THE HEDGE FUND INDUSTRY CHANGED FINANCE.
Its pioneers didn’t lay railroads, build factories, or invent new technologies. Rather, they made their billions by placing bets in the market that turned out to be right more often than not. In hedge fund circles, Steven A. Cohen was revered as a god. But that image was shattered when his fund, SAC Capital, became the target of a seven-year government investigation. Prosecutors labelled SAC a ‘magnet for market cheaters’ whose culture encouraged the relentless pursuit of ‘black edge’ – inside information – and the firm was ultimately indicted with charges related to a vast insider trading scheme. Cohen, himself, however, was never charged.
Black Edge is a riveting legal thriller that raises urgent questions about the power of wealth and the reach of justice in the modern world.
Sheelah Kolhatkar, a former hedge fund analyst, is a staff writer at the New Yorker, where she writes about Wall Street, Silicon Valley, politics, and more. She is a regular speaker and commentator on business and economics issues across the media, and has also written for Bloomberg Businessweek, The Atlantic, the New York Times and other publications.
For Seth
ONE EVENING IN JULY 2008, FBI Special Agent B. J. Kang sat hunched over a desk with headphones on, listening to a phone call. It was dark outside, and he hadn’t eaten dinner. His stomach growled.
“Raj, you better listen to me,” a woman said in a soft, breathy voice. “Please don’t fuck me on this.”
“Yeah,” a male voice said.
“They’re gonna guide down,”1 the woman said. Guide down, Kang knew, was a common Wall Street term that meant the company was planning to announce that its earnings were going to be lower than expected—definitely bad news; the “they” was an $800 million Internet company2 based in Cambridge, Massachusetts, called Akamai Technologies. “I just got a call from my guy. I played him like a finely tuned piano.”3
“I’m short it, you know that, right?” the man said.
“I want you to be on top,” the woman purred. “We need to be a team.” She wasn’t talking about sex, at least not this time. This was about money. “Let’s just play this thing. Just keep shorting, every day.”
Who was this woman? Kang thought to himself. She sounded cartoonishly conspiratorial. Kang listened and took notes. He was in the FBI’s “wire room,” a windowless den housing fourteen vintage Dell computers and an assortment of mismatched office furniture on the twenty-fourth floor of 26 Federal Plaza in lower Manhattan, home of the Bureau’s New York field office. Along one wall was a metal shelf loaded with granola bars, Goldfish crackers, and Kit Kats—sustenance for the agents who spent hours there each day, monitoring live phone calls.
Listening to the wires was generally considered a crappy job, but Kang didn’t see it that way. He understood it as a matter of patience; if you put in the work, it eventually paid off. A few months earlier, on March 7, a federal judge had handed Kang a gift, approving a wiretap application on the cellphone of a Wall Street titan named Raj Rajaratnam. Kang had been practically living in the wire room ever since, gathering evidence for a massive insider trading case. He wasn’t in securities crime just to bust the seedy, small-time frauds he’d been working on for the previous two years. He wanted to take down someone big—someone like Raj—a significant player in the financial world.
The fifty-year-old co-founder of the Galleon Group, a $7 billion hedge fund, Rajaratnam was one of the more high-profile traders on Wall Street. Partly this was due to his size. Raj was obese and flamboyant, a man of outsize appetites. He liked to eat, and he liked to spend money, flying seventy of his friends to Kenya for a birthday safari4 and paying $250,000 for a Super Bowl party on Star Island5 in Biscayne Bay. Raj cut a stark contrast to Kang, the disciplined child of Korean immigrants, who was built like a block of concrete with black buzz-cut hair. Where Rajaratnam lived to schmooze and trade and brag about his exceptional skill at every opportunity, Kang was a quiet, tireless worker who spoke only when absolutely necessary. Even his closest colleagues at the Bureau hardly knew anything about him.
Six days after that phone call6, Kang watched as Akamai announced to the world that its next earnings release was going to be a disappointment. Its stock dropped from $31.25 to $23.34 overnight. Raj, who was short 875,0007 shares, made over $5 million in a week. The woman who gave him the tip, a trader named Danielle Chiesi, made $2.5 million8. Kang wanted to know where she had gotten such valuable intelligence about what Akamai was going to do, so he subpoenaed her phone records. He could see, looking over her call logs, that she had spoken to a senior executive at Akamai just before she passed the information on to Raj.
“You did it in such a classy way,” Rajaratnam told Chiesi afterward, when he called to thank her for the tip. “The way you worked the relationship.”
Chiesi sighed. “It’s a conquest.”9
Rajaratnam had been caught on tape doing something that was clearly illegal: getting confidential, inside information about Akamai, trading on it, and making a profit. There was no code or innuendo. All the pieces were laid out perfectly, ready to go into a criminal complaint: The call came on the night of July 24; Raj shorted 138,550 shares10 the next day, betting that the stock was going to go down, and he kept shorting more until the news came out on July 30. Based on that evidence alone, one of the most successful traders on Wall Street was probably going to jail. Kang could feel himself growing excited. If Raj and Chiesi were trading on inside information so casually and openly, there had to be others doing it, too.
