BRIAN LAMB: Sheelah Kolhatkar, author of Black Edge, who is Steven Cohen?
SHEELAH KOLHATKAR: Steven Cohen was and continues to be a legendary figure in the financial world. He built up an enormous personal fortune almost entirely on the basis of his incredible skill for trading.
So he had a really strong instinct for the stock market. He would sit down behind his screens and just sort of look at the way stocks were trading every day, and was believed to have this very intuitive, incredible sense of how to sort of ride the waves in the market and make money.
And he has this very compelling, almost rags-to-riches story. He grew up very middle-class in Great Neck, Long Island, which was an affluent town. His family had, relatively speaking, less money than a lot of others around him. So I think from an early age, he felt this sort of hunger to become rich. He was very good at playing poker. He started playing poker in high school.
He went to Wharton, famous business school, and then he launched his hedge fund, SAC Capital in 1992. And very quickly, built up a multi-billion dollar fortune and he has the lifestyle to match a 36,000 square foot mansion in Greenwich, Connecticut, helicopter rides, $100 million works of art, his own ice rink in Zamboni. So he became an object of extreme envy on Wall Street, very quickly.
LAMB: SAC Capital, does it stand for the obvious?
KOLHATKAR: Yes, his initials.
LAMB: Steven A. Cohen.
KOLHATKAR: He embodied the firm, in every way.
LAMB: Late in your book, there's a moment where you come in contact with him, and you say in your book that he wouldn't talk to you for this book. Tell us about that moment.
KOLHATKAR: Well, I had spent several years reporting this book and I went about doing that the way any investigative reporter does. I had a lot of court documents, I did a lot of interviews with people, and I had tried multiple times to, convince him to sit with me.
And of course, I would've loved to talk with him. And by the time the story reached its conclusion and that moment you referred to in the book, he had largely won the legal case that I thought he may have a compelling reason to actually talk now. He kind of -- he beat the system, he's trying to remake his reputation.
So I heard he was going to be attending a very sort of rarified special art auction at Christie's Auction House in Manhattan. And I had met with Steve Cohen's staff and his people several times, I'd written them letters. But and they'd always said oh, maybe he'll meet with you, but they never really said no, so I went there and I just sort of ambushed him.
I knew he was going to come. He was selling a painting that night. And I stood in the door and I saw him come in and it was -- it was the first time I actually really spoken to him directly and it was -- it was a powerful moment for me because I felt like I knew him so well at this point. I had spoken to dozens of people who worked with him, his family members.
And we had a brief exchange that he basically as soon as he figured out who I was, he sort of said, oh, I don't think I can really talk to you and he sort of ran away.
And he looked very relaxed, he arrived just before the auction was set to begin which I thought was just interesting because he's so important in the art world, he's literally one of the biggest and most important modern art collectors in the world.
He knew that Christie's would never start without him. I mean he was a VIP in that world. So, when I sort of said to him, what are you doing tonight? Are you buying or selling? And I knew it had been reported, he was selling a painting out of his collection. And he said oh, no, I'm selling, I'm selling and then he went into the auction, and just a few minutes later, he paid -- I think it was $140 million for a Giacometti's sculpture.
LAMB: Let me stop you, let's look at a little piece of video that shows people what he paid $140 -- I think you say $141 million.
KOLHATKAR: A hundred and forty one. Yes.
LAMB: Let's just watch this.
(VIDEO STARTS)
Male: A man raises his arm, a man clenches his fist. Man is the indissoluble unity and the absolute source of his movements.
(VIDEO ENDS)
LAMB: How could that be worth $141 million?
KOLHATKAR: Well, it is worth whatever someone is willing to pay for it. That's how the market works. And it is interesting because he -- I think Cohen is reported to have purchased at least two of those sculptures for $140 million range. He had bought one prior to this one that was Pointing Man, I think he bought -- he purchased another one called Chariot, as well.
I think part of the reason the prices had become so elevated for these particular works of art is because this very, very small group of hedge fund billionaires, in particular, have become competitive about art collecting.
And, I think it happened to a lot of them that they achieved a lot of financial success fairly early. And they sort of realized that they were still not seen as these sort of sophisticated, cultured people, they were just thought of as Wall Street guys.
And many of them became interested in the art world, it was a way to just enter this whole other universe of sort of high culture and you would have your photo appear in the society pages, you could get your name onto the wall in the museum.
So many of Cohen's contemporaries became really interested in art, and they end up in this sort of arms raise bidding up certain artists into the stratosphere of prices, and there is -- a lot of people believe there is a big bubble in the art market.
LAMB: How much is he worth today?
KOLHATKAR: I believe it's at least $10 billion. He -- by the time all of this legal drama ended, he was forced to sort of shut down his hedge fund, SAC Capital, but he was still allowed to manage his own money through his private family office. So he's got a pool of his own money, it's upwards of $10 billion, and he still trades it every day in the market, so his lifestyle was largely unchanged from what it was before.
LAMB: How many people, when he had SAC Capital, went to prison or were -- they were convicted or they pled and are going to be sentenced, how many around him?
KOLHATKAR: Well, at least eight were either convicted or pled guilty. However, the two -- and these were other former or current SAC employees. A handful of others were connected to insider trading more indirectly.
However, the two kind of central characters at the heart of the story, they're very central characters in my book, are these two former portfolio managers for Cohen's funds, Mathew Martoma is one of them and Michael Steinberg is the other one.
And Martoma is currently serving a fairly lengthy prison sentence although his case is on appeal. And Mr. Steinberg was convicted but then his conviction was later overturned after an appeals court made a ruling that made it much harder to convict someone for insider trading, and he is now doing other things of his life.
LAMB: Has Steven Cohen ever been convicted of anything or charged with anything?
KOLHATKAR: No, absolutely not. Well, I should clarify. The SEC did charge him with failing to supervise his employees. That was sort of the final thing that happened but it was a fairly light charge that was settled for a financial penalty and some modifications to his business. But he was never charged with any crime, himself.
And there was sort of a dramatic moment in the story which I recount in the book where, the government, the Department of Justice, FBI and the SEC lawyers had spent years trying to build up a case against Cohen.
