This Hedge Fund Guy Finds There's Life After Bharara
On Saturday afternoon, Preet Bharara, the U.S. Attorney for the Southern District of New York and the most celebrated federal prosecutor since Rudolph Giuliani held the same post three decades earlier, was fired by President Donald Trump.
Some 48 hours later, Michael Steinberg, a former top trader with Steven Cohen’s hedge fund, then known as SAC Capital Advisors, is ready to disclose his next act: an early-stage venture capital fund called Reciprocal Ventures, which will focus on fintech (i.e. financial technology) startups. The coincidence is almost too perfect.
If you are a follower of business news, you probably know how the lives of these two men intersected. In 2013, the U.S. attorney’s office charged Steinberg with insider trading, one of several indictments that were aimed at bringing down Cohen, who was Bharara’s Great White Whale. The following year, Steinberg was convicted and sentenced to three years in prison by Federal District Court Judge Robert Sullivan, who, at the sentencing hearing, nonetheless described Steinberg, then 42, as “a good man.”
In October 2015, however, Bharara was forced to drop the charges against Steinberg after the U.S. Court of Appeals for the Second Circuit reversed the conviction of two other hedge fund managers, Todd Newman and Anthony Chiasson, who were convicted, before the same judge, on essentially the same set of facts. The appeals court ruled that both Sullivan and Bharara had stretched the insider trading laws beyond recognition, and that the means by which the hedge fund managers received market-sensitive information did not amount to insider trading. 1 Subsequently, Bharara reversed the conviction of Steinberg and dropped the guilty pleas of six cooperating witnesses.
It’s worth noting as Bharara leaves office that his desire to nail Cohen — who he was never able to indict — caused him to overreach, shutting down firms (though not Cohen’s, which is now called Point 72 Asset Management), throwing innocent people out of work and harming individuals like Steinberg, who simply wasn’t guilty of insider trading as the law defines that crime. It’s also worth noting that Bharara’s office also didn’t indict a single top Wall Street executive in the wake of the financial crisis.
On the plus side, he did a magnificent job prosecuting a genuinely criminal insider trading ring, the one that centered around the hedge fund manager Raj Rajaratnam, and he also did fine work rooting out corrupt politicians. Indeed, in another tweet this weekend, he implied that he was investigating Trump when he was fired: 2
In the aftermath of Bharara’s firing, you’re likely to see him showered in encomiums, especially by the anti-Trumpsters, but remember, his record is mixed. Rare is the prosecutor who is a candidate for sainthood.
There are those who would argue, I suppose, that Steinberg was no saint either; during his trial, one of his former underlings testified that he wanted “edgy, proprietary information that we can make money in these stocks.” But I find the Second Circuit’s forceful rebuke of the government’s case persuasive, and in any case, with Bharara fired, with Cohen preparing to open his hedge fund to outside money — he’ll be able to do so in 2018 — and with Steinberg about to become a venture capitalist, it would appear everyone is moving on.
Steinberg certainly is. When I met up with him a few weeks ago, he told me that he had a partner, Josh Kuzon, the former senior payments strategist at Silicon Valley bank, and was about to bring a third person into the firm. Although he wouldn’t discuss fundraising, the word on the street is that the fund will start with around $60 million. Most of all, he seemed excited to begin his new adventure.
As it turns out Steinberg had long been enamored of venture investing; while at SAC he used to search for small private companies that Cohen would have no interest in, and invest in them. A few years later, Steinberg began evaluating the emerging field of disruptive financial technologies for Cohen himself. (PayPal is the paradigmatic fintech company, though of course it was established long before Steinberg came along.)
Then came what Steinberg called “the curtain call of 2012,” when he left Cohen’s firm after Bharara’s investigation of him began in earnest. As Steinberg describes it, to be investigated or charged by the government means there are times of intense activity — preparing for a deposition for instance, or poring through documents. But there are also long stretches where there is simply nothing to do except wait for the government to make its next move, which can take months.
“You have to find ways to fill the time,” Steinberg said. “So I did this.” By “this” he meant continuing to investigate — and invest in — the fintech sector. One of his investments, DataMinr, which uses algorithms to send useful social media information to financial clients, did spectacularly well, and that gave him confidence that he would be successful with his own fund.
Steinberg says he doesn’t want to invest in disrupting startups simply for the sake of disruption. Rather, he hopes that the technologies he invests in will help, rather than hurt, large financial institutions, and he would like to create a “consortium of large institutions that want to adapt new technologies and want to invest in the companies that are creating them.” Cohen’s office always traded at a frantic pace; one thing Steinberg said he was looking forward to was “slowing things down and thinking about the future.”
Inevitably, I asked Steinberg about his ordeal with the U.S. attorney’s office. Not surprisingly, it wasn’t something he especially wanted to talk about. “It was hard,” he said. “It was gut-wrenching.” One thing that made it hard was that he has small children, and he felt it was important to tell them what was going on: “That they knew we were standing up for what we believed in.”
Another difficulty is that hedge fund managers are used to being in control of their own fate, and that is precisely what is taken away when you are under investigation or indictment.
“You’re fate is in the hands of others,” Steinberg said. “First the prosecutors, and then the jury.”
And also, as it turns out, the Second Circuit.
Before I left, I asked Steinberg if he still spoke with Cohen, who paid his legal bills. He smiled wanly and let out a small sigh. “Steve and I stay in touch,” is all he would say.
With Reciprocal Ventures, Michael Steinberg is moving on.
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To get in the weeds for a minute, the Second Circuit said that the person who leaked the information (the tipper) had to receive a tangible personal benefit from the person who received the information (the tippee). It also said that the tippee had to know about the personal benefit. Late last year, the Supreme Court ruled unanimously in a different insider trading case that the personal benefit could be something as intangible as friendship, which was vindication of sorts for Bharara. But the court did not change the second part of the Second Circuit’s ruling: that the tippee had to know about the benefit being received by the tipper. Because the information went through as many as four people before getting to Steinberg, Chiasson and Newman, there was no evidence they even knew who the tipper was, or the personal benefit he received — or that they were receiving information that had been obtained illegally.
The Moreland Commission was established in 2013 by New York Governor Andrew Cuomo to investigation political corruption in Albany. But after months of meddling in its work, Cuomo abruptly shut it down the following year in exchange for a face-saving package of minor reforms. Bharara then investigated the shutting down of the commission, though nothing appears to have come of it.
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