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Steve Marcus / Reuters file
Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, listens to a question during an interview at the SkyBridge Alternatives Conference in Las Vegas in May 2011.
A correction has been made to this article.
While federal authorities aggressively pursue individual insider stock trading cases – including an ongoing investigation of Wall Street titan Steven A. Cohen’s SAC Capital hedge fund – financial regulators remain years away from being able to peer into “dark pools,” the high-tech mechanism that insiders use to conduct secret, advantageous transactions.
Federal prosecutors have been circling Cohen, 56, the founder and owner of one of the largest and most profitable U.S. hedge funds and one of the richest men in America, since at least late last year, when an indictment was unsealed against former SAC employee Mathew Martoma. He was the fifth SAC employee accused of insider trading while at the firm; four others have pleaded guilty.
The complaint, which alleges that Martoma used inside information about a clinical drug trial to help SAC earn profits and avoid losses of $276 million in 2008, indicates that Martoma told Cohen about the results of the trial. SAC then sold stock in the Elan company and purchased options, a calculated and well-informed gamble that the stock would plummet once the news was announced, according to the complaint.
Martoma, 38, pleaded not guilty to insider trading charges this month. His lawyer said he expects his client to be “fully exonerated.”
Cohen has not been charged with any crimes. A spokesman for Cohen said, "The firm and Steve Cohen are confident he acted appropriately."
The complaint also offered a look at how “dark pools” allowed Cohen's firm to trade millions of shares and hundreds of millions of dollars of stock virtually undetected.
Dark pools are essentially private stock exchanges reserved for the largest traders, including hedge funds, major institutional funds, pension funds, and big banks. The pools use computers to match buyers and sellers of a particular stock, drawing pricing data from public stock exchanges like the New York Stock Exchange or NASDAQ.
While all exchanges have a degree of anonymity, dark pools have an increased level of secrecy because neither the size of the trade nor the identity of the participants are revealed until a trade is filled. It’s like the childhood pool game of “Marco Polo,” except all the players are blindfolded rather than just one. As a result, there is no way of knowing if just one broker, one trader or one firm doing all the buying or selling.
That means institutions trying to unravel or rapidly accumulate large positions in a company can avoid the large increases or decreases that often occur when a major trader begins acquiring or dumping a stock. Essentially, without knowing who is doing the buying or selling, other investors can’t recognize a sudden large increase in supply or demand, experts on the pools tell NBC News.
In the complaint against Martoma, investigators cite an email from a “senior trader” at SAC Capital explaining how trading in dark pools and using algorithms enabled the company to avoid detection, and potential losses on its sale of Elan stock:
“This process clearly stopped leakage of info from either in (or) outside the firm and in my viewpoint clearly saved us some slippage,” it said.
The secret trades are perfectly legal. Only if they are coupled with inside information and used to give buyers or sellers an improper advantage do they cross the line.
Investors who have filed a class-action lawsuit against Cohen and SAC Capital say that’s exactly what happened with the trades in the Elan pharmaceutical company initiated by Martoma. They allege that they were at a distinct disadvantage as SAC profited from insider knowledge.
What surprises many investors is that the Securities and Exchange Commission, the regulator of the dark pool exchanges, also is in the dark, with no way of quickly determining who is trading what, according to its website. Only through historical forensic analysis of trades -- and sometimes by subpoenaing trading records – can the SEC find suspicious patterns indicative of insider trading.
The regulatory agency is putting together a system, called the Consolidated Audit Trail (CAT), capable of tracking trades in near-real time. But that is at least three years away according to the bid schedule. It is unknown if such a system could have detected the huge moves by SAC Capital in July 2008.
The SEC declined requests for comment from NBC News, but pointed to the agency’s website for the information on CAT as well as the SEC's charter, which requires it to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
That mandate puts the agency in the difficult position, observers note, because it has to encourage innovation – such as the use of dark pools -- while simultaneously protecting investors from being at a disadvantage as a result of such systems.
