To Catch a Trader Documentary - The Hedge-Fund King Story

To Catch a Trader Transcription:

  To Catch a Trader - Before The Mets, Steve Cohen Was The Hedge-Fund King:

The Frontline documentary “To Catch a Trader” traces the meteoric rise of Steven A. Cohen, from his humble beginnings as a small-time options trader to one of the most successful hedge fund managers of all time. Cohen founded SAC Capital, which generated some of the best returns in the industry, making him a legend on Wall Street. But how did he do it? The answer lies in the multi-year federal investigation into insider trading on Wall Street, which eventually ensnared SAC Capital.

In November 2010, a major Wall Street Journal article exposed the government’s years-long investigation into insider trading on Wall Street, which named SAC Capital. The arrests that followed were a big shock but not a surprise to many traders on Wall Street, who had long speculated about insider trading at SAC Capital.

Two former SAC portfolio managers, Donald Longueuil and Noah Freeman, both pleaded guilty after the government caught them on tape. Longueuil had scrambled to destroy incriminating evidence before authorities could get to it, recounting in a recorded conversation with Freeman how he had taken apart several of his computer hard drives and thrown them into random garbage trucks.

Cohen himself was never charged with any wrongdoing, but he was deposed for two days as part of a civil lawsuit brought against SAC. The deposition video, obtained by Frontline, shows Cohen claiming that he did not have a clear understanding of SEC regulations prohibiting insider trading, and that the rules were vague and subject to interpretation. This claim was met with skepticism by many on Wall Street, who believe that any hedge fund manager worth his salt would know what material nonpublic information is.

Cohen’s reputation for making a tremendous amount of money trading has earned him a place in the pantheon of Wall Street legends. He developed this reputation almost entirely on his own steam, starting as a small-time options trader after graduating from Wharton Business School in the late 1970s. Although he declined to be interviewed for the documentary, Cohen’s story provides a fascinating glimpse into the cutthroat world of hedge fund management and the lengths some traders will go to get an edge.

In this video, the narrator discusses the rise and fall of hedge fund SAC Capital and its founder Steven Cohen. Over a period of two decades, SAC Capital grew to become a prominent hedge fund, and Cohen amassed an incredible fortune, including a 35,000 square-foot mansion in Connecticut, a $62 million beach house in the Hamptons, and a $115 million Midtown duplex in Manhattan. He also built up one of the most valuable private modern art collections in the world and donated tens of millions of dollars to charity. However, the returns he delivered to his clients, even after deducting his 50% fee, seemed too good to be true, averaging 30% after expenses for many years. Cohen's personal fortune reached $8 billion by 2008.

In 2013, the government began investigating SAC Capital, which had already come under scrutiny for violating rules regarding "friends and family" money. The SEC suspected that Rengan Rajaratnam, the owner of hedge fund Sedna Capital, was receiving insider tips from his brother Raj Rajaratnam, the CEO of The Galleon Group. In their investigation, regulators found instant messages between Raj and Roomy Khan, a well-connected Silicon Valley executive, indicating insider trading.

While working at The Galleon Group, Turney Duff received a hint of what was really going on when a caller whispered to him that Jefferies was going to upgrade Amazon's stock in six minutes. Duff ultimately bought 100,000 shares of Amazon and made about a half a million dollars 30 seconds later. Duff left The Galleon Group in 2001.

John Moon, who worked in the litigation department at UBS, was alerted to Sedna Capital, which was suspected of violating rules regarding "friends and family" money. Moon discovered that the hedge fund was allocating trades in a way that gave all the winning trades to friends and family while the public money received the losing trades. It was determined that Moon should go to the SEC and report the matter. When the SEC learned that Rengan Rajaratnam owned Sedna Capital, they suspected that he was receiving insider tips from his brother Raj. The investigators requested Raj's records and found instant messages between him and Khan.

The video discusses the role of expert network firms in the financial industry and how they acted as middlemen between public company employees and hedge fund portfolio managers. These expert network firms charged as much as $5,000 for an hour-long phone call, and some hedge fund clients paid as much as a million dollars a year to get actionable information. However, some expert networks were also used for insider trading, which is illegal.

The FBI had an informant pose as a hedge fund manager and call an expert network in Mountain View, California, called Primary Global Research (PGR), in 2009. The informant spoke to a PGR vice president, James Fleishman, who explained how the service worked and how to hook up with one of PGR's better experts. Fleishman also tried to provide anonymity to some degree for the experts to protect them.

In an interview with Frontline, Fleishman described how PGR tried to protect itself by having individual consultants sign an agreement that stipulated that they couldn't talk specifically about their own company or give out proprietary information about their own company. However, in a manuscript Fleishman shared with Frontline, he admitted that this kind of exchange was inevitable and that experts may at times have been talking about things they should not have been.

Fleishman insists that he did nothing wrong, but the FBI recorded his conversation with the informant, as well as having a wiretap on PGR's private lines. The FBI found evidence of insider trading and arrested Fleishman and other PGR executives. Expert network firms can be legitimate, but they can also be used for insider trading, and regulations are necessary to prevent this illegal practice.

There are currently six projects in Alzheimer's disease, two of which are in clinical trials, and that the speaker's company collaborates with Elan on these projects. The speaker explains that Elan and Wyeth had hired a University of Michigan neurologist named Sidney Gilman to help with drug testing. Through an expert network, Martoma had developed a relationship with Gilman, who was giving him inside information. The news about Elan and Wyeth at that time looked good, with the trials showing promising results. SAC, the hedge fund company, built up a bullish position on Elan and Wyeth over the course of 2008. However, inside SAC, some analysts and traders felt bearish on these companies, and they could not understand why Martoma and Cohen were building up such large positions without hedging their risks. Cohen believed in Martoma's conviction in the stock, and they stayed long on it.

A pharmacist and private investor named Greg Kappes, who had purchased more than $1.2 million worth of Elan shares, thought the news looked good too. He was optimistic about the success of the drug and felt that he had gotten ahead of the curve, having invested in the same stocks as SAC, which he saw as a good sign. However, nearly two weeks before the drug's second round trial results were released to the public, the government claimed that Dr. Gilman leaked the results to Martoma, who in turn called up Steve Cohen to share the information. SAC then started to aggressively unwind its large positions in Elan and Wyeth, and eventually ended up going short on these stocks to bet against them. The trial results were negative, and both Elan and Wyeth stocks dropped in value.

According to the government, SAC made an estimated $275 million based on inside information. Dr. Gilman is cooperating against Martoma in what has become the largest insider trading case in history. Greg Kappes lost more than a half million dollars and has joined a class action lawsuit against SAC. The video shows an interview with Kappes, who describes his experience of having lost money in the stock market, but feeling that it was different this time because the market had been “gamed”.

The video then shows a copy of SAC's code of ethics and conduct, which is called a compliance manual. It spells out the rules prohibiting insider trading. In his 2011 deposition, Cohen was asked by the plaintiff's attorney if he was familiar with SAC's compliance manual. Cohen did not seem to know what the manual said, and admitted that he relied on counsel when it came to trading. This lack of knowledge was seen as shocking, given that Cohen had been in the industry for 30 years. The video concludes by stating that the deposition was part of a lawsuit filed against SAC and other hedge funds by a company called Fairfax Financial over allegations of price manipulation.