[Music] Steven A Cohen went from a smalltime options Trader to one of the most successful hedge fund managers of all time Steve Cohen is the legend on Wall Street he's amassed one of the Great American fortunes he founded sa capital and started generating some of the best returns out there his track record his performance were amazing and everybody wanted in but how did the king of hedge funds do it how does anybody make 60% a year well the feds are asking that right now behind the multi-year federal investigation of insider trading at many Wall Street hedge funds the deal looks phenomenal there was a large network of insiders at a lot of these funds and the trail that led from Traders the phone rings and says Jeff is going to upgrade Amazon at 6 minutes 30 seconds later I made about a half million dollars to information Brokers they told me they were going to arrest everybody to SAC Capital rested fund manag doesn't matter who you are rules are rules and the law is the law tonight on front line to catch a [Music] traitor November 2010 a team of reporters at the Wall Street Journal was finishing a major story about a yearslong government investigation into insider trading on Wall Street that Friday we had been just working so hard getting ready to put the story out and we knew that it was going to like really be a game Cher the article was published late that night on New York's Upper East Side a Traer Donald Lil was alarmed that his former employer hedge fund giant sa Capital was named When Donald long wheel read this article on a Friday night uh he panicked because it became very clear to him that they were homing in on him and some of his colleagues Lil scrambled he pulled apart several of his computer hard drives containing incriminating evidence and recounted what he did with the remains in a recorded conversation with his colleague Noah Freeman I put him into four separate little baggies he told Freeman and then I go on like a 20 block walk around the city and through the in the back of like random garbage trucks both Don long wheel and Noah Freeman had worked at sac and they both ended up um pleading guilty after the government caught them on tape two former sa portfolio managers were named yesterday prosecutors alleging what many have speculated for years insider trading at Stevie Cohen's sa Capital the arrests were a big shock but not a surprise to many Traders on Wall Street listen if you walked up to a typical Wall Street Trader and you would say hey is there Insight trading at sa Capital going on after the guy falls on the floor dying of laughter will get up and say yes okay that's he dies of laughter because it's a naive question it's a naive question I mean that's their reputation the man at the top of sa Capital founder and CEO Steven A Cohen has been the subject of numerous articles in reports he is not speaking publicly on the issue of insider trading and he declined frontline's requests for an interview but in 2011 he was deposed for 2 days as part of a civil lawsuit brought against sa the deposition video was obtained by Frontline the way I understand the rules on trading inside information it's very vague are you familiar with rule 10b5-1 uh no um no uh not that you'd have to explain it to me rule 10b5-1 is the Securities and Exchange commission's principal regulation prohibiting insider trading it states that no trades can be made on the basis of what is called material non-public information proprietary information that can move a company's stock do you have an understanding about whether when in possession of material nonpublic information you're ever allowed to trade um security you know that's not the way it's explained to me the way I understand the law is that it's very vag so it's an interpretation of a law I think every hedge fund manager knows what material nonpublic information is um and if they don't um I sure hope they're not managing your money or mine so your understanding of the SEC rules on trading on Insight information is it do not preclude unequivocally trading while in possession of such information I'm not aware of that you don't know one way or the other no CBS news on Wall Street mow Jones Industrials up 1.96 to close at 84010 Steven Cohen came to Wall Street after graduating from Wharton business school in the late 1970s Steve Cohen is the legend on Wall Street and he's widely admired for the thing that people on Wall Street generally admire which is making a tremendous amount of money trading he's amassed one of the Great American fortunes almost entirely on his own steam as a Trader Steve con developed a reputation as having this sort of gifted ability to read the tape and to trade stocks he was at a firm called gruntle which is kind of a midling brokerage firm on Wall Street and the environment was very much Wild West eat what you kill you got to keep a large percentage of your profits which wasn't really possible at a lot of other firms and that was sort of his formative period that's where he learned how to trade if you talk to people on the street they would say that's the type of place where you learn about insider trading in all its all its capacity rental as a firm encountered a number of regulatory issues there were people sanctioned for insider trading there a whole bunch of issues with the management of the firm and it seemed like no one was even paying attention to what the Traders were actually doing by 1992 looking for a bigger stage to play on Cohen left gruntle with a small fortune and invested several million of it to start a hedge