Journalism in the Public Interest

From Bernie Madoff to Steven Cohen, Enabling Suspiciously High Returns

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To have one employee tied to insider trading may be regarded as a misfortune. But, with apologies to Oscar Wilde, to have six looks like carelessness.

Poor Steven A. Cohen, the powerful hedge fund manager who heads SAC Capital Advisers. People he employs just keep getting swept up in the sprawling insider trading investigation that has spanned years now. In addition to the six who have gotten in trouble for activities when employed at SAC, at least six others have been ensnared by insider trading investigations after leaving the firm. The latest arrest, of the pharmaceutical industry analyst Mathew Martoma, is the first that ties Mr. Cohen to trades the government says were illegal.

An investment manager has defended Mr. Cohen as the “Michael Jordan” of the investing world. But what if he is the Lance Armstrong?

While Mr. Cohen has not been accused of any wrongdoing, you have to wonder whether his returns have been generated not only through his trading brilliance but also through a culture of cutting corners and pushing employees to the point where they break the law. In the United States, you are innocent until proven guilty, and nowhere can that be seen more than for a man who can generate amazing investment returns.

Astonishingly, investors don’t seem to mind terribly. They added as much as $1.6 billion in new capital to SAC’s flagship fund from 2010 to the end of 2011, when the insider trading investigation was in full bloom, according to Absolute Return, an industry trade publication.

“Insider trading isn’t acceptable in our culture of compliance, and we don’t give a wink or nod to the contrary,” said a SAC spokesman, who declined to make Mr. Cohen available for comment.

At least some big institutions have begun to contemplate thinking about perhaps withdrawing money from Mr. Cohen. Congratulations. What took them so long? Citigroup’s private bank has told its clients not to put in new money, according to Bloomberg. What about getting their clients out? Why hasn’t bank given that advice before this?

A Citigroup spokeswoman explained that the private bank “typically puts funds on watch when there is significant news around a company; that is not a recommendation to move or keep money in the fund.” She declined to comment on Citigroup’s relationship with SAC.

Blackstone is thinking hard about it, according to reports. Think think think. That firm declined to comment.

Several high profile funds-of-funds still have money with him. Société Generale, the big French bank, decided to redeem its money only after the latest allegations. Given all that we know, how in the world do major institutional investors still have any money with Mr. Cohen?

The biggest, most sophisticated investors certainly put enormous amount of pressure on hedge funds. But almost none of it is about ethics and clean culture. It’s about performance. A fund that runs a few ticks lower than its peers for several months running can get put out of business.

But investors seem to demonstrate little interest in whether the person is ethical and trustworthy. Shouldn’t their threshold be a wee bit higher? After all, these institutions are mainly investing other people’s money. Investing money isn’t quite a sacred trust, but it’s a trust nonetheless.

Many institutional investors have so perfected the art of looking the other way that they make bystanders on a New York City subway platform look like models of social responsibility.

The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.

This is a long-standing Wall Street custom. Citigroup and JPMorgan played handmaiden to help Enron commit fraud, according to the Securities and Exchange Commission. The two banks didn’t admit or deny guilt in settling with the regulator.

There is a point where willful blindness turns to complicity. Investors profit from any added juice that SAC might gain, whatever its source. And if Mr. Cohen were to face charges, they would pay no price.

Major banks and investors around the world shoveled money to Bernard L. Madoff despite doubts about his purity. Some thought that Mr. Madoff was using his brokerage firm to front-run. In other words, they thought he was cheating on their behalf, not ripping them off. And that was an enticement.

The arrests and bad trades are finally hitting close to SAC, but there is nothing new about the questions surrounding Mr. Cohen’s business. He was always one of the most aggressive traders on Wall Street. Speculation that he may have tapped into legally dubious information wasn’t just whispered in private but splashed across the pages of The Wall Street Journal in a 2006 profile that raised questions about whether his firm traded improperly.

In the firm’s defense, a person familiar with the firm points out that two of the employees charged with insider trading started their scheme before joining the fund and have admitted taking extraordinary steps to circumvent SAC’s procedures while another was trading in his personal account.

“We expect our people to play by the rules and act with integrity,” the SAC spokesman said.

The firm boasts more than 30 legal and compliance officials in addition to a dedicated technology team devoted to compliance, says the person familiar with the firm.

