It’s common knowledge these days that Wall Street has a lot to answer for. After the events of the 2007-2008 financial crisis, one would hope that governments would crack down on the excesses at the heart of global finance.
Sadly, that simply has not been the case, and the injustice of this state of affairs is perfectly personified by Steve Cohen, a Wall Street investor who made billions of dollars by attaining a “black edge” over fellow investors.
Cohen procured illegal, or “black,” insider information about companies’ performances in order to gain an advantage over fellow investors. To the outside world, he was miraculously lucky, always betting on the right companies at the right time. In reality though, he was almost certainly utilizing an unfair advantage to surpass his rivals.
In 2008, in the midst of the worldwide financial crisis, US federal agents were in the process of taking down Raj Rajaratnam, a Wall Street titan, when they discovered something fascinating.
Rajaratnam was illegally using inside information from companies; he traded on this information and profited from it massively. The agents were intrigued at how one name kept cropping up during interviews with Wall Street insiders: Steve Cohen.
Was there an even larger case waiting to be uncovered? Rajaratnam, it turned out, was small fry - the investigation was only just getting started.
So who is Steve Cohen? Let’s start from the beginning.
Steve Cohen was born in 1956 and grew up in a middle-class family on Long Island, New York. From a young age, he was fascinated with finance.
As a student at the famous Wharton School at the University of Philadelphia, he read the Wall Street Journal every morning and followed the stock market. He was talented too: he played poker with his fellow students and made a lot of money doing so.
In 1978, fresh out of Wharton as a 21-year-old, he landed a job at Gruntal & Co., a New York brokerage firm. Even then, his skills shone through: in one afternoon, he made $4,000, a huge figure in 1978.
Cohen was successful, making $5 million to $10 million a year. But it didn’t take long for the first signs of wrongdoing to appear as he faced charges of insider trading.
In 1985, the Securities and Exchange Commission, or SEC, looked into Cohen’s transactions. Cohen had received inside information through a friend about an imminent takeover of electronics company RCA by General Electric. Cohen invested heavily in RCA shares and made $20 million in profits when the takeover was announced.
Even though the criminal case was later dropped, it strongly indicated Cohen had a somewhat unorthodox approach to trading.
Within 14 years, Cohen moved from being a lowly junior trader to a revered Wall Street personality. It would only be a matter of time before he wished to break free of Gruntal and venture out on his own.
So it was that in 1992, Cohen founded his own investment firm, SAC Capital Advisors, using his own initials for the company name. It was a hedge fund that profited by investing money gathered from different individuals and institutions.
Cohen began with $23 million and nine employees, and met with astronomical success. In just three years, SAC had quadrupled in size to $100 million. After that, SAC doubled each year, surpassing $1 billion in assets by 1999.
Cohen’s pockets were overflowing. But just how did he manage to make so much so quickly?
Cohen bet on short-term movements in stock prices. Each day, he gathered information about the market, bought large numbers of shares and then sold them when their price rose.
But it eventually became more complicated than that. In fact, SAC systematically attempted to receive and trade on inside information.
By the late 90s, SAC was finding it more difficult to profit from short-term trading, and Cohen sensed that things needed to be turned up a notch.
Until that point, his traders were unaware of the industries or companies whose shares they were trading. In response, Cohen started to hire
traders with a “fundamental edge,” that is, traders with deep knowledge, expertise or personal connections in a particular industry.
SAC wanted people who knew and would reveal valuable intelligence - in other words, inside information.
This Steve Cohen documentary is based on Black Edge book by Sheelah Kolhatkar.