And they had been trying to flip people and get cooperators who could lead them inside SAC. They had wiretaps on people, they had been tracking him for years and finally, in 2013, there's sort of this dramatic moment where they have to decide OK, what are we going to do?
And the entire world was watching, this was a very high profile case, there was tremendous news media coverage. The financial industry was sort of riveted, wanted to know whether this huge star of their world was possibly going to go to jail.
And I described this scene in the book where Mr. Cohen's lawyers came in to meet with the prosecutors and make a presentation and try to persuade them not to charge their client. And this is something that apparently happens. Many defendants are given the opportunity to come in and sort of present their defense.
So a handful of Steve Cohen's very high-priced defense lawyers came in there and there were around 17 government attorneys present. These were SEC lawyers, criminal prosecutors, FBI agents, all these people who had been involved in different aspects of the case.
And Mr. Cohen's lawyers, they made a four-hour presentation; they gave out these binders to everyone in the room. And they basically made the argument that -- there was this very critical e-mail that people were wondering whether Cohen had read it and contained to what they believed was inside information.
And his lawyers essentially said you have no proof he read the e-mail. You have no witness to put on the stand. He knew the government was very nervous about losing a big case. So they really targeted that weakness and they said you have no one to put on the stand and say they saw him do it or they talked about it with him. There's no evidence he read this e-mail. Even if he did read the e-mail, it might not be illegal.
And they just sort of hammered that point home, over and over again. And the government attorneys left that meeting and they still felt fairly sure of what they felt which was like oh, it really looked pretty bad, it looked like Cohen might be guilty of something.
However, they had to go and have a really hard conversation about the evidence they had and what they could do with it. And they ended up deciding that they did not have enough evidence to bring to a jury and be sure that they can win. So they ended up indicting Cohen's company instead of Cohen, himself.
LAMB: And that company paid how much?
KOLHATKAR: In total…
LAMB: To the government?
KOLHATKAR: In total, $1.8 billion, that was -- one chunk of that was an SEC fine and $1.2 billion approximately was sort of a criminal settlement.
LAMB: Once in awhile, I see that you were a trader. Where did that all start? And we needed to find things like, what is insider trading?
KOLHATKAR: Sure. So I -- one of the reasons I became interested in this story and it really connected with me is because I started my career working at two very small hedge funds. I was actually an analyst, which is a little different from a trader.
So the analyst is sort of the egghead who does the research. Traders are the ones who sit there and decide when to buy or sell and often people making decisions about trades will talk to the analysts and they'll say well, is this a good company? Should we put our money in this company or should we be selling this, what's happening, what's going to happen in the future, what are the product orders like?
And my job was to try and analyze our investments and then help guide the portfolio manager in making these decisions, and then a trader would execute them.
So it's important to understand this word edge, to kind of understand the concept of inside information. So inside Steve Cohen's former hedge fund, SAC, there was a portfolio manager who had the system for rating information. And he tried to teach it to the young guys working for him, so that they could stay out of trouble because it's a constant concern that you're going to end up with some information that you shouldn't have.
And hedge funds are very driven by information. The better the information is that you have, the more likely you are to make money. If you have bad information, you're going to lose money. So everybody's out there in the market everyday, trying to get the best, sharpest and most useful information.
LAMB: Let me ask you first -- again, about a hedge fund. Can I invest on a hedge fund?
KOLHATKAR: That depends on what your investible assets are, meaning…
LAMB: But let's say it's small.
KOLHATKAR: Yes. And so in general, hedge funds are intended to cater to wealthy investors who can afford, in theory, to lose the money they put in.
LAMB: What's the difference between buying a stock from a company or through a broker and investing in a hedge fund?
KOLHATKAR: Well, so hedge funds were conceived as this boutique kind of rarified product that were catering -- that was catering towards wealthy investors. And the idea was that a hedge fund was going to take a lot more risks in the market, potentially, than a regular mutual fund, for example, where at Fidelity or State Street.
So regulators looked at this and they said well, if you're going to be taking all this risk, if you're going to be borrowing money and trading it or if you're going to be shorting stocks which is basically betting that a stock will go down rather than up and it's very risky activity. Not everyone does it.
The SEC kind of said you can only do that if you're only taking money from people who could afford to lose the money. We don't want you taking money from middle-class, dentists or teachers or whoever…
LAMB: Why not?
KOLHATKAR: Who will be devastated if they lose this money, well, this was a little…
(Multiple Speakers)
LAMB: Why is the government telling -- protecting me?
KOLHATKAR: Well, that's the purpose of securities and regulators, is to make sure the market is fair and transparent and that people aren't getting fleeced but this fancy hedge fund guys.
LAMB: How many hedge funds are there?
KOLHATKAR: Thousands, thousands.
LAMB: Do they all make money?
KOLHATKAR: I would -- I would argue that probably most of them do not make money but a handful of them make a tremendous amount of money and they have made the founders of the hedge funds extremely wealthy.
And partly, this is because they charge very hefty fees, much higher fees than you would pay the Vanguard or any of your mutual fund companies. I mean they charged typically two percent to three percent of the assets that they're managing.
LAMB: So in other words, if I gave them a million dollars, they would take two percent off the top?
KOLHATKAR: Just too kind of cover their overhead, then at the end of the year, they figure out what profit they made.
LAMB: Let's say they make a hundred percent profit, in other words, their whole hedge fund starts out being worth $10 billion, at the end of the year it's worth $20 billion.
KOLHATKAR: So they're going to take that -- look at that profit, that 100 percent profit, and depending on the fund, they are going to take 20 percent, sometimes even 50 percent of that profit and keep it for themselves, and that is known as an incentive fee.
That is supposed to be motivation for the hedge fund manager to not do anything really foolish and to work really hard to make money for...
LAMB: How much did Mr. Cohen take from that?
KOLHATKAR: He had some of the highest fees in the business, 50 percent. And I will say that even with those high fees, his returns were spectacular. He -- especially during his earlier period, he was often returning 30 percent, 40 percent, 70 percent and investors were fighting to get into his fund all the time because he was just churning out profits.
LAMB: And when did you work in the -- in a hedge fund?