But given how forgiving institutional enablers are, one wonders why Mr. Cohen even bothers.

madeleine gallay

Dec. 12, 2012, 5:02 p.m.

Surprised that “it looks more and more like” is a prelude to an article. Slightly slurring Stevie Cohen on “it looks ...” ?



Good article…however the institutional complacency you reference may be because of high redemption fees to pull out money.  Some Hedge funds have been known to take a 20% cut.  Or, as an investor you may be contractually obligated to request redemptions in certain time periods and be blacked out in others.

Interesting opinion piece but its telling of opinions that ‘most’ main street folks already understand to be true of investors.

BTW I have tried to get to SAC Capital Ad visor’s home page and can’t find one. The only success is to career opportunities. My conclusion is they are available only to the privileged.

“Astonishingly, investors don’t seem to mind terribly ...”  It’s called greed.

To further Dave’s point, it’s not that investors don’t mind, it’s that they seek out and encourage illegal activity.

When you catch one of Bernie Madoff’s “victims” in an unguarded moment, you usually hear that they assumed his fund was illegal, but they didn’t know the details.  Because of the rumors he was doing something shady, he had requests flooding into his office by people (some of whom I’ve spoken to personally) who figured he was “beating the system” in some highly illegal way.

I’m not necessarily blaming the customers or trying to absolve the fund managers, but at the end of the day, these people are responding to market pressures and see the victims and damage as irrelevant.

And after decades of watching the government side with the banks on every single issue, it’s not hard to see why the “underground,” rebellious attitude would catch on in finance.

You know, I’m out here struggling to make it on SSDI where they require you to be almost destitute to get things like food stamps and Medicaid, and you are required to not have any assets that you possibly profit off of, and then you read a story like this.  Why these criminals are not doing hard time in club fed is beyond me and it angers me that these ” investors’ can skirt and break the rules and face no punishment for what they do illegally.  On the other hand if I were to grab a handful of cash out of a bank teller’s drawer and attempt to run off with it the judge would tell me what a bad person I am and then throw the book at me.  Justice is not applied equally in america and on top of that often things like the above story are allowed to go on for years until some district or state attorney even thinks about investigating it.  The maddov case is a good example of that.  How many years did bernie get away with what he did before someone finally decided to investigate it.  here’s hoping that the goverment investigation will begin in earnest after this pro publica story!

clarence swinney

Dec. 13, 2012, 1:02 p.m.

added 8 years to Medicare solvency
recovered 10.7 B in crackdown on fraud
preventative services to 47M
800,000 youths added to parents insurance
unemploy=8.6% in 2011—5.4% in 1996

“I’m not necessarily blaming the customers or trying to absolve the fund managers, but at the end of the day, these people are responding to market pressures and see the victims and damage as irrelevant.”

Why aren’t you blaming them? If they were pawnbrokers receiving stolen goods, they’d be in jail. Instead, since so much money is involved and so many of those involved are in the ruling elite, they get off scot free.

clarence swinney

Dec. 13, 2012, 4:57 p.m.

Tax Paid Federal-State-Local 2010
Lowest 20%=16.2% of Income
second 20%=20.7%
middle 20%=25.1%
fourth 20%=28.5%
next 10%=30.0%
next 5%=31.1%
next 4%=31.3%
top 1%=30.
Total=28.4% (#3 least lowest in OECD)
Bottom 90%=27.9%

So an investigation means automatically guilty. If I say the author of the article is a crook, he is a crook and his mother should avoid any contact with him.

There are probably investors who think the SAC dude is a crook and still invest with him, but until there’s proof, investors looking for a good manager may just invest in him because of a good track record.

By the author’s view, nobody can make any money ever, because high returns = bandit. So Steve Jobs, Bill Gates, Warren Buffet, any movie or sport star should all be arrested immediately since there’s no way they got their returns without cheating.

I actually do believe Cohen has a pretty good chance of being guilty, but the article reads like loser jealousy. I guess we should avoid reading anything by sucessfull journalists now since there’s no way they could have made more success than mr. Eisinger using honest means.

Thank God Madoff and Cohen are neither Arab nor Muslim. Had they been could you imagine the racism and hate that would have been directed at 2 billion Muslims.

You Americans deserve those Madoffs and Cohens. I hope they suck the marrow out of your bones.


