(reading notes for Black Edge by Sheelah Kolhatkar)

SAC, which was one of the biggest hedge funds in the world. Kang had been learning more and more about the fund and its mysterious founder, Steven Cohen, hearing from other traders on Wall Street that Cohen was “always on the right side” of every trade—something that seemed, at least on the surface, to be impossible.

Kang knew all of this. He liked to say that he understood the difference between “the dirty, important hedge funds,” the “dirty hedge funds you didn’t need to waste time on,” and the “not-important hedge funds.”

an investigation unlike any other in the history of Wall Street, a decadelong, multiagency government crackdown on insider trading focused almost entirely on hedge funds. It began with Raj Rajaratnam and the Galleon Group and quickly expanded to ensnare corporate executives, lawyers, scientists, traders, and analysts across dozens of companies. Its ultimate target was Steven Cohen, the billionaire founder of SAC Capital Advisors, possibly the most powerful hedge fund firm the industry had ever seen.

Over time, the name hedge fund lost any connection to the careful strategy that had given such funds their name and came to stand, instead, for unregulated investment firms that essentially did whatever they wanted. Though they became known for employing leverage and taking risk, the defining attribute of most hedge funds was the enormous amounts of money the people running them were taking in:

In 2006, the same year that Lloyd Blankfein, the CEO of Goldman Sachs, was paid $54 million—causing outrage in some circles—the lowest-paid person on the list of the twenty-five highest-paid hedge fund managers made $240 million. The top three made more than a billion dollars each.

By 2015, hedge funds controlled almost $3 trillion in assets around the world and were a driving force behind the extreme wealth disequilibrium of the early twenty-first century.

If there was one person who personified the rise of hedge funds, and the way they transformed Wall Street, it was Steven Cohen. He was an enigmatic figure, even to those in his own industry, but his average returns of 30 percent a year for twenty years were legendary. What was especially intriguing about him was that his performance wasn’t based on any well-understood strategy, unlike other prominent investors such as George Soros or Paul Tudor Jones; he wasn’t famous for betting on global economic trends or predicting the decline of the housing market. Cohen simply seemed to have an intuitive sense for how markets moved, and he entered the industry at precisely the moment when society reoriented itself to reward that skill above almost all others.

By 2012, SAC had become one of the world’s most profitable investment funds, managing $15 billion.

they knew how difficult it is to beat the market, day after day, week after week, year after year. Hedge funds are always trying to find what traders call “edge”—information that gives them an advantage over other investors.

At a certain point, this quest for edge inevitably bumps up against, and then crosses, a line: advance knowledge of a company’s earnings, word that a chipmaker will get a takeover offer next week, an early look at drug trial results. This kind of information—proprietary, nonpublic, and certain to move markets—is known on Wall Street as “black edge,” and it’s the most valuable information of all.

When one trader was asked if he knew of any fund that didn’t traffic in inside information, he said: “No, they would never survive.” In this way, black edge is like doping in elite-level cycling or steroids in professional baseball. Once the top cyclists and home-run hitters started doing it, you either went along with them or you lost.

Gruntal & Co. was a small brokerage firm located around the corner from the New York Stock Exchange in the gloomy canyons of lower Manhattan. Established in 1880, Gruntal had survived the assassination of President McKinley, the crash of 1929, oil price spikes, and recessions, largely by buying up other tiny, primarily Jewish firms while also staying small enough that no one paid it much attention.

The stock market distills a basic economic principle, one that Aizer had figured out how to exploit: The more risk you take with an investment, the greater the potential reward. If there’s a chance that a single piece of news could send a stock plunging, investors expect greater possible profit for exposing themselves to those potential losses.

All this card-playing helped Cohen learn an important lesson about capitalism. There were relatively difficult ways to make money, like working as a stock boy at Bohack supermarket for $1.85 an hour, which he did one summer and found to be excruciating. And there were much easier ways to earn a buck, like beating his friends at the poker table, which he found to be quite enjoyable.

Drexel’s top mergers and acquisitions banker, Dennis Levine, was arrested and charged with orchestrating a massive insider trading scheme by paying off lawyers and bankers to leak him information about takeovers and other deals. The Levine arrest was just the beginning of the unraveling of Michael Milken’s junk bond empire, an unprecedented series of prosecutions that would dominate news headlines for months.

Over the course of a single day that would become known as Black Monday, the Dow Jones Industrial Average fell 508 points, or 23 percent, the largest one-day decline in its history. Ten years of unrestrained borrowing was coming to a sudden, painful halt.

The junk bond bubble was beginning to burst, as companies that had borrowed billions of dollars found they couldn’t pay it back. The savings and loan crisis was also getting worse, causing the collapse of more than a thousand banks around the country. Wall Street was in crisis.

Within a relatively short time, the gloom of Black Monday went away. The stock market started another long climb. The SEC’s RCA insider trading investigation petered out, apparently without charges or sanctions against anyone. The same happened with the criminal case. Through it all, a lesson that many other suspects of financial crime would come to understand in the future had emerged: Taking the Fifth could take all the momentum out of a securities investigation.

