Black Edge Page 8
After Cohen told him to go forward, Grossman disappeared from the office for an entire day without telling anyone where he was. He reemerged with a business plan for his new investment unit. It would be called “CR Intrinsic.” The “CR” stood for “Cumulative Return.”
—
The art market offered a way to transform wealth into an alluring form of influence and power. “It is not even cool to be a billionaire anymore—there are, like, two hundred of them,” as Loïc Gouzer, a specialist in contemporary art at Christie’s New York, put it. “But, if that same guy buys a painting, suddenly it puts you in a whole circle….They enter a whole circuit. You are going to meet artists, you are going to meet tech guys. It is the fastest way to become an international name.” Cohen watched as some of his employees transformed their reputations by amassing extravagant art collections, as each new museum endowment was covered in the society pages.
His trader David Ganek had been collecting art since college, when he and his wife started visiting small galleries and the studios of artists who weren’t well-known. Ganek made a fortune after the technology market crashed in 2000: He had been almost entirely short in his portfolio, and he directed much of his new capital into art collecting of a different order. By the time he became one of Cohen’s most successful traders, it seemed as if Ganek was spending all of his free time bidding on contemporary pieces by world-famous artists like Jeff Koons and Cindy Sherman. If he was busy, he had his secretary hold his place on the phone during auctions at Christie’s and place bids on his behalf.
“Don’t spend more than $750,000 on this one,” Ganek would tell her, before disappearing to make a trade.
Cohen was impressed, and envious. People admired Ganek for his taste in art. Though Cohen had acquired a handful of paintings over the years, he had never thought of himself as a “collector.” He knew that for a smart trader there was potential not just to enhance his reputation by buying and selling art but to make a lot of money.
Art dealers and galleries in New York operated under their own restrictive code, and they wouldn’t deal with just anyone, no matter how much money he or she had. You couldn’t simply walk into a gallery and write a check for a Monet to hang on your penthouse wall. The gatekeepers of the art world understood that the exclusivity of their product depended on not allowing rich hedge fund managers from Greenwich to buy whatever they wanted. It was a form of discrimination, in a sense, but it was also simple market economics: In order to generate demand, you needed to control the supply. In response, Wall Street collectors needed to hire the right people to make the introductions that would move them to the front of the line.
For Cohen, that person was Sandy Heller, a childhood friend of Michael Steinberg, one of Cohen’s longtime traders. Many in the art world privately regarded Heller as something of an opportunist, but there was no denying that he had access to art buyers who occupied the top of the economic scale. He specialized in working with clients like Cohen, rich men who didn’t yet understand the intricacies of the art world. He started visiting galleries with Cohen, suggesting ways for him to build a collection, patiently developing him into a connoisseur. For Cohen, it was intoxicating. When he spent millions of dollars on a piece—paying $8 million for a shark suspended in 4,360 gallons of formaldehyde by Damien Hirst, for example—it made news. But it wasn’t just vanity. Cohen also developed a genuine love for many of the pieces he bought. He prided himself on buying only the best, highest-quality work.
When a painting by Picasso called Le Rêve (The Dream) became available in the fall of 2006, it was an opportunity to take his collecting to a whole new level. Cohen was overcome with the desire to own Le Rêve as soon as he saw it. A highly erotic portrait of Picasso’s young mistress Marie-Thérèse Walter asleep in an armchair, it was painted in 1932 when Picasso was fifty years old, a form of soft porn in jewel tones. In 2001, the casino magnate Steve Wynn had bought it from another collector who had paid $48.4 million for it in 1997. Then, five years later, he decided that he wanted to sell it. As soon as Cohen heard, he flew an art advisor out to California to look at the piece and evaluate its condition.
Cohen’s advisor inspected the painting closely and wrote a report confirming that it was in fine condition. A deal was made, with Cohen agreeing to pay $139 million for the painting. Then, the next weekend, Wynn hosted a celebratory cocktail party.
