“Rules are rules and the law is the law,” insists US Attorney Preet Bharara. He uses this aphorism in order to not-quite-explain the case against SAC Capital Advisors. Late last year, the hedge fund pleaded guilty to criminal charges of securities fraud and wire fraud in connection with an extensive and longstanding insider trading scheme. But even as Bharara speaks, Frontline‘s Martin Smith poses another question, that the rules and laws were broken by people, not only by the company. The plea agreement with SAC leaves these people largely unaffected.
Specifically, SAC pays $1.8 billion in fines. The company’s eponymous founder, Steven A. Cohen, remains free. As Frontline: To Catch a Trader lays out, Steven A. Cohen has been charged — but not convicted — in a civil case with failing to supervise his employees. So far, he faces no criminal charges. It appears that rules are rules and laws are laws… sometimes.
By way of illustration, the Frontline investigation traces the phenomenal rise and fall of SAC, founded by Wharton grad and Wall Street trader Cohen in 1992. At the time, he invested $20 million of his own money, made mostly while working for Gruntal & Co. By 2011, Forbes ranked him as the 35th wealthiest person in the US, worth some $8.3 billion. Cohen’s means to such blockbuster success might easily be described as cheating, as breaking rules and laws, and many of Smith’s interviewees say as much. They also suggest, however, that the rules and laws aren’t so precise, and that breaking them might also be understood as a matter of “interpretation”.
“Markets are based on rumors,” observes Fox Business Network’s Charlie Gasparino, meaning, they’re determined by information that’s true and false and guessed at. SAC, as Gasparino points out, “because of its size and how much it trades, gets first dibs on that information.” More specifically, SAC engaged in insider trading, defined by the SAC as the use of “material non-public information.”
Apparently this phrasing isn’t specific enough. Even as Cohen declined to be interviewed here, Frontline includes his deposition, taken over two days as part of the 2011 civil suit brought by Fairfax Financial Holdings. In the deposition (provided to Frontline by an anonymous source), Cohen says, “The way I understand the rules on trading inside information, it’s very vague.” When the lawyer representing Fairfield Financial tries again — “Do you have an understanding about whether, when in possession of material, nonpublic information, you’re ever allowed to trade a security?” — Cohen says no, he doesn’t have such understanding, and further, that he doesn’t know what’s in SAC’s own compliance manual.
So far, this profession of ignorance has sustained Cohen. Though SAC is paying the “largest penalty in an insider trading case ever”, Cohen has reorganized SAC to manage his own considerable monies and remains free, a prodigious art collector and minority Mets owner, still not charged with any criminal activity, despite the federal government’s finding that his company fostered an “institutional indifference” to insider trading. Bloomsberg Businessweek‘s Sheelah Kolhatkar points out that Cohen was admired for making money, that he had a “reputation for having a gifted ability” for intuiting stock activities.
No one is surprised to hear that this “gifted ability” was based on insider trading, as this appears to be the generally bendable rule. Former trader Turney Duff describes the “edge” necessary to be successful, the information you have that someone else does not. This edge is a function of contacts, people on the inside of businesses who share what they know in exchange for a range of payoffs. Some interview subjects do express a modicum of surprise at the extent of SAC’s reach; Special Agent David Chaves says that when his task force learned of the many funds involved, “We likened it to the first Jaws movie: ‘We’re gonna need a bigger boat.'”
While Cohen bought art and multiple Manhattan apartments, other participants had more banal interests; apparently, technology consultant Winnie Jiau asked for live lobsters and gift certificates to the Cheesecake Factory in exchange for nonpublic information.
Jiau, since sentenced to a four-year prison sentence, worked for Primary Global Research, an expert network associated with SAC. These networks are part of doing this sort of business, a way to organize the “contacts” Duff describes; Kolhatkar says, “Everyone uses expert networks,” who act as “matchmakers” for those seeking and those selling information, ostensibly operating under a set of rules.
Apparently, like the other rules and laws on Wall Street, these are open to interpretation. Some traders are caught, and others, not. When FBI Assistant Director-in-Charge George Venizelos says that SAC’s plea deal demonstrates “that cheating and breaking the law were not only permitted but allowed to persist,” he may think he’s describing the actions and environment his office investigated. But he may also be describing the deal his office made.