It was practically a genetic anomaly, this ability to behave like a reptile while he was trading, as opposed to a human being prone to fear and self-doubt. When he interviewed potential new hires he tried to test for this quality as best he could.

For years, hedge funds had existed apart from mainstream Wall Street, populated mainly by eccentric men who avoided publicity. A few investing celebrities had emerged from hedge funds in the 1980s, including George Soros and Paul Tudor Jones, but what exactly they did was still unclear to most people. Eventually, it became known that these brainy oddballs were quietly amassing multibillion-dollar fortunes, and the media started to pay attention. They bought mansions the size of the Taj Mahal, traveled by helicopter to beach houses on Long Island, and collected artwork that belonged in the Metropolitan Museum. They became objects of extreme envy.

Kenny Lissak,

Cohen and Lissak spent hours analyzing their trades and trying to figure out how they could have done better. Lissak characterized their core philosophy in simple terms: It was all about improving their odds of earning a profit by eliminating the ways they lost money and increasing the ways they made money. The key to making money, they believed, was by intelligently controlling their losses. Academically, this was known as risk management.

The economics of hedge funds are extremely favorable to the people running them, largely due to the exorbitant fee structure that they employ. Cohen made the decision early on to exploit this as much as he could. If investors wanted the best—him—they were going to have to pay for it. SAC was doing so well that he was able to charge higher fees than almost any other fund, keeping 50 percent of the profits at the end of the year. Most hedge funds charged 20 percent. But Cohen’s investors did not complain. In fact, they fought to get in.

The new way to command power in the financial industry was to start a hedge fund. Doing so at the right time could turn someone who might have accumulated millions over the course of a twenty-year career at Goldman Sachs or Morgan Stanley into a billionaire almost overnight. In a matter of a few years, hedge funds went from a peculiar subculture on Wall Street to the center of the industry. They were far more demanding and difficult (and almost certainly more clever) than the Fidelitys and State Streets of the world, and the Goldmans and the Morgans had to go to a lot of trouble to keep them happy. But in the end, they were paid for it. If a hedge fund that generated hundreds of millions of dollars in revenue wanted the best access to the best research or the first call, you gave it to them. Or they’d take their business elsewhere.

Drexel Burnham Lambert insider trading scandal.

etween 1998 and 1999, SAC reached an important marker, surpassing $1 billion a year in assets, which was achieved after five years of almost doubling their money each year. As SAC grew, though, the drawbacks of its bare-knuckled investing approach became increasingly hard for Cohen to ignore.

Citadel Investment Group, founded by Ken Griffin in Chicago, and Millennium Management, run out of New York

The art market offered a way to transform wealth into an alluring form of influence and power. “It is not even cool to be a billionaire anymore—there are, like, two hundred of them,” as Loïc Gouzer, a specialist in contemporary art at Christie’s New York, put it. “But, if that same guy buys a painting, suddenly it puts you in a whole circle….They enter a whole circuit. You are going to meet artists, you are going to meet tech guys. It is the fastest way to become an international name.”

a painting by Picasso called Le Rêve (The Dream)

Elan Corporation and Wyeth, which were testing a new Alzheimer’s drug called bapineuzumab

the Gerson Lehrman Group, which was an “expert network” or “matchmaking” firm. The matches it made were between Wall Street investors like Martoma and people who worked inside hundreds of different publicly traded companies, people responsible for ordering new truck parts or buyers for retail chains who could provide insight on their industries, their competitors, or even their own firms. The investors paid GLG a fee to connect them with these company employees, who in turn were paid handsomely—sometimes as much as $1,000 an hour or more—to talk to the investors. The company employees were supposed to share only information that was publicly available, to avoid breaking any laws. Or at least that was the idea.

In 2000, the SEC, deciding that such shenanigans were bad for the market, passed a rule called Regulation Fair Disclosure, often called “Regulation FD.” It prohibited public companies from offering important information about their businesses to some investors and not others. After the rule passed, companies had to tell everyone everything at the same time through public announcements and press releases. This made it much easier to get the information, but it also made the information much less useful, because everyone else had it as well. Traders had to find some other way to gain an advantage in the market.

Naturally, most corporate executives see the shorts as enemies of the happy stories they’re trying to tell about their companies, which tend to be full of puffery. For that reason, short sellers play a crucial role in the market, as the only actors who are motivated to look for problems at publicly traded companies—such as accounting fraud—which can be covered up for years. Short sellers were the first ones to point out problems with Enron.

On February 23, 2006, Biovail filed a lawsuit against SAC, naming Cohen and a few of his employees and accusing them of manipulating Biovail’s stock. The list of defendants also included Gerson Lehrman Group. The lawsuit accused the SAC traders of working together to drive Biovail’s share price down, from close to $50 to $18 in Canadian dollars.

