Steven Cohen Appears Oblivious to Insider Trading Law

You’ve got to figure that if the Justice Department had the goods on Steven A. Cohen, the billionaire hedge-fund manager, we would know about it by now. For years, the U.S. has been investigating allegations that Cohen’s SAC Capital Advisors LP is little more than a sandbox for insider traders. Cohen, the ultimate prize, has so far evaded Justice’s clutches.

Still, the investigation by Preet Bharara, the U.S. attorney in Manhattan, has yielded a jackpot of wrongdoing: Six former SAC employees have pleaded guilty to securities fraud; a seventh, Michael Steinberg, was found guilty in December of five counts of securities fraud and conspiracy; and the trial of an eighth, Mathew Martoma, is set to begin Jan. 7.

Cohen agreed to settle Bharara’s long-running insider-trading investigation against the firm (as opposed to its employees) by paying a record $1.8 billion fine, most of which is likely to come out of Cohen’s pocket. The Securities and Exchange Commission has also charged Cohen with failing to supervise his employees.

All this litigation has left SAC’s reputation in tatters. It now manages only Cohen’s considerable fortune, estimated by the Bloomberg Billionaires Index at $8.7 billion (without deducting his agreed-upon fine), and no longer manages outsiders’ money. In 2008, SAC had more than $16 billion in assets. This can hardly be the future Cohen envisioned. A Frontline documentary, “To Catch a Trader,” to air Jan. 7 on PBS stations, makes clear that Cohen has no one but himself to blame.

Using never-before-published video, “To Catch a Trader” reveals snippets of a 2011 deposition in which Cohen is asked about his understanding of the SEC rules governing insider trading. Cohen was being deposed as part of a lawsuit brought by Fairfax Financial Holdings alleging that a group of hedge funds conspired to drive down the price of the Canadian insurer’s stock; the lawsuit was eventually dismissed.

The director of the documentary, Nick Verbitsky, received a copy of Cohen’s two-day deposition on a USB drive -- with a Bugs Bunny head on top of it -- from an anonymous source who left it for him across the street from Frontline’s New York City office, wedged between two bars of scaffolding. (“You can’t make this stuff up,” Verbitsky e-mailed me.)

At one point in the deposition, Michael Bowe, a lawyer representing Fairfax, asked Cohen about his familiarity with insider-trading rules. You would think Cohen would be very knowledgeable on the subject. “The way I understand the rules on trading inside information, it’s very vague,” Cohen replied.

“Are you familiar with Rule 10b5-1?” Bowe wondered, in reference to the section of the SEC rules that defines insider trading as the buying or selling of securities knowing you have “material nonpublic information” about them, obtained from someone who breached a duty of confidentiality or trust. “Ah, no. Ah, no, I -- not that -- you would have to explain it to me,” Cohen said, shockingly.

“Do you have an understanding about whether, when in possession of material, nonpublic information, you’re ever allowed to trade a security?” Bowe continued.

“Ah, you know, that’s not the way it’s explained to me,” Cohen answered. “The way I understand the law is that it’s very vague, so it’s an interpretation of the law.”

“So your understanding of the SEC rules on trading on inside information is that they do not preclude unequivocally trading while in possession of such information?” Bowe tried again.

“I’m not aware of that,” Cohen replied. “You don’t know one way or the other?” Bowe said. “No,” Cohen answered.

Needless to say, for Cohen to claim in a sworn deposition to be ignorant of SEC rules governing insider trading is beyond unfathomable -- regardless of advice from lawyers to play dumb -- and is reason enough for his firm to be put out of business.

But wait, there’s more. In the deposition, Cohen further displays a blase lack of understanding about what his own firm’s compliance manual says about trading on material, nonpublic information.

“Actually I don’t know what it says,” Cohen said at one point. “Uh, when it comes to trading I rely on counsel.” Bowe then asked Cohen how he would handle getting a hypothetical e-mail revealing that a reporter was about to publish a negative story on a company he wanted to short.

After a palpably long pause, Cohen answered: “If the story was not coming out in a relatively short period of time, I would say there was ambiguity on that. I think it might be OK.”

While others have previously plumbed the depths of large portions of Cohen’s 640-page deposition, what makes “To Catch a Trader” so riveting is the chance to watch Cohen’s feeble and often condescending attempts to claim ignorance about well-established insider-trading rules and U.S. case law. “If you take an ethical approach toward life, you’re usually ahead of the rules,” John Loeb, the senior partner of investment bank Loeb, Rhoades & Co., once told the New York Times way back in 1968.

“To Catch a Trader” makes abundantly clear that Cohen never gave much thought to Loeb’s wisdom. At the very least, what Cohen has done at SAC Capital is make a mockery of the fundamental sanctity of the capital markets, yet again raising the question of how and why such a rich and powerful man continues to avoid the prison time he appears to so richly deserve.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres & Co., Merrill Lynch and JPMorgan Chase.)

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