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May 30th
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Steven A. Cohen: Genius or Crook?

borosonWarren120312_optBY WARREN BOROSON

What would you call an investor whose portfolio has risen an average of 30% a year for 20 years?

A genius?

Or maybe a crook?

Of course, he or she might be a combination of both. A somewhat crooked genius.

That’s the big question about Steven A. Cohen, founder of a gigantic hedge fund called SAC Capital Advisors in Stamford, Conn.—the SAC standing for you-know-what.

The government (meaning both the Securities and Exchange Commission and the Justice Department) suspects that Cohen has enjoyed what’s known as a “black edge”—insider knowledge. Important information that hardly anyone else has. And its suspicions seem well founded. Somebody has squealed.

SAC had owned a lot of stock in two drug companies, Elan and Wyeth—thanks to the recommendation of a 38-year-old ex-SAC portfolio manager named Mathew Martoma.

For six years, the government had been after SAC Advisors. And it seems to have found a smoking gun on a Sunday, July 20, 2008, when there was a 20-minute phone call between Martoma and Cohen himself. Martoma switched signals. Now he recommended selling $700 million worth of stock in Elan and Wyeth. He also persuaded Cohen to sell short both stocks—bet that their prices would head south. Cohen listened; SAC made a fortune on the short sales, beginning the next day. And avoided losses by also dumping the two stocks the next day.

Why had Martoma changed his mind about the two stocks? Well, apparently a scientist testing the drug against Alzheimer’s had leaked information to Martoma that the drugs had bad side-effects. The scientist, Dr. Sidney Gilman, had agreed to cooperate with the government in exchange for not being prosecuted. (Martoma was charged with securities fraud last year, and has pleaded not guilty. When told of the case against him, on the lawn of his million-dollar house in Boca Raton, Martoma fainted.)

Now, in the normal course of things, someone in trouble, like Martoma, implicates his alleged conspirators—in exchange for lenient treatment by the prospecutors. Otherwise, Martoma faces a sentence of 10 years in prison or more.

Martoma, assuming he’s guilty, hasn’t done the expected. And his lawyer, according to an article in Bloomberg Businessweek, claims that Martoma isn’t holding out for a better offer from the government, and isn’t expecting a generous reward from Cohen for his silence, either.

Eight other former or current SAC people have been linked to insider trading.

Whether the Elan-Wyeth case will lead to charges against Mr. Big himself is a question. There’s no evidence he had insider knowledge. And the case is actually complicated; SAC in effect had continued to own shares of the two drug companies. And SAC has been known for its lightning-quick trades.

Investors in SAC have begun withdrawing their money. Employees are also beginnng to leave. But Cohen himself seems confident and unconcerned.

Mr. Big, age 57, lives in 30-room, 14-acre compound in Greenwich, Conn., which has a golf course and an ice rink. He collects art, and has paid millions for various paintings. Forbes ranks him 35th in wealth among Americans.

He graduated from the Wharton School, worked at Gruntal, and did fabulously well before launching SAC. He’s known to be a generous philanthropist.


Insider trading is a tricky subject. As I understand it, if you accidentally overhear important information—on an elevator, you hear two executives say that their companies are going to merge—you can act upon that information with impunity.

But let’s assume that you obtain information illegitimately. You might act on this insider information surreptitiously, having a cousin or friend do the buying or selling. In one case, the wife of an executive told her psychiatrist something important about her husband’s company, and the psychiatrist traded upon the knowledge. (He was caught and punished.) A printer at Value Line would buy or sell before the newsletter came out with its latest data. He, too, was caught and punished.

Now, in what I like to call my long and undistinguished career in financial journalism, I’ve occasionally run into cases of insider trading. A famous investor bought a newspaper with the insider knowledge that its competitor would go out of business. A famous fund manager had told his analysts not to get off the phone with a corporation until they had obtained some important information. And I was there when an analyst phoned a famous fund manager, told him he had just had lunch with key executives at a giant company, and had learned that the stock price was drastically undervalued. (It was then that I decided to confine most of my investments to mutual funds, not individual stocks.)

Anyway, as I said, Cohen may get off and proceed on his merry way. After all, he may be innocent. But it’s good that the government has been working so hard to punish people who louse up our investment world by insider trading. It’s good that insider traders know that they may eventually get nailed.

***To receive Boroson’s column regularly, email him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .


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