Insider trading by all hedge funds has been under scrutiny since August 2009, when Preet Bharara took over for the U.S. Attorney's Office for the Southern District of New York.
Since then, 76 people have been charged with the illegal act of buying and selling stock based on information from insiders, with 71 convicted, according to the U.S. Attorney ‘s Office.
While the toll of insider trading is difficult to establish, plaintiffs in the class-action lawsuit against Cohen and SAC say their case shows that the practice punished both ordinary investors and other institutions that aren’t in the know.
In going after Cohen and SAC, they are targeting one of Wall Street’s savviest traders.
Cohen is worth nearly $9 billion, according to published reports. Despite his massive art collection, 36,000 square foot home, and enormous wealth Cohen maintains a relatively low profile, rarely granting interviews.
"In speaking to Steve Cohen you wouldn't necessarily know that he has one of the greatest track records as an investor over the last 15 or 20 years and that he's one of the richest men in the country, said CNBC's David Faber, "He's fairly understated, he's far from a recluse, he has plenty of friends and is extraordinarily competitive.”
But Kreier, one of the plaintiffs in the lawsuit, said he has no compunctions about going after such a prominent player, given the high price he paid for his investment in Elan. Because he had no idea SAC Capital was dumping hundreds of millions of dollars of stock and even short-selling Elan through the dark pools, he said his confidence in the stock market is shot.
"You don't stand a chance,” he said. “You buy a stock, you're better off buying a lottery ticket."
This report originally quoted investor Howard Kreier as saying that he had sold a million-dollar Long Island home based on investing losses in 2008. In fact, he sold the home in 2005.
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The system is fixed, has been for a long time. We now live in a plutocracy. Middle class is dead. This is what the French Revolution was all about, and to some degree our own revolution.
Slavery was good for the super wealthy, they want it back again, and it looks like they will get it.
The only function a small investor has in the market is to be at the other end of a trade that benefits a large investor.
Yes, what we need is a solid dose of true nationalism, a new nationalistic party, to get rid of all these international capitalist parasites sucking our country dry. From 'free trade' at the expense of American workers, to 'free trading' at the expense of American investors - international capital influence over US political system is destroying our country.
How can something be "regulated" when the regulators tasked with oversight admit to being completely ignorant of the transactions that are occurring. On its face this situation is laughable and as other posters have noted, it completely destroys any trust in the markets.
I have followed Mr. Bharara's career this past year, and he is one of the most intelligent, articulate and inciteful individuals I have come across in some time. While Bharara has had successes, I think Cohen knew the game was rigged in such a way as to grant him sufficient indemnity.
I imagine a settlement in which the government can claim "victory" through a monetary punishment that leaves Cohen with only 8.8 billion and his promise never to behave badly again.
The international super rich have funded the GOP for years. They do not work for America, they work for their handlers, the Kochs, Norquists and LaPierres of the world.
The Democrats and the Republicans love the banksters. If you think it is only the GOP then you have had the wool pulled over your eyes.
the squillionnaires will always find a way to deal in secret and against the public interest. after 2008, all the veils came off.
Hello folks, it’s all an illusion. The Fed uses institutions and corporations to control and extract the true intrinsic money or wealth (workforce labor). It’s rigged! Example: Jamie Dimon the CEO of JPMorgan Chase Bank sits on the board of the New York Federal Reserve, the entity that determines which banks get a bailout. The Federal Reserve are the true controllers of economies.
Corporate wealth translates into political power through campaign financing, corporate lobbying and the revolving door of jobs between government and industry; and political power
translates into further wealth through tax cuts, deregulation and sweetheart
contracts between government and industry. Wealth begets power, and power
begets wealth.
There are four key sectors of US business and their control mechanism that exemplify this feedback loop and the takeover of political power in America by the ”Corporatocracy”.
