Sheelah Kolhatkar’s cover story today in Bloomberg BusinessWeek about the SEC’s hunt to capture Steve Cohen is pretty amazing, and depending on your priors will leave you impressed or infuriated or both with the SEC. I vote both, but I always vote both.
The core of it is the story of how Sanjay Wadhwa, a senior enforcement lawyer at the SEC, got a tip from FBI agent B.J. Kang “that something big might have gone down during the summer of 2008 at SAC Capital,” though “It’s not clear whether Kang was motivated by information or intuition.” This nebulous tip led Wadhwa to research all previous SEC referrals about SAC. One that he found was a “multipage [September 2008] letter from NYSE Regulation … [that] said that someone from RBC Capital Markets had pointed out evidence of a market-moving information leak about Elan. ‘If there was a leak of information,’ the letter read, ‘it was probably during the ICAD [International Conference on Alzheimer’s Disease] conference,’ when doctors and investors would have been mingling and socializing.” Good tip!
This thesis turned out to be incorrect, but the letter did prompt the SEC to launch one of its largest investigations. It would end up issuing 140 subpoenas and amassing 2 million pages of documents as it built a case that kept leading in the direction of SAC Capital. … They tried to piece together an explanation for the astonishing amount of money SAC had made trading Elan. … The initial stages involved painstaking work: The firm’s trading records were a jumble of activity with nothing broken out. It was also difficult to discern which of SAC’s 900 employees they should focus on. …
After sifting for months through every phone call to SAC from anyone connected to Elan, the SEC team pinpointed Martoma and his source, a neurologist and Alzheimer’s expert named Dr. Sidney Gilman, who worked as a consultant to hedge funds through Gerson Lehrman. … As they tracked Martoma further back in time, a pattern emerged: Over the course of 2007 and 2008, Martoma and Gilman had spoken every time an Elan safety monitoring committee held a meeting.
Eventually they brought the case to prosecutors who arrested Martoma. Given the public information – mostly from the SEC and prosecutors at this point, but still – it’s pretty easy to believe that the SEC and prosecutors have Martoma dead to rights; Gilman has told prosecutors that he gave Martoma tons of inside information and Martoma then traded on it. So this really is – apparently – the story of a dogged team of investigators pursuing a thin lead and, through long hours of rigorous detective work, actually catching a criminal. Not Steve Cohen, but someone one level removed from him.
That is impressive. It’s hard dogged work; I am depressing myself just thinking about reading phone records for months on end. They get points for, like, the pure arete of it.
But it also sucks, doesn’t it? Read more »