Transcripts For KQED Frontline 20140108

Hes going to upgrade amazon in six minutes. 30 seconds later, i made about a halfMillion Dollars. Narrator to information brokers. They told me they were going to arrest everybody. Narrator to sac capital. Arrested fund managers. Doesnt matter who you are. Rules are rules, and the law is the law. Narrator tonight on frontline, to catch a trader. Frontline is made possible by contributions to your pbs station from and by the corporation for public broadcasting. Major support for frontline is provided by the john d. And catherine t. Macarthur foundation. Committed to building a more just, verdant, and peaceful world. More information is available at macfound. Org. Additional funding is provided by the park foundation. Dedicated to heightening Public Awareness of critical issues. The wyncote foundation. And by the frontline journalism fund, supporting investigative reporting and enterprise journalism. Narrator november 2010. A team of reporters at the wall street journal was finishing a major story about a yearslong government investigation into Insider Trading on wall street. That friday, we had been just working so hard getting ready to put the story out and we knew that it was going to, like, really be a game changer. Narrator the article was published late that night. On new yorks upper east side, a trader, donald longueuil, was alarmed that his former employer, hedge fund giant sac capital, was named. When donald longueuil read this article on a friday night, he panicked because it became very clear to him that they were homing in on him and some of his colleagues. Narrator longueuil scrambled. He pulled apart several of his computer hard drives containing incriminating evidence and recounted what he did with the remains in a recorded conversation with his colleague noah freeman. I put them into four separate little baggies, he told freeman. And then i go on, like, a 20 block walk around the city and threw the bleep in the back of, like, random garbage trucks. Both don longueuil and noah freeman had worked at sac, and they both ended up pleading guilty after the government caught them on tape. Two former sac Portfolio Managers were named yesterday. Prosecutors alleging what many have speculated for years Insider Trading at stevie cohens sac capital. Narrator the arrests were a big shock, but not a surprise to many traders on wall street. Listen, if you walked up to a typical wall street trader and you would say, hey, is there Insider Trading at sac capital going on . , after the guy falls on the floor dying of laughter, will get up and say, yes. Martin smith he dies of laughter because its a naive question . Its a naive question. I mean, thats their reputation. Narrator the man at the top of sac capital, founder and ceo steven a. Cohen, has been the subject of numerous articles and reports, but is not speaking publicly on the issue of Insider Trading, and he declined frontlines requests for an interview. But in 2011, he was deposed for two days as part of a civil lawsuit brought against sac. The deposition video was obtained frontline. The way i understand the rules on trading Insider Information, its very vague. Are you familiar with rule 10b51 . Uh, no. No, not. You would have to explain it to me. Narrator rule 10b51 is the securities and Exchange Commissions principal regulation prohibiting Insider Trading. It states that no trades can be made while in possession of what is called material nonpublic information proprietary information that can move a companys stock. Do you have an understanding about whether when in possession of material nonpublic information, youre ever allowed to trade in a security . De um, you know, thats not the way its explained to me. The way i understand the law is that its very vague, so its an interpretation of the law. I think every Hedge Fund Manager knows what material nonpublic information is. And if they dont, i sure hope theyre not managing your money or mine. So your understanding of the sec rules on trading on inside information is that they do not preclude unequivocally trading while in possession of such information . Im not aware of that. You dont know one way or the other . No. Cbs news. On wall street, the Dow Jones Industrial is up 1. 96 to close at 840. 10. Narrator steven cohen came to wall street after graduating from Wharton Business School in the late 1970s. Steve cohen is a legend on wall street and hes widely admired for the thing that people on wall street generally admire, which is making a tremendous amount of money trading. Hes amassed one of the Great American fortunes almost entirely on his own steam as a trader. Steve cohen developed a reputation as having this sort of gifted ability to read the tape and to trade stocks. He was at a firm called gruntal, which is kind of a middling Brokerage Firm on wall street. And the environment was very much wild west, eat what you kill. You got to keep a large percentage of your profits, which wasnt really possible at a lot of other firms. And that was sort of his formative period. Thats where he learned how to trade. If you talk to people on the street, they would say thats the type of place where you learn about Insider Trading in all its capacity. Gruntal as a firm encountered a number of regulatory issues. There were people sanctioned for Insider Trading. There were a whole bunch of issues with the management of the firm. And it seemed like no one was even paying attention to what the traders were actually doing. Narrator by 1992, looking for a bigger stage to play on, cohen left gruntal with a small fortune and invested several million of it to start a Hedge Fund Called sac capital. He would help pioneer a new kind of hedge fund. Hedge funds have been around for decades, since the 40s. But