Rajaratnam’s phone line was usually busiest in the morning, right around the time the market opened, and Kang made a point to get in early and listen. Raj would call his friends and acquaintances, casting around for dirt. Some of the people he exchanged information with were former classmates from Wharton who were now out in the world running technology companies or hedge funds. Many of them were on his payroll. Kang watched as Raj collected information about upcoming earnings announcements and takeover offers that hadn’t yet been disclosed and used it to make millions of dollars trading stocks. Within a few months, Kang had wires going on Rajaratnam’s friends11, too.
He and the other FBI agents on wire detail were shocked by what they were hearing. Was this normal behavior on Wall Street? Was inside information that easy to get? They had become accustomed to finding corruption in the financial industry, but these interactions were so blatant, so obviously illegal, and seemed to extend in every direction. Each time they discovered one insider trading circle, it would overlap with another, and they’d have a whole new list of suspects to go after. The problem was bigger than Raj. It was a large, complicated network.
As the agents listened and studied phone records and interview notes, one hedge fund kept coming up: SAC Capital Advisors12. Kang decided to look into it.
The sign for the Embassy Suites in South San Francisco loomed overhead as B. J. Kang steered the midsize rental car out of the parking lot and drove south, toward Cupertino, pulling up about forty minutes later in front of a three-bedroom house on a quiet street. He and his partner, who was sitting silently next to him, had spent a good part of the previous night rehearsing the different scenarios that might take place once they arrived at their destination and knocked on the door. What if the person they were looking for wasn’t home? What if he told them to go screw themselves? What if he had a gun? It was unlikely, but they had to be ready for every possibility.
It was April 1, 2009, and the sun was setting. Kang and the other agent—Tom Zukauskas, whom Kang referred to as his “wingman”—exited the car and strode up the front walk. They knocked on the door. A dark-haired man appeared.
“Ali Far?”13 Kang said. The man nodded, confused. Kang reached into his jacket and produced a badge, which he held up in front of the man’s face. “My name is B. J. Kang. I’m with the FBI. We’re here to talk about insider trading.”
He paused for a moment or two to let that sink in.
Kang explained that Far was in a difficult position because of some of the things he had done, but there might be a solution. Kang and Far could help each other. Far’s wife, two daughters, mother, and mother-in-law cowered in the background14, watching with alarm. “We know you used to work for Raj Rajaratnam at Galleon and that you’ve been trading on inside information,” Kang said. “We have you on tape.”
Tape?
Kang then played an audio recording in which Far could be heard giving inside information about a semiconductor company to Rajaratnam. As the recording played, Far was speechless.
Far had left Galleon in 2008 to start his own hedge fund with his friend Richard Choo-Beng Lee, who was known as “C.B.” by virtually everyone. Lee was a technology analyst15 who had previously worked at SAC Capital. Kang hoped that Far and Lee would lead him closer to SAC, which was one of the biggest hedge funds in the world. Kang had been learning more and more about the fund and its mysterious founder, Steven Cohen, hearing from other traders on Wall Street that Cohen was “always on the right side” of every trade—something that seemed, at least on the surface, to be impossible. No one in the industry understood how Cohen made so much money so consistently; his competitors were envious—and suspicious. Taking skills they’d developed at Galleon and SAC, Far and Lee had marketed their own fund, called Spherix Capital, to potential investors partly by advertising the access they had to executives at technology companies and the valuable information they could get as a result of those relationships. Kang knew all of this. He liked to say that he understood the difference between “the dirty, important hedge funds,” the “dirty hedge funds you didn’t need to waste time on,” and the “not-important hedge funds.” He had argued to his FBI colleagues that they should push their investigation beyond Raj Rajaratnam and Galleon to bigger and more powerful targets like Cohen. Kang thought that Far and Lee, who were well connected and seemed to be getting inside information directly from company employees, were from the first group, worth going after on their own. But to Kang, they were also a path to something bigger. All Kang had to do was convince them to flip.
Kang believed that Far, in particular, fit the profile of a potential FBI cooperator very well. He seemed like a decent person who would want to do what was best for his family.
“Do you really want to put your kids through this?” Kang asked.
He told Far to think carefully about his offer, as it was the best one he was going to get—definitely more appealing than going to jail. If he didn’t do the right thing and cooperate, the next time FBI agents showed up at his house, it would be to arrest him. “Don’t tell anyone about this,” Kang added, before saying goodbye. “We’ll be watching, and we’ll find out if you do.” The agents walked back to their car.
That night, Far was in distress. He couldn’t sleep. Despite Kang’s warning, Far placed a call to his partner16, C. B. Lee. The voicemail answered. “The FBI just showed up at my house,” Far said, then abruptly hung up.
It was critical to the FBI that word of the investigation and the wiretaps not leak into the hedge fund community. Kang had to talk to C. B. Lee as soon as possible in order to try to contain the disclosure. Lee lived with his mother just twenty minutes from Far, and two days later Kang went to see him. As soon as Lee answered the door, Kang told him that he knew he had been insider trading at Spherix.