KOLHATKAR: I was working the hedge fund from around, let me think here, '98 to 2002, so.
LAMB: And how big was -- how big was the office?
KOLHATKAR: Tiny, and I will say right now…
LAMB: What, five, six, a hundred?
KOLHATKAR: Yes, oh, yes, less fewer than 10 employees, both of them. And this is how -- this is how Steve Cohen's hedge fund started and this is how the whole hedge fund industry began during that period.
I mean a lot of hedge funds started by just one or two people who just did not want to go work at Goldman Sachs. They didn't want -- they didn't want to have to deal with the big corporate culture, there. They didn't want to wear suits. They were smart, they just want to make money, they were scrappy and ambitious.
So a lot of these hedge funds were little shops opened up by two or three people. And often, especially the people who are doing well, they would grow very quickly and you…
LAMB: Let's say for instance, you're at the small hedge fund and I have a lot of money and I call you up and -- who do I talk to when I call up?
KOLHATKAR: Well, it depends. If you're a small…
LAMB: I'm small, I'm...
KOLHATKAR: A brand new small hedge fund, you might call up and speak to the fund manager. If you're a slick, sophisticated multi-billion dollar hedge fund, you will talk to a department that is there to cater to investors.
LAMB: But let's say I call the hedge funds, I'd like to invest.
KOLHATKAR: Yes.
LAMB: Do I just write you a check?
KOLHATKAR: It's a little more complicated than that. You have to kind of prove that you have enough net worth to qualify to be an investor. It's also possible that the particular hedge fund, if it's a very hot in-demand hedge fund, might not just take money from anybody.
I mean this often happens with the really hot high performing ones. They can kind of pick which investors they want. And…
LAMB: Well, what kind of people work in a hedge fund office?
KOLHATKAR: What kind of people? Do you mean like the staff positions or just…
LAMB: Yes, in other words, when you walk in, where these folks come from?
KOLHATKAR: Well.
LAMB: Male, female, minorities in the business?
KOLHATKAR: Sure. I mean I will say that hedge funds became very quickly one of the most effective and efficient vehicles to kind of become extremely wealthy. They became known as places to go I you wanted to get really, really rich. And you could make more money in the hedge fund than you could even at the big bank, like a Goldman Sachs or JPMorgan.
So eventually, over time, hedge funds started attracting the best students out of Ivy League colleges. Math graduates from MIT, young, ambitious, hungry kids with PhDs in Science and Computer Programming. Often, these people are flocking to hedge funds.
LAMB: Where did -- where did you come from to a hedge fund?
KOLHATKAR: Well, I came from a very different background. I came…
LAMB: What is it? Where'd you grow up?
KOLHATKAR: Toronto.
LAMB: Parents were from?
KOLHATKAR: My father's from India and my mother's from the Midwest.
LAMB: Is that the Kolhatkar name India?
KOLHATKAR: Yes, that is a South Asian name.
LAMB: One of the things that's interesting and you have in your book is there are a lot of Indian-Americans that are -- you're writing about. Did that cross your mind as you were writing that?
KOLHATKAR: I mean it was obvious, it was remarkable. I mean there are a lot of South Asians sort of in all corners in the government side, in the hedge fund world. And I would occasionally ask people why that -- if anyone thought about that.
And, the one explanation I got was that many of these sort of insider trading rings that the government was pursing are -- spring up out of personal relationships and personal networks. And often, people end up involved in that kind of behavior with their friends and their -- the people they went to college with. So you would end up with these circles of people where, yes, you'd had certain groups overrepresented and it was interesting to me.
LAMB: You went to school where?
KOLHATKAR: I graduated from NYU.
LAMB: New York University, in what?
KOLHATKAR: I have a degree in film.
LAMB: In film?
KOLHATKAR: Yes, yes.
LAMB: And what did you do after your work for the hedge funds?
KOLHATKAR: Well, I spent about five years working for these two hedge funds. It wasn't at all what I intended to do, as you can discern from the fact that I have a film degree, and I kind of fell into it by accident.
And the whole time I was there, it was sort -- I mean I learned the tremendous amount and I actually love that, but I felt a bit like an anthropologist in this world that was really foreign to me.
And every year, I would kind of say to myself OK, I'm going to do this for one more year and then I'm going to get out and I'm going to go become a writer or a journalist or I'm going to do something else. And then every year, I get a bonus and I would think oh, well, maybe I should stay a little longer. And I think that's what -- I think that's what drives a lot of people into that world. The money drives people in.
LAMB: Did you make a lot of money when you were there?
KOLHATKAR: Not relative to what a lot of money would be now. But for me, at the time, it was a lot.
LAMB: And your job now is what?
KOLHATKAR: I'm a staff writer at The New Yorker.
LAMB: This is a very detailed book about a lot of names and all, we're not going to be able to get into, but I want to jump right into something. This is from 2011. Thanks to PBS Frontline, you were on this program, and it's -- I think it ran in 2014 and it's available on the Web Site if people want to watch it, it's an hour. Here's Steven Cohen in a deposition which I want you to explain.
(VIDEO STARTS)
MICHAEL BOWE: Do you have an understanding about whether, when in possession of material non-public information, you're ever allowed to trade in a security?
STEVEN COHEN: That's not the way it's explained to me. The way I understand the law is that it's very vague, so it's an interpretation of the law.
BOWE: 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?
COHEN: I'm not aware of that.
BOWE: You don't know one way or the other?
COHEN: No.
(VIDEO ENDS)
LAMB: What'd you see there? Where is that from?
KOLHATKAR: That deposition was a -- it was a video of a deposition he gave in a case that was really a private commercial litigation involving a company called Fairfax, which is a Canadian insurance company that it accused a bunch of hedge funds of manipulating its stock.
LAMB: Did you watch all of that deposition?
KOLHATKAR: I've watched some of it. I am not certain if I watched all of it.
LAMB: It's available on the PBS Frontline Web Site by the way, if people want to watch it.
KOLHATKAR: Yes, yes. No, it is interesting, it's interesting. I remember when -- I remember when those were leaked, it was quite dramatic.
LAMB: Can -- we're going to jump around a bit. If people want to know more, it's in the book, they can read it. But I want to go to 2008, Chicago, Illinois, Dr. Sid Gilman.