the 90s is when they really took hold because a lot of guys decided they did not want to put up with the bureaucracy and the politics of big Investment Banks. They thought they were smarter than everyone else and that they could make more money if they just went out on their own. It was another wild day on wall street. The Dow Jones Industrial average took off at the opening. Its important to remember that hedge funds werent designed originally to outperform the market. Wild swings in stock prices have become almost an everyday event. They were meant to be this uncorrelated part of your portfolio. They were going to be hedged. So if a rich person wanted to protect some slice of their assets from sort of wild swings in the market, they could park some of their money in a hedge fund. They always existed. They were just much more sleepy before, i would say, 1998, 99. And thats when they started exploding. There were a number of funds that sort of had highflying, big returns, so suddenly everyone thought, okay, you know, hedge funds have juice. Theyre going to beat the market. Theyre going to make me rich. And the expectations among investors changed, and people started to think this is normal. Narrator but among the new breed of hedge funds, cohens returns stood apart. And so did his fees. He had an incredibly aggressive fee structure. The standard in the Hedge Fund Industry is whats known as two and 20. That means you charge two percent of the assets you have under management and 20 of any profits. Cohen charged three and 50, meaning three percent of assets under management and 50 of any gains. And the reason he could get away with it is really, really simple his track record, his performance were amazing, and everybody wanted in. Narrator in his first seven years of managing money, cohen had only three losing months the worst, a two percent decline. He consistently trumped the market by trading in and out of stocks quickly. Cohens strategy was really based around what people like to call an informationdriven hedge fund, so he was all about trading around, say, the quarter. Intel exceeded wall streets earnings consensus by three cents a share. Dell computes a loss in the second quarter. When a Company Announces its quarterly results, stocks will either go up or down based on that companys earnings. Up 52 from a year ago. A new phone coming, a new ipad coming, that june quarter number was scary. And cohens strategy was to get as much information as possible to have an edge. To be able to, you know, make money either on the up side or the down side depending on how a companys earnings come out. People were throwing around this term edge a lot, which essentially means, you know, whats your information advantage in the market . What do you know that other people dont know . People were talking about this very openly without any shame. Youre constantly trying to get edge. If you have edge, that means theres a reason that you know that no one else does, legal or illegal, to buy the stock. Narrator turney duff worked at the Galleon Group, a hedge fund made famous by its founder and ceo, Raj Rajaratnam. Its all about getting information. They call it trading stocks, but its really trading information. Like, thats what we were doing. So you were constantly trying to make contacts with people who could help you make more money. So i was expected to go out two, three nights a week, you know, the tabs always picked up. There was not a restaurant i couldnt go to, a club i couldnt go to, which is great for a guy in his late 20s in new york city. You know, the city was mine. It was just there for the taking, and i took. But the purpose was for me to develop relationships and get information. Narrator for traders like duff and those at other funds like sac, the more contacts, the better. You would have one guy who knew what was going to be on the cover of barrons two days before it came out and youd have another guy who would be able to call you and say, hey, a billion dollars is coming into the market in two hours. And you might go visit a friend in the cape and find out that his father is a doctor and then all of a sudden, youre thinking maybe he knows something to do with this drug thats trying to get approved by the fda. So i started to realize that almost every relationship that you have could be, you know, information that will help you formulate a trade. Narrator Hedge Fund Traders also exploited the fact that they were very popular with Stock Brokers on wall street. The reason why wall street loves these guys so much is because theyre trading every day, so the market activity they generate is immense. And as theyre trading so much, theyre giving the wall street firms commissions. As the wall street firms are getting commissions, guess what . They give the hedge funds their best information. Narrator and more importantly, they would get the information first. The more commission you pay, you know, the Better Service youre going to get. Narrator in the industry, its known as a first call. You need that first call. And youre going to pay for it. If youre paying the street 30 million to 50 million in commissions, youre going to get peoples first call. Narrator recognizing that, cohen was willing to pay brokers big commissions. The rumor about steve cohen was always that he paid exorbitant commissions in order to be the biggest fee payer on wall street so that he could get advance word about upgrades and downgrades. And ive heard many, many stories of bankers saying to their traders, if stevie calls, you drop everything. He is our best client. Banks, because you give them so much trading commissions, tell you about Market Information before the rest of the world. Now, that has been considered legal. Smith how in the hell is that legal . You