Black Edge

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (2017), a non-fiction book by American journalist Sheelah Kolhatkar, chronicles the story of Steven A. Cohen, founder of the hedge fund S.A.C. Capital and the target of a high-profile insider trading investigation. Cohen served as the real-life inspiration for the character of Bobby Axelrod on the Showtime series Billions.

Founded by Cohen in 1992, S.A.C. Capital became the highest-returning hedge fund in the world, averaging returns of 30 percent between the time of its founding and 2013. At its height, the fund managed asset-portfolios totaling $16 billion. Despite having no unified theory of investing, Cohen always seemed to make the correct bets, which the author says was "something that seemed, at least on the surface, to be impossible." The author writes that Cohen was also well served by possessing an unbelievable tolerance for risk.

His wild success, however, quickly attracted the attention of federal authorities who suspected that Cohen and S.A.C. Capital were ignoring federal laws and regulations barring insider trading. In 2009, after securing a conviction and eleven-year prison sentence for the founder of the Galleon Group hedge fund, Raj Rajaratnam, federal authorities set their sights on Cohen. By that point, Cohen had amassed a $10 billion dollar fortune, a huge Connecticut estate with an ice-skating rink in its backyard, and an art collection that included Damien's Hirst's formaldehyde-suspended shark worth over $8 million.



Kolhatkar also examines the toxic business culture at S.A.C. Capital. Partners and even mentors were fired at the drop of a hat. Cohen would frequently erupt into paroxysms of rage if any of his portfolio managers made a major lucrative trade without running it by him first. “Employees often felt like they were part of an experiment looking at the effects of prolonged stress and uncertainty.”

Meanwhile, Kolhatkar depicts illegal insider trading as not only pervasive but normalized, baked into the very fabric of S.A.C. Capital and the hedge-fund industry at large. Big banking institutions were complicit in it, tipping off S.A.C. Capital to the status of various stocks as a reward to the hedge fund for doing so much business together. S.A.C. Capital hired firms to connect it with "expert networks" made up of individuals who worked for publicly-traded companies and who could reveal insider information that would increase the success of the funds' portfolios. On paper, a host of euphemisms such as "expert networks" and "earnings intelligence" hid practices that could only be defined as and understood to be illegal insider trading.

Informally, this information had a different name within these firms: a "black edge," hence the book's title. Kolhatkar writes that Cohen was careful never to explicitly ask his employees to hunt down insider information and act on it illegally. Instead, he would demand that his employees provide him "conviction ratings" pertaining to various stocks. This was a way for him to sense whether or not the employee had inside information on stock and how reliable that information was. His careful use of euphemisms, Kolhatkar adds, is part of what kept Cohen out of jail while so many of his employees were indicted and convicted on federal charges.



After the Securities and Exchange Commission opened its investigation on S.A.C. Capital in 2010, it uncovered a number of troubling episodes. One in particular involved S.A.C. trader Mathew Martoma, a Harvard Law School washout who was expelled after faking transcripts and manipulating his own grades. Martoma "befriended" a lonely neurologist and over the course of their "friendship" Martoma tricked him into giving over information about an experimental Alzheimer's drug that S.A.C. then acted on to make a profit of $276 million. Martoma, found guilty of securities fraud and conspiracy, was sentenced to nine years in prison. Nevertheless, when asked about this and other hugely lucrative insider trading deals, Martoma's clearly brilliant and superlatively involved boss Cohen said he couldn't recall the deals in question. “The greatest trader of his generation, who could track the price movements of eighty different securities at a time, claimed not to remember. He said ‘I don’t recall’ sixty-five times.”

While the government eventually forced S.A.C. Capital to shut down in 2013, fining it $1.8 billion, its founder avoided criminal charges. Cohen's $10 billion fortune was still largely intact, and while S.A.C. was banned from securities trading, Cohen was still permitted to act as an investor at a private family office. At the end of the book, Kolhatkar notes that Cohen made $2.5 billion as a trader in 2014 alone and has plans to reopen another hedge fund.

Black Edge is an infuriating but enlightening examination of lawless behavior that, in many cases, still persists and goes unpunished.