Internet chat rooms were buzzing every day with talk about how Fairfax was going to collapse. Bowe watched one day as Fairfax’s stock fell after message boards were flooded with rumors that the company’s CEO had fled the country and that its offices were being raided by the Royal Canadian Mounted Police. Fairfax was founded by Prem Watsa, a Canadian billionaire frequently described as “Canada’s Warren Buffett” in the press. Watsa alleged that an analyst at an independent research and trading shop based in Memphis called Morgan Keegan was working in partnership with a handful of hedge funds to spread false information about Fairfax. It turned out that one of the funds was SAC Capital.

Anonymous websites had been created comparing Fairfax to Enron, and Fairfax employees reported getting prank phone calls in the middle of the night

On July 26, 2006, Bowe filed a lawsuit in New Jersey State Court, accusing SAC and a group of other funds of spreading false rumors about Fairfax in the market. The lawsuit accused the hedge funds of violating the Racketeer Influenced and Corrupt Organizations Act, or RICO, a criminal statute designed to target the Mafia by holding the leaders of a criminal syndicate responsible for the actions of its lower-level employees.

During interviews with informants and witnesses from the financial world, Kang always asked the same questions: Who are the most successful hedge fund traders? How do they make their money? Do people think they’re clean? One name came up over and over again: SAC Capital.

In the course of investigating the industry on behalf of Biovail and Fairfax, Bowe had become convinced that hedge funds were incubating a new and virulent form of corruption. At the same time that high finance was inventing a nearly incomprehensible new array of financial products and instruments, collateralizing mortgages and other debt and turning it into securities, traders were finding new ways to cheat. When it came to innovating financial crime, hedge funds were like Silicon Valley

Government intervention had made matters worse, in a classic example of unintended consequences. In 2000, New York attorney general Eliot Spitzer launched an investigation of research departments at Wall Street investment banks, ultimately charging them three years later with manipulating their buy and sell ratings on stocks, the same ratings that many investors in the market turned to as guides when evaluating the health of various companies.

“We both know that if you have tons of money at stake and nobody is watching, you will find bad conduct,” Bowe said. On Wall Street, he argued, you were likely to find a range of misdeeds: some close to the line, some over it, and a few that went way beyond. The worst stuff, Bowe was convinced, was happening at hedge funds.

SAC was, but its employees often felt like they were part of an experiment looking at the effects of prolonged stress and uncertainty.

Most investors chose to ignore the signs of impending disaster, however. Rather, they were acknowledged only by those who were open to the possibility that their rapid accumulations of wealth hadn’t made them infallibly brilliant.

Steinberg told him, speaking slowly. “What I need you to do is go out and get me edgy, proprietary information that we can use to make money in these stocks.” Steinberg paused. “You need to talk to your contacts and the companies, bankers, consultants, and leverage your peer network to get that information.” He looked hard at Horvath, seemingly to make sure that he understood.

June 2007, FBI Special Agent David Makol

David Slaine.

Cooperation consisted of dozens of interview sessions with Makol, who questioned Slaine for hours about everyone he’d ever worked with and any criminal activity he might have seen. In order to avoid prosecution, Slaine had to prove to Makol that he wasn’t holding anything back. No one could be spared, not even the people closest to him.

the insider trading rings were in many ways similar to organized crime. And like crime syndicates, many of the hedge funds the FBI was looking at were secretive and hierarchical, with the lower-level workers doing questionable things while the bosses at the top maintained intentional ignorance and reaped most of the benefits

Just as the financial crisis hit, SAC reached its peak, with close to 1,200 employees and almost $17 billion in assets, half of which belonged to Cohen and his employees. Since its founding in 1992, the firm had gone through several reinventions: first a day-trading shop staffed with Cohen’s college friends; then a more professional operation with Ivy League types; and finally a research and intelligence-gathering machine filled with analysts who specialized in different industries. Its final expansion had been the most ambitious. Cohen had pushed the company into every corner of the market, opening offices in Asia and Europe, launching a private equity unit to take stakes in private companies, and starting a bond trading group, an area he knew little about but that now accounted for a quarter of his fund. SAC’s returns had averaged 30 percent over the previous eighteen years, an impossibly high level of performance that was several times greater than the average market return. Cohen was one of the richest men in the world, worth nearly $10 billion.

Self, by the conceptual artist Marc Quinn

Damien Hirst’s shark suspended in formaldehyde, called The Physical Impossibility of Death in the Mind of Someone Living.

Portfolio managers were expected to have a moneymaking idea to pitch him and an accompanying “conviction rating”—a way of conveying how sure they were that the investment would pay off.

They were known around Wall Street as Cohen’s “henchmen,” because they had the thankless task of burning other people in the market each day on behalf of their boss. At the same time, they had to try to maintain good relationships with those same people so that they could get access to information and the flow of trading activity each day. It was an awkward job.

For years, Wall Street had made billions of dollars off the booming housing market and the baffling array of mortgage products and derivatives that emanated from it. Certain that the value of their homes would only go up, millions of Americans borrowed recklessly against them, aided and abetted at every step by the financial industry. Between 2000 and 2007, Wall Street had made more than $1.8 trillion worth of securities out of subprime mortgages. Now all of that looked suspect.