know, markets are based on rumors all the time. You know, where do you draw the line between me misappropriating, getting someone to tell me what apples earnings are . Or my sources in the market are saying, apples going to knock it out of the park. You know what im saying . Its a market. People talk. But the bottom line is sac, because of its size and how much it trades, gets first dibs on that information. Narrator over a 20year lifespan, sac capital became a giant among hedge funds. And cohen himself amassed incredible wealth, including a sprawling 35,000 squarefoot mansion in greenwich, connecticut, a 62 million beach house in the hamptons, and multiple apartments in manhattan, including this 115 million midtown duplex. Cohen also assembled one of the most valuable private modern art collections in the world. And he has given tens of millions to charity. In 2002, cohen sent out christmas cards where he posed as king cohen. By 2008, his personal fortune reached 8 billion. Beating the stock market year after year, cohens returns, even with his first calls, seemed too good to be true. He takes 50 of the profits and then he returns, even after that, like 30 , 40 , 50 , 60 . Smith so in order for him to return to you a 50 profit, he has to make 100 . He has to double money. Yes, and it averaged, for many years, 30 after expenses. Smith after expenses, to deliver 30 to his clients. Yeah, thats over time, its huge. Smith . Means hes making more than 60 on the money hes managing . Now you know how you go from 25 million to 9 billion. Smith how does anybody make 60 a year . Well, the feds are asking that right now. Narrator the governments investigation of sac capital has taken a long and circuitous route. Seven years ago, it beganve focusing on a new york city hedge fund, the Galleon Group, and its ceo, Raj Rajaratnam. Rajaratnam was another wall street legend. He reigned over a very successful but relaxed, clubby and freewheeling office. He was very charismatic. He was very bubbly. And you know, it was almost as if when he walked into the office, someone was dropping rose petals in front of him, and you know, it was like the homecoming queen, and everyone loved him. Narrator but turney duff remembers getting a hint of what was really going on at galleon one day while manning the phones in rajaratnams absence. I remember sitting there on the desk one day and Raj Rajaratnam was out and the phone rings and im like, galleon, and the guys whispering or something. And im like, hello, galleon. And hes like, is raj there . And im like, no, and so hes like, hmm. Hes like, jefferies is gonna upgrade amazon in six minutes, click. And so im sitting there and im like, oh, my god, what do i do . , because if i dont buy amazon and the stocks upgraded and the stock goes up, theyre going to find out. But if i do it, you know, isnt this illegal . What should i do . And so i sat there for five minutes, sort of trying to make a decision. And i ultimately ended up buying 100,000 shares of amazon. 30 seconds later, i made about a half a Million Dollars. And i remember sitting there, saying, wow. Im like, if i got this call every day, id be a great trader too. Okay, i need my own mr. Whisper. Narrator duff left the Galleon Group in 2001. Five years later, a lawyer at Investment Bank ubs was poring over some trading records. I was in the Litigation Department at ubs. And as part of that function, i was the internal investigations coordinator. So when a matter came up that was suspicious, it would land on my desk. And what happened was this hedge fund was flagged by compliance. Narrator john moon was alerted to a hedge fund, sedna capital, suspected of violating rules regarding whats known as friends and family money. There were two parts to this hedge fund a fund that had the public investors money, and there was the fund that had the socalled friends and family money. And it appeared as though this hedge fund was allocating trades in a way that the friends and family would get all the winning trades, and the public money would get the losers. And i started to look into some of those trades, and it also appeared to me that the timing of at least one of those trades was more than fantastic. So it was determined that i should go down to the sec and report the matter. Narrator but it was the identity of sednas owner that piqued the interest of regulators. Sedna was run by Rengan Rajaratnam, and i said to them, by the way, you know, Rengan Rajaratnam is the brother of Raj Rajaratnam, who runs galleon. And that got their attention. Narrator the securities and Exchange Commission suspected that rengan was getting insider tips from his brother raj. Investigators requested Raj Rajaratnams records and in his instant messages found recent communications between him and a woman named roomy khan. A wellconnected Silicon Valley executive who once worked at intel corporation, khan was someone familiar to the fbi. This person was whats called known to the bureau. This person had been involved in Insider Trading in the past and they were punished. No sooner than they came off probation, this person was engaged and involved in Insider Trading. Smith so the sec had their eyes on this person. Right. Smith they had committed Insider Trading, been caught, been sanctioned, and then were back on the street. And so. So now the question is, how are we going to approach this person . Narrator to get khan to cooperate, an fbi agent,t, bj kang, was sent to atherton, california, to confront her at home. We try to initially do most of the talking. We tell them, were not just here to tell you that youre in trouble. I want to help you. Make it clear to that person that, you know, this isnt going to go away. Narrator kang told her what the fbi knew that she had passed valuable inside information