fund called SAC Capital he would help Pioneer a new kind of hedge fund hedge funds have been around for decades since the' 40s but the '90s is when they really took hold because a lot of guys decided they did not want to put up with the bureaucracy and the politics of big investment Banks they thought they were smarter than everyone else and that they could make more money if they just went out on their own it was another wild day on Wall Street the Dow Jones Industrial Average took off at the opening it's important to remember that hedge funds weren't designed originally to outperform the market while swings and stock prices become almost an everyday event they were meant to be this uncorrelated part of your portfolio they were going to be hedged so if a rich person wanted to protect some slice of their assets from sort of wild swings in the market they could Park some of their money in a hedge fund they always existed they were just much more sleepy before I would say 1998 99 and that's when they started exploding there were a number of funds that sort of had high flying big returns so suddenly everyone thought okay you know hedge funds have juice they're going to beat the market they're going to make me Rich and the expectations among investors changed and people started to think this is normal but among the new breed of hedge funds Cohen's returns stood apart and so did his fees he had an incredibly aggressive fee structure the standard in the hedge fund industry is what's known as 2 and 20 that means you charge 2% of the assets you have under management and 20% of any profits Cohen charged 3 and 50 meaning 3% of assets under management and 50% of any gains and the reason he could get away with it is really really simple his track record his performance were amazing and everybody wanted in in his first s years of managing money Cohen had only three losing months the worst a 2% decline he consistently trumped the market by trading in and out of stocks quickly Cohen's strategy was really based around what people like to call an information driven hedge fund so he was all about trading around say the quarter Intel exceeded wall Street's earnings consensus by three comput a loss in the second quarter with reeven when a company announces its quarterly results stocks will either go up or down based on that company's earnings 52% from a up pre market a new phone coming a new iPad coming that June quarter number was scary and Cohen's strategy was to get as much information as possible to have an edge to be able to you know make money either on the upside or the downside depending on how a company's earnings come out people were throwing around this term Edge a lot which essentially means you know what's your information advantage in the market what do you know that other people don't know people were talking about this very openly without any shame you're constantly trying to get Edge if you have Edge that means there's a reason that you know that no one else does legal or illegal to buy the stock attorney Duff worked at the gallion group a hedge fund made famous by its founder and CEO Raj rajaratnam it's all about getting information they call it trading stocks but it's really trading information like that's that's what we were doing it was3 so you were constantly trying to make contacts um of people who could help you make more money so I was expected to go out two three nights a week you know the tab's always picked up there was not a restaurant I couldn't go to a club I couldn't go to which is great for a guy in his late 20s and New York City and you know the city was mine it was just there for the taking and and and I took but the purpose was for me to develop relationships and get information for Traders like Duff and those at other funds like sa the more contacts the better you would have one guy who knew what was going to be on the cover of Barons 2 days before it came out and you'd have another guy who would be able to call you and say hey a billion dollars is coming into the market in 2 hours and you might go visit a friend in in the cape and find out that his father is a doctor and then all of a sudden you're thinking maybe he knows something to do with this drug that's trying to get approved by the FDA so I started to realize that almost every relationship that you have could be you know information that that will help you formulate a trade hedge fund Traders also exploited the fact that they were very popular with stock Brokers on Wall Street reason why Wall Street loves these guys so much is because they're trading every day so the market activity they generate is immense and as they're trading so much they're giving the Wall Street firms commissions as the Wall Street firms are getting commissions guess what they give the hedge funds their best information and more importantly they would get the information first the more commission you pay you know the better service you're going to get in the industry it's known as a first call you need that first call and you're going to pay for it if you're paying the street 30 to $50 million in commissions you're going to to get people's first call recognizing that Cohen was willing to pay Brokers big commissions the rumor about Steve Cohen was always that he paid exorbitant Commissions in order to be the biggest fayer on Wall Street so that he could get Advanced word about upgrades and downgrades and I've heard many many stories of Bankers saying to their Traders if Stevie calls you drop everything he is our best client Banks because you give