Into the midst of this tumultuous environment stumbled Mathew Martoma, the new healthcare portfolio manager at SAC’s CR Intrinsic unit. Martoma wanted to prove himself. On June 25, 2008, he instructed his trader, Timothy Jandovitz, to start accumulating shares of the pharmaceutical companies Elan and Wyeth

Elan, which was based in Ireland but traded on the New York Stock Exchange, and Wyeth, a midsized drug company founded in Philadelphia, had teamed up for the development of bapi, known also as AAB-001, in part to share the formidable costs of bringing a new pharmaceutical treatment to the market.

The writeups followed a prescribed format, with the name of the stock at the top, followed by “Target Price”—where the portfolio manager thought the stock might go—and the timing that was suggested for the trade. The most important part of the memo was the “Conviction” rating, a number on a scale of 1 to 10 that conveyed how certain the portfolio manager was about what he was suggesting.

Under “Catalysts,” which were the events he expected to move the stock price higher

Gerson Lehrman Group called itself a “knowledge broker,” a description that carried a certain irony. In reality, it was a vehicle for delivering superior information to sophisticated investors who were willing to pay for it.

the medical profession was being infiltrated by Wall Street, as more and more physicians were drawn into the web of high finance as paid sources for money managers. In 2005, Journal of the American Medical Association published a study finding that almost 10 percent of the doctors in the United States had paid ties to Wall Street investors, an increase of 750 percent since 1996. The unofficial number was probably much higher. The rapid coopting of the medical profession, according to the article, was “likely unprecedented in the history of professional-professional relationships.”

There was “white edge,” which was obvious, readily available information that anyone could find in a research report or a public document, information that wasn’t worth much, frankly, but wasn’t going to get anyone in trouble. Then there was “gray edge,” which was trickier. Any analyst doing his job well would come across this sort of information all the time. For example, an investor-relations person at a company might say something like, “Yeah, things are trending a little lower than we thought….” Was that material nonpublic information?

Karp’s third category of information was “black edge,” information that was obviously illegal. If traders came into possession of this sort of information, the stock should be restricted immediately—at least in theory. In the course of doing their work, analysts inevitably came across this type of information—a company’s specific earnings numbers before they were released, say, or knowledge that the company was about to get a big investment—although the vast majority of what the traders trafficked in was gray.

On March 7, 2008, after twelve months of digging by the SEC and the FBI, prosecutors at the Southern District of New York persuaded Judge Gerard Lynch to authorize a thirty-day tap on Rajaratnam. For almost the first time, the FBI was eavesdropping on Wall Street professionals doing their jobs.

“Dear Sid,” it read. “The password is ‘nuggets.’ ”

“400k at 34.97 all dark pools,”

After stepping down as chairman of the SEC in 2003, Pitt had founded a consulting firm called Kalorama Partners, selling his services to the private sector as an expert in compliance and regulatory issues. SAC had hired him to give a presentation to its staff on insider trading, a subject Pitt knew well.

Harvey Pitt

younger traders on Wall Street who hadn’t lived through the scandals of the 1980s and 1990s needed constant reminding about what was legal and what wasn’t. Otherwise, the past was destined to repeat itself.

“Don’t write or send any email or other electronic communication, or leave any voicemail message for anyone, if you wouldn’t want to see it in the media or have it read by regulators,” he warned.

“When is information ‘nonpublic’?” read one of the slides that Pitt had just displayed to SAC’s staff. “If it is not widely disseminated or if received with the expectation it will remain confidential.” A merger that hadn’t been announced yet was clearly inside information, based on Pitt’s or anyone else’s definition.

“Post Hoc Efficacy Analysis.”

“Watch what they do, not what they say,”

Each time the inside information worked, it raised the expectations for the next quarter, and the next quarter, and the quarter after that. The pressure to find more edge was that much greater. It was like a drug.

At SAC he’d participated in something called Tactical Behavior Assessment training, a strategy for learning how to read people’s body language for signs of deception.

It was a face chart, the sort of thing Hollander had seen in cop movies, usually tacked on walls with yarns of various colors pinned all over it: the map of a criminal conspiracy. Raj Rajaratnam, the Galleon co-founder, was on it, along with at least twenty other portfolio managers and traders, some of whom Hollander had worked with, some not. At the center was a face he recognized. It was Steve Cohen.

Kang had been consumed by the Raj Rajaratnam investigation for more than a year. It had expanded far beyond Raj to include dozens of other traders and hedge fund managers all over Wall Street. Over the preceding months, the investigation had fallen into a satisfying rhythm. The FBI would flip a cooperator, use him to gather new evidence against another trader, and then apply for a wiretap on the new trader. With each new wiretap, the FBI amassed more recordings that Kang and other agents could then use to flip more witnesses.