At first, Lee refused to answer any of the FBI’s questions. But by the end of their conversation, Kang felt confident that he would cooperate.
“We are going to help each other,” Kang told him. “You’re doing the right thing.”
The telephone rang inside Steven Cohen’s offices at SAC Capital. It was C. B. Lee on the line. He and Cohen hadn’t spoken in a while.
“Hey, Steve, we had to shut our fund down,” Lee told Cohen, trying to sound calm. He explained that he and Ali Far weren’t getting along because they couldn’t agree on how to share their profits. “I’d love to work with you again,” Lee said. He tried to bring up memories of all the money they had made together years ago when Lee worked for Cohen. Lee suggested an arrangement whereby he would come back as a consultant to Cohen and they would split the profits if Lee provided good information. He listed several technology companies and bragged about his ability to get the secret internal numbers at all of them.
“I know people,”17 Lee said. “I have people in sales and finance at Nvidia who keep me up on quarterly earnings, and I have a contact at Taiwan Semiconductor who gives me wafer data.”
Cohen was intrigued. Lee had been one of his highest-performing analysts, someone who could be relied on to bring in moneymaking trading ideas, until he left SAC in 2004. Lee’s research was so good that Cohen and one of his portfolio managers used to fight over it. But Cohen wasn’t naïve. He wanted to be careful.
“I don’t want to get into it on the phone,” he said.
He was interested enough, though, that he had his head of recruiting call Lee back and talk to him about the logistics of returning to work at SAC. The two men spoke several times.
A couple of weeks later, Cohen mentioned to one of his research traders that he was thinking of rehiring C. B. Lee. The trader shuddered, but he didn’t say anything. He had just heard some gossip about Lee from a friend who worked at Galleon, Rajaratnam’s fund. The rumor was that federal agents had recently visited Lee and Far’s hedge fund. “I don’t know what’s going on there,” the Galleon trader had said when he mentioned it during a group dinner in Manhattan three days earlier. “It’s weird.”
The next morning, the research trader leaned over to Cohen and summoned up all his courage. He had no idea how his volatile boss might react to what he was about to say. “This might be totally off base,” he said, “but there’s a rumor that the Feds were in C.B.’s office. You might want to take a closer look at it.”
“You mean the SEC?” Cohen said.
“No,” the trader answered. “The FBI.”
Cohen grabbed the phone and dialed the number of a friend of his, a former SAC portfolio manager who was close to Lee. “I heard C.B. might be cooperating with the Feds,” Cohen told him. “We heard he’s wearing a wire.”18 It sounded like there might be a federal investigation of the hedge fund industry going on. Who knew where it might lead?
“Be careful.”
It would be an investigation unlike any other in the history of Wall Street, a decadelong, multiagency government crackdown on insider trading focused almost entirely on hedge funds. It began with Raj Rajaratnam and the Galleon Group and quickly expanded to ensnare corporate executives, lawyers, scientists, traders, and analysts across dozens of companies. Its ultimate target was Steven Cohen, the billionaire founder of SAC Capital Advisors, possibly the most powerful hedge fund firm the industry had ever seen.
In 1992, the year Cohen started SAC, the average person had only the faintest idea of what a hedge fund was. Most funds like his began as tiny, informal operations founded by eccentric traders whose financial ambition couldn’t be satisfied by even the mightiest investment banks on Wall Street. They had little patience for corporate culture and no interest in negotiating over their bonuses each year. Many of them wore jeans and flip-flops to work. Their aversion to the big banks and brokerage firms was a source of pride.
Hedge funds were conceived as a small, almost boutique service, as vehicles for wealthy people to diversify their investments and produce steady, moderate returns that were insulated from swings in the stock market. The idea behind them was simple: A fund manager would identify the best companies and buy their shares while selling short the stock of ones that weren’t likely to do well. Shorting is a bet against a stock on the expectation that it will go down, and the practice opened up new opportunities to sophisticated investors. The process involves borrowing a stock (for a fee), selling it in the market, and then, if all goes well, buying the shares back at a lower price and using them to repay the loan. In a good market, when most stocks are going up, the gains on the longs eclipse the losses from the shorts; in a bad market, the shorts make money to help offset the losses on the longs. Being long some stocks and short others meant that you were “hedged.” This strategy could be applied to other financial instruments in addition to stocks, such as bonds and options and futures, in any market in the world.
The losses on a short position are potentially limitless if a security keeps rising, so it’s considered a high-risk activity. That, combined with the fact that many hedge funds employed leverage, or borrowed money, to trade with as they pursued different strategies in different markets around the globe, led regulators to decree that only the most sophisticated investors should be investing in them. Hedge funds would be allowed to try to make money almost any way they wanted, and charge whatever fees they liked, as long as they limited their investors to the wealthy, who, in theory at least, could afford to lose whatever money they put in.