them so much trading commissions tell you about Market information before the rest of the world now that has been considered legal how in the hell is that legal you know markets are based on rumors all the time you know where do you draw the line between me misappropriating getting someone to tell me what Apple's earnings are or my sources in the market are saying Apple's going to knock it out of the park you know what I'm saying it's a it's a market people talk but the bottom line is Sac because of its size and how much it trades gets first dibs on that [Music] information over a 20-year lifespan SAC Capital became a giant among hedge funds and Cohen himself amassed incredible wealth including a sprawling 35,000 ft² mansion in Greenwich Connecticut a $62 million beach house in the Hamptons and multiple apartments in Manhattan including this $115 million Midtown duplex Cohen also assembled one of the most valuable private Modern Art collections in the world and he has given tens of millions to charity in 2002 Cohen sent out Christmas cards where he posed as king Cohen by 2008 his personal Fortune reached $8 billion beating the stock market year after year Cohen's returns even with his first calls seemed too good to be true he takes 50% of the profits and then he returns even after that like 30 40 50 60% so in order for him to return to you a 50% profit he has to make a 100% he has to double money yes and it averaged for many years 30% after expenses after is to deliver 30% to his clients yeah that's overtime is huge means he's making more than 60% on the money he's managing now you know how you go from 25 million to to 9 billion how does anybody make 60% a year well the feds are asking that right [Music] now the government's investigation of SAC Capital has taken a long and circuitous Route 7 years ago it began focusing on a New York City hedge fund the gallion group and its CEO Raj rajaratnam rajar ratnam was another Wall Street Legend he reigned over a very successful but relaxed Clubby and freewheeling office he was very charismatic he was very bubbly and you know it was almost as if when he walked into the office someone was dropping Rose pedal in front of him and you know was like the the homecoming queen and everyone loved him but turny Duff remembers getting a hint of what was really going on at gallion one day while Manning the phones in rajaratnam's absence I remember sitting there on the desk one day and Raj Raj rotam was out and the phone rings and I'm like gallion and the guy's Whispering or something and I'm like hello gallion and he's like is Raj there I'm like no so he's like he's like Jeff is going to upgrade Amazon in six minutes click and so I'm sitting there I'm like oh my God what do I do like because if I don't buy Amazon and the Stock's upgraded and the stock goes up they're going to find out but if I do it you know isn't this illegal what should I do and so I sat there for five minutes sort of trying to to make a decision and and I ultimately ended up buying 100,000 shares of Amazon 30 seconds later I made about a half million dollars um and I remember sitting there saying wow I'm like if I got this call every day I'd be a great Trader too okay you know I need my own Mr whisper Duff left the gallion group in 2001 5 years later a lawyer at Investment Bank UBS was pouring over some trading records I was in the litigation department at UBS and as part of that function I was the internal investigations coordinator so when a matter came up that was suspicious it would land on my desk and what happened was this hedge fund was flagged by compliance John moon was alerted to a hedge fund set in a capital suspected of violating rules regarding what's known as friends and family money there were two parts of this hedge fund fund that had the public investors money and there is the fund that had the so-called friends and family money and it appeared as though this hedge fund was allocating trades in a way that the friends and family would get all the winning trades and the public money would get the losers and I started to look into some of those trades and it also appeared to me that the timing of at least one of those trades was more than fantastic so it was determined that I should go down to the SEC and Report the matter but it was the identity of sedna's owner that piqued the interest of regulators sna was run by rengan rajaratnam and I said to them by the way um you know rengan rer ratnam is the brother of Raj Roger ratam who runs gallion and that got their attention the Securities and Exchange Commission suspected that rangan was getting Insider tips from his brother Raj investigators requested Raj rajaratnam's records and in his instant messages found recent Communications between him and a woman named roomi Khan a well-connected Silicon Valley executive who once worked at Intel Corporation KH was someone familiar to the FBI this person was what's called known to the bureau this person had been involved in insider trading in the past and they were punished no sooner they came off probation this person was engaged and involved in insider trading so the SEC had their eyes on this person right they had committed insider trading been caught been sanctioned and then were back on the street and so so now the question is how are we going to approach this person to get Khan to cooperate an FBI agent BJ Kang was sent to Aon California to confront her at home we try to initially do most of the talking we we tell them we're we're not just here to tell you that you're in trouble I want to