Their biggest challenge was that, at that moment, the two lead FBI agents on the case, Kang and Dave Makol, were locked in a bitter turf war.

also described the internal landscape of SAC and its unusual structure. It was organized like a bicycle wheel, with the spokes consisting of about a hundred portfolio managers with their own teams of analysts and traders. Cohen was the hub, sitting at the center of everything. Information made it all move. Each team had an industry it specialized in, comprising thirty or more stocks—technology, healthcare, consumer companies like Target and GE—and they were pitted against the other teams to come up with the trading ideas that would make the most money.

Lee al

Lee also explained how SAC was organized to insulate Cohen from the behavior of the lower-level traders and analysts. All of the ideas for trades were filtered through layers of portfolio managers and assigned codes for how strong they were before they reached him—a “high conviction” idea might be given to the boss without explaining why the analyst was so sure about it. Cohen wanted guaranteed moneymaking ideas; the system was designed so that Cohen did not need to know what his traders had to do to get them.

The next steps in building the expert network case were straightforward enough: They needed more wiretaps. The FBI believed that Primary Global Research, or PGR, was one of the worst offenders, based on a handful of phone calls that Kang and other agents had heard on the tapes. C. B. Lee had been able to demonstrate what expert network calls were like by posing as a hedge fund investor and contacting PGR consultants

The two agents were leading separate FBI squads—C-1 for Kang, C-35 for Makol—investigating insider trading, and they had been circling each other’s territory for the previous year like wolves.

The second wiretap on Cohen’s phone ran out, and this time the judge was not willing to extend it.

For decades after its founding in 1934, the SEC was a feared and respected force on Wall Street, its lawyers priding themselves on their discretion and political independence. Over the previous few years, however, the culture at the SEC had changed; incompetence had become ingrained. The SEC enforcement staff was openly discouraged from pursuing ambitious cases, and getting permission to send out subpoenas required four levels of managerial approval, often taking weeks. This was partly a reflection of the SEC’s chairman, Christopher Cox, a Republican congressman from California who had been appointed by George W. Bush in 2005. Cox was a reluctant regulator who made no secret of his staunchly free market, pro-business views. He felt that regulatory agencies had no business trying to tell big banks and major investors on Wall Street what to do and that the financial industry could monitor itself for bad behavior.

Cohen was the anti–Warren Buffett.

The mechanism for reporting and tracking suspicious activity in the stock market was tragically antiquated. Financial regulators were like sad, old librarians overseeing a paper card catalog long after the rest of the world had gone digital. Except that these librarians happened to be responsible for ensuring the stability of a market in which trillions of dollars change hands each day. When strange activity was detected—a sudden increase in trading in options of a company the day before a takeover was announced, for example—by a bank employee or an investor, that person was encouraged to report it to the Financial Industry Regulatory Authority. FINRA would then spit out a referral—essentially a letter pointing out that a suspicious trade had occurred, without providing much in the way of details or context. These referrals were then passed along to the SEC, which was supposed to investigate them.

People across the country were struggling to deal with the fallout from the financial crisis, and public sentiment had turned strongly against Wall Street. Families were being evicted from their homes while traders at AIG and other companies that had been bailed out by the government were once again pocketing eight-figure bonuses.

Just after 10 P.M. on Friday night, November 19, 2010, The Wall Street Journal posted an article on its website that would appear in the newspaper the next morning. “U.S. in Vast Insider Trading Probe,” the headline read.

The article had a shocking number of details about what the FBI and the SEC were doing—things that up until then had been completely secret. It identified the expert network firm PGR as one of the main targets of the investigation. It mentioned a handful of drug companies the government was looking at. It also reported that Richard Grodin, C. B. Lee’s former boss at SAC, had received a subpoena. For the government, it was a devastating leak that would alter the course of the investigation.

One, a consultant named Doug Munro—nickname “10k”—ran a company called World Wide Market Research. Munro maintained an email account under the name JUICYLUCY_XXX@yahoo.com; in it, Munro would compose emails containing inside information about Cisco and other companies but leave them in the “drafts” folder, where they supposedly would not create an email trail. Barai paid him around $8,000 a month, and Freeman paid him, too; in return, both had the password to the email account.

Barai, Freeman, and Longueuil

Their best source was Winifred Jiau. Her nicknames were “Winnie the Pooh” and “the Poohster,” and she was a little nutty. She had a statistics degree from Stanford, had worked at Taiwan Semiconductor, and had friends all over Silicon Valley, although “friends” in her case had a loose definition.

They had to prove that he had acted on the information, and that was sure to be difficult. He told himself that he’d invested using the “mosaic theory”—an approach to analyzing stocks that involved collecting disparate bits of public information about a company’s operations and putting them all together to create a “mosaic” about the business. It was a long-standing defense argument traders used to explain what prosecutors often thought of as insider trading.

Diamondback’s founders, Larry Sapanski and Richard Schimel, had been two of Steve Cohen’s most successful traders before they went out on their own in 2005.