KOLHATKAR: Oh, yes.
LAMB: Set it up, please. Who is Dr. Sid Gilman?
KOLHATKAR: Well, Dr. Gilman was a very accomplished Alzheimer's researcher.
LAMB: University of Michigan?
KOLHATKAR: At the University of Michigan. He was the Head of the Medical Department there. He -- he authored medical papers, he mentored students, he helped with drug trials. He was a lion of the scientific community, very highly regarded. He was in his 70s I think at the time many of the events in the book took place.
And at one point, one of Steve Cohen's portfolio managers, Mathew Martoma, decided that he wanted to research a drug trial. He wanted to invest in the development of this drug. There were two drug companies creating -- trying to invent, come up with a cure for Alzheimer's.
LAMB: Elan and Wyeth.
KOLHATKAR: Wyeth, yes.
LAMB: And those are -- both have been purchased since then?
KOLHATKAR: Yes. I don't remember exactly what's happened to them, but yes, they both had -- I think they both been taken over.
LAMB: Pfizer took over Wyeth.
KOLHATKAR: Yes.
LAMB: And I can't remember the name of the company that took over the other one. But so -- we're in…
KOLHATKAR: So…
LAMB: We're in Chicago.
KOLHATKAR: So developing a drug is extremely expensive, and going through the FDA drug approval process is expensive. So often, companies will team up to do this and that's what these two did.
Now, Mathew Martoma, when he arrived at Steven Cohen's fund, he was very ambitious, he wanted to make a lot of money, he was looking for a winning trading idea and he was an expert in technology stocks and biotechnology stocks and drug companies.
So he had been tracking the development of this Alzheimer's drug and there was a tremendous commercial potential for this Alzheimer's drug. Basically, for any company that found a cure for Alzheimer's, there were billions of dollars to be made. This is a disease with no cure and it's devastating to millions of people.
So Martoma started looking around for people who could help him learn more about this drug trial, and he ended up becoming connected to Dr. Gilman and over a number of months, cultivated a relationship with Dr. Gilman that culminated in him getting allegedly inside information from Dr. Gilman about this drug trial.
And there's a very dramatic moment that I recount in the book where Dr. Gilman appears at a medical conference in Chicago, I think it's in July of 2008, and it's this big unveiling of the final trial results of this Alzheimer's drug trial.
And this auditorium at a hotel in downtown Chicago was packed and there are scientific researchers there, there are university presence there, there are drug company representatives there, and there are a lot of traders and analysts from Wall Street, because all of Wall Street has been sort of gambling one way or another on the outcome of this drug trial.
So Dr. Gilman stands up there and sort of clears his throat and he announces the drug trial results and he shows this whole PowerPoint. And he was trying to be optimistic because I think he was so hopeful and wanted so badly for this drug to work.
But ultimately, the people in the audience understood that the trial had shown that the drug was not working. It was not -- it was not -- it was not -- it was not becoming more effective if you took a higher dose, there are all sorts of problems with it.
So immediately, everyone on Wall Street starts trying to sell, sell, sell, sell these sort of code red alerts go out, everyone is dumping their shares. Well, it turned out Martoma allegedly had gotten this information the week before, and SAC Capital had already sold off its whole position and, in fact, shorted the two stocks. And it really illustrated the difference, there. I mean all of these people who did not have the benefit of that information earlier ended up losing money because the stocks plunged.
LAMB: Did you ever interview Dr. Gilman?
KOLHATKAR: No.
LAMB: Did you ever interview Mathew Martoma?
KOLHATKAR: No. I did…
LAMB: And what's his real name?
KOLHATKAR: Mathew Martoma, Ajai Mathew Mariamdani Thomas, I believe was his given name and he did change his name, at one point.
LAMB: Why?
KOLHATKAR: You would have to ask him.
LAMB: But he's a story in himself.
KOLHATKAR: He is quite a character.
LAMB: Where is he right now?
KOLHATKAR: He is in prison in Florida and his case is on appeal.
LAMB: Is he from India, originally?
KOLHATKAR: His family is. He's of Indian descent.
LAMB: There was a time when this man fainted.
KOLHATKAR: Yes.
LAMB: In your story.
KOLHATKAR: There are several fainting men in my book.
LAMB: I mean just dropped.
KOLHATKAR: Yes, well, the FBI -- I mean one day, the FBI decided they were going to kind of pursue Martoma and one of the main characters in the story, B.J. Kang, who was this very ambitious kind of tough guy, FBI agent…
LAMB: Korean-American?
KOLHATKAR: Yes. He went down to Florida to approach Martoma at his home in Boca Raton where he had a very sort of beautiful, expensive house, he was living there with his family, and their hope was that Martoma would flip and become a cooperator to them. And they had all this -- they had amassed a lot of evidence they believed of this conspiracy involving Dr. Gilman and his drug trial, and.
LAMB: But should I say, in order to get Steve Cohen, is that why they wanted to -- so they wanted him to flip?
KOLHATKAR: I think that was their ultimate hope, they would probably never admit that officially, but it seemed quite clear from the way they were behaving. And now, Martoma himself, was a worthwhile target on his own. It was a huge insider trading case just involving Martoma, himself.
But yes, I think they had a lot of questions about what Martoma had shared with Steve Cohen. So B.J. Kang went down there and confronted Martoma on his front lawn and he said, I want to talk to you about insider trading. What happened in July of 2008? And Martoma fainted.
And B.J. Kang sort of shook his head and he had been through many of these approaches before. He had been working on this case for years.
LAMB: B.J. Kang is in the first sentence of your prologue, at the beginning of the book.
KOLHATKAR: He's a very key figure in this whole thing. I mean he was one of the central FBI agents who investigated these cases. And he had -- yes, he did some of the big arrests. He arrested Raj Rajaratnam.
LAMB: Who is he?
KOLHATKAR: He was another big hedge funds manager who was arrested and charged before the Martoma case.
LAMB: He's originally from Sri Lanka?
KOLHATKAR: Yes.
LAMB: Where is he today?
KOLHATKAR: He is in prison I believe in upstate New York, I'd have to double-check.
