The 2009 arrest of Raj Rajaratnam of the Galleon Group was the start of a long trail of insider trading prosecutions that culminated in the prosecution of SAC Capital. The SEC had identified Steve Cohen as the worst of the insider trading hedge funds and the SEC put his SAC Capital in its cross-hairs. It convinced the Justice Department to prosecute the offenders with criminal charges.
Sheelah Kolhatkar tells the tale in Black Edge.
Ms. Kolhatkar was a hedge fund analyst and is now a staff writer at The New Yorker, where she writes about Wall Street, Silicon Valley and politics among other things. She shows a keen understanding of traders and regulators, and conveys the story into a page-turner.
I know what happens in the end to SAC Capital and Steve Cohen. I knew some of the insider trading prosecutions. I never appreciated how all of those prosections from 2009 to 2014 were tied together.
Matthew Martoma plays one of the biggest roles in the story. He was a former trader at SAC Capital who was caught red-handed on insider information about negative results from a drug trial. His source, a doctor working on the trial, passed Martoma the information. Martoma made SAC Capital a lot of money on that information and Steve Cohen profited handsomely. What the feds really wanted was for Martoma to implicate Cohen in exchange for a lesser sentence. I won’t spoil the end for you.
Besides Rajaratnam and Maratoma, the feds brought cases against Michael Steinberg, a portfolio manager at SAC, Anthony Chaisson of Level Gobal and Todd Newman of Diamondback Capital.
It was this last one that lead to the undoing of some of the ability to prosecute insider trading. The Newman appellate decision slapped tighter requirements on the government when trying to prosecute an insider trading case.
Black Edge is well worth the time if you have any interest in the area.