Honor, morality, faith and integrity
Are the glue which holds society in place.
Pornography, hate, jealousy and greed
Cause man to be plagued by disgrace.

Night and day we’re informed by headlines
Which seem to give evil added time.
Always at war killing one another
In our world full of violence and crime.

Be thankful for the upright among us
Who desire to obey God’s laws.
Repentant when wrong they change their ways
Serving the rest of us despite our flaws.

Honor, morality, faith and integrity
Are what life’s heroes are made of.
Defending what’s right; confronting what’s wrong
Propelled by achievement, and love.


What Satan has planned for our harm
Integrity will transform to good.
Adhering to morals gives us peace
Teaching us to respond, as we should.

Sometimes we must go against the flow
Questioning what our shepherd’s may say.
For they are not God, only human
And for their integrity, we pray.

Though faith we can stay undiminished
Keeping ourselves entire and whole.
Avoiding human hate and mistrust
While struggling to preserve our soul.

With honor we obtain uprightness
And by love and compliance we gain grace.
Integrity gives us proper goals
Improving the standard of our race.

Those who laugh at the straight and narrow
Will not hear God’s answer to their cry.
Those who yearn to earn their integrity
Must not steal, persecute or lie.


So perfect is nature, though not by man
It’s the brush of our Master that paints the land.
The sun comes up and sun goes down
As in every direction God’s wonders are found.

The tide comes in and the tide goes out
Our faith in eternalness is what life is about.
Contentment depends on which path we walk
By daylight or darkness; our faith is our rock.

Our confidence and trust in a higher power
Helps guide us through every moment and hour.
Fidelity to one’s promise and observance of law
Lets our Lord know we heed His call.

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Derryl Hermanutz

Dec. 14, 2012, 8:32 p.m.

The laws of finance are and always have been put in place to make the peasants believe “free market justice” is at work.  In fact “insider trading” is just America’s rulers doing what they have always done: combining and colluding to funnel America’s wealth into their own pockets.  Those who gain wealth and power in this way are “the government”.  “The government” does not prosecute itself for violating the laws it made to be applied against the governed, the pissant peasants who steal nickels and dimes.  Commenter Robert calls criticism of this system, which is plutocracy, not republicanism, “loser jealousy”.  Corporatists who are strong because they work together have always plundered individualists who have no personal or political power but who hope “justice” will protect them against lawless predation by gangsters.  I’m not jealous of plutocrats who got together to steal the country.  Rule by power is the way of the world.  I just hate lying hypocrites who steal for a living but want to be known as morally upright “leading citizens” of a republican nation.  If people want to be honored for exercising their power to exploit and get rich, let them stand up and say so.  They will attract lots of allies.  Just don’t pass yourself off as a brilliant free market competitor when power and political manipulation, not skill, is the key to your success.  Read long term Senator and businessman Richard Pettigrew’s 1922 book, “Triumphant Plutocracy: The Story of American Public Life from 1870 - 1920” (available free online) for an insider’s description of America’s business and governmental history.

hey, robert, You must not have noticed the start of the article where it said that at least six employees of one firm were tied to insider trading.  These people have been ripping off the general public for years now and it’s time for it to stop!  The people listed in the article have all been tied, in one way or another to very questionable practices and while i’m not going to not give them the presumption of innocent until proven guilty in a court of law, the time to investigate and indict is long past due.

One wonders if it is time for a serious discussion about modifying, or perhaps even doing away with, the corporate form.  It seems that in all of these corporate scandals, you have executives and their minions committing acts that the average person can identify easily as unethical, fraudulent, and otherwise against the law, but because they commit these crimes within the corporate construct, these issues suddenly become fuzzy. 

Corporations as a vehicle have been used more and more as shields rather than actual investment vehicles.  Imagine how many of these rather crooked campaigns investors would shovel their money towards if they thought they would be liable for their bad acts?  Imagine how many publicly traded companies wouldn’t receive funding if, for example, a whole company could suddenly become delisted for unethical and egregious acts?

It is also the irony of ironies that the people who trumpet “personal responsibility” in our society are the first to hide behind the corporate shield.  Indeed, Mr. Blankfein, you must be doing “god’s work”, because you certainly aren’t working for society’s benefit.

I think Jessee trying to put a little distance between him and some of the hedge funds he’s done short and distort articles for. Fortunately he’s probably to small a fish for the feds to come after….

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)