For years hedge funds existed largely separate from Wall Street’s operatic boom-bust cycles, but by the mid-2000s they’d moved to the center of the industry. Some started producing enormous profits each year. Over time, the name hedge fund lost any connection to the careful strategy that had given such funds their name and came to stand, instead, for unregulated investment firms that essentially did whatever they wanted. Though they became known for employing leverage and taking risk, the defining attribute of most hedge funds was the enormous amounts of money the people running them were taking in: The fees they charged were generous, typically a “management fee” of 2 percent of assets and a “performance fee” of 20 percent of the profits each year. Before earning anything for his or her investors19, the manager of a $2 billion fund would be positioned to make $40 million in fees just to keep the place running. By 2007, hedge fund founders like Paul Tudor Jones and Ken Griffin20 were managing multibillion-dollar pools of money, building twenty-thousand-square-foot palaces to live in, and traveling on $50 million private jets.
To work at a hedge fund was a liberating experience for a certain kind of trader, a chance to test one’s skills against the market and, in the process, become spectacularly rich. Hedge fund jobs became the most coveted in finance. The immense fortunes they promised made a more traditional Wall Street career21—climbing the hierarchy at an established investment bank such as Bear Stearns or Morgan Stanley—look far less interesting. In 2006, the same year that Lloyd Blankfein, the CEO of Goldman Sachs, was paid $54 million—causing outrage in some circles—the lowest-paid person on the list of the twenty-five highest-paid hedge fund managers22 made $240 million. The top three made more than a billion dollars each. Cohen was number five that year, at $900 million. By 2015, hedge funds controlled almost $3 trillion in assets around the world23 and were a driving force behind the extreme wealth disequilibrium of the early twenty-first century.
The hedge fund moguls didn’t lay railroads, build factories, or invent lifesaving medicines or technologies. They made their billions through speculation, by placing bets in the market that turned out to be right more often than wrong. And for this, they have gained not only extreme personal wealth but also formidable influence throughout society, in politics, education, the arts, professional sports—anywhere they choose to direct their attention and resources. They manage a significant amount of the money in pension and endowment funds and have so much influence in the market that CEOs of public companies have no choice but to pay attention to them, focusing on short-term stock performance to keep their hedge fund shareholders happy. Most of these hedge fund traders don’t think of themselves as “owners” of companies or even as long-term investors. They are interested in buying in, making a profit, and selling out.
If there was one person who personified the rise of hedge funds, and the way they transformed Wall Street, it was Steven Cohen. He was an enigmatic figure, even to those in his own industry, but his average returns of 30 percent a year for twenty years were legendary. What was especially intriguing about him was that his performance wasn’t based on any well-understood strategy, unlike other prominent investors such as George Soros or Paul Tudor Jones; he wasn’t famous for betting on global economic trends or predicting the decline of the housing market. Cohen simply seemed to have an intuitive sense for how markets moved, and he entered the industry at precisely the moment when society reoriented itself to reward that skill above almost all others. He traded in and out of stocks in rapid-fire fashion, dozens of them in a single day. Young traders longed to work for him and rich investors begged to put their money in his hands. By 2012, SAC had become one of the world’s most profitable investment funds, managing $15 billion. On Wall Street, “Stevie,” as Cohen was known, was like a god.
Word quickly spread about this new way to become wildly rich, and thousands of new hedge funds opened up, all staffed with aggressive traders looking for investments to exploit. As the competition became more intense and the potential money to be made ballooned, hedge fund traders started going to extreme lengths to gain an advantage in the market, hiring scientists, mathematicians, economists, and shrinks. They laid cable close to stock exchanges so that their trades could be executed nanoseconds faster and employed engineers and coders to make their computers as powerful as those at the Pentagon. They paid soccer moms to walk the aisles at Walmart and report back on what was selling. They studied satellite images of parking lots and took CEOs out to extravagant dinners, digging for information. They did all this because they knew how difficult it is to beat the market, day after day, week after week, year after year. Hedge funds are always trying to find what traders call “edge”—information that gives them an advantage over other investors.
At a certain point, this quest for edge inevitably bumps up against, and then crosses, a line: advance knowledge of a company’s earnings, word that a chipmaker will get a takeover offer next week, an early look at drug trial results. This kind of information—proprietary, nonpublic, and certain to move markets—is known on Wall Street as “black edge,” and it’s the most valuable information of all.
Trading on it is also usually illegal24.
When one trader was asked if he knew of any fund that didn’t traffic in inside information, he said: “No, they would never survive.” In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost.
And just as in cycling and baseball, the reckoning on Wall Street eventually came. In 2006, the Securities and Exchange Commission, the Federal Bureau of Investigation, and the Manhattan U.S. Attorney’s Office declared they were going to go after black edge, and before long their search led them to Cohen. Whatever it was that everyone was doing, they realized, he was clearly the best at it.