In the Wall Street cases, by contrast, people turned on one another with very little prompting. There was no code at all, nothing beyond a shared lust for making money. Freeman hewed to type. He barely hesitated before flipping on Longueuil, who had been the best man at his wedding.

He was immediately struck by how many interview subjects had said that Cohen was trading on inside information or that people who worked at SAC were doing so with Cohen’s knowledge. At the same time, few had any hard evidence to back up their claims. There was clearly a culture of insider trading at the firm but also strong mechanisms in place to protect Cohen from what was going on. People fed tips into Cohen’s portfolio by using a numbered “conviction rating” to convey how sure they were about the value of the tip. This meant Cohen was insulated.

The three interrelated groups involved in federal securities investigations—the SEC lawyers, FBI agents, and federal prosecutors—formed a sort of unsteady but codependent triumvirate. Although they often worked together closely and the FBI was technically a subsidiary of the Justice Department, each felt some resentment toward the others, and members of each group wondered whether they were putting in most of the effort and receiving insufficient credit for the cases being filed.

Senator Charles Grassley, an influential Republican senator from Iowa, had started complaining—loudly and publicly—that the SEC was not doing its job policing the stock market. The previous month, Grassley’s office had received a tip from someone suggesting that the Senate Judiciary Committee look into a rogue hedge fund called SAC Capital.

There was a referral from May 9, 2007, reporting suspicious trades by the SAC unit CR Intrinsic in something called Connetics Corporation. Another referral from October 26, 2007, flagged SAC trades in Fidelity Bankshares. Another referral, from December 14, 2007, read: “The investigation identified timely purchase of INGR shares by two hedge funds located in Greenwich, CT that had contact with INGR during the period of June 26, 2006 through August 31, 2006.” The funds were part of SAC, and the purchases happened right before a buyout of INGR was announced. The list went on and on: problematic trades in United Therapeutics, Sirtris Pharmaceuticals, Third Wave Technologies, Cougar Biotechnology, Synutra International. Some of the trades had happened as recently as 2010. Included in the pile was the September 5, 2008, referral about Elan and Wyeth and the massive stock sales SAC had made a week before the drug trial announcement.

Kang had to leave the meeting early, but he had heard enough to be convinced about Elan. He had developed a skeptical view of what was happening on Wall Street, to put it mildly. He’d heard over and over from his cooperators and sources that cheating was rampant. When the incentives were so huge and you had so many funds competing to the death—all of them with the same Wharton-trained wizards on staff, the same state-of-the-art technology systems, the same expert network consultants, the same greed and determination—how else could you rise above everyone else and beat the market year after year?

Now that Gilman had been approached, the investigation was no longer a secret, and the SEC was free to start sending subpoenas for his personal and professional data. His calendars, his files from the University of Michigan, everything on his laptop. They were able to go back to Elan with more specific details about what they were looking for, including anything relating to Gilman’s role in the bapi trial. They could see from the phone records that Martoma and Gilman had often talked for over an hour at a time.

The one notion that kept coming to mind was that an innocent person was unlikely to pass out after hearing the words insider trading.

By the end of 2011, after five years of issuing subpoenas, flipping cooperators, and wiretapping traders, the Justice Department finally had some tangible victories to show for its investigation of the hedge fund industry. Raj Rajaratnam had been sentenced to eleven years in federal prison. Dozens of other traders and executives had been convicted or pleaded guilty. In spite of all that had been accomplished, though, there was still a sense of frustration among the FBI agents and prosecutors. And that was because they still hadn’t been able to get close to Cohen.

Even though Hollander was angry about the way he had been treated and had no sense of loyalty to Cohen or Karp or anyone else at SAC, he looked at the risk/reward ratio of the situation with Makol, just as he would with a stock trade. The government didn’t seem to have enough evidence to force him to do anything he didn’t want to do, so why should he cooperate with the FBI?

Cohen was smooth and experienced; a transcript of a deposition he had given in the Fairfax case a year earlier showed just how naturally Cohen could respond to questions without really answering them.

And if there was one thing the Bernie Madoff case had shown, it was that even sophisticated investors could fall for the lure of easy money.

One of the challenges of prosecuting white collar crime is the resource mismatch between the two sides, and this was on full display at the conference table. On Cohen’s side sat two silver-haired professionals, each of whom boasted thirty years in the industry as well as illustrious clerkships and Ivy League degrees. They were more experienced, more cynical, and, important, were making boatloads more money, working for a client with nearly unlimited funds. On the other side, Charles Riely and Amelia Cottrell were young, smart, and hardworking, products of fine colleges themselves. But they could have been associates at Klotz’s and Kramer’s firms if they hadn’t been working for the Securities and Exchange Commission.

The golden ring of defense lawyering is obtaining something called a non-prosecution agreement. It guarantees that your client won’t be charged with a felony, or even a misdemeanor, in exchange for fulfilling certain obligations, which might include testifying for the government. It is almost the best deal a defendant can get, and Preet Bharara’s office did not give them out freely. Marc Mukasey intended to secure one for Sidney Gilman. He was confident that he could make it happen because Gilman was so important to the case against Martoma.

