DealBook: Insider Trading Cases Stain Hedge Fund Manager's Reputation

 Minh Uong/The New York Times

Steven A. Cohen, the once-secretive billionaire hedge fund manager, is suddenly everywhere.

On Monday, Mr. Cohen and his wife attended the Metropolitan Museum of Art’s annual Costume Institute gala, where they rubbed elbows with the rock star Mick Jagger and the quarterback Tom Brady. On Wednesday, he is scheduled to speak, before former President George W. Bush, at a prominent hedge fund conference in Las Vegas. Earlier this year, he made his first trip to Davos, Switzerland, for the World Economic Forum, where he could be seen dancing the night away at a private party.

And Mr. Cohen is bidding to buy a large stake in the New York Mets from the team’s owners.

Behind the scenes, life has not been nearly so fun.

Federal prosecutors are examining trades made in an account run by Mr. Cohen at SAC Capital Advisors, his hedge fund in Stamford, Conn., that manages about $12 billion, according to a government filing. The trades were suggested by two SAC portfolio managers who have pleaded guilty to insider trading-related crimes. The charges are part of a vast investigation into insider trading at hedge funds by the United States attorney in Manhattan that has resulted in criminal cases against at least 47 people over the last two years.

Meanwhile, Senator Charles E. Grassley, Republican of Iowa, asked the Financial Industry Regulatory Authority in a letter on April 26 to provide information on “potential scope of suspicious trading activity” at SAC.

For years, Mr. Cohen’s firm has been beset by persistent whispers of a cowboy culture that often walked up to the line, if not over it, while generating stupefying returns, minting scores of millionaire traders and making Mr. Cohen a billionaire many times over.

Earlier this year, those whispers became louder when one of the SAC portfolio managers, Noah Freeman, admitted trading on illegal tips about publicly traded companies while working for Mr. Cohen and agreed to cooperate with the government’s investigation, leading to questions about whether Mr. Cohen himself and the firm could become ensnared.

Rick Maiman/Bloomberg News Donald Longueuil, a former portfolio manager at SAC Capital, who pleaded to insider trading charges.

The other SAC portfolio manager, Donald Longueuil, pleaded guilty last week.

“The striking thing about SAC has always been its extraordinary performance in the absence of any identifiable special sauce,” said Sebastian Mallaby, the author of “More Money Than God,” a book published last year on the history of hedge funds. “Charges like these cast doubt on the legitimacy of the fund’s investment process.”

Neither SAC nor Mr. Cohen has been accused of any criminal wrongdoing and the firm is cooperating with the government’s investigation. The government’s interest in Mr. Cohen’s trades was reported earlier by The Wall Street Journal.

Unlike many hedge funds that are controlled by one portfolio manager who makes all the investment decisions, SAC is decentralized; 142 small teams are each given control over hundred of millions of dollars to invest. Mr. Cohen attracts talented, ambitious traders because he offers to pay each team as if they run their own fund — without having to raise money and run a business.

“He’s giving them a lot of autonomy — that’s the pitch,” said a former employee who asked for anonymity because he did not want to harm his relationship with Mr. Cohen. “Do I think the fish stinks at the head of SAC? No. But does the business model make it challenging to keep bad people from doing bad things? Yes.”

The firm’s unusual balkanized structure could ultimately insulate Mr. Cohen from any insider trading allegations. Most of the firm’s traders invest on their own with little direct input from Mr. Cohen, who manages less than 10 percent of the fund’s capital. The two SAC portfolio managers who pleaded guilty to insider trading worked in two different satellite offices — Boston and Manhattan — and had little contact with Mr. Cohen in the two years they worked at the firm.

Mr. Cohen, 54, who grew up in Great Neck, N.Y., on Long Island, spends most of his day either at his desk in the middle of an expansive trading floor in what feels like a domed football stadium or in his corner office, where he has an array of therapeutic devices for his bad back, including a massage table. From his desk, filled with computer screens, he manages his own portfolio, focusing primarily on health care, energy and industrial stocks. (He rarely trades technology stocks, which are the center of the government’s vast investigation into insider trading at hedge funds.) He also monitors the firm’s trading and with the flick of a switch can be piped in by video to any trader’s desk to ask questions about a particular position.