to rajaratnam. The message that we want to get across is, this is a serious situation. You know, your life is never going to be the same again. Narrator after a twohour meeting, roomy khan agreed to cooperate and become an informant for the fbi. In new york, agents had been looking for other potential informants among rajaratnams employees. We spent months surveilling people from their home to the subway, to work, followed them on their breaks, listened to what they had to say, who they were speaking to, so that we could learn as much as we could about these people. Narrator one of those people was david slaine, a trader who once worked alongside turney duff at galleon. David slaine was one of the most feared people on wall street. Hes a big guy, very intimidating, and there wasnt a personality bigger on wall street when it came to trading. Narrator in june 2007, fbi agent david chaves and his squad moved in. And on the given day, when we felt that the timing was right, we would get behind that person in a starbucks or Dunkin Donuts and when the clerk would ask, how do you take your coffee . We would answer for him, two sugars and cream. Please come with u wed like to speak to you. Smith and what was his reaction at that moment . Stunned. Narrator slaine was stunned, and flipped. He soon provided critical insights into how Raj Rajaratnam developed his inner circle. Raj had an amazing rolodex. He had a lot of connections, and a lot of it, turns out, came from people that he went to Wharton Business School with. So the people he went to wharton with, some of them became executives in Big Companies and consulting companies, and he was still friends with a guy who worked at advanced micro devices, amd. So he continued to sort of cultivate these people. Some of them he actually had real friendships with. Narrator the fbi continued to gather more names, and when agents carroll and chaves sat down at fbi headquarters to compare notes, they realized there was more corruption out there than they had spected. As the galleon case expanded, we realized they had a Large Network of insiders and other funds that were willing to engage with them. Smith how large . Significant. Smith are we talking ten funds, 20 funds . It was a lot of funds. It was a lot of funds. Smith what did you say amongst yourselves, what did you think you were onto here . We likened it to the first jaws movie, that were going to need a bigger boat. Smith this was a bigger shark than you bargained for. It sure was. It sure was. Narrator beginning in late 2007, the fbi obtained authorization to tap the phones of galleon traders, including Raj Rajaratnam. Narrator it was the first time federal agents had used a wiretap for an Insider Trading investigation. In the past, they did it for mafia guys, they did it for drug dealers, obviously terrorism. But since the wiretap act was passed in the late 60s, that was basically it. Now weve got them going after whitecollar criminals with wiretaps. They approached it as if they were going after the mob. One of the riches of wire intercepts is the freedom that they used in talking about trading. And this cascading flow of riches is still being sorted through today. But remember, when guys are talking about stocks all day long, its not easy to decipher what may be inside information, if you will. So my personal submission is we probably missed a lot more than we captured. phone ringing hello . Hey, good morning, raj. Good morning, how are you . Good, you . Our positions are the same, so i just want to find out what you guys took. I dont have any number from last week. I just wanted to know whether you got any updates on synaptics because its a large position. About 4 million of cancellation on notebook. Rajaratnams sources ranged from everyone from, you know, lowerlevel Company Employees to fellow wall street traders. There was this dynamic character named danielle chiesi, who was a Hedge Fund Manager who considered herself a seductress. She had an affair with an ibm executive and he was giving her inside information about the computer company. But the most shocking figure in the entire insider investigation was rajat gupta. Narrator rajat gupta was one of the most respected businessmen on the street, a board member of procter gamble, American Airlines and Goldman Sachs. Gupta was sitting on a call in october of 2008, in the middle of the financial crisis, hearing how Goldman Sachs was going to get a 5 billion investment from warren buffett, arguably the most famous investor in the world. And here was rajat gupta, had that information secretly, and what does he do when the phone call ends . He hangs up the phone, he calls his friend, the Hedge Fund Manager Raj Rajaratnam, and says, youre not gonna believe whats happening. Buffetts getting an investment into Goldman Sachs. So what does rajaratnam do . He loads up on Goldman Sachs stock, and when they announce it that evening, hes able to make a lot of money. Buffetts Berkshire Hathaway is now saying it is buying a 5 billion stake in goldman. 