Tim Jandovitz, had left Wall Street and was living in Chicago, where he’d started a high-concept sandwich shop that was based around a special waffle bread he had developed. He hoped it would become the next Chipotle.

On a purely financial basis, Steinberg’s case was minuscule. Under normal circumstances, the government probably wouldn’t have even bothered to charge him. He was alleged to have made only $1.4 million on his illegal trades—a tiny amount compared to the $276 million Martoma case. But the arrest sent an important message. It was the first time that someone close to Cohen was dragged out of his home in handcuffs. Unlike most of the others charged until that point, Steinberg was like Cohen’s son.

Securities fraud had a five-year statute of limitations.

Bharara had watched prosecutors in the Eastern District lose a closely watched fraud case against two Bear Stearns hedge fund traders a few years earlier, in 2009, a case that had similarly seemed to be a surefire winner. It was one of the first major criminal cases to arise out of the financial crisis, and the two fund managers were acquitted after just six hours.

Richard Zabel, Preet Bharara’s deputy, sat at the center of the “government” side of the long table. Surrounding him were the prosecutors, the securities unit chiefs, the head of the asset forfeiture unit, and the leader of the office’s criminal division. Several FBI agents were there as well as the SEC lawyers working on the Dell and Elan cases. There were so many government attorneys, seventeen in all, that someone had to get extra chairs from down the hall.

Klotz showed up looking slightly disheveled, as usual. Michael Schachter, his partner from Willkie Farr & Gallagher, took the seat next to him. Daniel Kramer, Michael Gertzman, and Mark Pomerantz, all partners at Paul, Weiss, sat next to them. Ted Wells, star trial lawyer at Paul, Weiss, was also in attendance. He didn’t speak, but the message was clear: If this case reached a courtroom, Wells, who was known to cry during his own closing arguments, would be their adversary.

Milken’s work building the junk bond market had created value for companies and communities around the country.

Milken had ushered in new methods for companies to borrow money and expand, especially companies considered too small or too risky to obtain traditional loans; his innovations had contributed to economic growth in ways modern-day hedge funds never had. Milken also launched a public relations campaign, offering interviews to news outlets he was sure would be friendly.

risk assessment and vanity

The argument Klotz made regarding Dell contained three elements: that it was highly unlikely Cohen had read the “2nd hand read” Dell email; that whether or not he had read it wasn’t relevant anyway; and finally, that even if Cohen had read the email and made a trade based on its contents, it was far from clear that it would constitute insider trading because Cohen knew so little about the original source of the tip.

The argument Klotz was making was deceptively simple. He was not making the case that Cohen had his own, brilliant, reasons for selling his shares of Dell. Rather, Cohen’s own lawyer was saying that the most successful trader of his generation was winging it every single day. Maybe he read a critical email, maybe he didn’t. Who knew? Cohen lived in a swamp of information so deep that there was simply no way to prove that any single email was even read, let alone acted upon. He was making decisions independent of his own highly paid analysts and experts, based on his gut. There was basically no method to what he did; it was all chaos.

SAC’s largest outside investor was the Blackstone Group, a giant private equity fund run by the billionaire Stephen Schwarzman.

Not much had happened during the month of August, after the indictment. The prosecutors noticed, though, that business at SAC had gone on as if nothing unusual had occurred. There were no visible crises in the market, no layoffs or margin calls. Wall Street had absorbed criminal charges against one of the largest hedge funds in the world with barely any disruption.

major investment banks like Morgan Stanley, JPMorgan Chase, and Goldman Sachs, the ones that had earned hundreds of millions of dollars in commissions from Cohen over more than a decade, refused to abandon him during his time of darkness, even though his company had been branded a criminal enterprise and Cohen himself was still at risk of criminal prosecution. It was virtually unprecedented in the financial industry. Mainstream Wall Street looked at the agency that stood for law and order and ethics in their field and at the most profitable trader they had ever worked with and then pointed at Cohen and said, “We choose you.”

Again, comparisons with Michael Milken, in many ways Cohen’s precursor, seemed appropriate. In 1989, Milken’s firm Drexel Burnham Lambert had pleaded guilty to securities fraud and agreed to pay a $650 million fine. The SAC deal was similarly impressive. For Americans who were still confused and upset about why nobody had been held legally responsible for the crimes that led to the financial crisis of 2008, the case against Cohen’s company was something different: a clear, unequivocal victory for the forces of fairness and integrity.

Martoma had been given ample opportunity to testify against his former boss in exchange for a lighter sentence, and he had refused. Instead, he went through a humiliating trial and now faced more than ten years of jail time. Why? It was the question that surrounded his case for three years.

Cohen had been working to cleanse his reputation on Wall Street as well, trying to create distance between himself and the legal scandal. As required by the criminal settlement with his company, Cohen had closed SAC and turned it into a private family office that invested only his own money, close to $10 billion. It was important to him, that $10 billion figure.