help you make it clear to that person that you know this isn't going to go away Kang told her what the FBI knew that she had passed valuable inside information to Raja ratnam the message that we want to get across is this is a serious situation you know your life is never going to be the same again after a 2-hour meeting roomy Khan agreed to cooperate and become an informant for the FBI in New York agents had been looking for other potential informants among rajaratnam's employees we spent months surveilling people from their home to the subway to work followed them on their brakes listened to what they had to say say who they were speaking to so that we could learn as much as we could about these people one of those people was David slain a traitor who once worked alongside tney Duff at gallion David slain was one of the most feared people on Wall Street and he's he's a big guy very intimidating and there wasn't a personality bigger on Wall Street when it came to trading in June 2007 FBI agent David shavs and his Squad moved in and on the given day when we felt that the timing was right we would get behind that person in a Starbucks or Duncan Donuts and when the clerk would ask how do you take your coffee we would answer for him Two Sugars and cream please come with us we'd like to speak to you and what was his reaction at that moment stunned slain was stunned and flipped he soon provided critical insights into Raj rajaratnam's Inner Circle he had an amazing Rolodex he had a lot of connections and a lot of it turns out came from people that he went to Wharton business school with so the people he went to Wharton with some of them became Executives and big companies and Consulting companies and he was still friends of the guy who worked at Advanced Micro Devices AMD so he continued to sort of cultivate these people some of them he actually had real friendships with the FBI continued to gather more names and when agents Carolyn shavs sat down at FBI headquarters to compare notes they realized there was more corruption out there than they had suspected as the gallion case expanded we realized that they had a large network of of insiders and and other funds that were willing to engage with them how large significant was we're talking uh 10 funds 20 funds it was a lot of funds it was a it was a lot of funds what did you say amongst yourselves what did you you think you were on to here we we likened it to the first Jaws movie that we're going to need a bigger boat this was a bigger shark than you bargained for it sure was sure was beginning in late 2007 the FBI obtained authorization to tap the phones of gallion Traders including Raj rajar ratnam hey Raja hi Adam over there ah bit better um listen now I talked to Kamal last night it was the first first time federal agents had used a wir tap for an insider trading investigation deal looks phenomenal to him in the past they did it for Mafia guys they did it for drug dealers obviously terrorism but since the the wiretap Act was passed in the late 60s that was basically it now we've got them going after White Collar criminals with wir Taps said nine book values 18 they approached it as if they were going after the mob okay how's the market treating you today h i baby treats a diaper one of the riches of wire intercepts is the freedom that they they used in and talking about uh trading and this cascading flow of riches is still being uh sorted through today but remember when guys are talking about stocks all day long um it's not easy to decipher what may be inside information if you will so my personal submission is we've probably missed a lot more than we captured hello hey good morning Raj hi good morning Joe how are you he good now positions are the same so I just want to find out what you guys are thinking don't have any number from last week I just wanted to know whether you got any update on synaptics because it's a large position for us about $4 million of uh cancellation on Notebook Roger rotam sources range from everyone from you know lower level company employees to fellow w W Street Traders there was this dynamic character named Danielle Chi who was a hedge fund manager who considered herself a seductress Danielle hey Raj he baby how are you I'm py she had an affair with an IBM executive and he was giving her inside information about the computer company I'm a chick in this business with a reputation of knowing IBM but the most shocking figure in the entire Insider investigation was rajat Gupta gupto was one of the most respected businessmen on the street a board member of Proctor and Gamble American Airlines and Goldman Sachs Gupta was sitting on a call in October of 2008 in the middle of the financial crisis hearing how Goldman Sachs was going to get A5 billion investment from Warren Buffett arguably the most famous investor in the world and here was roget gupa had that information secretly and what does he do when the phone call ends he hangs up the phone he calls his friend the hedge fund manager Raj Roger rotam and says you're not going to believe what's happening Buffett's getting an investment into Goldman Sachs so what does Roger rham do he loads up on Goldman Sachs stock and when they announce it that evening he's able to make a lot of money Buffett's Burkshire Hathaway is now saying it is buying a $5 billion stake in Goldman billion St surging hours it is already this is a huge surprise Warren Buffett is buying a steak in Goldman the next day Raj gets on the phone with one of his traders in Asia and he's so proud of himself hey he buddy