5 billion of preferred stock. Its a huge surprise. The next day, raj gets on the phone with one of his traders in asia, and hes so proud of himself. Narrator prosecutors allege that gupta had a financial interest in passing rajaratnam insider tips. He was convicted on Insider Trading charges, but is now appealing. Rajaratnam was convicted and is serving an 11year sentence. Smith theres a picture ive seen of you with rajaratnam under arrest. Put me in the moment. There are two sides to that, where this was a culmination of the amount of work that we put into it, but the other side, the bigger side for me, was that, based in part because of the galleon investigation, we still had a tremendous amount of work to do. So it wasnt, we made the arrest, now its over. It was, we made the arrest, okay, now we continue. Narrator the fbi refocused their investigation. Informants had pointed them toward independent Research Firms known in the industry as Expert Networks. Well, a nber of traders have said to me that everyone in the business used Expert Networks, that basically, you werent doing your job if you did not talk to Expert Network consultants. Please enter your conference code now. Narrator there are about 40 Expert Networks operating nationwide. I think its pretty volatile. Narrator independent of the traders, and with almost no regulation, they can act as matchmakers, putting employees inside companies on the phone with big investors like hedge fund Portfolio Managers. Now, there were rules, and even the Expert Networks knew that there were rules as to what the public Company Employees could and could not speak to Money Managers about. So you might be able to give a broad view on, say, a product that your Company Might be developing, but you cant tell the Portfolio Manager, you know, what the upcoming quarters going to be. And of course, these wall street Money Managers, they wanted as much information as they could possibly pump out of these public Company Employees. So you had a lot of Hedge Fund Guys calling up middle managers at manufacturing equipment firms, asking them about their orders or their pipelines or how many trucks are in your parking lot. They had Portfolio Managers talking to doctors, researchers at Drug Companies to explain about the development of a particularly hot new drug. Then you had the Hedge Fund Investors paying a lot of money to these Expert Network firms, who would then pay these consultants. Narrator Expert Network firms charge as much as 5,000 for an hourlong phone call. Some Hedge Fund Clients paid as much as a Million Dollars a year. With that kind of money in play, Expert Networks were under pressure to deliver actionable information. Expert networks were the sort of middleman that misappropriated the information directly from the company to the hedge fund trader. The Hedge Fund Traders paying a lot of money. You know, they want to know more than theoretical and sort of intuition. They want to know what could move a stock. Smith they dont want just punditry. They want hard facts. And they want inside information. Smith thats what it leads to . It led to that in many, many cases. Expert networks performed a very legitimate function in the industry. They were also used for Insider Trading. And we learned this because we use cooperators to join these networks and we recorded these telephone calls. phone ringing this is james. James, good morning. This is karl. Oh, hi, karl. Narrator in 2009, the fbi had an informant pose as a Hedge Fund Manager and call an Expert Network in mountain view, california primary global research. Walk me through how it works. So do you give me a list of contacts . You will get information from our website. Narrator the informant is speaking to a pgr Vice President , james fleishman, who explains how the service works. And then well set up the call for you where we just try to provide anonymity to some degree for the experts. Thats just to protect them . Yeah, you know, we have people from a lot of public companies. Narrator fleishman also explains how to hook up with one of pgrs better experts. Generally what you want to see with these experts is that people talk to them and then they check back with them a couple months later. So theres a pattern that shes providing information thats useful, and i see a little bit of that. Narrator in an exclusive interview with frontline, fleishman described how pgr tried to protect itself. Smith individual consultants that you were linking up with the Hedge Fund Managers were asked to sign an agreement by your company. Right. Smith and that agreement stipulated what, exactly . So it stipulated that they couldnt talk specifically about their own company. They couldnt give out proprietary information about their own company. Smith and why was that agreement important . Well, because theres security laws, you know, that prohibit that type of information being exchanged. Narrator but in a manuscript fleishman shared with frontline, he admits this kind of exchange was inevitable. Smith you wrote that, it occurred to me this is your writing, in an unpublished memoir it occurred to me that over the course of these calls that experts may at times have been talking about things they should not have been. Hmm. It occurred to me. Well, i was aware of the fact that it was possible that they could be disclosing information that they shouldnt have been. But there were no. There were no specific instances that i was aware of. Smith but you did say, i mean, not only that it was possible, you say, you wrote, it was bound to happen from time to time. So you were aware that this was not just possible but was likely. No, i wouldnt say that. Smith well, you said it was bound to happen. Im quoting you, right . Okay. Smith given the volume of calls and the nature of the investment communitys thirst for information, it was bound to happen. Okay. Yeah, if you have 10,000 calls, you know, is there going to be. Is a consultant going to give out a piece of information that they shouldnt . You know, is that going to happen . The probability is yes, it will happen that someone will talk about something that they shouldnt if you have 10,000 calls. Narrator fleishman insists he did nothing wrong. But the fbi didnt only record fleishman; agents also had a wiretap on pgrs private conference line. phone ringing narrator the woman speaking is winnie jiau. A taiwaneseborn stanford graduate, jiau was a Silicon Valley contractor who made more than 200,000 as a pgr expert consultant. Winnie jiau was one of these consultants