Former SAC employees describe a firm that preaches ethics and integrity, but also is a sink-or-swim culture where traders can be summarily dismissed for poor performance. Mr. Cohen, who was once known to berate his employees in middle of the trading floor, imposes what he calls a “down and out” number for portfolio managers. That is, if the portfolio managers lose a certain amount of money, they risk being jettisoned from the firm.

Mr. Cohen will increase or decrease the money each team manages depending on their performance. If a trading team is generating strong returns, Mr. Cohen will often give them more money to manage. Groups that are floundering can see their allotment cut back.

SAC portfolio managers are known for relentlessly pressing sources for information about companies in the hopes of building what they call a “mosaic” to gain an investment edge. They have incentives to share their best ideas with Mr. Cohen, and if they want to do so, they must fill out an electronic form explaining the investment and the thesis behind it. Each Sunday afternoon, Mr. Cohen speaks to his senior staff to grill them about their investment plans, but the majority of the firm’s daily trades are made without consulting him.

Teams are paid a percentage of the profits that they generate for SAC, which, including its borrowings from banks, has a staggering $39 billion in total buying power. The more money a team manages, the greater that team’s potential compensation. Top traders can earn tens of millions of dollars annually.

“It’s a Darwinian and pressure-packed culture with ridiculous amounts of money at stake,” said another former employee, who asked for anonymity because he did not want to spoil relationships at the firm.

In a letter sent to his investors in February when the two former portfolio mangers were arrested, Mr. Cohen wrote, “If the government allegations are true, these former employees’ actions are egregious violations of our policies and ethical standards and inconsistent with our culture of compliance. Any wrongdoing that might have been committed by an individual or individuals is not reflective of our organization or the integrity of our more than 850 employees.”

In the last several years, SAC has put in place a compliance program to monitor the firm’s activities and has had lawyers including Harvey L. Pitt, the former chairman of the Securities and Exchange Commission , speak to the company’s employees.

“Listen, we’ve beefed up our compliance,” Mr. Cohen told Vanity Fair magazine last year. Still, he allowed, “This was a learning process.”

He explained that, back in the 1990s, “you have to remember, we were smaller. Things were different then.”

The firm has been under a cloud since a former employee, Richard Choo-Beng Lee, pleaded guilty in 2009 to insider trading and began helping the government in its investigation. The crimes he confessed to were committed after he left SAC, but he agreed to provide information about his five years at the firm, which ended in 2004.

The United States attorney in Manhattan has twice issued subpoenas to SAC requesting the firm’s trading records. And late last year, F.B.I. agents raided two large hedge funds owned by former top SAC traders.

Mr. Cohen has declined to comment about the insider trading investigation. There have also been at least two other instances of federal authorities citing illegal trading by traders with connections to SAC.

In 2009 federal prosecutors criminally charged an investment banker with providing illegal tips about merger and acquisition deals to an unnamed hedge fund analyst who traded on the information. The analyst, who generated $3.5 million in profits for his firm, was Jonathan Hollander, a former SAC employee, according to a person with direct knowledge of the case, who would not speak publicly about it.

Mr. Hollander’s lawyer, Aitan D. Goelman, declined to comment. The government dismissed the complaint against the investment banker and has not charged Mr. Hollander with any wrongdoing.

Earlier this year, the Securities and Exchange Commission filed civil insider trading charges against Robert Feinblatt, who started his own hedge fund after leaving SAC in 2002. Mr. Feinblatt did not return telephone calls seeking comment.

Amid the distractions, Mr. Cohen continues to counter the long-held stereotype that he is a cagey hedge fund manager who never leaves his trading lair. He and his wife have stepped up his philanthropy, recently donating $50 million to finance the Cohen Children’s Medical Center on Long Island. He frequently appears at art shows, where he looks to add to a world-class collection of paintings by artists including Pablo Picasso and Andy Warhol.

Before a packed banquet room at the Waldorf Astoria hotel, Mr. Cohen recently sat for an hourlong interview at an investment conference sponsored by a Wall Street research firm.