First is the well-known military-industrial complex. As President Eisenhower famously warned in his
farewell address in January 1961, the linkage of the military and private
industry created a political power so pervasive that America has been condemned
to militarization, useless wars and fiscal waste on a scale of many tens of
trillions of dollars since then. If you don’t think those in power won’t start
useless wars to maintain the military economy you have been sleeping.
Second is the Wall Street/Federal Reserve - Washington complex, which has steered the financial system towards control by a few politically powerful Wall Street firms, notably Goldman Sachs,
JPMorgan Chase, Citigroup, Morgan Stanley and a handful of other financial
firms. We have a two headed one party system serving their masters the
banksters/Federal Reserve and Wall Street. The stock market is just one
gigantic Ponzi scheme. If it weren’t for the bailouts anybody with anything in
the stock market would have lost everything.
These days, almost every US Treasury secretary, Republican or Democrat, comes from Wall Street and goes back there when his term ends. The close ties between Wall Street and Washington paved the
way for the 2008 financial crisis and the mega-bailouts that followed, through
reckless deregulation followed by an almost complete lack of oversight by
government.
Third is the Big Oil-transport-military complex, which has put the US on the trajectory of heavy
oil-imports dependence and a deepening military trap in the Middle East.
Since the days of John D. Rockefeller and the Standard Oil Trust a century ago, Big Oil has loomed large in American politics and foreign policy. Big Oil teamed up with the automobile
industry to steer America away from mass transit and towards gas-guzzling
vehicles driving on a nationally financed highway system.
Big Oil has consistently and successfully fought the intrusion of competition from non-oil energy sources, including wind, solar power, fusion and Magrav technologies.
It has been at the side of the Pentagon in making sure that America defends the sea-lanes to the Persian Gulf, in effect ensuring a $US100 billion-plus annual subsidy for a fuel that is
otherwise dangerous for national security. That is why we attack, kill,
overthrow regimes and displace millions of people in countries around the world
such as Yemen, Oman, Libya, Somalia, Egypt, Iraq, etc.
And Big Oil has played a notorious role in the fight to keep climate change off the US agenda.
Exxon-Mobil, Koch Industries and others in the sector have underwritten a
generation of anti-scientific propaganda to confuse the American people.
Fourth is the healthcare industry, America’s largest industry, absorbing no less than 17 per cent of US
gross domestic product.
The key to understanding this sector is to note that the government partners with industry to reimburse costs with little systematic oversight and control. Pharmaceutical firms set sky-high
prices protected by patent rights (there is no money in the cure only in
treating the disease), Medicare (for the aged) and Medicaid (for the poor) and
private insurers reimburse doctors and hospitals on a cost-plus basis, and the
American Medical Association restricts the supply of new doctors through the
control of placements at medical schools.
The result of this pseudo-market system is sky-high costs, large profits for the private healthcare sector, and no political will to reform. While health care remains a privilege in the US
wealth remains a birthright for the elite.
There is absolutely no economic crisis in corporate America because to maintain these behemoths, austerity is imposed on the middle class and poor through some form of taxation.
Unfortunately the sheeple contribute to this psychopathy by blaming themselves and
other middle class and poor through the propaganda of the bloodsucking leeches
that caused this mess to begin with.
Consider the pulse of the corporate sector as opposed to the pulse of the employees working in it:
corporate profits in 2010 were at an all-time high, chief executive salaries in
2010 rebounded strongly from the financial crisis, Wall Street compensation in
2010 was at an all-time high, several Wall Street firms paid civil penalties
for financial abuses, but no senior banker faced any criminal charges, and
there were no adverse regulatory measures that would lead to a loss of profits
in finance, health care, military supplies and energy. These same groups
perpetrate irrecoverable atrocities on the global community and are immune to
the laws that govern the rest of us.
All the while the most vial corporation ever imagined and created, the Federal Reserve which is neither
Federal nor a reserve is bankrolling these industries through near zero percent
loans, subsidies or outright taxpayer bail outs. This is done through their central
planning role that has been granted to them via our government’s abdication of
control of the creation of our countries currency.