Wynn and his wife, Elaine, had a group of celebrity friends visiting from New York, among them Nora Ephron, Nicholas Pileggi, Barbara Walters, and the power lawyer couple David and Mary Boies. Wynn couldn’t help but brag about the record-setting deal he had just struck with Cohen. “This is the most money ever paid for a painting,” Wynn told them, noting that it surpassed the prior record of $135 million that Ronald Lauder had paid for Portrait of Adele Bloch-Bauer I by Gustav Klimt.
Wynn invited his friends to come see the Picasso in his office, before it disappeared forever into Cohen’s mansion in Greenwich. The piece shared a wall with a Matisse and a Renoir. Wynn began to entertain his guests with explications about the eroticism of Le Rêve and how part of Marie-Thérèse’s head actually made the shape of a penis and how the piece had once belonged to the collectors Victor and Sally Ganz, who had accumulated a celebrated art collection in their Manhattan apartment in the 1940s and 1950s. As Wynn spoke, he suddenly backed up and jammed his elbow right through the canvas. There was a “terrible” ripping sound, as Ephron later recalled. The room suddenly got very quiet.
“I can’t believe I just did that,” Wynn said as his guests looked on in horror. “Oh, shit. Oh, man.”
Wynn tried to make the best of the situation. “Well, I’m glad I did it and not you,” he told his friends. “It’s a picture, it’s my picture, we’ll fix it. Nobody got sick or died. It’s a picture. It took Picasso five hours to paint it.”
The next day, he called William Acquavella, his art dealer in New York, who reacted almost as if he’d been told someone he cared about had been murdered. “Noooo!” he cried. Soon, Wynn’s wife, Elaine, was on a private jet to New York along with the damaged painting. An armored truck met them at the airport and transported them to Acquavella’s gallery, located in a townhouse on East Seventy-ninth Street. Cohen met them there. He wanted to see the damage for himself. Although Wynn harbored some hope that the piece could be restored, they agreed that for the time being the sale was off.
Cohen was bitterly disappointed. Le Rêve would have to wait.
—
Finding people to work at CR Intrinsic, SAC’s new division, was the focus of Sol Kumin’s job. The new traders had to have more than a track record; they had to be brilliant and have industry expertise, and they weren’t easy to find.
He heard about one portfolio manager who sounded promising, a biotechnology specialist at a small hedge fund called Sirios Capital Management, in Boston. The biotechnology industry was booming, with dozens of companies competing to produce new drugs with enormous economic potential. Understanding what they all did was not easy. The young man projected a serious, inscrutable eggheadedness, as if he were a surgeon or medical researcher rather than a mere investor in medical companies. He had recently gotten an MBA from the Stanford Graduate School of Business, one of the top business schools in the country. His name was Mathew Martoma.
“Would you be open to considering a job at SAC?” Kumin asked him.
Martoma wasn’t sure. Like everyone in his industry, he had heard stories about SAC, and he wasn’t sure if he was suited to the intense culture. He was quiet and courteous, not someone who handled open conflict well. Still, one aspect of the job was very interesting—the money.
Kumin explained the details. Martoma would have a portfolio of about $400 million to invest, putting it in the middle in terms of relative size at the firm. He would also have a guarantee that he’d take home more than 17 percent of the profits he made in his portfolio, as well as a portion of any profit Cohen made based on the ideas Martoma supplied. If he returned just
15 percent at the end of the year, he’d make more than $10 million. Almost no other hedge fund offered such a generous arrangement. Plus, he would be part of SAC’s new research team, working with the most talented people at the company.
At home that night, Martoma debated the job offer with his wife, Rosemary. She was a doctor, and she was involved in every decision he made. They concluded, based on the compensation and the prestige of working at one of the best-known hedge funds in the industry, that it was worth pursuing the job. On June 2, 2006, SAC sent him an official job offer. It included a base salary of $200,000 and a signing bonus of $2 million. Kumin noted in an internal report that Martoma had great sources of information in the biotechnology world, including a network of doctors “in the field.” Martoma signed the offer letter and sent it back. If he was smart about it, no one in his family would ever have to work again.