very well connected inside the technology world, especially at companies that had operations in asia. So what have you been hearing from your friends . She had worked at nvidia, so she had friends there. So she maintained the friendship. Narrator jiau was consulting for an sac trader named noah freeman. Narrator freeman shared winnies tips with his colleague donald longueuil. And these Hedge Fund Guys were making a ton of money off winnie, but. She was someone that, you know, would demand payment. She was described as a highmaintenance person. She would message them, and shed say, are you guys gonna pay . Say, yeah, sure, were putting the checks in. And then she would say, oh no, cooks need more sugar. Im gonna need more sugar than this. And noah told his secretary at one point to get a 500 Gift Certificate for a nice Womens Clothing store and to send it to her as a thankyou. And so they send her the Gift Certificate, and it gets sent back returned. Dont want it. What do you want . She wants 500 Gift Certificates to the cheesecake factory. laughs and then, uh, she wanted live lobsters. I think whats interesting is how many hoops people will go through to get to information. I mean, you would think some guy from sac capital would say, you want a lobster . You know, bleep off. You know what im saying . But no, she got the lobsters because she was giving him what he needed, which was inside information. Narrator freeman says that over a fouryear period, he made five to ten Million Dollars by trading off of winnie jiaus information. Narrator by may 2010, the fbi was ready to move in. I stopped to get some lunch at a Subway Sandwich shop. I walk in, and theres a couple guys in suits, and these two guys turn out to be fbi agents. They played recordings for me. Smith and they told you what . They told me they were going to arrest our clients. They were going to arrest our consultants. They were going to arrest everybody. Narrator fleishman served 14 months in federal prison. Winnie jiau was sentenced to four years, based on noah freemans profits. Freeman, on the other hand, began cooperating with the fbi. He has not been sentenced yet. In november 2010, the wall street journbroke the pgr story, sending donald longueuil on his frantic Early Morning effort to destroy evidence. Three days later, the fbi raided two other pgr clients. The raids come on the heels of a weekend report. Narrator both had close ties to sac capital. Diamondback Capital Management and level global investors. We knew that the u. S. Attorney in manhattan arrested members of the Expert Network firm primary global research, and we wondered when federal prosecutors would get around to charging Hedge Fund Managers. Narrator informant noah freeman had led the fbi to his good friend and former best man, donald longueuil. He also spoke openly about life as a trader at sac. He gives a laser sharp view of what life is like at sac. He tells the fbi that to do business and succeed at sac, it was understood that you give material nonpublic information. The way sac works is that these traders operate in pods. And theyre very independent. Theres not a lot of oversight. And if cohen likes one of your ideas and puts it in his portfolio, then you get a percentage of his profits as well. So if you were a cynic, you would say the incentive for people at sac is to do whatever they can to make money, and cohen doesnt have to know about it. He can be insulated from the source of peoples ideas. Narrator but in march 2013, another arrest michael steinberg, an sac Portfolio Manager very close to steven cohen. Steinbergs been at sac for ten years, trading mostlyn tech stocks, and is considered a very, very trusted confidante and source of information to cohen. He rose through the ranks. He was a trusted sort of arbiter. You know, cohen would go to him to kind of make sense of varying opinions about stocks. Narrator investigators believed that through steinberg, they had caught cohen selling an 11 million stake in Dell Computer based on illegal inside information. The government says that cohen received an email that said, i have a source inside dell thats giving me information that the quarters going to be bad. What cohens lawyers have said is that he did not read that email before he sold dell stock. He was out at his beach house in the hamptons that day when the email came across his screen and he just didnt read it. Narrator cohens lawyers add that he sold his dell shares because an sac trader he relied on was also doing so. No charges were brought against cohen. Steinberg pled not guilty to Insider Trading and was convicted in december 2013. He is currently awaiting sentencing. Narrator but now, theres another case focusing attention on cohen and sac capital. Did you ever see mr. Cohen. Mr. Martoma, are you waiting for a better deal from the government . Narrator sac Portfolio Manager Matthew Martoma is accused of using an Expert Network to obtain valuable inside information. Through an Expert Network, martoma cultivated a doctor who was involved in the Clinical Development of a very important drug for alzheimers that was being developed by two companies elan and wyeth. Wyeth is writing up its latest prescription for investors. We actually have six projects now in alzheimers disease, two of which are in Clinical Trials. We collaborate with elan on those, and. Youre collaborating with elan. To help with the drug testing, elan and wyeth had hired a university of michigan neurologist named sidney gilman, and through an Expert Network, martoma had developed a relationship with gilman, who was giving him all sorts of information. Elan corp. Up two dollars and nine cents. The company and its partner wyeth have started advanced trials for their alzheimers disease treatment. Narrator initially, the news looked good, the trials promising. Wyeth moved up two dollars and three cents to 58. 