The interviewer was a fellow hedge fund titan, Paul Tudor Jones, who refrained from asking questions about the government’s insider trading charges.

Instead, he asked Mr. Cohen about his market outlook.

“Underneath stocks are exploding, and everything I’m seeing today looks bullish,” he said. “I’m not going to get negative just for the sake of being negative.”

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Cases Without Borders: Without His Mother’s Milk, a Haitian Boy Is Lost

I got up and walked over to the hospital entrance. Because the emergency room had only two beds, and the hospital itself had limited resources, patients were sent through triage at the gate, and only those who could be treated were brought in. The others were turned away to seek care elsewhere.

Arriving at the gate, I could already smell the sharp odor of diarrhea. A young woman was holding a baby wrapped in a stained and tattered blanket. From the interpreter, I learned this was a 5-month-old boy with watery yellow diarrhea, vomiting and a decrease in oral intake during the previous four days.

Opening the blanket and looking at him, I was amazed that he was still alive. His chest looked like a chicken breast picked clean of meat. His mucus membranes were pasty dry, his eyes and fontanel were sunken and his skin hung off his arms and legs as if it were three sizes too large. At 5 months he weighed less than four and a half pounds.

The gastroenteritis, it turned out, was only what had tipped him over. On further questioning we learned that his mother had stopped nursing shortly after he was born because her “milk was bad,” and had been bottle-feeding him with watered-down 7Up soda.

Because he was so dehydrated, his veins had collapsed and the nurses in the emergency room weren’t able to place an intravenous line to give him fluids. It was clear that I’d have to insert a thick needle directly into his shinbone to deliver sterile saline solution with a syringe, an ounce at a time.

Never having done this before (though I had practiced on a raw chicken leg), I was nervous about the procedure. The only needle available was longer than his leg was thick, and I was afraid I would push it through and pin him to the mattress.

He hardly whimpered as the needle entered the tibial cavity with a crunch. We gave him the fluids and admitted him to the pediatric ward, but had no way of measuring his electrolytes. He continued to have severe diarrhea and died several hours after being admitted. While gastroenteritis can be fatal in otherwise healthy infants, his extreme malnutrition had made him more vulnerable, and we were unable to save him.

The Haitian belief in “bad milk” — “lèt gate,” in Creole — is well described by Paul Farmer in his book “Partner to the Poor” (University of California, 2010). It is one of the main reasons for the premature stopping of breast-feeding in Haiti, often with deadly consequences for the infant deprived of safe and dependable nourishment.

That same week, one of the nurses in our group was able to prevent something similar from happening to another infant for whom we were caring. Born a few hours before we arrived, and several weeks before his due date, he, too, weighed less than four and a half pounds.

He was placed in an incubator and given antibiotics, and he seemed to be doing well except for one thing: His mother refused to nurse him, or even to express milk to feed him by bottle. Denise, the nurse who cared for him the week we were there, could not understand why the mother refused so adamantly to feed her son.

She pressed the mother every time she saw her, explaining the advantages of breast milk over formula, until finally the mother explained that a previous child of hers had died in infancy, and that a houngan (voodoo priest) had told her that her milk was no good and that she must never nurse any subsequent babies or else they, too, would suffer a similar fate.

Each day Denise pleaded with her to try to nurse. On the third day, the maternal grandmother came to visit and had a long conversation with Denise, asking whether her daughter’s milk was somehow tainted. Denise assured her it was not.

The next day the mother agreed to try nursing her son. He had difficulty latching on, and she expressed a small amount into a bottle, which he eagerly gulped down.

The following morning she returned, nervous about how he had fared. Once she saw that he was fine, she unbuttoned her blouse and again tried to nurse, this time with better success. Over the next few days she continued to nurse him until she no longer needed to express into a bottle, and looked much more relaxed and in better spirits than she had since he was born.

The difference between breast milk and calorically depleted drinks, or formula prepared from water potentially contaminated with organisms that cause diseases like cholera, can be a matter of life or death. And so encouraging this young mother to give her son the sustenance he needed was a potentially lifesaving intervention, achieved through patience, education and the building of trust.

While it may not sound like much, the sad truth is that in Haiti all of these are hard to come by and remain very much in need.

