The following column is the opinion of the author.
If you're a journalist with any kind of honesty and ambition, I don't see how the dubious tactics of aggressive hedge fund traders can't have a gut appeal. Steven A Cohen, the hedge funder now being hotly pursued by the Feds, does what I do. Many of the people who work for Cohen seem to do what I do. We call up people and ask for information.
The government frames this differently. It casts this as a conspiracy between a small number of individuals: one who has the information, passing it, for some benefit, to others who will act on it. The metaphor is spying. Trafficking in secrets. Often, the government has wire taps that reinforce this sense of organized crime and its cryptic vulgarity.
But a high-performing hedge fund, like Cohen's SAC, also sounds like a news organization of old – when there were no limits on expenses, and coziness with your sources was the norm, and the feeling of belonging to a club produced reliable and remarkable gossip. (This happens much less in news organizations now, because there are no expense accounts and because the news business is no longer a salubrious or sought-after club.)
Hedge funds began as an investing method that used the latest in mathematical models and algorithms to derive enough of an advantage to generate significant and predictable profits. But when these models and ever-faster computing became commonplace, the advantage was largely lost. Indeed, if there has been any notable recent trend in hedge fund investing, it's that successful investors are closing shop and getting out of the business.
Indeed, there is a corollary. If you are still in the game, and making sweet returns – as high as 30% for SAC – you've got something up your sleeve. What you have going is the other advantage, adapted by the most aggressive hedge fund players – which is having better information than the next guy.
Now, this is what I do all day long. I extract information more efficiently than most other people. I can read the news and, because I know who has written it, understand what's not there or who is paying to have it say what is there. Then, I go to lunch with someone who knows a piece of the puzzle that I might not know, and we exchange nuggets. Then, I makes my calls to twice-removed or once-removed sources. And I assemble a portrait, a mosaic of what I really think is going on, which is the same word they use at Cohen's SAC fund for their assemblage of the facts and details and gossip about the actions of a prospective company: "mosaic".
And, I suspect that if I had read fewer books, and had been somewhat less snobbish, I would be a rich man now. And, likely, bound for jail, along with Steven A Cohen.
Ever since the mid 1980s, when Drexel Burnham's Dennis Levine got nicked for insider trading and proceeded to bring the Boesky-Milken era in Wall Street history to a close, I have tried to get securities lawyers and prosecutors to define the exact moment at which information crosses from legal to illegal. When the inference and analysis of what will likely happen becomes an unfair advantage of positively knowing what will happen.
From what I have learned, reality very rarely hands you a smoking gun; there is seldom a moment anymore, as with Dennis Levine, of a tit-for-tit exchange of state secrets. That's a prosecutor's construct.
Who would be so lame?
In the instance now dogging Cohen, one of his researchers, Matthew Martoma, interviewed one of their paid experts, a Dr Sidney Gilman, about the progress of a drug trial at a company where Gilman was, curiously, also consulting. For some irksome reason, I have never been a paid expert, but I have often been wined and dined by hedge fund researchers who have turned me inside out. As good as I am at getting information out of somebody, perhaps because the stakes are higher, or because they have somebody like Steven A Cohen, who will scream at them and fire them if they don't get the goods, these guys are much better. Rabid.
It may be, as so often happens with sources, that Dr Sidney Gilman was playing both ends against the middle, believing he could straddle a line between telling what he was allowed to tell and withhold the other. But, likely, he got squeezed and helped fill out the mosaic, to SAC's profit.
You can see the one-dimensional ways the prosecutor will construct this. Dr Gilman, who will go to jail if he doesn't frame reality from the prosecutor's view, will say he gave up proprietary information, which he probably did, even though he probably didn't think he was, or probably thought he was controlling the information game. Martoma, on his part, will believe and maintain, until prosecutors flatten him, that if he got two mosaic tiles from Dr Gilman, the telling detail in the picture involved at least three or four.
You can see why gathering information, even in perfectly legal ways, would not seem so sympathetic to a jury. It is not straightforward conduct. No one in the transaction is exactly what they seem to be. Everywhere, there is artifice. Gossip is the currency.
But you can also see – or at least, I can see, and I'd assume any reporter can see – how marvelous and addictive this must be. At a moment in time when information is everywhere, you have the skills and data power to harness it. What's more, in a world where people want to keep you from knowing things, you have the resources to pursue what you want to know.
Still, this gives prosecutors, and their literalness, a leg-up. Information-seekers do not seem like they are pursuing truth so much as further complications and obfuscation. Information is so much smoke.
Indeed, I can't see how Steven A Cohen, famous for his temper and for his show-off art collection in addition to his money, gets off.
He built the exact business that any of us in the news game should envy, an aggressive information machine. But the truth is that here, in the information age, information has a bad name. Information is money and is in similar disrepute. People who have too much information, who are too adept at getting information, are thought of as dangerous and amoral people.
We like the opportunity to convict them of something – and insider trading will do.
This article originally appeared on guardian.co.uk
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