41. Theres great optimism about the success of the drug. And over the course of 2008, sac built up a huge position that was really, really bullish on elan and wyeth. And inside sac, there was a thought that it was just too risky to be exposed to those two Companies Heading into the trial announcements. There were several analysts and traders who felt very bearish on elan and wyeth, and they could not understand why martoma and cohen were building up these pretty substantial, unhedged positions. And cohen would say, well, martoma knows a lot about this. Martoma told cohen that he had the greatest conviction in the stock. And cohen said, hes my guy. And they stayed long the stock. Narrator in santa rosa, california, a pharmacist and private investor, greg kappes, thought the news looked good too. He had purchased more than 1. 2 million worth of elan shares. Smith so they had a first trial on a drug, and that looked promising to you. And that contributed to your decision to buy more shares . Yeah, i thought that was what was really going to drive this stock to levels that would make me and several other people happy. Smith and what did that mean to you when you learned that sac had taken a large position . I thought that that was a good sign. To see them pumping money into it, you think to yourself, wow, i got ahead of the curve here. Im with the big boys now. So this looked like a good thing. Narrator but unbeknownst to kappes, nearly two weeks before the drugs second round trial results were released to the public, the government claims dr. Gilman leaked the results to martoma. In the days before the results of the Clinical Trial are due, martoma allegedly gets a powerpoint from dr. Sidney gilman revealing some really bad news about these drugs, and martoma calls up steve cohen, and the only people in the world who know what happened on that conversation are martoma and steve cohen. The next day, sac started to aggressively unwind its large positions in elan and wyeth, and in fact ended up going short those two stocks to make a bet against them. Elan plc tumbling 14. 12. Thats a 42 drop. The announcement came out, the results were very negative and both elan and wyeth dropped in value. So according to the government, sac ends up making an estimated 275 million based on inside information. Narrator dr. Gilman is cooperating against martoma in what has become the largest Insider Trading case in history. Greg kappes lost more than a half Million Dollars and has joined a Class Action Lawsuit against sac. Smith so you played in the market and you lost. Happens to people all the time in the stock market. Yes. Smith what was different . sighs it was gamed. And in hindsight, what we found out is that sac knew the hand before everybody else did, and acted accordingly. Narrator this is a copy of sacs code of ethics and conduct, obtained by frontline. In the industry, its called a compliance manual. It spells out the rules prohibiting Insider Trading. In his 2011 deposition, cohen was asked by the plaintiffs attorney if he was familiar with sacs compliance manual. Now, the sac compliance manual at the time provided that if you were in possession of material nonpublic information, you could not trade, period, correct . Well, the way. Is that correct . Actually, i dont know what it says. Okay, so at the time, you didnt know what sacs compliance manual said on Insider Trading . When it comes to trading, i rely on counsel. You know, youre talking about somebody whos been in the industry for 30 years, and for him to be that oblivious of these very central things to his business in that deposition was shocking. I dont remember what it says. So you dont know today, sitting here as the head of the firm, what your compliance manual says. Ive read it, but if youre asking me what it says, today, i dont remember. What it meant was he really didnt care to have an understanding of what the rules were or even what was in his compliance manual, which just told me he didnt take those things very seriously. And there was trading in fairfax. Narrator the deposition was part of a lawsuit filed against sac and other hedge funds by a Company Called fairfax financial over allegations of price manipulation. And we went short fairfax. Fairfax had been targeted for whats classically called a bear raid, which is when short sellers go out into the marketplace and try and drive the stock price down artificially by putting out negative information about the company. Well, it really comes down to where they heard it. If they heard a rumor, i think it would be totally appropriate. Narrator michael bowe asked cohen whether he thought it was acceptable for his traders to short a stock if they have advance knowledge of negative press stories about the company. What if they sent you an email that said the reporter told me he is coming out with a negative story . Is it your testimony it would be okay for them to short . sighs if the story was not coming out in a relatively short period of time, i would say there was ambiguity on that. I think it might be okay. Narrator fairfaxs suit was dismissed, but the securities and Exchange Commission took an interest in cohens answers under oath and subpoenaed his deposition. A deposition by steve cohen may come back to haunt him as he tries to protect his sac capital from a federal Insider Trading lawsuit. Narrator in july of 2013, the sec brought a civil case against cohen, alleging he failed to supervise his traders, a charge he is fighting. They basically said, look, this was an operation where there was a complete failure of compliance, and cohen, who has his name on the door and owned 100 of the firm, failed to properly supervise these