Wall Street’s Biggest Insider Trading Story in History

Sheelah Kolhatkar talking:

the period that I really describe in this book is sort—it was like a flowering of insider trading in the hedge fund world that the government kind of investigated and cracked down on. But a lot of that took root during the—from the mid-2000s to 2008, ’09, ’10, when they really started to crack down on it. And I think it’s really important to put it in context. I mean, a lot of this crime that I write about happened during the same period of time when the mortgage fraud housing bubble inflated, that literally blew up and led to the financial crisis, and this coincided with a period of serious deregulation in Washington. And, in fact, during many of those key years, the head of the SEC, which is responsible for policing the market and making sure it’s fair for everyone, he did not believe in regulation. The chairman, Christopher Cox, essentially said markets can regulate themselves. He discouraged SEC attorneys from bringing enforcement actions against people on Wall Street. They did not—they were discouraged from even interviewing prominent financiers. I mean, they were supposed to kind of take a hands-off approach. And look what happened at the end of it. We had this huge blow-up of crime and fraud. And, you know, I would argue that we are still paying the price for that. And the dynamic that was created at that moment led to widening income inequality, and I think that has contributed directly to the situation we’re in now.

it’s important to understand that hedge funds are driven by information. And if you’re trading in the stock market each day on a kind of a short-term, speculative basis, the better the information is that you have, the more money you’re going to make. That’s the general philosophy. So, everyone is out there trying to get good, usable information. Inside the hedge fund that I write about a lot in this book, SAC Capital, you know, they had different categories of information. There was white edge, which is publicly available information that anyone can get, like information that is in an SEC filing that a company makes—not very useful to a trader, because everyone already has that. There is grey edge, which is in the grey zone. It might be something that an executive at the company told you, but it wasn’t entirely clear what they meant. You’re not quite sure. You’re sort of—you might have to talk to your legal counsel before you can trade on that information. And then there’s black edge, which is clearly material, nonpublic information, inside information—for example, access to confidential drug trial results before they are released. And a person could make a lot of money trading on that kind of information.

there are thousands of hedge funds now, and, of course, they all do different things. And some of them are fine, and some of them are not so fine. But, really, the whole idea of a hedge fund began decades ago. The idea was that you could create an investment fund where you could hedge your investments. So, if you went long certain stocks, you could also short other stocks, which means you were betting that the price would go down, and that would kind of offset your losses if the market went down. You know, so you were kind of hedging your bets. And this was attractive to wealthy investors. And the regulators decided that if only wealthy investors were using these funds, they would give them more latitude to take risk in the market. So they could borrow more money. They could do this shorting. And it started off as this little niche thing. But it was so successful, and many of the people running these funds became so wealthy—I mean, billions of dollars at early ages.

Steven Cohen was, year after year. His hedge fund, SAC Capital, posted 30, 50, 70 percent in its early days, 100 percent. And investors were fighting to get in. And by the time the events that I write about in this book really come to a head, you know, he had only had one down year, which was 2008, financial crisis year.

SAC Capital and Steven Cohen.

ultimately, the FBI decided they were going to try and crack down on the hedge fund industry, and they kept hearing the name SAC all over the place, from different informants, on wiretaps, so they started to look into it. And over a period of several years, they used the same techniques they had used to investigate the Mob. They ended up charging a handful of people who worked at SAC.

SAC stands for Steven A. Cohen. Those are his initials, so Steven A. Cohen’s hedge fund, SAC Capital. It was a $15 billion fund at its peak, very powerful force on the market. And ultimately, the government had to make a decision about whether they were going to charge Cohen himself. And this is where he becomes, I think, sort of the man of our time, because there was this huge debate, the press was watching, a lot of anticipation: Is this huge Wall Street titan going to possibly face jail time?

unlike the low-level drug dealer who’s definitely going to jail. I mean, there was a huge debate about this. Everybody was waiting to see. And the government ultimately decided they did not have the evidence they needed to definitively prove that Steve Cohen knew this illegal activity was taking place. And that is true. They did not have a witness. They did not have a wiretap. They did not have anything that definitively showed that Steve Cohen knew this was going on, even though the circumstantial evidence looked quite bad. So they ended up charging the company instead, SAC Capital, and Mr. Cohen ended up paying almost $2 billion in fines, and the hedge fund was shut down. But he can return to the industry in 2018. And I would argue that this story is important for everyone, because we all have money in the stock market now. I mean, Americans have largely been pushed to put their retirement savings in the stock market. And what you see, through this story, is that there are two markets.

after the financial crisis, the same thing happened. We did not see any senior-level bankers even facing the possibility of going to jail. And they largely resolved the criminal activity from that scandal through fines. So, I think this has caused a lot of frustration for the American public.

people from Cohen’s world and his industry have now moved into Washington, and they are directing economic policy and regulatory policy. And this is something we all need to be concerned about. And I don’t think it’s going to resolve the frustrations of the voters who put Trump in that position. [For obama also these people are in power.]

Sheelah Kolhatkar
staff writer at The New Yorker and the author of Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street.

— source democracynow.org


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