This book is a detective story set in the back rooms of office parks and the trading floors of Wall Street. It’s about FBI agents who followed hunches and set up wiretaps, flipping witnesses and working their way up the hierarchy until they reached the guys in charge. It’s about idealistic government prosecutors facing slick defense lawyers making twenty-five times as much money a year. It’s about young traders smashing their hard drives with hammers, shredding files, and turning on their closest friends to stay out of jail. It’s about how hedge funds like SAC were carefully structured so that the people at the top were protected from the questionable dealings of the employees below.
It’s also about Steve Cohen, his dizzying ride to the pinnacle of Wall Street, and his epic fight to stay there.
THERE TEND TO be two types of people who seek out jobs on Wall Street. The first are those with wealthy parents who were sent to the right prep schools and Ivy League colleges and who, from their first day on the trading floor, seem destined to be there. They move through life with a sense of ease about themselves, knowing that they will soon have their own apartments on Park Avenue and summer houses in the Hamptons, a mindset that comes from posh schooling and childhood tennis lessons and an understanding of when it is appropriate for a man to wear seer-sucker and when it isn’t.
The second type call to mind terms like street smart and scrappy. They might have watched their fathers struggle to support the family, toiling in sales or insurance or running a small business, working hard for relatively little, which would have had a profound effect on them. They might have been picked on as children or rejected by girls in high school. They make it because they have a burning resentment and something to prove, or because they have the ambition to be filthy rich, or both. They have little to fall back on but their determination and their willingness to do whatever it takes, including outhustling the complacent rich kids. Sometimes the drive these people have is so intense, it’s almost like rage.
Steven Cohen came from the second group.
As he reported for work one morning in January 1978, Cohen looked like any other twenty-one-year-old starting his first job. He could hear the roar of the trading floor, where dozens of young men were chattering away on the phone, trying to coax money from the people on the other end of the line. The room was alive with energy. It was as if a great oak tree were shaking in the middle of an autumn forest and leaves of money were raining down. To Cohen it felt like home, and he ran right in.
Gruntal & Co. was a small brokerage firm located around the corner from the New York Stock Exchange in the gloomy canyons of lower Manhattan. Established in 1880, Gruntal had survived1 the assassination of President McKinley, the crash of 1929, oil price spikes, and recessions, largely by buying up other tiny, primarily Jewish firms while also staying small enough that no one paid it much attention. From offices across the country, Gruntal brokers tried to sell stock investments to dentists and plumbers and retirees. When Cohen arrived, the firm was just starting to move more aggressively into an area called proprietary trading, trying to make profits by investing the firm’s own money.
For an eager Jewish kid from Long Island like Cohen, Wall Street didn’t extend an open invitation. Even though he was freshly out of Wharton, Cohen still had to push his way in. Gruntal wasn’t well-respected, but he didn’t care about prestige. He cared about money, and he intended to make lots of it.
It happened that a childhood friend of Cohen’s, Ronald Aizer, had recently taken a job running the options department at Gruntal, and he was looking for help.
Aizer was ten years older than Cohen, had an aptitude for math, and had autonomy to invest the firm’s capital however he wanted. On Cohen’s first day, Aizer pointed at a chair and told his new hire to sit there while he figured out what, exactly, he was going to do with him. Cohen sank down in front of a Quotron screen and became absorbed in the rhythm of the numbers ticking by.
The stock market distills a basic economic principle, one that Aizer had figured out how to exploit: The more risk you take with an investment, the greater the potential reward. If there’s a chance that a single piece of news could send a stock plunging, investors expect greater possible profit for exposing themselves to those potential losses. A sure, predictable thing, like a municipal bond, meanwhile, typically returns very little. There’s no reward without risk—it is one of the central tenets of investing. Aizer, however, found an intriguing loophole in this mechanism, where the two elements had fallen out of sync. It involved stock options.
The market for options at the time was far less crowded than regular stock trading—and in many ways, more attractive. Options are contracts that allow a person to either buy or sell shares of stock at a fixed price, before a specific date in the future. A “put” represents the right to sell shares of stock, which means that the owner of a put will benefit if the stock price drops, allowing him or her to sell the underlying shares at the agreed-upon higher price. “Calls” are the opposite, granting the holder the right to buy a particular stock at a specific price on or before the expiration date, so the owner of the call will benefit if the stock rises, as the option contract allows him or her to buy it for less than it would cost on the open market, yielding an instantaneous profit. Investors sometimes use options as a way to hedge a stock position they already have.
At Gruntal, Aizer had implemented a strategy called “option arbitrage.”2 There was a precise mathematical relationship dictating how the price of the option should change relative to the price of the underlying stock. Theoretically, in a perfect market, the price of a put option, the price of a call option, and the price at which the stock was trading would be in alignment. Because options were new and communication between markets was sometimes slow, this equation occasionally fell out of line, creating a mismatch between the different prices. By buying and selling the options on one exchange and the stock on another, for example, a clever trader could pocket the difference.
