Most of the hedge funds and individuals targeted so far in the government’s insider-trading crackdown have something in common:
They all have close ties to the gigantic hedge fund SAC Capital and its billionaire founder and head trader, Steve Cohen.
This suggests that the target of the investigation is none other than Steve Cohen himself.
Because the normal strategy in large government investigations like this is to go after the “little fish” first and use them them to get to a “big fish.”
This is the strategy the government used in the big insider-trading cases of the late 1980s, in which “little fish” like investment banker Dennis Levine were targeted first. These little fish were then often “flipped” into star witnesses for the government, and they helped bag big fish like Michael Milken and Ivan Boesky.
The government has already used this strategy to full effect in the Galleon Group investigation of last summer, and it appears to be using it again now.
The “big fish” in the current investigation would seem to be SAC founder Steve Cohen, whose extraordinary trading record–and extraordinary command of information–has raised eyebrows (and hackles) on Wall Street for years.
The “little fish,” meanwhile–who, in any other context would be huge fish–are a coterie of traders and former colleagues of Steve Cohen, some of whom remain close confidants of his.
If past is prologue, as this investigation continues, the government will gather as much evidence as it can against the little fish and then use this evidence to try to pressure one or more of them to cooperate. And then, with star witnesses and evidence in hand, the government will go after the big fish.
TARGETING THE SAC GANG
As the the FBI’s insider trading probe intensified over the last few weeks, a shared trait emerged between several of the men that feds targeted (or are said to have targeted) with wiretaps, subpoenas, and raids.
Until now, the established connection between those targets and Cohen has seemed to be that each used to or currently does work at SAC.
But according to a source familiar with the situation, Cohen’s relationship with some of those targets – David Ganek, Richard Grodin, Ian Goodman, and Michael Steinberg – goes beyond (or at least went beyond) professional collegiality.
According to a source familiar with the situation, these men formed a tight-knit group of friends who partied together in Vegas; at sports events; and at bachelor parties for years. The group also sometimes included Todd Deutsch, a former trader at Galleon Group (and also in possession of an FBI subpoeana, though he didn’t work for SAC), who was also an occasional guest through Cohen’s right-hand man, Michael Steinberg.
The crew has historically traveled – not always all together, but at least a few at a time – to Las Vegas, major sporting events like the NCAA final four and big league boxing matches, and bachelor parties.
(Sidenote: Cohen might bet big in markets, but apparently he does not at the casino tables. More evidence that he is a very smart man–one who doesn’t play games in which the odds aren’t in his favour.)
Much of the time, these lavish trips were paid for by brokers that filled orders for SAC Capital, according to a source familiar with the group.
Michael Steinberg began work at SAC Capital in 1997; he is one of the longest tenured portfolio managers at the company. Steinberg appears to be one of the few long-term SAC traders who have remained with SAC, and that may speak to his loyalty to Steve Cohen, who was a guest at Steinberg’s wedding at the Plaza Hotel in 1999.
Like many of Cohen’s top portfolio managers, Steinberg routinely called Cohen on Sunday nights, a source tells us.
If there is anything going on at SAC that could qualify as “insider trading” under the government’s new and expanded definition, it’s likely that Steinberg would know about it. And Steinberg’s close relationship with Cohen could help the Feds prove that Cohen was involved.
As a reminder, Steinberg joined SAC’s New York division in 2001, which is where he worked with former SAC manager, Richard Grodin, whose hedge fund Stratix has received a subpoena. David Ganek, also an ex-SAC portfolio manager, founder of raided hedge fund, Level Global.
Michael Steinberg and Todd Deutsch’s relationship dates back to college, the two having become close as students at the University of Wisconsin, our source said.
Steve Cohen also has a super-personal connection to another SAC alum who was recently hit by the investigation: the founder of hedge fund “Diamondback,” Richard Schimel. Schimel is married to Cohen’s sister, Wendy. Like Level Global and other funds with SAC ties, Diamondback recently got raided by the government.
THE KEY MAN: MICHAEL STEINBERG
Of all the names that have recently surfaced in the investigation, Michael Steinberg could potentially be the most valuable to the government in a campaign to take down Steve Cohen. This is because Steinberg has remained close to Cohen over the past few years, while others in the group have moved on.
A source familiar with the situation tells us that “Steve Cohen has not talked to Ganek or Grodin for many years. In fact, prior to 2003.”
“I believe Cohen was not pleased when Ganek and Grodin defected to launch their own funds, because they had been so productive for SAC,” says another source who was close to the situation at the time.
Obviously, at times, due to defections, there was tension between Cohen and his colleagues-cum-buddies. Steinberg, however, continued to keep in touch with and “share ideas” with Ganek and Grodin even after they left SAC, a source tells us.
THE FEDERAL NOOSE TIGHTENS AROUND STEVE COHEN
The Wall Street Journal reported that the government is targeting SAC, but has stumbled in recent weeks in their investigation.
Again, if past is prologue, the government will likely try to use little fish in this investigation to get to a big fish, and given the little fish that have been targeted thus far, that big fish could very well be SAC Capital and Steve Cohen.
It is important to remember of course that SAC is an enormous institution; a place where many begin their careers, and then move on to start their own shop.
A law enforcement source said the FBI has put a lot of resources into this phase of their case and it’s no coincidence that there is a common thread: “you can see where this story is going to end; they are looking in one very clear direction.”
And the man who could presumably become the best source of evidence and the star witness in any prosecution, due to his longevity at SAC, is Michael Steinberg.
SAC Capital declined to comment for this story.
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