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A Plus

Book review

January 2018


Title: Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

Author: Sheelah Kolhatkar

Publisher: Random House



As any auditor knows, outliers tend to attract attention. Transactions that don’t add up are segregated for more detailed audit examination. It was thus no surprise when authorities would take a closer look into SAC Capital, a hedge fund in the United States, which had made outsized returns to investors in the grip of a market downturn.

By 2010, the worst of the Great Recession had passed and U.S. regulators were moving in. Bernie Madoff had been put away for 150 years, Congress had passed the Dodd-Frank reforms that would better protect investors and federal prosecutors were looking for more violations.

Steven A. Cohen was an obvious target. His returns seemed impossible to achieve. While there was no evidence that SAC Capital was a Ponzi scheme like Madoff’s – Cohen’s investments were real – investigators thought something was amiss.

For Sheelah Kolhatkar, a writer at The New Yorker and a former hedge-fund analyst, the Cohen case was fascinating, especially after the arrest in 2012 of Mathew Martoma, a former portfolio manager at SAC Capital. “I knew as a journalist that this would be a story of major significance to the public, so I started following the story and just kept going,” Kolhatkar tells A Plus (see interview below). The result is her first book, Black Edge.

Cohen was a throwback to the ostentatious 1980s: his Manhattan condominium cost US$24 million back in 2005, while his mansion in leafy Greenwich, Connecticut, boasted a 6‚400-square-foot (595 square metres) ice skating rink. He bought stakes in the Los Angeles Dodgers and New York Mets baseball franchises and was an avid collector of artworks from Pollock and Hirst to Warhol and Picasso.

Cohen used his “edge” to get ahead. But financial “edge” comes in various hues. White edge is the publicly available information about a stock, while grey edge is information obtained after dusk, at cocktail parties, off-the-record briefings or a candid comment from a regulator.

Kolhatkar focuses on SAC Capital’s use of black edge – illegally obtained inside information. “If traders came into possession of this sort of information,” she writes, “the stock should be restricted immediately – at least in theory.” That, prosecutors argued, was how Cohen got above-average returns.

There are several moments of high drama in Black Edge. Martoma, for example, had befriended Sidney Gilman, an elderly physician and Alzheimer’s disease researcher with the Elan pharmaceutical company, while he was looking for winning stocks.

Kolhatkar describes the moment that Gilman, addressing a medical conference in Chicago in 2008, painstakingly unveils the final trial results of a prospective Alzheimer’s treatment. As Gilman speaks on, clicking PowerPoint slides, it gradually dawns on the audience – composed of researchers, academics, doctors, drug company representatives and many Wall Street traders and analysts – that the drug doesn’t work.

The traders, who have all invested in Elan and Wyeth, the drug’s co-developer, hit their phones, desperate to sell. Except Martoma and SAC Capital. Gilman allegedly tipped off Martoma a week before, and SAC Capital had not only sold off its Elan and Wyeth holdings but had shorted the two stocks.

Kolhatkar’s heroes are the cops and regulators who pursued SAC Capital. In a scene straight out of a criminal procedure series, Securities and Exchange Commission lawyer Charles Riely, desperate to identify SAC Capital’s trader in Elan stocks, doggedly combs through phone records until he finds a database match. (It was Martoma).

Her profiling of characters isn’t always successful. “People accused of serious crimes are often in personal turmoil,” she states, fairly obviously. There are a few clichés – defence lawyers are “young and eager” while prosecutors stage a “bitter turf war.” Nonetheless, the narrative is gripping enough among the large cast of characters.

The major voice missing from the narrative is that of Cohen, who was determined to stand apart from the investigation into the goings-on at his fund. He focused his energy on fighting any potential charges and was never known to be accessible to the press in any case.

Ultimately it was a worthwhile strategy. Cohen received a relative slap on the wrist: he paid a US$1.8 billion fine and ceased trading for two years. He’s now back in the game. Cohen apparently still has his edge, but its current shade remains to be seen.

 


Author interview: Sheelah Kolhatkar

Whether as a student of movie-making, a high-flying financial analyst, or a staff writer at The New Yorker – her current job – Sheelah Kolhatkar has an unerring eye for the unusual.

Back in 2012, the Federal Bureau of Investigation arrested Mathew Martoma, a former portfolio manager at SAC Capital, one of the most prominent hedge funds in the United States, and charged him with a massive insider-trading scheme.

“It was very dramatic,” Kolhatkar tells A Plus from her office in New York. “It was clear that the U.S. Justice Department was continuing its investigation, hoping to catch even larger targets.”

The Canadian-born Kolhatkar was already familiar with SAC Capital from her financial services career, which began after she graduated from New York University with a degree in film. “I was a hedge fund analyst and I knew that Steven A. Cohen, the founder of SAC Capital, was one of the most successful and powerful figures on Wall Street.”

Despite her experience with both hedge funds and gathering newsworthy information, Black Edge was not an easy project. “It was very challenging for a number of reasons,” she says. “I was trying to learn more about a high-profile securities crime investigation while it was still going on.”

Many of her potential interviewees were already the subjects of law-enforcement or regulatory inquiries. Others were concerned they would be drawn into the probe. “Some were worried about going to jail,” she recalls.

Even more surprising was the web of illegality eventually uncovered. “I was familiar how things work in the financial world [but] I was surprised to learn just how far insider trading had spread within the industry.” Kolhatkar says the events portrayed in Black Edge are a reminder that greed can be a powerful incentive that can sometimes drive people to cross the line.

At The New Yorker, Kolhatkar expects to combine news-driven commentary and analysis for the magazine’s digital edition with traditional business-focused long magazine pieces. One recent assignment brought her to China. As the Mainland financial sector grows and strengthens, she notes, the opportunities for illegal activities there will expand. “I think that there is always a risk of that, which is why intelligent, firm regulation is a necessary part of any capital markets system.”

She cites her adopted country as an obvious example. “Wall Street cannot be left to regulate itself – that has never turned out well.”