Unless we remove the tentacles of the Military Industrial Complex, Wall Street, Big Oil, and Big Pharma and cut the head off of this monster that is the Federal Reserve we will all be pulled
under only to suffer egregious taxation through the underhanded chicanery
called austerity.
You make many good points but its government regulations and exorbitant law suits that make drug prices high. The testing and development that must be done to get a high quality, FDA approved drug to market is in the billions of dollars, not to mention the decade of time required. And when anyone that gets sick (from the pill that they willfully put in their own mouth) and immediately sues the pharma company, they have no choice but to have high prices. You're right about Wall Street, however.
This is the EXACT reason I do not have a 401K.
In my short adult life, I have witnessed the stock market wipe out 401k's 3 times - and each time I have heard from people "dont worry, you're young enough to make that all back"
except, how can I make it all back if it keeps happening every 5 years or so?
REALITY CHECK: in order for a few to win big, everyone else must lose.
REALITY CHECK 2: you're far more likely to be the "everyone else" than the "few" who win big.
I'll happily keep my money out of the BIG CASINO called wall street.
At least when I go to Vegas and gamble my money, im doing so for the purpose of entertainment - not hanging my entire retirement on it like all idiots who have 401ks...and I get the benefit of pretty lights and free drinks, all you guys are going to get are bankrupt and devastated and unable to retire before 75.
Good to see you wised up early. The power of the average joe in this country is in universally pulling all of their money out of their 401k's and take charge of their own destiny.
Robo trading is the biggest SCAM on Wall Street.
Right on, read about this in the last month. Wall St. is a lot like date rape. They will buy you dinner but be prepared to get (Beep).
Robo trading itself is not a scam. It is just automated trading, and can typically have a stabilizing effect (but not always). It's insider trading that's the scam.
These 'dark pools' were obviously thought up by Congress to allow them to continue their insider trading once that was officially taken away from them. Ban online trading altogether. That is what is ruining the stock market and f&cking up the economy to begin with!
Just make the penalty for insider trading death!!!!!!!!!!!!!!!!!!!!!!
The man is not even going to be found guilty because it was done in secret. He'll walk.
I agree with this completely. Stock transactions are supposed to be completely transparant, at least to the SEC. How did these "dark pools" come to be? Who allowed it?
More loopholes and special privilages that can be accessed only by the uberwealthy that can afford to bribe enough law makers to create these loopholes in the first place.
Reminds me of Congress declaring that companies are people too, at least when it comes to allowing companies to make campaign contributions as an expression of their freedom of speech. What a bunch of hooey.
This does not even begin to scratch the surface of all of the abuses going on.
Robo-trading? You are right, Max. It is nothing but working the numbers to get a tiny advantage. It has nothing to do with analyses, or adding value. It is just diving for (lots of ) pennies that add up to millions.
Private stock trading markets? Lots of them, all hidden, none or few regulated.
This is what always and invariably happens when you deregulate. Cheating always pays better than real work. Takers on Wall Street, not makers!
The regulations exist, they just don't get enforced. Fraud is still a crime.
Still no regulations on derivatives. Bush pushed through drastic cuts in reserve requirements. It is a combination of not enforcing, not passing, ignoring, and getting rid of laws.
But at least with the laws in place, there is some possiblity of prosecution. When they deregulate, they are entirely above the law. Fraud is only one aspect of all of this.
Liberals keep pushing for a gun ban, it will be easier for these pricks to pick our bones clean.
Yeah. Let's get some conservative Republicans in there who deregulate these guys completely. That will solve everything.
Just so you know I despise liberals and con repubs alike, thank you.
This talk of using our pathetic little small arms against our government is insanity. A fleet of remote controlled drones would put down ANY armed resistance.
Has no connection except the super rich gun industry owning the NRA.
Yeah. Let's get some conservative Republicans in there who deregulate these guys completely. That will solve everything.
I am not a conservative Republican but deregulation would be better than bailing these mother@!$%#ers out.
