7 min read ⌚
Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
“Black Edge” tells the story of Steven A. Cohen, a guy you may know by the moniker “hedge fund king” and a fat cat whose net worth is currently estimated to be in the region of $14 billion. In other words, he is one of the richest people in America.
But how much of his wealth did he earn fair and square?
Well, according to Sheelah Kolhatkar, not much.
Who Should Read “Black Edge”? And Why?
Covering the largest insider trading investigation in the history of the United States, “Black Edge” should be another nail in the coffin of Wall Street.
It is a new chapter in the “How-Greedy-Can-Men-Get?” novel which Wall Street has been writing for a while now.
But, to quote David Grann, the author of the equally disturbing “Killers of the Flower Moon,” “everyone should read this book,” since it’s “an essential exposé of our times—a work that reveals the deep rot in our financial system.”
About Sheelah Kolhatkar
Sheelah Kolhatkar is a New York-based staff writer for “The New Yorker” on topics such as Wall Street, Silicon Valley, and economics.
She earned an undergraduate degree from New York University and an M. A. from Stanford before becoming a risk arbitrage analyst at two different hedge funds in New York. After several years, she started a successful career as a journalist.
One of the best books of the year according to both “The Economist” and “The New York Times,” “Black Edge” is Kolhatkar’s debut book.
“Black Edge PDF Summary”
In 2008, as the world was struggling to get out of the most serious financial crisis since the Great Depression, US federal agents were struggling to put Raj Rajaratnam behind bars.
A Sri Lankan-American hedge fund manager, Rajaratnam was a Wall Street titan worth almost $2 billion at the time, so it’s not like he was a small fish in the pond.
However, what federal agents discovered while investigating Rajaratnam’s Galleon Group for insider trading, was something intriguing.
Namely, that there was an even bigger fish in the same pond.
Steve A. Cohen, one of the 30 richest people in the United States.
Born in 1956 and fascinated with finance ever since an early age, Cohen was a talented poker player and an avid “Wall Street Journal” reader even as a student at the Wharton School of the University of Philadelphia, one of the best business programs in the United States, and the world.
In 1978, at the age of 21, Cohen landed a job at a New York brokerage firm and very soon gained a reputation of a whiz kid, a genius trader.
However, just seven years later, the SEC revealed that Cohen was probably using some insider information when investing in electronics company RCA’s shares before its imminent takeover by General Electric.
The criminal case was dropped, and Cohen went about the usual business.
In 1992, at the age of 36, he founded his own investment firm, SAC Capital Advisors, with an initial investment of $23 million.
Just seven years later, the company boasted $1 billion in assets!
So, how did Steve Cohen and SAC did it?
Obviously – by aggressively hunting and hiring connected people, who were then able to give Cohen the necessary insider information.
But that wasn’t the only tactic.
SAC was also not beyond spreading false news and reports about companies, thus causing their stock prices to drop and profit hugely from betting against them.
Biovail and Fairfax – two Canadian companies – were the first to notice this practice and to blame SAC as the mastermind behind it.
And, to the surprise of no one, in 2006, SAC was accused of manipulating stock prices – another investigation which amounted to nothing.
But, then in 2008, SAC’s greediness went even further, when they earned $276 billion by short-selling the stocks of two pharmaceutical companies – Elan and Wyeth – who tried unsuccessfully to develop a cure for Alzheimer’s just seconds prior to the announcement of the results.
The SEC and the FBI took notice.
Unfortunately, on November 19, 2010, the “Wall Street Journal” published a story about SEC’s and FBI’s investigations into the matter and this resulted in the traders setting about on an operation to destroy their hard drives and all possible evidence.
However, few months later the authorities realized that there must be some kind of a connection between the Elan and Wyeth short-sale and the fact that Dr. Sidney Gilman, the chair of Elan’s safety monitoring committee, and Matthew Mortoma, a SAC trader, were talking a lot on the phone during the previous few months.
In late 2012, Matthew Mortoma – real name Ajai Thomas – was arrested, after Gilman finally agreed to cooperate.
The authorities knew that Cohen was the chief culprit, but for some reason, Mortoma didn’t implicate him, even though this could have reduced his potential sentence.
We still don’t know why he did that, for he remained quite even after being sentenced to nine years in prison in the fall of 2014.
In the meantime, SAC agreed to pay two record fines to settle the cases of insider trading, fearing that the situation may get worse.
Fortunately for Cohen, it didn’t.
On the contrary: he walked away free, rebranded SAC Capital as Point72 Asset Management and earned even more money than before.
The moral of the story.
There is none:
The hedge fund industry created unprecedented fortunes for a new generation of Wall Street traders whose primary innovation was to find ways to make more aggressive bets in the stock market. Cohen was a pioneer, the creator of a trading empire designed to gain an edge over less sophisticated investors. Years later, after paying the largest fines in the history of financial crime—and seeing a dozen of his employees implicated in insider trading—Cohen emerged from the crisis that engulfed his company as one of the world’s wealthiest men. In the end, the evidence against him that the government spent nearly ten years assembling was never presented to a jury. All that was left was for Cohen to spend his billions and to plan for his return.
Key Lessons from “Black Edge”
1. Steve Cohen Was a Gifted Investor…
2. …But He Chose to Earn Money the Illegal Way
3. The Financial System Is Rotten: And Hedge Funds Prove This
Steve Cohen Was a Gifted Investor…
Steve Cohen was a success story.
He was interested in the world of finance ever since very early age. He was a brilliant poker player in high school. He studied at the prestigious Wharton School of the University of Philadelphia.
In 1978, at the tender age of 21, Cohen was already working at a New York brokerage firm and had a reputation of a whiz kid.
In fact, he was so skilled that during the very same year, he once earned $4,000 in a single day, which is more than $15,000 in today’s money.
…But He Chose to Earn Money the Illegal Way
By 1992, Cohen had amassed a fortune of more than $20 million.
But it wasn’t enough.
He founded a firm, SAC Capital, which will become a $15 empire in a matter of years!
The whizz kid at it again?
No, not this time.
The FBI and SEC found out that the “hedge fund king” built a business model around illegal insider trading schemes. And even though they still know this to be true, there’s just not enough evidence to put Cohen behind bars.
The Financial System Is Rotten: And Hedge Funds Prove This
Hedge funds are now estimated to manage almost $3 trillion in assets!
And that’s scary.
Because these are not people who have built factories or laid railroads to compete among themselves for such a disgustingly huge amount of money.
No – these are people who merely place bets on the market.
And they are not beyond using illegal ways to discover information which might gain them the edge.
The black edge.
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“Black Edge Quotes”
Kang had thought carefully about his first line. He wanted Martoma to know that he had done his research. By this point, he knew everything about Martoma and his life, things his wife probably wasn’t even aware of. Click To Tweet
Cohen was acting like a man who was celebrating, while the government was far from finished with its investigation. The $616 million he paid the SEC was nothing, Cohen seemed to be saying. He could find that in the cushions of his Maybach. Click To Tweet
Our Critical Review
“Black Edge” is basically “Dan of Thieves” a few decades later – the only thing that’s changed is the name of the main protagonist.
If that sentence doesn’t sound scary to you – believe us – it should.
Because it basically means that numerous people are still earning money through speculation and insider trading, i.e., through cheating, without having any skin in the game.
“A tour de force of groundbreaking reporting and brilliant storytelling,” “Black Edge” documents a scandal of astronomic proportions.
Take it seriously.
Also published on Medium.