Previous Mind-Body Politic posts related to Steve Cohen, in reverse chronological order (incomplete):
Rajat Gupta Trial: The other Goldman insider ring, MBP, June 10, 2012
More on Einhorn’s rumour-mongering about Lehman, MBP, April 15, 2010
Hedge-funds: top ten earners in 2007-2008, MBP, January 13, 2010
Steven Cohen: third-biggest owner of Sotheby’s in 2009, MBP, Dec. 30, 2009
SAC spin-offs fail, even when they succeed, MBP, Dec. 26,2009
SAC subpoenas former SAC trader Grodin, MBP, Dec. 25, 2009
Den of Thieves: Hedge-hogs go into SAC remote mode, MBP, Dec. 23., 2009
Sad SAC: Reuters spikes hedge story on complaints from Steven Cohen, MBP.com, December 22, 2009
Ex-Sith lady uses RICO on Sith lord? Mindbodypolitic, December 17, 2009
In his piece at Deep Capture, “SAC Capital (and Steve Cohen too) should be convicted”, researcher Mark Mitchell is far more sanguine than I am that Preet Bharara really means to go after the chief of the mega-hedge fund SAC, Steven Cohen, after he puts away various underlings, like Michael Steinberg and Indian-born Matthew Martoma.
“By fixating on the insider-trading angle in all his cases, Bharara, in my opinion, undermined the whole credibility of his prosecution and opened himself up for charges that he is merely targeting politically-viable low-hanging fruit.
Lila: As I’ve documented thoroughly at this blog, Bharara hasn’t had much credibility in his Wall Street prosecutions for at least a year now, regardless of how successful his other prosecutions might have been in some people’s eyes. I’m glad to see some main-stream voices coming around to my view.
I think I know a little about the Steven Cohen investigation, from my conversations with some of the principals at Deep Capture, where the investigation of Cohen began
Here’s a piece I wrote which they picked up, back in 2009:
Here are Lila’s observations on the matter:
1. The high number of SAC traders who seem to have gone off into their own businesses.
You’d think with all that money and the fund’s record as the most consistently successful in the business (only one bad year on record), their traders would stay forever. Quite the opposite. People seem to have been leaving all the time to form their own businesses.
But SAC was also said to be a very tough environment. You produced, or you left.
So maybe that’s why Lee and Far, Grodin and Goodman, all left to found their own firms?
Could be. But I’m not convinced.
2. None of the spin-off firms seems to have been very successful.
Why not? Why couldn’t these hot-shot traders make money on their own?
The Reuters piece suggests that perhaps the SAC experience didn’t foster business ability. And that perhaps SAC traders flounder without SAC’s huge supporting cast.
But those things are likely to be true of other firms as well, not solely SAC.
Still not convinced.
Furthermore, consider this.
3. A spin-off fund that didn’t get money from Cohen ended up quite successful:
“Healthcor, a healthcare industry focused fund, had raised $3.2 billion by June 2009 since launching four years ago. The fund returned 25 percent in 2006, 18 percent in 2007, and was up 4 percent last year, when the average hedge fund lost 19 percent. In the first 10 months of 2009, Healthcor was up 7 percent.
Healthcor, founded by Arthur Cohen and Joseph Healey, opened without any financial support from SAC. In fact, soon after Cohen and Healey struck out on their own, SAC sued the pair, accusing them of breaching their employment contracts. The matter ultimately was settled. (Healthcor’s Cohen is not related to SAC’s Cohen).”
4. Even spin-offs that were doing well were shut down.
When Stratix started in 2004, it had $60 million given to it by SAC. When it shut down, in 2007, it was up 17% and had $530 million under management. Yet it shut down. Why did it shut down? Those numbers sound pretty good.
Another spin-off, Fontana Capital, started out in 2005 with $50 million of SAC money. It grew to $325 million by 2006. But sometime in 2007, Cohen pulled out all his money. And in 2009, Fontana was down to $16.1 million, despite being down only 7.69%, compared to the average S&P Financial index loss of 57%. Again, that sounds like it wasn’t doing all that bad.
Reuters quotes someone familiar with the record of ex-SAC traders:
“So many of the ex-SAC people seem to have this model where they attract you with fantastic returns in the first year but in year two or three or four you get annihilated,” said a person who is familiar with several former SAC employees’ records.
Shades of Bernie Madoff….
Someone need to look closely at what happened to the money at these firms…
Unlike some, I don’t think the fact that Bharara has an agenda means that Martoma is necessarily innocent, either.
I just think that even guilty as charged, Martoma is small fry.
He’s Cohen’s employee and by every account I’ve read, Cohen kept notoriously tight control of his business and tolerated no dissent.
He was not the kind of hands-off employer who can plead ignorance after the fact, even though that’s just what he did.
So Martoma might be guilty as heck, but it’s beside the point.
Insider-trading, outside the issue of racketeering, is an irrelevant and minor side-show.
But Bharara hasn’t shown that, nor does he even look like he’s trying to show that.
He looks like he’s polishing his resume for a move into politics.
Anyway, here’s Mark Mitchell at Deep Capture:
“During the trial of Martoma, DOJ prosecutors confirmed that SAC Capital traded on inside information provided by a doctor at the University of Michigan, which was all well and good, but as I documented in my book, SAC Capital not only traded on inside information from another University of Michigan doctor, but also profited from short selling Dendreon’s stock after multiple doctors (some of whom had demonstrably corrupt relationships with Milken) conspired to undermine Dendreon’s treatment by convincing the FDA (also corrupted by Milken and his associates) to delay approval of the treatment (which had been proven effective).
Some journalists and their Wall Street sources have argued that insider trading is an essentially harmless offense and that SAC Capital deserves leniency, but their arguments obscure the fact that SAC Capital’s insider trading has involved the wholesale corruption of the FDA and some of the nation’s most prominent doctors, all of whom have (as my book documents in detail) shown themselves more than willing not only to provide Steve Cohen and his associates, including Milken, with inside information, but also to undermine pharmaceutical companies with effective treatments while promoting companies (i.e. companies that are financed by Milken and his associates) whose treatments are actually killing people.”
Lila: Exactly. But then, in that context, Matthew Martoma is actually the lesser offender.
He was after all a portfolio manager, a trader. His employment depended on his getting an edge.
When he stopped getting that edge (illegal, as it turned out), he was fired. Since Martoma has been attested to be very knowledgeable in his field by the doctors with whom he interacted, it follows that his competitors in the field must also have been getting their “edge” in the same way.
Industry-wide corruption of that kind isn’t best addressed by throwing the book at some representative pawn/small fish in the game. That only makes the prosecutors’ office look biased or politically motivated.
Which it usually is.
If the nation’s top doctors were engaged in corrupt activities, why aren’t some of them being prosecuted before Martoma?
And, if Steven (don’t call me Stevie) Cohen is a racketeer, prove that.
Then give yourself a gold medal. Not before.