"This talk of using our pathetic little small arms against our government is insanity. A fleet of remote controlled drones would put down ANY armed resistance."
Why would they do that? So they could rob our paychecks? Oops, they do that already, every week. Let's face it folks, the government owns us already. They LET you have your pop-guns, 2nd amendment has nothing to do with it (well-regulated militia, read it again), NRA (gun mfrs) have everything to do with it.
Satanick -
So, why on earth do you think we have to bail them out???
This has happened repeatedly, and will happen again. Deregulation leads to incredibly greedy and wild behavior, which leads to a crash, which leads to bailouts.
Reagan did it with the Savings and Loans - first deregulation, then they made loans to anyone with a pulse, then the loans went bad, then we bailed them out (largest bailout in history up until TARP)
Then Bush deregulated Wall Street, same thing all over.
So, do not wish for deregulation as a cure for bailouts! It is the cause of the bailouts.
Insider trading is legal if you are a city/county/state/federal elected official.
Also legal if you are an idividual or corporation that line the pockets of our elected officials with political
bribescontibutions.Nothing to see here - now move along, move along then.......
The house always wins on Wall St. Be prepared for more of the same when they turn over your social security money to thieves.
From the movie Trading Places:
"no matter if the stock goes up or down, we STILL make money."
"oh I get it ... you guys are like a couple of bookies!"
So true.
Only the GOP and Ryan-like wackos want to do this.
Call it what it is- rename 'Wall St.' to 'Corruption St.'
Does everyone now understand the TRUE meaning of 'filthy rich'?
It's because all of these s.o.b.s are filthy slime.
They should all get flushed down the toilet.
Kreier is clueless. Whether someone else owned the stock or was shorting the stock is irrelevant. Coehn did not take money from him. Kreier lost because the company released bad news. Cohen does not control the company or the news. Whether Cohen had a position or not, the stock would still have dropped.
If SAC traded on inside info...fine them. But Kreier's bad investment decision to own this stock is his own decision, Cohen did not force him to buy. If anything, Cohen selling his long position, and selling more to go short...should have pushed the price down before the news...a signal that should have given Kreier a clue.
Complaining that someone won, while you lost....is just blaming someone else for your bad decision. Be mad at the company you invested in, for their poor performance- they are to blame for the stock drop.
When people/market see that a huge hedge fund just dumped a ton of stock, what do you think the value of that stock will be....it will only go down more. And the only reason they dumped as much as they did is because they had inside info. It was because they sold so much that the value went down as much as it did.
jp- That's the gist of the article. People did not see these trades,they were hidden in a DARKPOOL!
Money don't vanish it only changes hands , so when the middle class lost their money it just went into the upper class bank account to be hidden in tax havens , and now they say we need more tax breaks so we can put the people back to work , Bull Crap
I like how the rich banksters cause the housing market to collapse and then they are out there snatching up all the low priced homes. They always win.
A page right out of the House of Morgan.
These need to be a hanging offense.
And we bail these scum out everytime they need it, and not by choice.
.....something deeper going on for sure between the Fed and Wall Street.
This is why I will never participate in the stock market again. Ever. There was a very brief time in the 1990's when you could make a bit of money in the market. Those days are long gone. I'm not going to risk my retirement savings in the Wall Street casino.
"It's called the American Dream, because you've got to be asleep to believe it."
"'I had a million dollar home, now I'm in a manufactured home,' said one of the plaintiffs, Howard Kreier of North Carolina. Today, he said, he's ashamed to talk to his friends who also bought the Elan stock on his recommendation and lost big too."
Sorry buddy, but if you put all of your money into one stock then you're the idiot. The hedge fund may be guilty of insider trading, but that only means that they knew something before everyone else did. The news would eventually come out and the stock plummet regardless of what the hedge fund did. To go from a million dollar home to a manufactured home on one bad stock pick ... Wow!
Thought it said 'dark stools'...now where did I put my glasses?