LAMB: But what's hard for the outsider to understand is you talked about three groups of people from the government that make a difference, the SEC, Securities and Exchange Commission, the FBI and the U.S. attorneys. And you talked a lot in the book about how they -- there's jealousy between the two different departments and all that. Let me just show Preet Bharara who is -- who is he?
KOLHATKAR: The U.S. Attorney for the Southern District of New York, so the top prosecutor in Manhattan for the Federal Government, a very important law enforcement figure.
LAMB: What's the name Bharara?
KOLHATKAR: India, from India.
LAMB: Very interesting. Let's go to Preet Bharara in November the 4th in 2013.
(VIDEO STARTS)
Preet Bharara: This past July, we filed a criminal indictment against four SAC Capital-related companies for engaging in insider trading that was substantial, pervasive and on a scale without precedent in the history of hedge funds. Three months later, we are here to announce a resolution that is matching in its magnitude.
All of the charged SAC companies have agreed to plead guilty, all have agreed to wind down and close their outside investment businesses, and all have agreed collectively to pay total fines and penalties in the record amount of $1.8 billion.
(VIDEO ENDS)
LAMB: Who is this man and how does he get to where he is?
KOLHATKAR: He's the son of immigrants from India. He grew up in New Jersey, his father was a medical doctor. And it's interesting because both he and his brother, Vinnie, were these incredibly accomplished students. Apparently, their parents were extremely demanding, sort of stereotypical tiger parents wanted them to have straight As, sacrificed a lot so they could go to good schools.
And my understanding is that Preet wanted to be a prosecutor from early on in his career. He had -- he had a very strong sense of right and wrong. He did a lot of debate and things like that in highs school, so he enjoyed the standing up and arguing and developing ideas and performing. And he ended up going to -- I'd have to double-check -- he ended up going to either Columbia or Harvard.
LAMB: I think it was Columbia Law School.
KOLHATKAR: Yes, I think Columbia, Harvard undergrad and Columbia Law School. There's a lot of Ivy League graduates in my book, so sometimes I confuse them, but. And then he ended up working for Chuck Schumer, the senator from New York, as his sort of one of his chief legal council.
And Schumer is the one recommended him for the job he has now which is this U.S. Attorney for the Southern District job, and it's one of the most high profiled jobs in law enforcement.
New York City has many of the most high profile cases, it has terrorism cases, narcotics cases, complicated financial crime cases, and Preet was told recently that President Trump wants him to stay on in the role, which surprised some people since he was an Obama appointee.
LAMB: But again, looking at how this all works, you talked about insider trading and I kind of learned from you that it's not that clear sometimes, what insider trading is.
KOLHATKAR: Well, yes so I could -- I mean there's an easy way to explain it, which is through this -- by explaining the title of the book, Black Edge. So there were some employees at Steve Cohen's firm, they had this method of describing different types of information.
There was white edge, which was considered to be information that was publicly available that anyone could get like a companies' public SEC filings, and companies when they report their earnings, they have to make filings with the Securities and Exchange Commission. Anyone can look at those on the web -- on the internet.
So that's white edge. Everyone kind of has access to it. It's not actually very valuable for a trader because everyone has it. Presumably, there's no money to be made from trading, based on its contents.
Then there's gray edge, which is information that sort of -- it's ambiguous. For example, an analyst might call an employee of a company and say, you announced this merger. How is it going? When's the merger going to close? You've announced -- you've announced this big investment that's happening. When is that going to happen?
LAMB: Would that have been you, by the way, when you were…
KOLHATKAR: Yes.
LAMB: Working in the hedge fund?
KOLHATKAR: I did some of this, exactly. And the person may or may not authorized to tell you that information. So it depends, if you have a relationship with that person or if you're very important investor, they might say to you well, we're feeling good about it.
And so then you go back to your desk and you think OK, was that material non-public information that I am not supposed to trade on or was that just, no big deal? And hedge funds are supposed to have compliance officers and counsel to help advise you if you end up in the situation. And a lot of the time, the information that these analysts are getting is in this gray zone. So…
LAMB: Are hedge funds -- as one way to describe it, it's like they don't have the kind of rules that you do if you went to a Vanguard fund or something like that. I mean they're just -- it's -- they're not as regulated as some of the other funds are?
KOLHATKAR: They are more lightly regulated, that is absolutely true, and they don't have to disclose as much about what they're…
LAMB: So it's a big benefit to rich people?
KOLHATKAR: Some people believe that. Now, a hedge fund manager would say, a lot of hedge funds do take money from pension fund managers, so they would say that some of their investors through these pension funds, which will kind of put chunks of money with different hedge funds sometimes. So they would say we're also managing money for teachers in California, as a group. So it's not only rich people who benefit from us. But for the most part, they do cater to rich people that's correct.
LAMB: And so we go back to the beginning. We're talking about Steve Cohen sitting there and making $10 billion or whatever it is, he's not been charged with anything. He needs to have the edge, as you say?
KOLHATKAR: Well…
LAMB: He needs to know information that other people don't know.
KOLHATKAR: So I would say that anyone working at any hedge fund who -- involved in short-term trading, meaning everyday they're coming and trading in and out of stocks, all of those people want edge that is a common term in the industry. They want edge. And there's -- this white edge, it's kind of useless for their purposes. There is the gray zone and then there is black edge, which is clearly inside information.
LAMB: I want to go back to Matt Martoma, you talked about, because the Sid Gilman story, Dr. Sid Gilman, makes a presentation in Chicago, but prior to that, you tell the story about Matt Martoma flying to Ann Arbor.
KOLHATKAR: Right.
LAMB: Ahead of that speech.
KOLHATKAR: Yes.
LAMB: To try to gather new information about the Alzheimer's drug but at the same time, he's phony about it, he tells Dr. Gilman he's coming for another reason. Tell that story, please?
KOLHATKAR: Well, so over a number of months, Martoma has built up this report with Dr. Gilman. They talk on the phone for hours, they meet for dinner, they get together. And Gilman, over time, he's a bit lonely. He starts to see Martoma almost like a surrogate son, he feels very connected to him.