guys. Narrator that same month, the Justice Department filed a criminal indictment against sac, calling it a magnet for market cheaters. The government decided that they found Insider Trading so pervasive that they wanted to put their foot down and say, okay, this is effectively a criminal enterprise and were going to declare it that and charge the firm criminally. Narrator Steven Cohens lawyers have argued that he has never been involved in Insider Trading. Cohen has repeatedly declined frontlines requests for an interview. The embattled hedge fund is preparing to give back most of the client money it still manages, but one client is staying put. He is ed butowsky, the managing director at Chapwood Investments in dallas. Narrator but one dallas money manager, ed butowsky, did agree to talk. Allegations have been made, but you know, what kind of country do we live in when everyone in the world just starts convicting somebody when weve yet to hear back from stevie cohen . Smith its unusual for a money manager to come public like this and speak out on behalf of a fund like sac. Im not so much speaking out for the firm; im speaking out for due process. And i dont know all the facts. All i know is what has been alleged. Smith its not just allegations. Right now it is allegations. Has stevie cohen or sac been put on trial, and have they been convicted . Smith individuals have pled guilty to Insider Trading. Okay. Give me facts. Tell me exactly what it was, what it amounted to, and did stevie cohen know it, did the firm know it . Because guess what it happens. There are bad people out there. Narrator in november 2013, after months of talks. Good afternoon, everyone, my name is Preet Bharara and i am the u. S. Attorney for the Southern District of new york. Narrator sac capital agreed to plead guilty as a corporation. For engaging in Insider Trading that was substantial, pervasive, and on a scale without precedent. Narrator under a proposed agreement with prosecutors, sac would cease to operate as a hedge fund, and as sole owner, steven cohen would pay the largest Insider Trading fine in history. In the record amount of 1. 8 billion. Narrator and u. S. Attorney Preet Bharara says the Insider Trading investigations will continue. A number of people have been charged and convicted, and the investigation remains ongoing. It doesnt matter who you are, how much money you have, who youre connected to. You have to play by the same rules as everyone else. You know, rules are rules and the law is the law. Narrator cohen has not been charged with Insider Trading. The judge who sentenced Raj Rajaratnam questions if there is enough evidence. Smith the government alleged that sac capital was, quote, a veritable magnet of market cheaters. And they then decided to indict the company, not the founder and architect and president , the man who ran the company. Does that make sense . Well, you have to assume, by looking at the indictment, that the government did not believe it had the goods on mr. Cohen. Smith so if i form a company and, you know, i have 1,000 employees, but i have a couple of units of that company that are engaged in criminal behavior, even if the companys indicted, i dont really face any consequences for setting that up . In the criminal law, in order to be guilty and for the government to be able to convict you, you have to show criminal intent, a willing intent to violate the criminal laws. Smith but there is such a thing as criminal negligence. Well, yes, there is such a thing as criminal negligence, but you cant violate the Insider Trading laws. You cant commit fraud negligently. Narrator as it stands, the criminal negligence laws that cover some industries do not apply to finance. To change that, congress would need to pass a new statute. We have conspiracy statutes and we have aiding abetting statutes, and we have the criminal ability to bring a case against an institution, but we dont bring criminal cases against people for negligence. Smith do you think youll ever see a case where negligence rises to criminal liability in the Hedge Fund World . I. I would doubt that. Narrator the trial of sac Portfolio Manager Matthew Martoma, who pled not guilty, starts this week. The Justice Department is actively investigating two other Insider Trading cases involving sac. Narrator next time on frontline. The north korea the regime doesnt want seen. If people stop believing in the regime, that means Central Control is breaking down. Narrator with undercover footage and exclusive interviewfrontline uncovers a new generation risking their lives to smuggle information in and out. Any kind of uprising will probably fail, and all your relatives will be sent to prison camps. Narrator inside the secret state of north korea. Go to pbs. Org frontline for exclusive video excerpts of steven cohen being questioned about Insider Trading. You would have to explain it to me. When does a hot tip become Insider Information . Judge for yourself in our interactive quiz. Read extended interviews with turney duff, Preet Bharara and others. And connect to tfrontline community. Sign up for our newsletter, and follow us on facebook, twitter and pbs. Org frontline. Frontline is made possible by contributions to your pbs station from and by the corporation for public broadcasting. Major support for frontline is provided by the john d. And catherine t. Macarthur foundation. Committed to building a more just, verdant, and peaceful world. More information is available at macfound. Org. Additional funding is provided by the park foundation. Dedicated to heightening Public Awareness of critical issues. The wyncote foundation. And by the frontline journalism fund, supporting investigative reporting and enterprise journalism. 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