Steven A. Cohen: The Master of Edge

[00:00:09] Morning folks and welcome to today's episode called Steven A. Cohen, The Master of Edge. And the edge in the title refers to an advantage that Cohen had over the rest of the market because he is considered, without doubt, one of the best intuitive traders ever. Good enough that he took

[00:00:32] home 3.5 billion dollars last year, rich enough to lose more than 1.5 billion in the whole GameStop short squeeze thing and shrug it off. But is his wealth and success, is it all down to skill? Or does he cross the line as prosecutors have tried to prove numerous times? This is a cracking story.

[00:00:58] Enjoy. So, Cohen was born June 11th 1956 in Great Neck, Long Island and his father worked as a dress manufacturer in Manhattan's garment district. His mother was a piano teacher so they were middle class, professional and he was an okay student but nothing brilliant. Now outside the school, poker was his big thing and by all accounts he is a fantastic poker player. As a teenager he was making

[00:01:26] about 500 to 1000 dollars in every game that he played. In 1974 he enrolled at Wharton School of the University of Pennsylvania, studied economics and while there he became known as the stock guy because he started hanging around outside a Merrill Lynch office in downtown Philadelphia, watching the numbers of the New York Stock Exchange through the window. In his own words, and I quote,

[00:01:52] you could see the trade happening and later, not right away, I found I was pretty good at guessing which way those numbers would go. And he became obsessed with trading because he found out that he had a particular skill. You see, Cohen is what is known as a tape reader. Now this style of predicting the way

[00:02:17] shares would go, it's gone out of fashion with the advent of computerized systems. So it's a real old-fashioned way but basically a tape reader is somebody who bets on stocks based on an intuitive reading of the way the numbers are going. And Cohen is believed to be the very best at this. And this is what Cohen said of tape reading from an excellent article in Vanity Fair. There's a kind of an art to

[00:02:45] reading the tape. I can't really explain it. It's about pattern recognition. I'm not looking at anything, just the numbers on the screen. I couldn't even tell you what the company did and I don't care. I've always been intuitive like that. It's always seat of the pants. Now, the problem with the way Cohen trades is that it's looked down on by most of Wall Street. You see, on Wall Street there's a kind

[00:03:11] of hierarchy and at the very top are the Warren Buffets, the people who buy long-term. They're, you know, they're the visionaries. They have the long-term vision. They are widely respected. In the middle is most of Wall Street. The hedge funds, the private equity firms, investors who are investing in various ways. You're talking about buyouts, holding on to shares for a few cycles or maybe a

[00:03:35] few years. All that kind of stuff. But then at the very bottom are the short-term traders, often referred to as day traders. And there's a snobbery here because they're seen as hustlers. They got no vision. And most of them aren't as massively successful as Cohen. And it's for that very reason that Cohen has always been viewed with suspicion. Like how can a day trader get it right so often and so successfully?

[00:04:01] He must be dodgy, right? Or, you know, maybe he's just really good at what he does. Cohen graduated in 1978 and started working for Gruntle & Company. It was a mid-tier Wall Street brokerage and he joined as a junior trader. On his very first day he made an $8,000 profit. That's about $40,000 in today's money. And here's a quote from his boss.

[00:04:26] I knew he was going to be famous within a week. I never saw talent like that. In Cohen's second year, he earned over a million dollars. And again, just to underline how good he is, because it's important when we get into the story of how much money he's making and how successful he is, here's a quote from the CEO of a big firm that cleared many of Cohen's trades.

[00:04:52] My conclusion is simply that the guy is an artist. I've sat and watched him trade and I can tell you without a doubt, he is the best that ever was at what he does on the planet. So now, 1983, five years into his career, he was running a $50 million portfolio, a team of six traders, and apparently it was here that he perfected a tactic that traders call, take the streets.

[00:05:20] So according to former colleagues, Cohen would get on the phone to lots of brokers and instruct them to buy large blocks of the same stock at exactly the same time. And because all those brokers are buying at the same time, they burn through their available shares fast. And to keep up with demand, they have to go back into the open market to buy more. And that wave of buying pushes

[00:05:44] the stock price up and Cohen then sells his shares into that rising price and takes a profit. So what he was doing here was creating a false impression of market demand. It is a form of market manipulation. But you could get away with it in the 1980s because regulation wasn't as tight. And what we

[00:06:07] can see here is that Cohen was more than willing to push the envelope. And as a result, his first brush with the regulators happened in 1985. So General Electric is about to buy RCA, that's the parent company of NBC, for $6.4 billion. But in the days before any public announcement was made, Cohen buys up a huge amount of RCA stock. When the deal is announced, he makes $9 million

