Destruction and Corruption: The Lessons from Sheelah Kolhatkar's "Black Edge"

Across the political spectrum, there was enormous outrage over the the widespread fraud and pay-to-play structures going on in Wall Street that led to the collapse of the economy and the bailing out of the big banks.  What I think most people to umbrage tow was the fact that, except for a few cases, the bankers themselves did not face any kind of prosecution for their financial malfeasance.  Lives were ruined and they got to walk away from it with billions in salaries, stock options, and bonuses.  The question is, if there is so much fraud on Wall Street, why haven't there been more major prosecutions?

This book, Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street,  tackles that question by examining the the hunt by federal investigators and prosecutors to bring down one of the most notorious hedge fund managers in the industry, Steven Cohen.  The first half of the book charts the rise of Cohen through the ranks of Wall Street to the founding of his own hedge fund, SAC Capital Advisors, through the lucrative shorting of pharmaceutical stocks where one of his advisors acquired illegal inside information to make the trade.  The second half of the book follows federal investigators and prosecutors as they fine SAC Capital and try to bring Steven Cohen himself to justice.

There are a couple of things I learned from reading this book that I think are worth taking a note of.

1. The Heartbreaking Use of Personal Friends to Acquire Inside Information- The crux of the narrative hinges on one of Mr. Cohen's underlings, Matthew Martoma, acquiring information about a Alzheimer's drug being jointly tested by two pharmaceutical companies.  For those of you who don't know, inside information is when a person acquires information critical to company's future, say an earnings report or the results of emissions tests on a new line of cars, before they are made public information.  It is illegal for stock traders to have this information and trade on it before the information is made publicly aware (if any of my friends are versed in financial regulations and sees an error in this definition, please let me know in the comments below). This may conjure up images of corporate spies hacking into computers or cracking safes at someone's office, but the truth is a little more mundane and far more heartbreaking.  Mr. Martoma, con man who was kicked out of Harvard Law School for submitting false grades in order to secure a clerkship, took advantage of a relationship with Dr. Sid Gilman, an elderly medical scientist whose eldest son had committed suicide.  According to the author, their relationship started off innocently enough, with Mr. Martoma being genuinely interested in the research he was doing.  But by the end of their relationship, Mr. Martoma was guilting Dr. Gilman into showing him the clinical test results of a new Alzheimer's drug he was testing.  Dr. Gilman knew what he was doing was wrong, but Mr. Martoma and he had built up such a relationship that he just could not say no to him.  Dr. Gilman was forced to resign from his prestigious university position in disgrace.  But the saddest part of this is that when Dr. Gilman testified at Mr. Martoma's insider trading trial, he was asked why he gave Mr. Martoma the information.  Dr. Gilman's reply was "'He was personable.... 'And he, unfortunately, reminded me of my first son.  In his inquisitiveness.  His brightness.  My first son was very bright also.'  There was a long pause. 'And he committed suicide.'" (p. 277).  Greed is not good.  Greed destroyed this relationship and ruined this mans life.
2. SAC Capital Advisors Shared Similarities to the Mob- The idea that Wall Street is filled with crooks may be hyperbole, but in some instances it's not far from the truth.  Steven Cohen created a system where he could plausibly deny that he knew that there was any inside trading going on in his company.  However, if you at the way he set up his company, it's laughable to think that he didn't know exactly what was going on.  Also, when his company came under investigation, federal investigators had to work their way up a chain of command in order to even come close to Mr. Cohen.  The entire prosecution hinged on their ability to flip people in Cohen's circle to become informants or testify against Mr. Cohen.  However, in spite of the mountain of wiretaps and circumstantial evidence they gathered, they could not flip key personnel like Mr. Martoma and never brought Mr. Cohen up on charges.  This may or may not have something to do with the fact that SAC Capital was paying for Mr. Martoma and other current and former employees, a conflict of interest if there ever was one.  If this is all sounding like an episode of the Sopranos or a rerun of The Godfather, even the author makes that analogy.  
3. MAJOR Wall Street Reform is needed- Perhaps the most outrageous aspect of this story is how little all of this mattered.  SAC Capital was forced to pay $1.2 billion in fines for its illegal trades, some SAC employees did serve some jail time, and Steven Cohen was barred from trading SAC's assets until 2018.  However, many of the employees had their convictions overturned on appeals, the federal government was successfully sued by SAC for being too aggressive in their investigations and prosecutions, and Steven Cohen was still able to trade his personal assets in the market.  In effect, nearly a decade of investigations and prosecutions ended with a slap on the wrist.  Furthermore, many of the investigators and prosecutors were hired by the very companies they had just been investigating.  Now, you can't really fault people for wanting to make more money or for companies to hire former financial investigators and prosecutors for their legal compliance sections, but this all smells capture of the regulatory bureaucracy that is suppose to be vigorously policing Wall Street.  Between this and the way companies like SAC Capital are organized to insulate their top brass from federal prosecution, is it any wonder why there have been so few major and successful prosecutions of key Wall Street figures.  Major financial reform far beyond what the Dodd-Frank Act did is necessary to bring any kind of order and justice to the financial industry consistent with what the people want.  

At the end of this book, I came away feeling that the financial industry, and hedge funds in particular, are incredibly corrupt.  The greed generated out of here destroys lives and relationships.  And until there is major reforms that really drive at the heart of the situation, then none of this will ever change.  Sadly, what is lacking is the political will to do so.  And the only way there will be political will is if the people demand change.  I just pray we don't have to have another financial crisis to gin it up.

Thank you for reading this blog.  Next week I will be reading The Evangelicals: The Struggle to Shape America by France Fitzgerald.  Until then, keep on reading!