The Securities and Exchange Commission is filing civil charges against multi-billionaire hedge fund trader Steve Cohen, just days before the statute of limitations on the cases was about to run out. While my trading career on the floor of the New York Mercantile Exchange and the trading life of Steve Cohen are different in the many zeroes that would need to be added to the sums involved, there are still a useful number of similarities that I can draw - and a conclusion that Mr. Cohen was a knowing and guilty manager.
Mr. Cohen's fund is known for its short-term trade strategies. While other hedge funds are more macro-focused, SAC has always comprised floor-like quick-trade experts, including the master Cohen himself. As on the floor, the endless search for "edges" in trading is what usually has separated the marginal trader from the great one. Some of these edges were legitimately obtained on the floor, while others were most certainly not. In that way, most men followed their moral instincts where I worked, and some could not resist the temptations of finding an "easier way." I saw a lot of outright cheating in my two and a half decades at the Nymex.
It's not in doubt that some of the traders at SAC succumbed to similar temptations to what I saw on the floor, as three former SAC traders have already been convicted of various insider schemes. But the leader of this pack has so far gone unscathed, relying upon the "closed-door" defense that many CEOs at other disgraced companies rely upon. They'll say "I didn't know and I couldn't tell you" what went on in these separate funds and individual desks -- that they were running the business from a macro level from the 35th floor.
"While you may have found a bad apple," they'd say, "the business doesn't condone or provide shelter" to the rogues that might appear in small numbers to have worked outside the rules.
With Steve Cohen, this defense has even less merit than it had had for Ken Lay at Enron. Compensation for traders at SAC is directly related to money made. In fact, the more money you made, the more money you got to manage, and the bigger the share devoted to you from the parent fund run by Cohen himself.
This implies a level of interest from the top dog that no closed door should be able to shield. This is particularly so when it comes to Steve Cohen, who knows better than any other CEO what kind of edges are needed for success in the trading game and the temptations behind various alternative doors for that success. There's little doubt in my mind that Steve Cohen deserves a conviction.
But will the SEC get one? Considering how long they took to press charges and the lesser accusations that they finally made -- I greatly doubt it.