So gradually -- and he knows he's not supposed to be sharing confidential information about the Alzheimer's drug, but over time he starts to share it because Martoma is just pushing and pushing, he really wants this information.
So at some point, it crosses the line and Gilman starts sharing information he's not supposed to be sharing. And meanwhile, Martoma is back at SAC Capital, working for Steven Cohen, he's advocating very hard for them to invest very heavily in Elan and Wyeth, these two drug stocks. He's saying, this Alzheimer's drug trial is going really well. We really need to think about this.
LAMB: Let me interrupt. If I'm Steven Cohen and Matt Martoma is working for me and he comes in to him and says we've got to short this because this isn't going to work, does he -- is the issue at that moment, does he tell him that he has gotten this from Dr. Gilman?
KOLHATKAR: Well, there's some mystery at the center of it because ultimately what happened is after pushing and advocating for months to be -- to aggressively invest in these two companies on the basis of this trial, Martoma -- and there were other people at SAC who were against the idea because they didn't think the drug trial was going to work out. And there was this constant debate and arguing and no one can understand why is Martoma so confident? This is really weird. And at one point, one of Martoma's colleagues says he seems -- he's acting like he's black edged, what's going on? And they couldn't get an answer. So there was all this fighting and the sort of mystery swirling around it.
So it seems a little fishy, right? So then the government alleges and they had -- they presented at Martoma's trial, airplane tickets, phone records, they had all sorts of documentary evidence that the week before the trial was publicly announced in Chicago that Martoma flew to the University of Michigan to visit Dr. Gilman, went in to Dr. Gilman's office, looked at the presentation that Dr. Gilman was working on that had all of the final drug trial results in it, confidential presentation.
Gilman had received this under lock and key from Elan. So Martoma is alleged to have looked at this. He gets -- he gets back in his taxi, goes back to the airport, flies back home. And then on Sunday morning, the following day, there is a phone call with Steve Cohen.
And at Martoma's trial, the government presented some of this evidence. He sends an e-mail to Steve Cohen in the morning, Sunday morning, not a typical time for a work colleague. And he says I need to speak with you, it's important.
They talk on the phone. No one knows what they said. And then immediately afterwards, Mr. Cohen starts instructing his traders to sell off their shares, and they spend the next week sort of liquidating their whole position, almost $1 billion.
LAMB: Quietly?
KOLHATKAR: Quietly. And it's important to note that there are many reasons why you do that quietly. I mean if someone -- if people hear that Steve Cohen is dumping shares of Elan and Wyeth it can almost trigger like a response.
LAMB: Let me show you some video. This is a year before the last -- that we showed you Preet Bharara who is the U.S. Attorney, Southern District of New York. Appointed by which president?
KOLHATKAR: Preet, Obama.
LAMB: President Obama. Would you say by the way that those positions often lead to running for attorney general of the state or governors or senators?
KOLHATKAR: Preet, in particular, was seen as someone who has got a lot of political ambition, so yes.
LAMB: Hired a PR group to bring -- come in more so than normal?
KOLHATKAR: Well, he, in particular, was seen as being very sensitive to the press coverage, yes.
LAMB: OK, here it is. This is in 2012. We're talking again about Matt Martoma who is now in prison.
(VIDEO STARTS)
Preet Bharara: As the criminal complaint in this case alleges, by cultivating and corrupting a doctor with access to secret drug data, former portfolio manager Mathew Martoma and his hedge fund benefited from what might be the most lucrative inside tip of all time.
In any case, this is certainly the most lucrative insider trading scheme ever charged, allegedly resulting in an illegal windfall to the hedge fund of more than a quarter of a billion dollars and that's billion, with a B.
(VIDEO ENDS)
LAMB: Did Dr, Gilman, I don't know if you use the word flip, on this, did he become a…
KOLHATKAR: He did, he became the star witness in the government's case against Martoma.
LAMB: How big a deal was this for Preet Bharara?
KOLHATKAR: This was a very significant case. I mean as he just mentioned, it was $275 million profit. So that made it just monetarily I think the biggest insider trading case ever and…
LAMB: How did they initially figure out that this was an insider trading case? What -- I know you've got, again, the Securities and Exchange Commission. Is that an independent group in Washington independent of the president?
KOLHATKAR: Well, it's a regulatory agency and the chair and there are commissioners who oversee the SEC and there is a chair who is normally appointed by the president. So often, the SEC is so extensively independent. However, it relies on Congress for its funding and its budget, and it will reflect the political views of the chairman. So
LAMB: And the recent chairman?
KOLHATKAR: Well, the outgoing chairman is Mary Jo White.
LAMB: Who used to be the U.S. Attorney in the Southern District of New York.
KOLHATKAR: Way back, yes, she had Preet's job. She was at Debevoise & Plimpton. She was in private practice for a long time. I have to say that a lot of the activity that I cover in this book is sort of swirling rampant in insider trading. A lot of it took place in the years leading up to the financial crisis when the SEC was managed for at least some of that time by people who didn't really believe in regulation.
And there was a sense that the market could regulate itself. There is a very deregulatory environment. a lot of this was during the George Bush era. And at the end of it, we ended up with this huge mortgage fraud crisis and this insider trading crisis.
LAMB: The commissioners are appointed by the president, approved by the Senate, so they're sitting there and then down the street is the FBI?
KOLHATKAR: Yes. So they're independent and they're very different. The SEC is supposed to be -- there are all sorts of different divisions but there is -- they wanted an enforcement division inside the SEC and they're there to enforce securities laws. And they are often doing the very painstaking difficult work of looking at suspicious trades.
So if something happens in the market, for example, one day, there's an announcement that, I don't know, AOL and Time Warner are merging. OK, this is an ancient merger, but OK, they're merging.
Well, you look at the stock chart and it looks like oh, wow, Time Warner shares were up $20 yesterday before the news came out, that's really -- it looks like somebody knew something.
So that might get flagged to the SEC. Someone - there's a - there's another agency that might send a piece of paper to the SEC that says you, guys, should look into this. This is kind of -- somebody obviously knew and loaded up on the shares of Time Wagner right before this news came out, OK.
