Before The Mets, Steve Cohen Was The Hedge-Fund King (full documentary) | FRONTLINE

In November 2010, a Wall Street Journal article on insider trading caused panic at SAC Capital. Trader Donald Longueil destroyed computer hard drives, fearing he was being targeted by federal investigators. Both Longueil and Noah Freeman, former SAC portfolio managers, later pleaded guilty to insider trading. Wall Street traders commonly believed insider trading was rampant at SAC Capital.

Steven A. Cohen, founder and CEO of SAC Capital, refused interview requests but was deposed in 2011 for a civil lawsuit. During the deposition, Cohen claimed he found insider trading rules, particularly Rule 10b5-1, to be 'vague' and not explicitly prohibiting trading on material non-public information. Experts found his responses shocking, indicating a potential disregard for regulations.

Steven Cohen, a Wharton graduate, built his fortune as a successful trader known for his ability to 'read the tape.' He founded SAC Capital in 1992, pioneering a new type of hedge fund and charging aggressive fees (3% of assets and 50% of profits). His consistent, high returns, often exceeding 60% annually, led to massive wealth and an extravagant lifestyle, but also raised questions about how such performance was achieved.

Hedge fund traders, including those at Galleon Group and SAC Capital, actively sought an 'edge' – information that others didn't have, regardless of legality. This involved cultivating contacts and building relationships to gain early access to market-moving information. Wall Street brokers readily provided their 'best information first' to hedge funds like SAC, which paid exorbitant commissions, creating a system where those with the most money got advanced market intelligence.

A seven-year federal investigation began with the Galleon Group, led by Raj Rajaratnam. Attorney Turney Duff recalls an instance of obvious insider trading that profited him significantly. The investigation broadened when a UBS lawyer flagged suspicious trading at Sedna Capital, run by Rajaratnam’s brother, Rengan. This eventually led to the FBI initiating wiretaps on Galleon traders, treating the white-collar crime investigation like a mob crackdown. These wiretaps uncovered a vast network of insider trading.

The investigation revealed shocking cases, including Rajat Gupta, a respected businessman and board member of major corporations. Gupta was found to have leaked critical, non-public information about Warren Buffett's $5 billion investment in Goldman Sachs to Raj Rajaratnam, who then profited significantly. Gupta was convicted of insider trading, while Rajaratnam received an 11-year sentence. These arrests marked a major turning point, but the FBI realized the problem was much larger.

The FBI shifted its focus to expert networks, firms that connect industry insiders with investors. While legitimate, these networks became a significant channel for insider trading. Despite agreements prohibiting sharing proprietary information, the high fees paid by hedge funds (up to $5,000 for an hour-long call) pressured expert networks to deliver 'actionable information,' often leading to the disclosure of illegal insider tips.

Winnie Jiao, an expert consultant for Primary Global Research (PGR), a prominent expert network, provided insider information to SAC Capital trader Noah Freeman. Jiao, described as 'high maintenance,' demanded significant compensation, including $500 gift certificates to The Cheesecake Factory and live lobsters. Freeman, who claims to have made $5-10 million from Jiao's tips, ultimately cooperated with the FBI and has not yet been sentenced, while Jiao served a 4-year sentence.

The PGR story led to the unmasking of Donald Longueil, Noah Freeman's colleague at SAC. Freeman's cooperation provided a direct view into SAC Capital's operations, where traders in 'pods' were incentivized to generate profits, with Cohen allegedly insulated from the sources of information. This structure suggested a culture where obtaining material non-public information was key to success.

In March 2013, Michael Steinberg, a close portfolio manager to Steven Cohen at SAC Capital, was arrested. Investigators believed Steinberg had access to insider information regarding Dell computer, which led Cohen to sell an $8 million stake. Cohen's lawyers claimed he didn't read the email containing the insider tip and sold based on another trader's actions. Steinberg was convicted of insider trading.

Matthew Martoma, another SAC portfolio manager, was accused of using an expert network to gain insider information about an Alzheimer's drug trial involving companies Elan and Wyeth. Dr. Sydney Gilman, a University of Michigan neurologist involved in the trials, allegedly leaked negative results to Martoma before public release. SAC Capital then aggressively unwound its large position and shorted the stocks, reportedly making $275 million based on this insider information. This became the largest insider trading case in history, impacting investors like Greg Capus.

Cohen's deposition revealed his unfamiliarity with SAC's compliance manual and insider trading rules, suggesting a lack of seriousness about regulations. In 2013, the SEC filed a civil case against Cohen for failing to supervise his traders, and the Justice Department indicted SAC Capital as a 'magnet for market cheaters.' SAC Capital pleaded guilty, paying a record $1.8 billion fine and ceasing operations as a hedge fund. However, Cohen himself was not criminally charged.

The lack of criminal charges against Cohen sparked debate about the definition of criminal intent and negligence in finance. Critics questioned why the company was indicted but not its founder. Legal experts noted that criminal negligence laws covering other industries do not typically apply to financial fraud or insider trading without specific legislative changes. Investigations into other SAC Capital insider trading cases remain ongoing.