In theory, the technique involved almost no risk. There was no borrowed money and relatively little capital required, and most positions were closed out by the end of the day, which meant that you didn’t develop ulcers worrying about something that might send the market down overnight. The strategy would be rendered obsolete as technology improved, but in the early 1980s it was like plucking fistfuls of cash off of vines—and the traders at Gruntal enjoyed bountiful harvests. All day long, Aizer and his traders compared the prices of stocks to their valutions in the options market, rushing to make a trade whenever they detected an inconsistency.
“You could have IBM trading at $100 on the New York Stock Exchange floor,” explained Helen Clarke, who worked as Aizer’s clerk in the early 1980s, “and the options that equal IBM at $100 trading at $99 in Chicago, so you’d run to Chicago and buy it and sell it at the NYSE.” If done enough times, it added up.
Without the benefit of computer spreadsheets, the traders had to keep track of everything in their heads. Aizer set up a system that required minimal thinking. You didn’t have to be good, he liked to say, you just had to follow the formulas. It was tedious. A trained monkey could do it.
On Cohen’s first day, he watched Aizer work with a trading assistant, scouring the market for $0.25 or $0.50 they could make on their idiot-proof options schemes. During a lull in activity, he stared at the market screens. Then Cohen announced that he was looking at a stock, ABC. “I think it’s going to open higher tomorrow,” he said. Even brand-new on the job, Cohen was confident in his abilities as a trader.
Aizer snickered. “All right,” he said, curious to see whether the new kid with bushy brown hair and glasses had any clue what he was doing. “Go ahead, take a shot.”
Cohen made $4,000 that afternoon, and another $4,000 overnight; in 1978, this was a meaningful profit. Watching the price oscillate like a sine wave, placing the bet, taking the risk, absorbing the payoff—his body surged with adrenaline, and Cohen was hooked. Trading was all he wanted to do.
Aizer was stunned. How could someone so inexperienced, someone who couldn’t even be bothered to iron his shirt, be this good at predicting whether stocks would go up or down?
“I knew he was going to be famous within a week,” Aizer said. “I never saw talent like that. It was just staring at you.”
On Sunday afternoons, inside a four-bedroom split-level house in Great Neck, a little boy stood watch by his bedroom window, waiting for the sound of tires on asphalt. As soon as the Cadillac pulled up outside, he came flying down the stairs. He wanted to beat his siblings to the door when his grandparents arrived.
Walter and Madeline Mayer, Steven Cohen’s maternal grandparents, lived partly off an investment portfolio of inherited money, and they came to see their grandchildren once or twice a month. They led an alluring life in Manhattan, one that involved fancy restaurants and Broadway shows. They represented escape and abundance and excitement, and when Steve was growing up, their visits were his favorite moments of the week. They were always talking about money, and Cohen listened carefully to the lessons that emerged, the idea that once you had money, banks would pay interest on it, and that money could be invested and it would grow, requiring little or no work on the part of the investor, who was left to be envied and admired by others. The freedom that his grandparents enjoyed was a sharp contrast to the pinched and pedestrian existence of Cohen’s parents. When his father walked in the door after work each night, Cohen grabbed his New York Post so he could study the stock tables3 like his grandfather.
Born in the summer of 1956, Cohen was the third of Jack and Patricia Cohen’s eight children. Great Neck was twenty miles from New York City, an affluent suburban enclave of progressive-minded Jewish professionals who expected their children to do well in school and go on to careers as doctors and dentists. F. Scott Fitzgerald settled there in 1922, and the area became partial inspiration4 for The Great Gatsby, which was set in the fictional “West Egg,” based on Kings Point, Great Neck’s northernmost tip on the Long Island Sound. Many of the fathers of Great Neck lived separate Long Island and Manhattan existences, which involved a lot of drinking and long train commutes and extended hours away from home. There were synagogues and good schools and grand estates.
In Great Neck, the Cohens were on the low end of the financial spectrum, which Steve was aware of from an early age. At a time when the Garment District still produced garments, Cohen’s father, Jack, took the train every morning to one of his showrooms in Manhattan, where he ran a business called Minerva Fashions, which made twenty-dollar dresses for chains such as Macy’s and J. C. Penney.
Cohen’s mother, Patricia—Patsy—was a self-employed piano teacher. She advertised in the local Pennysaver for clients, mostly neighborhood children, and taught strictly popular music—“Hello, Dolly!” rather than Beethoven or Brahms. She was a harsh, uncompromising woman who dominated the family, known for a sense of humor that could cut like a blade and for periodically berating her husband: “Jackie, you gotta fuck them before they fuck you!”
Money was a constant source of stress in the Cohen household. Cohen’s mother and father spoke openly about the inheritance they hoped was imminent from Patsy’s parents, which they planned to use to introduce more comfort into their lives. Although he was small, Cohen was a gifted athlete, pitching for the baseball team, playing point guard in basketball. But his parents didn’t have the means to help him make the most of his athletic potential—there wasn’t much money for private lessons or time to drive him around to games. The junior high soccer coach ran a lakeside summer camp in Maine where several of the neighborhood children went. Cohen attended in 1968 and loved it. Camp was an enchanted world, a great equalizer where all the kids wore the same T-shirts and slept in little pine cabins, everyone on equal footing. There were no parents around fighting about the bills and telling the kids they couldn’t do things. After that one summer, however, Steve’s parents never sent him back; his classmates believed it was because they couldn’t afford the fees.