So then they started to send out subpoenas. They look at trading records, phone records, and they are doing this really painstaking work of analyzing all these documents and trying to figure out, if something happened, that shouldn't have happened. And it can take months. I mean the Martoma case took years to kind of build, to put together.
LAMB: Before we leave Matt Martoma though, there is a story in the book about Harvard.
KOLHATKAR: Yes.
LAMB: And Stanford and law school and clerkship and -- what is it, what's the story? I mean we're beating up on him but there are lots of other people in there, but it -- this story might be useful.
KOLHATKAR: Well, there -- so I'll back into the story by saying, during Matt Martoma's trial, we all came in there to the courthouse in lower Manhattan. It's freezing. And one morning, we show up there and his defense lawyers are standing over that New York Times and they are quite enraged.
And on the cover, I think, of the business section, there was this headline to the effect of Mathew Martoma, a falsified transcript and was expelled from Harvard Law School. That's on the front of the New York Times in the middle of this guy's criminal trial, and his lawyers were very concerned that members of the jury who were supposed to kind of come being partial and neutral might see this.
So the story behind the story is that Martoma is this very ambitious student, he went to Duke, he then gained admission to Harvard Law School, incredible accomplishment. After -- I think it was after his first year, he starts struggling a little bit and he's surrounded by these very ambitious students and everyone is getting these incredible clerkships for the summer and preparing for their careers. And they're all competing for this coveted summer jobs. And Martoma did not feel that his grades were quite strong enough to get him one of these clerkship positions that he really wanted.
LAMB: He got some Bs, is what you're saying.
KOLHATKAR: He maybe had a couple Bs in there, mixed in with the A. I mean it was the transcript that his parents have been sort of happy, but it wasn't sort of perfect. So he is alleged to by Harvard to have doctored his transcripts and then applied for these clerkships. And someone noticed something was a little off.
LAMB: I mean at the school -- at Harvard?
KOLHATKAR: At Harvard. And Harvard is obvious -- like apparently all schools, they're very sensitive to scandals like this, so they conducted an investigation and they concluded that Martoma had falsified the transcripts and lied about it to try and cover it up.
They were very unhappy, they voted to expel him, and he fought very hard at trying to convince them not to and tried to tell them that he had -- he had tried to solve -- to fix the problem, he'd apologize, all the stuff, they just didn't -- they didn't accept it. So he's pushed out. He continued to fight for -- to fight to be -- to be reinstituted into the program and they didn't go for it.
LAMB: I want to go -- we don't have a whole lot time left, but I want to go to a page, its page 293 in your book and you'll see the purpose of this. It's a whole page about Cohen's ex-wife Patricia and that relationship.
But it gets down to meanwhile, the prosecutors and regulators involved in the building the case against Cohen and SAC had moved on to more lucrative careers. The purpose of asking this is what should we think about this?
I'll read Lorin Reisner, the head of Bharara's criminal division, who helped negotiate SAC's $1.8 billion fine became a partner with Paul Weiss, the same law firm that supplied Cohen's legal defense team.
KOLHATKAR: Oh, and the list goes on from there.
LAMB: Well, I know. And…
(Multiple Speakers)
… Antonia Apps, the prosecutor who tried the Steinberg case which is one of those that you write about left the government for a partnership at Milbank, Tweed, Hadley & McCloy, another corporate law firm where she does white collar defense work. I should go on really. Bharara's Deputy Richard Zabel announced that he was taking a job as general counsel at a hedge fund called Elliott Management. They're more of it.
KOLHATKAR: So a lot of people would look at that and say that is the revolving door and that is a big part of the problem we have in Washington, which is that there are people going from the public sector to the private sector and sort of cashing in on their time in the public sector. And they're not -- and then -- and then when they're doing their jobs as prosecutors or regulators, they're not actually doing their job because they're trying to set up a future high-paying job in the private sector. And it looks…
LAMB: Let me read some more because…
KOLHATKAR: Yes.
LAMB: It just keeps going. After 25 years with the FBI, B.J. Kang's former supervisor Patrick Carroll joined Goldman Sachs as a vice president in its compliance group.
You continue, Arlo Devlin-Brown, who led the Martoma prosecution, became a partner at Covington & Burling, a law firm. These mostly are law firms.
KOLHATKAR: Yes.
LAMB: The most starling move of all, however, came from Amelia Cottrell, a senior enforcement attorney at the SEC, the Securities and Exchange Commission, who oversaw the agency's Martoma investigation.
At the end of June 2015, she shocked her colleagues by announcing that she was going -- joining Willkie Farr, the firm who's Cohen's long-term -- long-time defense counsel Martin Klotz's work. Should we as a public worry about this?
KOLHATKAR: I think it raises questions. Now, I need -- I feel like I need to point out that for these people, I think -- I think it seems entirely normal to people in the legal profession to do this.
They put in a few years working for the government. They're making a lot less money than they could be making working, yes, white shoe law firm. And then at the end of it, it's time to move on, maybe they want to make more money, this time to send their kids to private school, and it seems very normal to them to just go get another job in the private sector at $4 million potentially. Many of them make millions of -- I mean some of the people in those videos now, I know, are making $5 million a year, so.
LAMB: Well, they were. I mean I know in the government, salaries are somewhere between $120,000 and $150,000.
KOLHATKAR: I don't know exactly what they are, they're still respectable salaries but I think if you're living in New York City and you're surrounded by all these fancy Wall Street people all the time that doesn't seem like a lot of money. It doesn't go that far. So a lot of them - and of course, they have these fancy Ivy League law educations and they could make -- they can make a lot more money than that and I think also, government work is just very exhausting too, it takes a huge toll.
LAMB: From your experience, by the way, you're right, it's almost impossible to prosecute corporate criminals who operate at the highest levels.
KOLHATKAR: Well, so this is where I think the story is actually really important from a policy perspective because here we are, there are almost no -- well, no senior executives were charged with crimes related to the financial crisis. No one went to jail for that, of any relevance.
You could say the same thing about the insider trading stuff. I mean Raj Rajaratnam who was one hedge fund manager did go to jail but they really did not get a lot of people. And now, we have this new era in Washington where we have a lot of Wall Street financiers in President Trump's Cabinet. And his main message to Wall Street so far is that he's going to cut taxes and then he's going to gut financial regulation.