how are you so big drama yesterday but I got a call at 358 right yeah saying something good might happen to [Music] Goldman prosecutors alleg that Gupta had a financial interest in passing Raja ratam Insider tips he was convicted on insider trading charges but is now appealing Raja ratnam was convicted and is serving an 11-year [Music] sentence there's a picture I've seen of you with Raja rutnam under arrest put me in the moment there are two sides to that where this was a culmination of the amount of work that we put into it um but the other side the bigger side for me was that based in part because of the gallan investigation we still had tremendous amount of work to do so it wasn't we made the arrest now it's over it was we made the arrest okay now we [Music] continue the FBI refocused their investigation informants had pointed them toward independent research firms known in the industry as expert Networks well a number of Traders have said to me that everyone in the business used expert networks that basically you weren't doing your job if you did not talk to expert Network Consultants please enter your conference code now there are about 40 expert networks operating Nationwide I think pretty volatile independent of the Traders and with almost no regulation they can act as matchmakers putting employees inside companies on the phone with big investors like hedge fund portfolio managers that sounds good all right thanks all right now there were rules and even the expert networks knew that there were rules as to what the public company employees could and could not speak to money managers about so you might be able to give a broad view on say a product that your company might be developing but you can't tell the portfolio manager you know what the upcoming quarter is going to be and of course these Wall Street money managers they wanted as much information as they could possibly pump out of these public company employees [Music] so you had a lot of hedge fund guys calling up middle managers at manufacturing equipment firms asking them about their orders or their pipelines or how many trucks are in your parking lot they had uh portfolio managers talking to doctors researchers at drug companies to explain about the development of a particularly hot new drug then you had the hedge fund investors paying a lot of money to these expert Network firms who would then then pay these consultants for notebooks it's basically about 65 expert Network firms charge as much as $5,000 for an hourong phone call large unfor that might some hedge fund clients paid as much as a million dollars a year what's going on the hard drive world are you with that kind of money in play expert networks were under pressure to deliver actionable information million expert networks were the sort of middleman that misappropriated the information directly from the company to the uh to the to the hedge fund Trader the hedge fund Traders paying a lot of money you know they they want to know more than theoretical and sort of you know intuition they want to know what could move a stock they don't want just punditry they want hard facts and they want inside information that's what it leads to it led to that in many many cases expert networks perform a very legitimate function in the industry they were also used for inside of trading and we learn this because uh we use Cooperators uh to join these networks and we recorded these telephone calls this is James uh James good morning this is Carl oh hi Carl how you doing I'm doing fine in 2009 the FBI had an informant pose as a hedge fund manager and call an expert Network in Mountain View California primary Global Research walk me through how it works so do you give me a list of contacts you will get information from our website the informant is speaking to a pgr vice president James fleschman who explains how the service works and then we'll set up the call for you we just try to provide anonymity to some degree for the for the experts that's just to protect them yeah you know we have people from a lot of public companies fleshman also explains how to hook up with one of PG's better experts generally what you want to see with these experts is that you know people talk to them and then they check back with them you know a couple months later so there you know there's a pattern that that she's you know providing information that that's useful and I see a little bit of that in an interview with Frontline fleshman described how pgr tried to protect itself individual Consultants that you were linking up with the hedge fund managers were asked to sign an agreement by your company right and that agreement stipulated what exactly so it stipulated that they couldn't talk specifically about their own company they couldn't give out proprietary information about their own company and why was that agreement um important wellc because there's security laws U you know that that prohibit that type of information being exchanged but in a manuscript fleshman shared with Frontline he admits this kind of exchange was inevitable you wrote that it it occurred to me this is your writing in in an unpublished Memoir uh it occurred to me that over the course of these calls that experts May at times have been talking about things they should not have been it occurred to me well I was aware of the fact that it was possible that that they could be disclosing information that they shouldn't have been but there were no there were no specific instances that I was aware of but but you did say I mean not only that it was