Why SAC Capital's Steven Cohen Isn't in Jail
Photograph by Simon Dawson/Bloomberg
Ten thousand dollars an hour worth of lawyers filed into a courtroom in lower Manhattan on the morning of Nov. 8. The legal team represented Steven Cohen’s hedge fund, SAC Capital Advisors, which had agreed to pay $1.2 billion to settle criminal charges that it had engaged in securities fraud. The hearing was the culmination of a long legal struggle between SAC and the government that has dramatically altered what was once one of Wall Street’s most powerful firms. Eight former or current SAC employees have been charged with insider trading. Six of them have pleaded guilty; one, Mathew Martoma, is due to go on trial on Jan. 6, and another, Michael Steinberg, was convicted on Dec. 18 of insider trading in two technology stocks. Separately, Cohen was charged in a civil case with failing to supervise his employees by the Securities and Exchange Commission, which is seeking to bar him from the securities industry. Cohen’s company is transforming itself into a much smaller operation that manages only Cohen’s money. SAC had fostered an unprecedented “culture of corporate corruption,” U.S. Attorney Preet Bharara said when the criminal charges against the company were first unveiled.The man who was conspicuously absent from the courtroom that day was Cohen. After seven years of investigations, wiretaps, unearthed documents, and undercover informants, the government had not been able to assemble enough evidence to charge Cohen criminally with insider trading—though people familiar with the investigation say the pursuit of the billionaire hedge fund founder continues. It’s becoming increasingly apparent, however, that Cohen was just clever—or lucky—enough to avoid the harshest penalties levied against some of his own employees. The reasons why may trace back to his actions during a few pivotal weeks in the summer of 2008.
SAC, at the beginning of 2008, was at its peak, with close to 1,200 employees and more than $16 billion in assets. The firm had just gone through several years of rapid expansion, moving into areas beyond its specialty as a short-term stock-trading shop, having launched a private equity group in 2007, a Hong Kong office the year before, and other new funds and divisions in the preceding years. There were lavish holiday parties, three in-office masseuses, and the occasional cigarette boat stashed outside the firm’s headquarters in Stamford, Conn. The collection of cars in the parking lot was legendary: a portfolio manager’s Mercedes with gullwing doors, Maseratis, Ferraris, a brown Bentley just like Justin Bieber’s. Few at SAC could have imagined what was to come during the next 12 months, when the firm’s “edge” would evaporate and two portfolio managers would commit acts that would have them facing prison five years later. The year 2008 was, and remains, SAC’s only down year, when the firm’s flagship fund lost almost 28 percent.
Photograph by Shannon Stapleton/Reuters
Both Jon Horvath and Martoma had been with SAC for more than a year. Martoma, now 39, had grown up in Florida, graduated from Duke University, and had an impressive collection of degrees and residencies, including a stretch at Harvard Law School, a Stanford MBA, and time logged at a Boston hedge fund called Sirios Capital Management. Horvath, 44, a Swedish native who’d been raised in Toronto, graduated from Queen’s University in Kingston, Ont., with a degree in Commerce. He had shaggy hair and a slightly dazed expression that made him perpetually look as if he’d been up partying the night before. He’d worked at Lehman Brothers in San Francisco analyzing computer stocks at its Neuberger Berman asset management group before joining SAC’s Sigma Capital Management unit in New York in September 2006, following a vetting process that lasted six months.
SAC was structured like a bicycle wheel, with the spokes consisting of about 100 portfolio managers with their own teams of analysts and traders working in competition with the other teams. Camaraderie in SAC’s offices was low. At the center was Cohen, 57, the only connector between the different groups, who would take the best ideas from each and trade on them himself. Aside from losing money, there was nothing Cohen hated more than a portfolio manager who didn’t communicate vigorously and often.
Horvath’s job was to provide research ideas to Michael Steinberg, who had been at SAC since 1996 and was one of its most senior portfolio managers. Steinberg, 41, had attended the same high school as Cohen—Great Neck North in Long Island, N.Y.—and the two were close. Horvath tracked companies including Dell, Apple (AAPL), Microsoft (MSFT), IBM (IBM), Hewlett-Packard (HPQ), and many others. He traveled constantly between California—where he had an apartment in San Francisco and a ski share at Lake Tahoe—and New York, as well as to conferences and company visits in places such as Boston, Arizona, and Taiwan.