So I think it's an area of concern. I think people need to think about it and I think this story is an important reminder of why intelligent regulation is actually really important, why it's important to prosecute fraud and crime in the white collar world.
And if you don't do that, you end up with a system that is favoring the extremely wealthy and well-connected and leaving everyone else outside and it's just not a fair transparent system.
LAMB: One last story, Michael Steinberg, the perp walk, the whole idea of being arrested by the FBI, how did they do this? And by the way, where is he today?
KOLHATKAR: Well.
LAMB: You told us earlier he…
KOLHATKAR: His conviction was overturned.
LAMB: Yes, so he's free.
KOLHATKAR: So he is a free man and…
LAMB: Is he trading?
KOLHATKAR: I actually don't know. He was looking into alternate careers last I heard. He's very wealthy, so he can do a lot of different things. The…
LAMB: How did the arrest go by, because that's an interesting story?
KOLHATKAR: Sure, yes, well, so the FBI was arresting a lot of people, a lot of fancy, rich hedge fund guys during this period and…
LAMB: And he worked for SAC?
KOLHATKAR: He worked for SAC. He was working at the time he was arrested. Oh, I guess he'd been put on leave shortly before, but. And the FBI really made a point, often these hedge fund defendants, who had this very high-priced smart lawyers, they would say they -- they would kind of know if they were possibly going to be arrested. And they'd say -- well, they'd call up the prosecutors and they'd say well, can we just come in voluntarily? We don't want the FBI storming into our Park Avenue penthouse and arresting our guy in front of his family. It's embarrassing and it's really upsetting.
And the FBI was very adamant that they did not want to treat these hedge fund defendants any differently from a drug dealer or a petty criminal because those people do not have the luxury of having their white collar lawyer call up and walk them in, in a civilized fashion.
So the FBI kind of made a point of busting in the doors of these hedge fund guys early in the morning and usually show up at 5:00 AM or 6:00 AM and there is this sort of very intense scene I described in the book where Michael Steinberg knows he's been kind of tipped off, he's going to be arrested.
And he returns to Manhattan from the family vacation in Florida and he gets dressed and at five in the morning, he's sitting in his Park Avenue apartment with his attorney and just waits, because he knows they're coming. And sure enough, right on cue, bang, bang, bang, the FBI, they came in and arrested him.
LAMB: Where did they take him?
KOLHATKAR: They took him to, I guess they call it central processing, it's a building in lower Manhattan and he gets fingerprinted and arraigned and…
LAMB: They put handcuffs on?
KOLHATKAR: They did handcuff him. They put him in a car. There was a Wall Street Journal reporter had been tipped off about the arrest and she stood on the street and videotaped it with her phone, and that video got played on the internet. So it was very humiliating for him. And considering the fact that his conviction was later overturned, you can understand why he would be pretty upset about this.
LAMB: How long have you worked for The New Yorker?
KOLHATKAR: Since July.
LAMB: What did you do right before that?
KOLHATKAR: Right before that, I was a writer at Bloomberg Businessweek.
LAMB: So when you looked back at this book, what were the important moments for you or people or devices for you to be able to write this book?
KOLHATKAR: Interesting question. Well, personally, I found it fascinating to get to kind of go inside an investigation like this. I had never become so deeply enmeshed in an FBI-SEC criminal prosecution the way I was able to report in this book, and I just found that to be really interesting. And I saw the whole process and all its flaws.
LAMB: Were you there with B.J. Kang when he was taken -- listening to the phone calls?
KOLHATKAR: No, but I was able to relieve it all through my reporting.
LAMB: How close did you get to the whole story? I mean did people let you in behind the scenes?
KOLHATKAR: You will have to read the book and judge for yourself. It certainly felt that way to me, but.
LAMB: So let's go back to the question. What was the -- who shined the light the most from your standpoint or who is the best character in the book? And I hate to use that term but I mean who is the hero for you? Where should -- as the public looks at it, who should they say, that's who I trust?
KOLHATKAR: That's an interesting question. That's a tough one. I don't know if I would boil it down to a matter of heroes or not. I think everyone -- even the people you would typically think of us, maybe the heroes like the FBI agents were flawed, they did some things wrong.
They certainly -- they were a little overaggressive at different points. You could -- you could say some people's lives got completely wrecked and kind of for nothing in the end. But to some extent, I feel like the investigators working at the SEC are kind of the unsung heroes to some extent. They do not usually get a lot of public glory and they're doing a lot of really difficult work of just regulating and monitoring the securities markets.
And we live in a world where everyone has money in the stock market. We all have retirement money in the stock market, so.
LAMB: These hedge funds though, do affect the average person investing in the stock market?
KOLHATKAR: They absolutely do because we're all in there. Our futures are tied up in the stock market and increasingly, we have two markets, we have -- we have the market for the wealthy, well-connected, sophisticated investors like hedge fund traders, and the one for everyone else.
LAMB: One personal question before we close, we're out of time, are you married?
KOLHATKAR: Yes.
LAMB: Do you have a family?
KOLHATKAR: Yes.
LAMB: Do you have kids? How old are the kids?
KOLHATKAR: Can I ask why are you're asking me this, sorry?
LAMB: No reason, I just want to know. We -- I always ask these questions.
KOLHATKAR: Oh, you do, OK, sorry do you want ask me again, then?
LAMB: No, I just want to know how old your kids are.
KOLHATKAR: Nine and five.
LAMB: And?
KOLHATKAR: No one's ever asked me that before so that's why, yes.
LAMB: Yes. I don't want to know anymore, I don't want to know where you live or anything like that.
KOLHATKAR: OK. I just -- I mean it's just no one has ever asked me about them, but -- during an interview, but that's fun, yes.
LAMB: All right. The name of the book is, Black Edge. On the cover is a shark wrapped in money. What's that from?
KOLHATKAR: It was inspired by a sculpture that Steve Cohen is famous for owning, a Damien Hirst sculpture of a shark suspended in formaldehyde, he paid $8 million for it.
LAMB: Subtitle, Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street. Sheelah Kolhatkar is our guest. Thank you very much.
KOLHATKAR: Thanks.