possible you say you wrote uh it was bound to happen from time to time so you were aware that this was not just possible but was likely no I wouldn't say that well you said it was bound to happen I'm quoting you right given the volume of calls and the nature of the investment community's thirst for information it was bound to happen okay yeah if you have 10,000 calls you know is there going to be is is a consultant going to give out a piece of information um that they shouldn't you know is that going to happen the probability is yes it will it will happen happen that someone will talk about something that that they they shouldn't if if you have 10,000 calls blman insists he did nothing wrong but the FBI didn't only record Flashman agents also had a wir tap on PG's private conference line hello hey wi how are you the woman speaking is Winnie J a Taiwanese born Stanford Graduate jaia was a Silicon Valley contractor who made more than $200,000 as a pgr expert consultant Winnie jaia was one of these Consultants very well connected inside the technology World especially at um companies that operations in Asia so what have you been hearing from your friends um down broke Nvidia wow she had worked at Nvidia so she had a friends there so um she maintained the Friendship so's okay but everyone else is cutting orders yeah ja was Consulting for an Sac Trader named Noah Freeman any other updates how is Q4 looking Q4 utilization probably Dr to low 18 Freeman shared Winnie's tips with his colleague Donald Lil and these hedge fund guys are making a ton of money off Winnie she was someone that you know would demand payment you know she was kind of a described as a high maintenance person she would message them and she'd say uh you are you guys going to pay say yeah sure we're putting the checks in and then she would say oh no Cooks need more sugar I'm going to need more sugar than this and Noah told his secretary at one point to get a $500 gift certificate for a nice women's clothing store and to send it to her as a a thank you and so they send her the the the U gift certificate and it gets sent back returned don't want it what do you want um she wants um $500 gift certificates to The Cheesecake Factory and then uh she wanted live lobsters I think what's interesting is how many Hoops people go to to get the information I mean you would think some guy from SEC Capital would say you want a lobster you know off you know what I'm saying but no she got the lobsters because she was giving him what he needed which was inside information so for for reue fo 2 million Freeman says that over a 4-year period he made5 to10 Million by trading off of Winnie J's information that's all I have okay that's very helpful Winnie by May 2010 the FBI was ready to move in I stopped to get some lunch at a Subway sandwich shop I walk in and there's a couple guys in suits and these two guys turned out to be FBI agents they played recordings for me and they told you what they told me they were going to arrest our clients they were going to arrest our Consultants they're going to arrest everybody Flashman served 14 months in federal prison wi jaao was sentenced to 4 years based on Noah Freeman's profits Freeman on the other hand began cooperating with the FBI and has not been sentenced yet in November 2010 The Wall Street Journal broke the pgr story sending Donald Lil on his frantic early morning effort to destroy evidence 3 days later the FBI raid two other pgr clients raids come on the heels of a weekend report in the Wall Street joural close ties to SAC Capital by Capital Management and level Global investor that the US attorney in Manhattan arrested members of the expert Network firm primary Global Research and we wondered when Federal prosecutors would get around to charging hedge fund managers informant Noah Freeman had led the FBI to his good friend and former best man Donald lanel he also spoke openly about life as a Trader at sa he gives a laser sh sharp view of what life is like at sa um he tells the FBI that to do business and succeed at sa it was understood that you give material non-public information the way Sac works is that these Traders operate in pods and they're very independent there's not a lot of oversight and if Cohen likes one of your ideas and puts it in his portfolio then you get a percentage of his profits as well so if you were a cynic you would say the incentive for people at sa is to do whatever they can to make money and Cohen doesn't have to know about it he can be insulated from the source of people's ideas but in March 2013 another arrest Michael Steinberg an Sac portfolio manager very close to Steven Cohen Steinberg's been at Sac for 10 years you know trading mostly tech stocks and is considered a very very uh trusted confidant and source of information to Cohen he rose through the ranks he was he was a trusted sort of arbiter you know Cohen would go to him to kind of make sense of varying opinions about stocks investigators believed that through Steinberg they had caught Cohen selling an $1 million stake in Dell computer based on illegal inside information the government says that Cohen received an email that said I have a source inside Dell that's giving me information that the quarter is going to be bad what Cohen's lawyers have said is that he did not read that email before he sold Dell stock he was out at his beach house in the Hamptons that day when the email came across his screen and he just didn't read it Cohen's lawyers say that he sold his Dell shares because another sa Trader he relied on was