Dr. Dennis Rosen is a pediatric pulmonologist at Children’s Hospital Boston and an instructor at Harvard Medical School.

 

Cases Without Borders: Without His Mother’s Milk, a Haitian Boy Is Lost

I got up and walked over to the hospital entrance. Because the emergency room had only two beds, and the hospital itself had limited resources, patients were sent through triage at the gate, and only those who could be treated were brought in. The others were turned away to seek care elsewhere.

Arriving at the gate, I could already smell the sharp odor of diarrhea. A young woman was holding a baby wrapped in a stained and tattered blanket. From the interpreter, I learned this was a 5-month-old boy with watery yellow diarrhea, vomiting and a decrease in oral intake during the previous four days.

Opening the blanket and looking at him, I was amazed that he was still alive. His chest looked like a chicken breast picked clean of meat. His mucus membranes were pasty dry, his eyes and fontanel were sunken and his skin hung off his arms and legs as if it were three sizes too large. At 5 months he weighed less than four and a half pounds.

The gastroenteritis, it turned out, was only what had tipped him over. On further questioning we learned that his mother had stopped nursing shortly after he was born because her “milk was bad,” and had been bottle-feeding him with watered-down 7Up soda.

Because he was so dehydrated, his veins had collapsed and the nurses in the emergency room weren’t able to place an intravenous line to give him fluids. It was clear that I’d have to insert a thick needle directly into his shinbone to deliver sterile saline solution with a syringe, an ounce at a time.

Never having done this before (though I had practiced on a raw chicken leg), I was nervous about the procedure. The only needle available was longer than his leg was thick, and I was afraid I would push it through and pin him to the mattress.

He hardly whimpered as the needle entered the tibial cavity with a crunch. We gave him the fluids and admitted him to the pediatric ward, but had no way of measuring his electrolytes. He continued to have severe diarrhea and died several hours after being admitted. While gastroenteritis can be fatal in otherwise healthy infants, his extreme malnutrition had made him more vulnerable, and we were unable to save him.

The Haitian belief in “bad milk” — “lèt gate,” in Creole — is well described by Paul Farmer in his book “Partner to the Poor” (University of California, 2010). It is one of the main reasons for the premature stopping of breast-feeding in Haiti, often with deadly consequences for the infant deprived of safe and dependable nourishment.

That same week, one of the nurses in our group was able to prevent something similar from happening to another infant for whom we were caring. Born a few hours before we arrived, and several weeks before his due date, he, too, weighed less than four and a half pounds.

He was placed in an incubator and given antibiotics, and he seemed to be doing well except for one thing: His mother refused to nurse him, or even to express milk to feed him by bottle. Denise, the nurse who cared for him the week we were there, could not understand why the mother refused so adamantly to feed her son.

She pressed the mother every time she saw her, explaining the advantages of breast milk over formula, until finally the mother explained that a previous child of hers had died in infancy, and that a houngan (voodoo priest) had told her that her milk was no good and that she must never nurse any subsequent babies or else they, too, would suffer a similar fate.

Each day Denise pleaded with her to try to nurse. On the third day, the maternal grandmother came to visit and had a long conversation with Denise, asking whether her daughter’s milk was somehow tainted. Denise assured her it was not.

The next day the mother agreed to try nursing her son. He had difficulty latching on, and she expressed a small amount into a bottle, which he eagerly gulped down.

The following morning she returned, nervous about how he had fared. Once she saw that he was fine, she unbuttoned her blouse and again tried to nurse, this time with better success. Over the next few days she continued to nurse him until she no longer needed to express into a bottle, and looked much more relaxed and in better spirits than she had since he was born.

The difference between breast milk and calorically depleted drinks, or formula prepared from water potentially contaminated with organisms that cause diseases like cholera, can be a matter of life or death. And so encouraging this young mother to give her son the sustenance he needed was a potentially lifesaving intervention, achieved through patience, education and the building of trust.

While it may not sound like much, the sad truth is that in Haiti all of these are hard to come by and remain very much in need.

Dr. Dennis Rosen is a pediatric pulmonologist at Children’s Hospital Boston and an instructor at Harvard Medical School.