Martoma was a first-generation American, a son of immigrants from India who had been raised to respect and fear his parents. Status, conferred through educational achievement at name-brand institutions, was a family obsession, along with the conviction that, as newcomers to America, they had to work harder than other Americans to find financial security. Theirs was a culture in which people were introduced with a lengthy summary of their achievements and credentials, including the number of school prizes they’d won going all the way back to second grade. In addition to making him rich, SAC would add another line to his sparkling résumé.
That summer, Martoma moved with his family into an apartment in Stamford, Connecticut, and began acclimating himself to his competitive new work environment. Rosemary, pregnant with their second child, decided to devote herself to being a mother and a partner to Martoma rather than practice as a pediatrician. She was an overachiever, like her husband, and she took his work as seriously as if it were her own, giving him constant advice. Martoma was determined to do well. He fit the new SAC image Grossman had envisaged perfectly. He was a thinker, not a yeller, with all the right credentials.
In a way, Martoma was re-creating his childhood dynamic at his new firm, trying to please his demanding fathers, Cohen and Grossman. He fell into the same work habits he’d developed back when he was in high school, trying for the highest grades in the class. He started working at 4 A.M. to focus on the European stock markets and went home after the U.S. market closed to help Rosemary get the children bathed and put to bed. Then he stayed up late working another shift, reading research reports while his wife slept beside him. There was a sense of urgency to his work. He was in a hurry to find a winning trade.
Healthcare was one of the most exciting, unpredictable, and, at times, profitable areas of the stock market, where companies in heavily regulated industries were trying to create and market products to save people’s lives. Drug development and other healthcare research consumed billions in resources. Every new drug trial was a gamble, making for a volatile market in the companies’ stocks. It was one of Cohen’s favorite sectors to trade.
By the time he started at SAC, Martoma was already paying close attention to two companies, Elan Corporation and Wyeth, which were testing a new Alzheimer’s drug called bapineuzumab, or “bapi” for short. Drug development was so expensive that the two companies had teamed up to help defray the costs of years of research and drug trials. Alzheimer’s was a long-standing interest of Martoma’s, dating back to his time as an undergraduate at Duke, when he volunteered in the Alzheimer’s wing of the university medical center, and he felt that this particular drug had considerable potential. Reduced to its simplest terms, bapi had been designed to improve upon a precursor Alzheimer’s drug, AN-1792, which had had to be withdrawn from testing after it was shown to cause severe brain swelling in patients. Bapi had a less complex structure and had shown some effectiveness in animal studies. Martoma thought that it might prove to be a huge commercial success, and he wanted to learn everything he could about the science behind it and the logistics of the trials.
To do so, he planned to make use of every resource he had access to, which at SAC included several high-priced research services. One in particular was of great interest to him, the Gerson Lehrman Group, which was an “expert network” or “matchmaking” firm. The matches it made were between Wall Street investors like Martoma and people who worked inside hundreds of different publicly traded companies, people responsible for ordering new truck parts or buyers for retail chains who could provide insight on their industries, their competitors, or even their own firms. The investors paid GLG a fee to connect them with these company employees, who in turn were paid handsomely—sometimes as much as $1,000 an hour or more—to talk to the investors. The company employees were supposed to share only information that was publicly available, to avoid breaking any laws. Or at least that was the idea.
By the 2000s, after years of regulatory scrutiny, most traders had become more careful about sensitive mergers and acquisitions information. The Michael Milken case had taught traders to avoid buying shares of companies right before takeovers were announced; big price movements in stocks right before takeovers were announced often drew the attention of the SEC. Still, investors were desperate for information that might provide them with an advantage, and they went to a lot of effort to get it. Hedge fund analysts monitored shopping mall parking lots and sent spotters to China to watch trucks driving in and out of factory loading bays, searching for unique insights into how companies were doing. It was understood that information already in the public domain, like a company’s SEC filings or earnings releases, was essentially worthless for trading purposes.