Still, Steve was doted upon. His grandmother marked him as the brightest of the eight siblings and referred to him as the “sharpest pencil in the box,” which made him glow with pride. He got good grades without spending a lot of time studying. Cohen’s older brother Gary remembers their mother fixing steak for Steve while the rest of the kids got hot dogs. “I used to complain,” he recalled, “and my mother said, ‘Your brother Steve is going to support us someday.’”
In high school, Cohen discovered the one extracurricular activity that ignited true passion in him: poker. “A group of us, we started playing cards at each other’s houses, all day, then all night,” Cohen remembered. “The stakes started at, like, a quarter, fifty cents. Eventually we got up to five, ten, or twenty bucks a replacement card, and by tenth grade you could win or lose a thousand dollars in a night.”
All this card-playing helped Cohen learn an important lesson about capitalism. There were relatively difficult ways to make money, like working as a stock boy at Bohack supermarket for $1.85 an hour, which he did one summer and found to be excruciating. And there were much easier ways to earn a buck, like beating his friends at the poker table, which he found to be quite enjoyable. Cohen would stumble home early in the morning with bundles of cash5, making sure to return his dad’s car keys in time for his father to make his morning commute to work. Watching his father trudge off to work each day, Cohen had one thought: This life is not for me.
Cohen was admitted to Wharton, and his parents were overjoyed. They had inherited some money from Jack’s parents, freeing them from the burden of student loans, although Steve would still have to work to earn money for books and going out. As soon as he arrived on campus, he noticed that the parking lot was filled with BMWs and Mercedes that belonged to his fellow students. Once again, Cohen was in an environment where most everyone around him came from wealthier families than he did and he was shut out of the most elite social circles. His fraternity house became the center of his life.
The culture at Wharton6 was driven by the worship of money. Cohen’s fraternity, Zeta Beta Tau, or ZBT, was the wealthier of the two Jewish fraternities on campus. Its nickname was “Zillions Billions Trillions.” Cohen spent most of his nights in ZBT’s living room, which was transformed into a gambling den, with a dozen guys around a table. At the center of the table sat Cohen, leading the game, intensely focused amid clouds of smoke and clinking beer bottles. He was part of a core of five or six young men who dominated the table, while a rotating cast of losers filled the extra seats.
One night in 1976, a student from one of his classes sat across from him, sweat accumulating at the base of his back. Cohen cracked jokes and flashed his gap-toothed smile. He had become known as a snake charmer who specialized in separating his classmates from their inheritances. He wasn’t cool and didn’t have women paying attention to him, but he had earned the respect of the trust fund kids he was in school with. The stakes in the game were already into the hundreds of dollars, which Cohen’s opponent, an occasional player, found to be a little rich for a game full of college students. Cohen’s classmate swallowed hard and braced himself for another loss. Cohen won several thousand dollars from him over the course of the semester, and each time he lost, the classmate swore he wouldn’t let it happen again.
While many of the fraternity brothers stayed up late dropping acid or drinking beer, Cohen rose early each morning to read The Wall Street Journal. He carefully tracked the stock market, but he considered school itself to be a waste of time. One day, during a statistics exam, while the others in the class were struggling to finish, Cohen stood up and marched out the door before he was done to check his closing stock prices. He thought he had no chance of competing7 with the prep school kids who spoke the same language and had all read the same books. He would have to outsmart them.
In between classes, Cohen roamed around the floor of the Philadelphia-Baltimore-Washington stock exchange in a T-shirt, walking up to the traders and annoying them by saying things like: “Hey, your spreads are off.” He started skipping classes to visit the Merrill Lynch offices in Philadelphia, where he could watch the NYSE ticker. “I’d just stand there and stare,”8 he said. “I could hear the tick tick tick of the tape, and you would watch a stock go by at, say, 50 … 50 … 50 … And then it might go up or down a tick. You could see the trade happening. You could just watch it happen in slow motion. And later, not right away, I found I was pretty good at guessing which way those numbers would go.”
All around him, Cohen saw people who weren’t as talented as he was succeeding. That tick tick tick of the tape became the key to the future he felt he deserved.
Elaine’s was a smoky, oak-paneled restaurant that attracted artists and theater people on the Upper East Side, and Cohen was at the bar, sipping a drink. He was alone, on his birthday. He didn’t have many friends. Rain was pouring down on the street outside.
It was June of 1979, and Cohen was exhausted from a day on the floor at Gruntal, where all day long people had been screaming “Stevie!” at him. The nickname made his skin crawl. Aizer had adopted “Stevie” as a way to distinguish Steve Cohen from Steve Ginsberg, the older brother of Kenny Ginsberg, Cohen’s best friend from high school, who had recently started working with them. Aizer’s little operation was becoming an important profit center at Gruntal, and they were given a lot of freedom by Howard Silverman, Gruntal’s CEO9, who adored Cohen. Silverman drove sports cars10, spoke with arrogance and ambition, and liked people who shared his values. He could see that Cohen was hungry, and he wanted guys like him around.
