Black Edge,’ an Account of a Hedge Fund Magnate and Insider Trading
By Jennifer Senior
Two men pass out in Sheelah Kolhatkar’s book about Wall Street skulduggery. I must confess that I was not expecting this. Hedge funders are supposed to be yodeling Tarzans, not fragile consumptives in a Verdi opera.
One fellow faints in his driveway in Boca Raton, Fla., as a pair of F.B.I. agents ask him about insider trading. The other, a defendant in a courtroom, is sitting at a table when the jury walks in with its guilty verdict. He loses consciousness before it is read aloud.
Only one of those men goes to jail, which is hardly surprising if you have even a passing familiarity with the story of the company they worked for, SAC Capital Advisors, and its founder, Steven A. Cohen. Kolhatkar’s “Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street” tells it depressingly well. Justice is not served. The little guy does not triumph. In the words of Lemony Snicket: “If you are interested in stories with happy endings, you would be better off reading some other book.”
If “Black Edge” weren’t about real life, it would be an uncomplicated pleasure to read. The book is many things: a Wall Street primer; a procedural drama; a modern version of “Moby-Dick,” with wiretaps rather than harpoons. Kolhatkar, a staff writer for The New Yorker and a former hedge fund analyst, expertly synthesizes an enormous amount of material, including court documents and hundreds of her own interviews.
Cohen was not among them, alas. He seems to have given only three for-the-record interviews, ever, to reporters. But his silence may also have been liberating to Kolhatkar, who was not psychologically constrained by gratitude to her subject for letting her in. She does not spare us her judgments of Cohen or of SAC Capital or of the hedge fund industry. They are not favorable.
For those who do not remember: SAC Capital was once one of the most powerful hedge funds on Wall Street. Cohen, its fabled steward, was different from the other colossi of the industry (George Soros, Paul Tudor Jones) in that he never seemed to have a grand unified field theory of investing. Rather, he had a talent for reading the market’s movements and a freakishly high threshold for tolerating risk.
And, miraculously, he was on the right side of almost every transaction — “something that seemed, at least on the surface, to be impossible,” Kolhatkar writes. This improbable winning streak eventually got the F.B.I.’s attention, when it was investigating insider trading at a different hedge fund, the Galleon Group, and managed to lock up its chief.
But Cohen never faced a criminal charge. The most the government could do was order SAC Capital to shut down in 2013 and fine it $1.8 billion — a figure that sounds like an awful lot until you learn that Cohen had almost $10 billion of his own money left over, which he could still trade and invest as a private family office.
Kolhatkar never reduces anyone in “Black Edge” to a stone-gargoyle grotesque. But Cohen certainly goes across the street and around the corner to reify certain stereotypes about hedge fund managers. Monster estate in Greenwich, Conn.? Check. (The backyard has a 6,000-square-foot ice-skating rink, plus a shed for the Zamboni.) Priceless art collection? That, too. (It includes Damien Hirst’s shark suspended in formaldehyde, a metaphor so literal you don’t know whether to laugh or cry.) Nasty divorce? Oh, yes. (You know things are ugly when your ex files a Freedom of Information Act request to get the goods on you.)
Even more striking to a civilian, though, is the other-planetary toxicity of SAC Capital’s culture. The competition was ruthless. Everyone was expendable, including partners and mentors. Cohen couldn’t tolerate anyone’s making money before he did — he’d fly into a rage if he heard that a portfolio manager had done a trade without giving him first dibs. “Employees often felt like they were part of an experiment looking at the effects of prolonged stress and uncertainty,” Kolhatkar writes.
But my hunch is that readers will most remember “Black Edge” for showing them just how alarmingly pervasive insider trading was in the years surrounding the 2008 collapse. It became commonplace, domesticated — dare I say it? — normalized. Big banks, Kolhatkar writes, often shared what they knew about the status of a stock with SAC Capital first, because they did so much business with it. Whole research firms existed for the sole purpose of connecting shops like SAC Capital to “expert networks,” or to individuals who worked in publicly traded companies, with the expectation that these people would share valuable insights to help those on Wall Street make better trades.
The industry called it “earnings intelligence.” But the line between earnings intelligence and inside information could be very hard to discern.
Kolhatkar makes a convincing case that Cohen leaned very hard on his employees to get vital information — to find an edge. Hence the book’s title: A “black edge” is early, private, proprietary information about a company. Cohen was too smart to declare explicitly that he wanted it. Instead, he’d ask his employees to give their assessments a “conviction rating,” from one to 10. And why would someone rate a conviction as nine without a black edge?
Perhaps the most despicable episode in Kolhatkar’s book involves Mathew Martoma, a portfolio manager for SAC. He struck up a mercenary friendship with an older, lonely neurologist, hoping to wrangle information from him about the status of an experimental drug to treat Alzheimer’s disease. The way Martoma went about seducing him is both sickening and extremely impressive.
It worked. Martoma contacted Cohen, who then arranged to unload millions of shares in two companies that were testing the drug. He shorted some of their stock for good measure.
Yet, when later pressed for specifics about it by the government, Cohen, “the greatest trader of his generation, who could track the price movements of 80 different securities at a time, claimed not to remember,” Kolhatkar writes. “He said ‘I don’t recall’ 65 times.” It worked. Martoma, as many people know, had a different fate.
So how do you end a book like this? In James B. Stewart’s “Den of Thieves,” it was easy: Michael Milken was sent to jail. Here, Kolhatkar doesn’t have so gratifying an option, but her ending is no less chilling for it. She notes that in 2014, Cohen made $2.5 billion by trading his personal fortune alone. “He is making plans to reopen his hedge fund,” she writes, “as soon as possible.”