In the years since the Milken case, short-term investors had turned their attention to quarterly earnings announcements instead, particularly of companies in the technology and science sectors, where the stocks could move dramatically after the results were made public. Setting up the right trade anticipating a company’s earnings release became an incredibly profitable strategy, but it only worked if you got good information about the earnings before they were announced.
Getting earnings intelligence, then, was what hedge fund traders became focused on. They badgered corporate executives for hints about what might happen. Would the third-quarter results be disappointing? Was a big announcement about next year’s growth plan coming up? The traders used whatever crumbs they gathered from these interactions—from the “body language” of the CFO to explicit details provided by investor relations staff—to trade in and out of the stock. In 2000, the SEC, deciding that such shenanigans were bad for the market, passed a rule called Regulation Fair Disclosure, often called “Regulation FD.” It prohibited public companies from offering important information about their businesses to some investors and not others. After the rule passed, companies had to tell everyone everything at the same time through public announcements and press releases. This made it much easier to get the information, but it also made the information much less useful, because everyone else had it as well. Traders had to find some other way to gain an advantage in the market.
Companies like GLG rose up to help provide it, by offering access to the heart of a company’s operations. Hedge fund traders saw the expert network firms as a way to fill the information gap. “We thought it was kind of ridiculous that the hedge fund business got so much information by asking for favors—‘Could I please have 15 minutes of your time?’—when they would certainly pay for that information,” Mark Gerson, one of GLG’s founders, said shortly after starting the company. “We just thought there should be a way to get the two connected.”
Of course, GLG told the company employees it signed up as consultants not to share material nonpublic information with their Wall Street clients. But the employees often had only a fuzzy understanding of where that line was. The hedge fund investors, on the other hand, knew exactly what they were after and would do whatever they could to get it. SAC traders loved the service and had a $1.2 million annual subscription. It enabled them to have conversations with employees who worked at all levels of c
ompanies in healthcare, telecommunications, energy, and countless other industries, people they never could have found or persuaded to talk to them on their own. SAC was one of GLG’s best customers.
On August 30, 2006, Martoma sent GLG a list of twenty-two medical experts he might want to talk with, all of whom were involved in the clinical trials for bapineuzumab. “Are any of these docs in your database?” he wrote. “I would like to seek consultations with all of them on Alzheimer’s Disease and AAB-001. For those not available, can we recruit?”
One physician in GLG’s network replied to him.
“I am Chair of the Safety Monitoring Committee for this trial,” the doctor wrote in response to Martoma’s request. “Although I know more than is publicly available, I have a confidentiality agreement and will share only information that is openly available, of course.”
The doctor was a respected neurologist in his seventies, a leading expert in Alzheimer’s research who held an endowed chair at the University of Michigan medical school. His name was Sid Gilman.
CHAPTER 4
IT’S LIKE GAMBLING AT RICK’S
Twenty-six Federal Plaza is a blunt rectangular tower surrounded by security barricades in lower Manhattan, located near the courthouses and City Hall. Michael Bowe took a deep breath as he pushed through the revolving doors, dropped his bag on the security belt, and told the guard he was visiting the New York field office of the FBI. Then he passed through the full body scanner that led to the elevators.
A partner at Kasowitz Benson Torres & Friedman, a law firm that specializes in commercial litigation, Bowe was known for his expertise in financial fraud cases. He was a broad-shouldered Irishman with ruddy skin and bright blue eyes and had the look of someone who had gotten into his share of bar fights as a young man but had since developed a taste for loafers and cashmere sweaters. It was November 2006, and Bowe was in the middle of two nasty lawsuits representing companies suing SAC Capital and a handful of other hedge funds for allegedly manipulating their stock prices. Things had gotten so ugly that there were accusations of each side rifling through the other’s garbage. Bowe had been investigating SAC and its founder for two years.