the firm was sort of switching directions a little bit to move in this more research intensive direction, I I do think a lot of the people who got into trouble

legally. A lot of them joined during this era. Although not all of them, but There was definitely an influx of new people who started to go, you know, who started to really look for edge uh in in tech stocks in particular. And that led them into some activities that they weren't supposed to be involved in. So um certainly the documented problems.

You know, tended to ha to happen later. But there are people who had suspicions going all the way back. Are you ready to get serious about trading? Then join Tasty Trade, Investorpedia's best platform for options trading in twenty twenty six. Stocks, options, futures, and more. Tasty Trade has everything you trade all in one platform. Get low commissions, including zero commission on stocks.

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Okay. So he hired a whole bunch of analysts. I mean at How were they getting their information? Well, so they all had they all had their different strategies, but just to give you a couple of examples, there was one portfolio manager in particular he hired named Matthew Martoma. He's the one who was arrested uh in two thousand twelve who

it kind of piqued my interest in the story who who I mentioned earlier. So Martoma arrived, Ivy League educated, smart guy who um was a sort of a biotech and pharmaceutical uh stock expert. And he'd been at another hedge fund in Boston. So he took a job at SEC Capitol. And he was a very determined aggressive, ambitious fellow and he decided um that he uh he was going to pursue an investment in uh some drug companies which were developing a new Alzheimer's drug.

And he he knew a lot about Alzheimer's, he knew a lot about uh the human brain and how these different drugs were supposed to try and address Alzheimer's disease. There's no cure for Alzheimer's. So um for the right company that figures out a treatment for this disease

There's obviously a lot of commercial potential. There's a lot of money to be made. So a lot of investors were tracking various Alzheimer's drug trials and trying to uh make investments so they could they could benefit if the drugs worked out.

So Matthew Martoma, Steve Cohen's new hire, immediately started trying to learn everything he possibly could about these drug companies and about this particular drug and about Alzheimer's and and the whole drug testing process. Martoma Used an expert networking firm to try and help connect him to sources who would know about these drug stocks.

Now, um expert networking firms are are sort of hard to they uh they they just they this was a type of business that had popped up to cater to hedge funds. And you would basically pay a fee to this this company and it would help connect a hedge fund investor to Employees or experts um in a particular company or industry who could kind of educate the hedge fund investor about about these uh this new company or industry.

So Martoma used one of these to help connect him to a doctor who was helping to run the drug trial. This is all laid out in the government's case against Martoma, but um according to the government, Martoma immediately started pressuring this doctor to disclose secret information about the drug trial.

And um the doctor was not supposed to discuss that type of information with him. He was only supposed to talk about publicly available information. However, uh over time, according to the government, Martoma sort of corrupted this doctor and ended up getting access to the drug trial results a week before Uh they were announced publicly.

And um this is the basis of the of the largest uh of all the insider trading cases involving SAC Capital. And um Matthew Martoma was alleged to have so paid money to this doctor, gotten this information that sold off almost a billion dollars worth of these two drug stocks. And then um in in in a collaboration with Steve Cohen shorted the stocks and then a week later the trial results came out and the stocks plummeted. And uh SAC Capital was alleged to have

made profits and avoided losses of two hundred and seventy six million dollars. So the largest insider trading case ever filed here. So the incentive for the doctor in this case, he was obviously being paid to supply the information. I mean that was the only incentive for him. That was one incentive, but I I think honestly the doctor developed affection for for Martoma, this this kind of handsome young traitor. I think they almost became friends.

And eventually you know, eventually he he wanted to help Martoma out and he made a mistake. And uh he ended up cooperating with the government to testify against Martoma and I think he really regretted it. It cost him his career. Uh he could have gone to jail, he didn't. But um I think he became personally kind of wrapped up uh with Martoma as their relationship became more friendly.

And um but the reasons why he did it are c are it's it's it's hard to believe because he really gave up a lot. It was a really terrible error that he made. Sure. So were they paying Would SAC pay for all their sources of information or was there I mean, why why would people give them inf information? Obviously we we've talked about this case, but just I guess speaking more broadly, why were people offering information to SAC like what was in it for them?