also doing so no charges were brought against Cohen Steinberg pled not guilty to insider trading and was convicted into member 2013 he currently awaits sentencing but now there's another case focusing attention on Cohen and SAC Capital you ever see Mr Cohen sa portfolio manager Matthew martoma is accused of using an expert Network to obtain valuable inside information through an expert Network Maroma cultivated a doctor who was involved in the clinical development of a a very important drug for Alzheimer's that was being developed by two companies Alan and WTH WTH is writing up its latest prescription for investors we actually have six projects now in Alzheimer's disease two of which are in clinical trials collaborate with Elon on those you're collaborating on those so the help with the drug testing Elon and wyth had hired a University of Michigan neurologist named Sydney Gilman and through an expert Network martoma had developed a relationship with Gilman who was giving him all sorts of information Elon up $29 the company and its partner Wyatt have started Advanced trials for their Alzheimer's disease treatment initially the news looked good the trial's promising Wyatt moved up $23 to $58.41 there's great optimism about the success of the drug and over the course of 2008 sa built up a huge position that was really really bullish on Elon and wyth and inside sa there was a there was a thought that it was just too risky to be exposed to those two companies heading into the trial announcements there were several analysts and Traders who felt very bearish on Elon and wyth and they could not understand why martoma and Cohen were building up these pretty substantial unhedged positions and uh Cohen would say well martoma knows a lot about this martoma uh told Cohen that he had the greatest conviction in the stock and Cohen said he's my guy and they stayed along the stock in Santa Rosa California a pharmacist and private investor Greg cus thought the news looked good too he had purchased more than $1.2 Million worth of Alan shares so they had a first trial on a drug and that looked promising to you and that contributed to your decision to buy more shares yeah I thought that that's was was really what was really going to drive this stock to levels that would make me and several other people happy and what did that mean to you when you uh learned that Sac had taken a large position I thought that that was a good sign to see them pumping money into it you'd think to yourself wow I got ahead of the curve here um I'm with the big boys now so this looked like a good thing but unbeknownst to capus nearly 2 weeks before the drug second round trial results were released to the public the government claims Dr Gilman leaked the results to martoma in the days before the results of the clinical trial are due Maroma allegedly gets a PowerPoint from Dr Sydney Gilman revealing some really bad news about these drugs martoma calls up Steve Cohen and the only people in the world who know what happened on that conversation are martoma and Steve Cohen the next day sa started to aggressively unwind its large positions in Elon and wyth and in fact ended up going short those two stocks to make a bet against them Elon PLC tumbling $142 that's a 42% drop came out the results were very negative and both Al and WTH dropped in value so according to the government ends up making an estimated $275 million based on inside information Dr Gilman is cooperating against martoma in what has become the largest insider trading case in history Greg kappus lost more than a half millionar and has joined a class action lawsuit against Sac so you played in the market and you lost yes it happens to people all the time in the stock market yes what was different it was gamed um and in hindsight what we found out is that Sac um knew the hand before everybody else did and acted accordingly this is a copy of sa's code of ethics and conduct obtained by Frontline in the industry it's called a compliance manual it spells out the rules prohibiting insider trading in his 2011 deposition Cohen was asked by the plaintiff's attorney if he was familiar with sac's compliance manual now the sac compliance manual at the time provided that if you were in possession of material nonpublic information you could not trade period correctly yeah well the wayct object actually I don't know what it says okay so you don't know at the time you didn't know what sa's compliance manual said on insid of trading in uh when it comes to trading I I rely on Counsel you know you're talking about somebody who's been in the industry for 30 years and for him to be that oblivious of these very Central things to his business in that deposition was shocking I don't remember what it says okay so you don't know today sitting here as the head of the firm what your compliance manual says I I I've read it but I don't if you're asking me what it says today I don't remember what it meant was he really didn't care to have an understanding of what the rules were or even what was in his compliance manual which just told me he didn't take those things very seriously and there was trading in Fairfax and the deposition was part of a lawsuit filed against sa and other hedge funds by a company called Fairfax Financial faira over allegations of price manipulation and we went short Fairfax Fairfax had been targeted for what's classically called a bar raid which is when short sellers go out into the marketplace and try and drive the stock price down artificially by putting out negative information about the