Unfortunately, there is no way for the small investor to compete with high velocity computer trading, or high powered firms with insider knowledge - or just plain smarter analysts. No reason to forego the market, however. That will just guarantee you a very low return on your money....at least for the next several years. The small investor should "ride" the broad stock market averages: S&P500, Small Cap, International Index, etc. over a longer time....5 to 10 years. Small investors putting 401k money in a S&P500 fund in the last three years have done very well. Same for a Small Cap fund. 2012 was especially good. Losses from the crash have been recouped and new money invested has grown 30% or more. When interest rates finally go back up, shift over to higher yielding CDs or Treasuries, but keep a portion in the stock market. Keep the long view and you will do all right. Forget about Cohen and his ilk....you can't compete with them anyway....and if you stay away from individual stocks, you won't get hurt by the likes of him either.....just saying..
That's all fine and good, but these banksters and Romney types need to be reined in. There are a lot of folks that are still working because these fraudsters took all of their money in 2008.
The stock market is just a legalized gambling racket, with a HUGE house advantage.
Dark pool trading should be banned - make these scumbags do their business out in the open, like all the little people have to do. Oh, but that would require congress to actually do something, and they'd have to get their lips unfastened from wall street's ass first.
Again.....What is the argument for deregulation?
This is the classic thing that occurs when the Feds fail to set rules for trading. You have the greedy bunch out there that will make their own rules and the SEC and the crooks in Washington will stand back and smile as the loot is funneled into their campaign(bribe) accounts. Why doesn't the Govt set the rules and if anybody operates outside them, they lose all of their investments in the market and all the ill gotten gains from it. We smile and slap them on the hand and fine them a few million and let them keep the other billions. If we let this go on we will have nothing but a King and Earls and Knights with all of us being the Pawns.
These banksters get rich and shareholders and 401k's pay the piper when they get caught. Seen an awful lot of settlements lately but no one is guilty. Billion dollar settlements paid by companies owned by the public while the crooks walk away with billions.
Wow ! NBC News scores another scoop ! NOT !
This article might have been timely YEARS ago.
Dark pools are OLD news. Ancient, actually. Big Banksters and Hedgies have been screwing other traders this way for years. It's just a more efficient venue for them to practice their tricks.
Dark pools are old news. The news is that another billionaire may have gotten caught. There is little to no risk of jail when you are one of the billionaire class, that pay little in taxes as the head of a hedge fund and you own more politicians than the public does.
So, while a handful of people make huge amounts of money, the vast majority of those who are playing by the rules lose confidence in the system, they pull out and the money dries up. The short-sightedness of "the few" will eventually lead to the demise of the investor class. Shameful what greed can do to a healthy economic system.
What burns my ass is a lot of the so called victims, those who say, oh invested 500,000 dollars and lost everything, knew the risk going in.. the bank pays 1.87% interest but these guys are promising 6,7,and 8 percent returns or more on their investment. The investors cannot be that dumb, just greedy! Come on now, really, did they think this was done by magic?
I see ads on Television that say, did you stock broker lose your money? Then you should come to the law firm of Dickleweed, Robyoublind, and Robyoublind. makes me so mad! Sue sue sue! Frickin ambulance chasers! No, you should have had the sense to see that if they claim they are going to provide Amazing returns there was going to be amazing risks!
What happened to the banking industry? In the past bankers where conservative bean counters. Their advice was safe, to the point of being called boring. Now they are like the Jet set Crowd, like coke heads lying and cheating and doing whatever it takes to make their millions and then get out before they get caught.. find a loophole, exploit it, doesn't matter if you lose someone Else's money, its not theirs!
And yet we hear people saying we need less government oversight? If a past administration hadn't of change the rules, the country would not have seen "The Great Recession" We need to come down hard on these #^#%^ not bail them out. Dam I wish I had a 2 million dollar golder parachute! Oh wait I work for a honest living.. what was I thinking?
The saying goes if it seems to be good to be true.. It probably is!
Vote Republican so the rich can get richer even faster.