Before The Mets, Steve Cohen Was The Hedge-Fund King
“To Catch a Trader” is a documentary film that explores the world of high-frequency trading (HFT) and its impact on the financial industry. Produced by PBS (Public Broadcasting Service), the film provides an in-depth look at the complex and often controversial practice of using algorithms and computer programs to make lightning-fast trades in financial markets.
The documentary features interviews with a range of industry experts, including traders, regulators, and academics, who provide insights into the intricacies of HFT and its potential for market manipulation, insider trading, and other illegal practices. The film also examines the challenges faced by regulators in keeping up with the rapid pace of technological change in the financial industry.
One of the central figures in the documentary is Navinder Singh Sarao, a British trader who was arrested in 2015 for his role in the "flash crash" of 2010. The film explores Sarao‘s use of HFT strategies to manipulate the market and profit from the crash, as well as the wider implications of his actions for the financial industry as a whole.
The documentary also touches on the involvement of Steve Cohen's hedge fund, SAC Capital, in the insider trading scandal that shook the financial industry in the early 2010s. SAC Capital was one of the firms investigated by the U.S. government for insider trading, and the investigation ultimately resulted in a $1.8 billion settlement and several former employees being charged or pleading guilty to insider trading charges. While Cohen himself was not charged with any wrongdoing, the investigation and settlement dealt a significant blow to his reputation and to SAC Capital as a whole.
Overall, “To Catch a Trader” is a compelling and informative documentary that raises important questions about the fairness and transparency of financial markets in the age of high-frequency trading. It provides a nuanced look at the potential benefits and drawbacks of HFT, and the challenges faced by regulators in keeping up with the rapidly evolving landscape of the financial industry.
Video Key Points:
- The Frontline documentary "To Catch a Trader" follows the rise of Steven A. Cohen from a small-time options trader to one of the most successful hedge fund managers of all time.
- Cohen founded SAC Capital, which generated some of the best returns in the industry, making him a legend on Wall Street.
- SAC Capital was eventually ensnared in a multi-year federal investigation into insider trading on Wall Street.
- In November 2010, a Wall Street Journal article exposed the government's investigation into insider trading on Wall Street, which named SAC Capital.
- Two former SAC portfolio managers, Donald Longueuil and Noah Freeman, both pleaded guilty after being caught on tape.
- Cohen himself was never charged with any wrongdoing, but he was deposed for two days as part of a civil lawsuit brought against SAC.
- The deposition video shows Cohen claiming that he did not have a clear understanding of SEC regulations prohibiting insider trading, which was met with skepticism by many on Wall Street.
- Cohen's reputation for making a tremendous amount of money trading has earned him a place in the pantheon of Wall Street legends.
- Cohen started as a small-time options trader after graduating from Wharton Business School in the late 1970s.
- Cohen declined to be interviewed for the documentary.
- The video discusses the rise and fall of hedge fund SAC Capital and its founder Steven Cohen.
- SAC Capital grew to become a prominent hedge fund over two decades, and Cohen amassed an incredible fortune, including several properties and a valuable private art collection.
- The returns he delivered to his clients seemed too good to be true, averaging 30% after expenses for many years.
- In 2013, the government began investigating SAC Capital for violating rules regarding "friends and family" money, and the SEC suspected that Rengan Rajaratnam was receiving insider tips from his brother Raj Rajaratnam, the CEO of The Galleon Group.
- Regulators found instant messages between Raj and Roomy Khan indicating insider trading, and Turney Duff, a former employee of The Galleon Group, received a hint of insider trading while working there.
- John Moon, who worked in the litigation department at UBS, was alerted to Sedna Capital, which was suspected of violating rules regarding "friends and family" money.
- Moon discovered that the hedge fund was allocating trades in a way that gave all the winning trades to friends and family while the public money received the losing trades.
- When the SEC learned that Rengan Rajaratnam owned Sedna Capital, they suspected that he was receiving insider tips from his brother Raj.
- Expert network firms act as intermediaries between public company employees and hedge fund portfolio managers
- These firms charge up to $5,000 for an hour-long phone call, and some hedge fund clients pay as much as a million dollars a year for actionable information
- However, some expert networks have been used for insider trading, which is illegal
- In 2009, the FBI had an informant pose as a hedge fund manager and call an expert network called Primary Global Research (PGR)
- PGR's vice president, James Fleishman, explained how the service worked and tried to provide anonymity for the experts
- PGR had consultants sign an agreement that they couldn't talk specifically about their own company or give out proprietary information
- However, Fleishman admitted in a manuscript that this kind of exchange was inevitable and that experts may at times have been talking about things they should not have been
- The FBI recorded Fleishman's conversation with the informant and found evidence of insider trading
- Fleishman and other PGR executives were arrested
- Expert network firms can be legitimate, but regulations are necessary to prevent illegal practices like insider trading.
- There are six Alzheimer's disease projects, two in clinical trials that the speaker's company collaborates with Elan on.
Elan and Wyeth hired Sidney Gilman to help with drug testing. Through an expert network, Martoma developed a relationship with Gilman, who was giving him inside information.
SAC built up a bullish position on Elan and Wyeth over 2008, despite some analysts and traders feeling bearish on the companies.
SAC unwound its large positions in Elan and Wyeth and eventually ended up going short on these stocks after the negative trial results were released to the public.
SAC made an estimated $275 million based on inside information, and Dr. Gilman is cooperating against Martoma in what has become the largest insider trading case in history.
Greg Kappes lost over $500k and has joined a class-action lawsuit against SAC.
SAC's compliance manual spells out the rules prohibiting insider trading, and Cohen admitted to not knowing what the manual said during his 2011 deposition.
The deposition was part of a lawsuit filed against SAC and other hedge funds by Fairfax Financial over allegations of price manipulation.