Well that's a good question. There are all different examples that ha have come up. I mean in some cases, uh according to some of these the cases the government filed, there were hedge fund analysts at different hedge funds. who were each getting information through various means. Uh often it was through friends, people they'd known from college, uh friend of a friend who worked at Intel or Dell or Nvidia, you know, some company that makes um

microchips for computers. You know, the the government had exposed one ring of of hedge fund analysts at a whole bunch of different funds who were getting information and then sharing it with each other. So there was some trading going on of information. Um sometimes people were f were friends and wanted to help their friend out. A lot of people were paid for the information. You know, a lot of people said I'll give you information if you if you kick me some of the profit you make back.

Uh there were all sorts of complicated reasons, but i it wa it was really a a a corruption. People people became corrupted and I think a big part of the reason is because of the money. There was so much money to be made. And there wasn't a lot of policing going on of this of this industry. Right. Now when they were doing this and when they were taking on this information, were they knowingly breaking the law at the time or was this bit of a grey area?

There is definitely some gray area in insider trading law and um I mean my sense from the cases that I was able to study closely, there are signs that the people involved did know that what they were doing was wrong. Uh I mean they they would h try and hide it, for example.

Uh but many of them did argue uh that they didn't know for sure or that the line wasn't entirely clear. And it's true that insider trading is a little complicated to prove and You have to prove that um uh not only that the the person who traded the information um you know that they knew they they they the the person who trades the information has to have known

that it was leaked by somebody who was not supposed to be leaking it. This you know, usually it's a company insider who has a duty to keep that information confidential.

So so they have to leak it out and then the the person who gives out the information also needs to receive some kind of benefit for it. They can't just sort of share it for a g as a gift. They need to receive something in return, either Uh either um you know, uh money or maybe another piece of inside information if they're trading information.

Um but you have to kind of prove all these elements to really make a case in court that somebody knew. So a lot of people were able to avoid charges by saying, I didn't really know, the line was unclear. And I think in some cases that was true. There is some gray area in this. I guess the only other point I would make is that there were a lot of legal experts who said, Listen, you know, if you're a hedge fund manager of any reputation

Um you know it w when you see it. I mean if if a piece of inside information, black edge, as I call it, comes your way, you know it when you see it or and it and you should know it if you're running a big hedge fund. And I think that's also a fair point.

Well let's talk a little bit about when things actually began to fall apart. So on the legal side, who actually picked up that SAC were doing something they perhaps shouldn't be doing? The government was in the middle of this big insider trading uh investigation that had led to the arrest of Raj Rajaratnam, who was another big tech hedge fund manager, not as well known as Steve Conn, but he had been arrested and was awaiting to go to trial.

And they continued investigating and they had developed a lot of sources, uh a lot of cooperators in that Raja Ratnam case, and a lot of people were just reporting to the FBI and even to the SEC uh that they should look at SAC B capital. And they did. Then th then they started to sort of turn their attention to SAC, start to find people they could possibly flip and turn into cooperators. And some of the first most fruitful tips that they got though arose right out of that Rajaratnam case.

You know, then it was just painstaking work. I mean at one point um the SEC uh gathered up all of the suspicious trading reports. You know, every time there's a suspicious trade and someone complains about it in the market. There's a regulator who who gets sort of a letter saying, Oh, this fund made a suspicious trade. At one point the S the Securities and Exchange Commission, which is responsible for policing the markets.

said, you know, we're gonna look at all of the referrals um regarding SAC capital. And this huge box arrived of just dozens of these referrals. I mean they were just Constantly. Raising red flags. And uh then they then they had to go and start piecing it all together through this very painstaking fashion. You know, they'd have to look at each suspicious trade and and figure out who who made the trade and is it possible they could have had inside information to make this trade?

And that is how the Martoma case really came together. I mean they they figured out that SAC Capital had made this enormous profit um one week before these drug trial results became public. And That looked very fishy and then they started trying to figure out, okay, who uh who works at SAC Capital might know someone who was involved in this drug trial, who would have had access to confidential information about these drug trials. And eventually and I mean literally this took a couple of years.

They f they they found the connection between the doctor and Matthew Martoma, the portfolio manager at SAC Capital. And even once they had those two names, they had to then go and try and find um evidence to sort of use to encourage the doctor, for example, to cooperate. And eventually, um, after many, many months of pressure, the doctor agreed to flip and um testify for them. And that was that was sort of a huge break in their case.

When SAC realized that they were being investigated, I mean, what were some of the things that they did to try and cover their tracks to avoid being caught? Because I remember when I watched the documentary, uh the frontline documentary, um, How to Catch a Trader, which is uh mostly about Steve Cohen. I remember the like the opening scene, a guy talks about taking a computer hard drive, smashing it with a hammer, and then

Splitting it amongst four different rubbish bags and then walking round Manhattan, throwing it in different uh garbage trucks. Are there any other stories like this?