company well it really comes down to where they heard that if they heard a rumor I think it' be totally appropriate Michael Boe asked Cohen whether he thought it was acceptable for his traders to short a stock if they have advanced knowledge of negative press stories about the company what if they sent you an email that said the reporter told me is coming out with a negative story is it your testimony it would be okay for them to Short if the story was not coming out in a relatively short period of time I would say U there was ambiguity on that I think it might be okay fair fact tax's suit was dismissed but the Securities and Exchange Commission took an interest in Cohen's answers under oath and subpoenaed his deposition the deposition by Steve Coen may come back to haunt him as he tries to protect his sa capital from a federal insider trading lawsuit in July of 2013 the SEC brought a civil case against Cohen alleging he failed to supervise his Traders a charge he is fighting they basically said look this was an operation where there was a complete failure of compliance and Cohen who has his name on the door and owned 100% of the firm failed to properly supervise these guys that same month the justice department filed a criminal indictment against Sac calling it a magnet for Market cheaters the government decided that they found insider trading so pervasive that they wanted to put their foot down and say okay this is effectively a criminal Enterprise and we're going to declare at that and charge the firm criminally Steven Cohen's lawyers have argued that he has never been involved in insider trading Cohen has repeatedly declined frontline's request for an interview the embattled hedge fund is preparing to give back most of the client money it still manages but one client is staying put he is Ed Bowski the managing director at chapwood Investments but one Dallas money manager Ed Bowski did agree to allegations have been made but you know what what kind of country do we live in when everyone in the world just starts convicting somebody when we' yet have to hear back from Stevie Cohen it's unusual for a money manager to come public like this and speak out on behalf of a fund like sa I'm not so much speaking out for the firm I'm speaking out for due process and I don't know all the facts all I know is what has been alleged and if some it's not just allegations right now it is allegations has CV Cohen or sa been put on trial and have they been convicted individuals have pled guilty to insider trading okay give me facts tell me exactly what it was what did it amount to and did Stevie Cohen know it did the firm know it because guess what it happens there are bad people out there in November 2013 after months of talks good afternoon everyone my name is PR barara and I am the US attorney for the southern district sa Capital agreed to plead guilty as a corporation for engaging an insider trading that was substantial pervasive and on a scale without precedent under the proposed agreement with prosecutors sa would cease to operate as a hedge fund and as sole owner Steven Cohen would pay the largest insider trading fine in history in the record amount of 1.8 billion and US attorney PR barara says the insider trading investigations will continue a number of people have been charged and convicted and the investigation remains ongoing it doesn't matter you who you are how much money you have who you're connected to you have to play by the same rules as everyone else you know rules are rules and the law is the law Cohen has not been charged with insider trading the judge who sentenced Raj rajaratnam questions if there is enough evidence the government uh alleged that sa Capital was quote a veritable magnet of Market cheaters and they then decided to indict the company not the founder and architect and president the man who ran the company does that make sense well you have to assume by looking at the indictment that the government did not believe it had the goods uh on Mr con so if I form a company and you know I have a thousand employees but I have a couple of units of that company that are engaged in criminal behavior um even if the company is indicted I don't really face any consequences for setting that up in the criminal law in order to be guilty and for the government to be able to convict you you have to show Criminal Intent a willing intent to violate the criminal laws but there is such a thing as criminal negligence well yes there is such a thing as criminal negligence you can't violate the insider trading laws you can't commit fraud negligently as it stands the criminal negligence laws that cover some Industries do not apply to finance to change that Congress would need to pass a new statute we have conspiracy statutes and we have aiding abetting statutes and we have uh the criminal ability to to bring a case against an institution but we don't bring criminal cases against people for negligence you think you'll ever see a case where negligence um Rises to criminal liability you know in in the in the in the in the hedge fund world I don't I I I I would doubt that the trial of Sac portfolio manager Matthew martoma who pled not guilty starts this week the justice department is actively investigating two other insider trading cases involving sac [Music] w for more on this and other Frontline programs visit our website at pbs.org [Music] Frontline front lines to catch a Trader is available on DVD to order visit shop pbs.org or call 1 1800 play PBS front line is also available for download on iTunes [Music]