In December 2014, an appeals court overturned the convictions of Todd Newman and Anthony Chiasson, from Diamondback and Level Global, respectively, funds that had strong ties to SAC. The judges reprimanded Bharara’s office for being too aggressive in charging traders who were getting inside information indirectly, from friends or employees, rather than from the company insider himself.

In what came to be known as the “Newman decision,” the court said that in order for a trader to be prosecuted for trading on material nonpublic information, he or she had to be aware of the benefit the original leaker of the information had received. In many of the insider trading rings, traders got earnings or revenue numbers from other traders, knowing that they originated with someone inside the company and little else. The court also ruled that the benefit the leaker received in exchange for sharing the information had to be something tangible, akin to money. Friendship or favor-trading on its own was not enough.

It was yet another measure of vindication for Cohen, essentially legalizing the don’t-ask-don’t-tell information-gathering model employed at SAC. Bharara said that the decision will affect only about 10 percent of the cases his office filed, but he believes that a large category of insider trading will now go unpunished and that the precedent creates yet another advantage for wealthy and well-connected people with access to valuable information

It basically grants permission to trade on material nonpublic information, as long as you don’t know too much about where it came from. “This creates an obvious road map for unscrupulous behavior,” Bharara said.

Two years after the initial Newman decision, in December 2016, the Supreme Court ruled unanimously in an unrelated insider trading case that the Newman ruling had gone too far, and that valuable information given to a friend or a relative did count as an improper benefit, offering some measure of vindication to the Justice Department.

The charges that the SEC filed against Cohen in 2013, accusing him of failing to supervise Steinberg and Martoma, were quietly settled in January 2016. The appeals court ruling in the Newman and Chiasson case had weakened the SEC, and the agency resolved the case with only one significant sanction against Cohen, which barred him from managing outside investor money for two years. The deal leaves him free to return to the hedge fund business in 2018.

Meanwhile, the prosecutors and regulators involved in building the case against Cohen and SAC have moved on to more lucrative careers.

Lorin Reisner, the head of Bharara’s criminal division who helped negotiate SAC’s $1.8 billion fine, became a partner at Paul, Weiss, the same law firm that supplied Cohen’s legal defense team. Antonia Apps, the prosecutor who tried the Steinberg case, left the government for a partnership at Milbank, Tweed, Hadley & McCloy, another corporate law firm where she does white collar defense work. Bharara’s deputy, Richard Zabel, announced that he was taking a job as general counsel at a hedge fund called Elliott Management, which is run by the prominent billionaire political donor Paul Singer. After twenty-five years with the FBI, B. J. Kang’s former supervisor, Patrick Carroll, joined Goldman Sachs as a vice president in its compliance group. Arlo Devlin-Brown, who led the Martoma prosecution, became a partner at Covington & Burling. The most startling move of all, however, came from Amelia Cottrell, a senior enforcement attorney at the SEC who oversaw the agency’s Martoma investigation. At the end of June 2015, she shocked her colleagues by announcing that she was joining Willkie Farr, the firm where Cohen’s longtime defense counsel Marty Klotz worked. It turned out that leading the most powerful case the government assembled against Cohen was the best possible audition for a job working for his consigliere.

The financial industry has evolved to be so complex that large parts of it are almost completely beyond the reach of regulators and law enforcement. Wall Street’s most successful enterprises are constantly pushing into the frontier; every time the law looks like it’s catching up, they move farther away. There is a perception that in the years after the Milken era, and especially since the financial crisis of 2008, it has become almost impossible, due to a lack of will or expertise, to prosecute corporate criminals who operate at the highest levels.

The Justice Department was unable, or unwilling, to bring any senior Wall Street figures to face criminal charges for the widespread fraud that swept the financial system prior to 2008. Instead, it extracted billions of dollars in fines from the world’s largest banks. In 2015, in response to criticism regarding the lack of individual prosecutions, the Justice Department announced aggressive new policies on financial crime that would focus on holding individuals accountable, although as of this writing, little seemed to have changed.

Years later, after paying the largest fines in the history of financial crime—and seeing a dozen of his employees implicated in insider trading—Cohen emerged from the crisis that engulfed his company as one of the world’s wealthiest men. In the end, the evidence against him that the government spent nearly ten years assembling was never presented to a jury. All that was left was for Cohen to spend his billions and to plan for his return.

Now Cohen is making more money than ever. In 2014, trading only his own fortune, he earned $2.5 billion in profit, more than paying back the fines he was ordered to hand over to the U.S. government. Then, on November 8, 2016, Donald Trump was elected president, vowing to usher in a new era of financial deregulation. The general counsel for Point72, Cohen’s private investment firm, was appointed, briefly, by the incoming Trump administration to recruit candidates for the new Justice Department during the tumultuous transition. In the meantime, Cohen is making plans to reopen his hedge fund as soon as possible.

CAST OF CHARACTERS At the time of the events depicted