Well yeah I mean yes that was a pretty dramatic story. There were people who went and w started shredding all their files There was one guy in particular, he didn't work at SAC but he was friends with with some SAC traders, so they were all swapping information and this but this particular hedge fund manager, he he um You know, he read a a leak in the Wall Street Journal, like a an article that sort of described that this case was going on and he panicked.

uh because he knew he was guilty. And um you know, he he ordered one of his underlings to go and destroy all of their files in their office and he tried to delete the hard drives in his computer. Uh this other SAC capital portfolio manager you just mentioned, yeah, he he did destroy his um he had a bunch of thumb drives where he was keeping all his inside information. He smashed them up.

Um that particular guy didn't even know it at the time, but his his very good friend ended up wearing a wire and recording him. on implicating him and they both ended up being charged.

You know, it's hard to know. I mean, there's some things we don't know in terms of what happened. The government was very convinced that there was a lot of evidence being destroyed and this prompted them in two thousand and ten to actually go and raid a handful of hedge funds. They literally stormed into three different hedge funds. One of them had been started by um actually two of them had been started by former SAC capital traders.

So they were very closely connected to Steve Cohen, and I think the government felt that they would get evidence uh connected to Cohen, you know, from these two funds, although they they never really did, but they literally walked in there with a warrant on a Monday morning. and took out their hard drives and all their files. And uh this was a really big deal. Um, you know, hedge funds were not very happy to see the FBI storming into their offices.

No, I can imagine. And in the end, yeah, it was a really and in the end it was it's it really was kind of an overreach. I mean, they didn't get anything that was very valuable. And those funds ended up shutting down because that was just so damaging to their reputations.

So the government was criticized very heavily for for being too heavy handed, uh with some aspects of this. Right. So how did all of this play out? Like was SAC ever prosecuted for these claims of insider trading? Well so there was a very dramatic moment in twenty thirteen when, several years into this investigation, um there was a lot of speculation that Steve Cohen was going to be charged. He was gonna be indicted, he might go to jail. I know he was nervous about this.

You know, a lot of reports about his investors panicking and pulling their money out. So in the middle of all this, uh his team of defense lawyers, because of course he had the best lawyers money could buy, they they went down to the US Attorney's Office and they made a big presentation to try and convince the government not to charge Steve Cohen. And they were there for four hours.

And they basically um you know they had some sense of what the evidence was that the government had amassed and that they were considering what to do with this evidence. So they walked the government through this evidence and basically their argument came down to um You know, Steve Cohen doesn't read his email. You know, there were a couple of very damning emails that they the government had found that seemed like they had made their way to Steve Cohen. And Steve Cohen's lawyer said

You know, he doesn't read his email, there's no evidence that he read this email. You don't have any witnesses to testify against him. You can't prove anything. You're gonna lose in court. It's gonna be humiliating. And he just sort of you know, scared them all. So they ended up deciding to indict Steve Cohen's firm, SAC Capital.

instead of Steve Cohen himself and They mandated that the hedge fund be shut down, um, which it was, and that Steve Cohen's company, which which basically s means Steve Cohen himself had to pay one point eight billion dollars to resolve the criminal charges and also SEC charges. And um of course it was all very humiliating and

You know, his reputation was tarnished and I don't think Steve Cohen was very happy about it. But, you know, it was not a very satisfying ending for a lot of people because Steve Cohen himself did not go to jail or even have to go to trial and in fact he can start a new hedge fund in two thousand eighteen. chooses, which strikes some people as unfair. I had no idea that he never even went to trial. That's really incredible.

Well, Sheila, I appreciate you coming on the podcast. Um I'm gonna mention if anyone wants to pick up a copy of Sheila's book uh titled Black Edge, I'm gonna set up a link, chatwithraders.com slash black edge. Uh and that'll redirect you directly to the book Black Edge on Amazon. Uh yeah, Sheila, once again, thank you very much for coming on the podcast. If anyone wants to follow you on Twitter, uh what's your Twitter handle?

It is at Sheila K, which is S H E E L A H K. And it was a pleasure to be with you. Thanks. Great. Thank you very much. You've reached the end of this episode of Chat with Traders, but rest assured there are more episodes. Love it if you leave a-