He's Wall Street's ultimate comic-book villain – with his glowing bald head and marble eyes, he looks a little like Lex Luthor. But maybe the best comparison for famed hedge-fund shark and long-suspected insider-trading ringleader Steve Cohen is the Joker. Earlier this year, when the SEC extracted $616 million from Cohen's fund in two regulatory settlements, he expressed his deep remorse by buying, within weeks, a $155 million Picasso and a $60 million beach house in the Hamptons, right down the road from his other Hamptons beach house, worth $18 million.
It was a big fat middle finger to the government, flipped by a man who clearly thought he was getting away with a slap on the wrist, the way every other brazen Wall Street crook in the past half-decade has done so far.
But in late July, Cohen was hit with two new major blows: a civil charge from the SEC and criminal charges filed by federal prosecutors against his firm, SAC Capital Advisors. The SEC charge, "failure to supervise," looked at first like a relatively tame thing to lay on a suspected criminal mastermind, with a lifetime ban from the securities business being the worst possible outcome. But it was the first strike in what appears to be a surprisingly clever and aggressive government prosecution. Because the SEC filed its case through an administrative proceeding, not in civil court, Cohen will have limited rights to discovery, which would have helped him prepare his defense in any potential criminal cases.
Just a few days later, in a neatly executed ballet, the FBI and the Justice Department dropped criminal fraud charges on SAC Capital and its affiliates. And charges against Cohen himself, the kind that could put him behind bars, may still be coming. "I think the feds are running the table on Cohen," says Michael Bowe, a partner with New York law firm Kasowitz Benson Torres & Friedman, who has spent years chasing Cohen and SAC Capital in a racketeering suit. If Bowe is right and this turns out to be part of a tough, coordinated action against Cohen, the question will be: Does it matter? Does bagging a single hedge-fund slimeball make up for years of nonaction against more dangerous systemic corruption among the big banking powers?
"A pelt is not enough," says Dennis Kelleher of Better Markets, a group dedicated to Wall Street reform. "We need to see a pattern."
SAC Capital has for years been the symbol of what many believe to be a rampant culture of insider trading at the periphery of Wall Street. In the main ring of the circus, bankers reaped untold billions through sophisticated crimes like the frauds of the mortgage bubble, market manipulation and other schemes, getting off in almost all cases with cost-of-doing-business fines. One study reported that JP Morgan Chase, for instance, paid an incredible $8.5 billion in fines between 2009 and 2012, which worked out to be 12 percent of its net income over that period – but the bank has so far completely avoided criminal charges.
Meanwhile, individuals like Cohen devoured the scraps through what look like crude insider-trading scams that would have fit in well during the Gordon Gekko era. Cohen's fund posted average annual trading returns nearing 30 percent – not over one or two lucky years, but for two decades – numbers that recall Barry Bonds' home-run totals, numbers that would not seem possible without a lot of cheating. At least nine SAC foot soldiers have been indicted or otherwise implicated in insider-trading cases. In the most recent and notorious case, an SAC portfolio manager, Mathew Martoma, is accused of getting Cohen to dump $700 million of stock in two pharma companies after Martoma learned of failures in a new drug trial.
So the fact that the state finally seems to have its sights on Cohen sounds like good news, but it's about time. In fact, it's probably shameful he's not already breaking rocks somewhere.
Some critics not only aren't impressed yet by the state's move against Cohen, they see in it something a little more sinister, given the way the government has failed to take serious action against the corruption of the big banks, which if anything are probably cheering the Cohen prosecution. "Insider trading hurts Wall Street as much if not more than it hurts Main Street," says Jeff Connaughton, former chief of staff to Delaware Sen. Ted Kaufman. "Prosecuting hedge funds won't hurt anyone's future employment prospects."
Connaughton recalls his former boss, Kaufman, pushing powerful regulators like Robert Khuzami (former SEC enforcement chief), Mary Schapiro (former SEC chief) and Lanny Breuer (former head of the Justice Department's Criminal Division) to go after the banks that crashed the economy. But now all three are out of government and in private practice representing those very Wall Street interests – earning a combined annual income of more than $9 million, according to The New York Times. "I'm truly outraged that the three people Kaufman tried to push to do the right thing," Connaughton says, "are all in Fat City representing big banks."
Meanwhile, as comic-book villain Cohen circles the drain, the SEC has been struggling to make another high-profile case: the civil prosecution of Fabrice "Fabulous Fab" Tourre, the Goldman Sachs trader charged with enabling a hedge fund to steal a billion dollars from European banks through a fiendishly complex derivative deal. Fab's bosses at Goldman have already gotten off with the usual slap-on-the-wrist fine, and now the state is having trouble scoring what would seem to be an easy win. On the second day of the trial, as prosecutors laid out their complex case, I watched one juror fall asleep for an extended period. The lesson in all this? Even if the Cohens of the world go down, and even if patsies like Fab take a hit or two, the bigger crooks are doing fine.
This story is from the August 15th, 2013 issue of Rolling Stone.
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