Over the previous year, Cohen had started making more and more money trading at Gruntal, but he was still socially unhappy, permanently disappointed over the lack of recognition he felt he received. He didn’t have many friends. Elaine’s was crowded and Cohen looked around, contemplating the fact that he was now twenty-three years old and single, when someone caught his attention.
A woman had just walked in, dripping wet, in a white camisole and a silk skirt that clung to her legs. Cohen stared at her.
The woman looked around anxiously and smoothed her wet hair. She was supposed to meet a girlfriend for dinner. It was the sort of Manhattan rainstorm that made it impossible to find a cab, so her friend was late. She hovered by the bar and watched the door, keeping her eyes cast low to avoid the gazes of the men who were staring from different parts of the restaurant, a New York City survival tactic that came naturally to her. At one point, she noticed Cohen looking in her direction and angled herself so that she was facing the other way. Cohen watched her for a few minutes before he felt bold enough to approach her.
“Hello,” he said, sidling up awkwardly. He tried to smile.
“Hello,” she said, and looked at him quizzically. Who is this guy? she thought to herself.
Her name was Patricia Finke. She would never normally have bothered with someone like Cohen, who was so conservative, so corporate-looking. She had grown up in an artsy family in Manhattan and had been raised with a snobbish attitude toward the suburbs. Under different circumstances she would have completely ignored him. But he appeared harmless enough in his wrinkled shirt and unstylish shoes, and he seemed captivated by her. He gave off an aura of vulnerability that was appealing.
At first, Cohen tried to impress Patricia with stories about how he’d gambled all his bar mitzvah money in the stock market as a kid and how his bosses at Gruntal were upset about how much risk he took with his trades and how everyone at work thought he was too cocky. “They think I’m a cowboy,” he said. For a while, Patricia kept looking over his shoulder, watching for her friend. But eventually, against her better instincts, she was drawn in. She and Cohen ended up talking for hours11.
Before he left that night, Cohen convinced Patricia to give him her phone number. He spent the next few weeks pursuing her, calling three times a day, asking to know when they’d see each other again.
They dated for the next several months. Some of Patricia’s friends couldn’t understand what she was doing with Cohen, who seemed so un-sophisticated, a money-obsessed schlub from Long Island. But Patricia had grown up without money, and she hadn’t finished high school. She knew what it was like to worry about paying for all her expenses. She was supporting herself working for a publishing company and had a rent-controlled apartment in the West Village. She wasn’t unhappy, but there was no denying that Cohen’s drive for riches was attractive. She didn’t have a clue about the stock market, but he talked about it endlessly, boasting about how much money he planned to make. He said that he would take care of her.
Cohen, for his part, had little else going on in his life. He lived in a one-bedroom apartment where most of the lightbulbs were burned out. He spent a lot of his free time by himself. He wanted a wife. He cared about Patricia, and he started suggesting they get married. Patricia finally agreed.
They told their parents that they had eloped. But in fact there was a tiny wedding12, with just two guests, Patricia’s maid of honor and Cohen’s best man, at a small Unitarian church in Murray Hill, a quiet neighborhood in the middle of Manhattan. Not long after, in 1981, their first child, Jessica Lynn, was born. Finally, Cohen had his own family.
“Pick up the fucking phone!” Ron Aizer yelled.
It was a typical morning on Gruntal’s trading desk, with Aizer’s traders tapping on their keyboards. Usually, when a phone rang, everyone would wait to see who would be the first one to get too annoyed to ignore it and pick it up.
One of the assistant traders, who was trying to fill in trade tickets that were spread all over his desk, looked around, but there was no free phone within reach. “I don’t have a phone!” he yelled.
The phone kept ringing.
Cohen, who was trying to make a trade, yanked his own phone right out of the wall and slammed it on the assistant trader’s desk. “You want a phone? Here’s a fucking phone!” Within seconds, they were both on their feet, inches apart.
“You motherfucker, what do you think you’re doing?”
“You fucking piece of shit!”
A few minutes later, everybody was friends again.
It went like that every day. It was Aizer’s job to manage the tension and keep his traders productive and busy. He divided the stocks of the Dow Jones index among them, usually reserving the biggest ones with the most volatility, such as IBM and Eastman Kodak and Honeywell, for himself. If no one appeared to be trading a particular security regularly, any one of the traders could gradually take it over until it became theirs. Most of the time, everyone respected these allocations. Everyone except Cohen.
One day, a trader came to Aizer to complain about Mesa Petroleum, one of his stocks. Mesa was a volatile company, with dramatic swings that created ample opportunities to make money, which meant that everyone else wanted to trade it, too. “Every time I try to trade, Steve’s ahead of me,” the trader complained. “Mesa’s my best stock, and he’s killing me!”
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