[00:06:35] personally. Now the SEC got suspicious. They opened an investigation into potential insider trading. And when Cohen appeared before the SEC, he refused to answer any questions, more or less invoking the Fifth Amendment. You also have to remember, this was 1985. There were no mobile phone logs, no text messages, not even emails. So without a paper trail and with Cohen saying nothing,

[00:07:01] the investigation is dropped. Cohen continues to prosper. But his personal life at this stage, it's kind of falling apart because his divorce from his wife Patricia in 1988, it became very, very acrimonious, mainly because his wife accuses him of lying about his net worth. So initially, Cohen declares a net worth of $16.9 million. Then a few months later, he claims his net worth

[00:07:29] dropped to $8.2 million as a result of a bad real estate investment. And as a result then, his ex-wife gets just $1 million in cash and an apartment on the Upper East Side. Now, years later, she sued Cohen, claiming that he fraudulently hid his true net worth and that he was involved in various tax fraud schemes. And crucially, she also alleged that he had told her directly that he received

[00:07:58] inside information about the RCA merger. But his ex-wife's case is ultimately dismissed because there was no hard evidence against him. So now we're in 1992. Cohen is now 35 and he uses $10 million of his own savings and an additional $15 million from wealthy investors to launch SAC Capital with nine

[00:08:21] employees. Now, the fee structure that Cohen charged from day one, it's pretty extraordinary. And it gives you an insight not only into how bullish Cohen was, but also into how well he was regarded because he had a fantastic performance record from 1985 through to 1992. He had only three losing months. So the industry standard in terms of fees that hedge funds charged at that time was 2%

[00:08:50] management fee and 20% of any profits. I think it's still more or less the same, but Cohen charged a 3% management fee and up to 50% of the profits. But investors were willing to pay us. In its second full year, SAC generated a 51% return. By 1999, SAC's Assets Under Management, or AUM as they call it,

[00:09:15] was $1 billion. And the aggressive, fast style of SAC, it was ideally suited for the dot-com boom where you had a lot of volatility, a lot of fast-moving stocks. And the firm returned 69% that year. But, you know, everyone was winning at that time. And here's a quote from Cohen. I used to say, in the 90s, all you had to do was show up. It was a bull market. You are bailed out

[00:09:44] of every mistake. So it was when the bubble burst in March 2000. That was when Cohen's reputation skyrocketed because he got his timing just right. He pivoted aggressively to short positions just before the NASDAQ crashed. And SAC finished with a 73% return in 2000. Now, like all the high achievers,

[00:10:10] Cohen, he never rests on his lords. Because here's a quote from one of his colleagues, straight after the dot-com burst, after their very best year. I remember in January 2001, right after our best year ever, we had this management meeting and Steve was pounding the table going, we got nothing. We suck. We have to tear this place down. Every January, he's the same. He's just never been very impressed with what we've done. But obviously investors were impressed

[00:10:39] because they were literally now queuing up to hand Cohen their money. And by 2002, SAC was managing about $4 billion. So, flush with money, SAC, they moved into their own 14-acre campus in Stamford, Connecticut. And Cohen built this custom trading floor. It's the size of a football field. It's got high ceilings, no partitions, open floor planning with Cohen's desk in the very middle

[00:11:06] of the floor. Because as one of his former traders said, he's in the trenches every day with his traders. He's one of them. If the markets are tough, he's plugging away. And that's how he leads. And Cohen also, he wanted to ensure that every variable that could be managed on this trading floor was managed. For example, the temperature in the trading floor was kept at 69 degrees to prevent drowsiness. The phones, they were modified. So they lit up instead of ringing because Cohen

[00:11:36] hated sudden loud noises because they broke his concentration. And kind of bizarrely, he also had what was called the SteveCam. And this was a live video feed set up at his desk. And it was broadcast to a screen on every other employee's desk so that they could observe his trading patterns and see exactly what he was doing. Now, employees were organized into pods, each one containing a

[00:12:05] portfolio manager plus a few analysts. And they were working in isolation from every other pod. So the pods weren't allowed to share ideas with each other. And SAC, it was also too big now to be operating under the simple, you know, read the tape type model. A lot of these pods were taking massive long-term bets based on deep, intense research. And it's this research and how they got it that leads

[00:12:31] to a whole lot of trouble that I'll be talking about soon. And also though, they still use their fast trading routes to exit or trade quickly on their bets, on their trades. And when they get information about particular companies and the way it worked, each of these pods, they would have tens of millions, sometimes hundreds of millions to invest in their own investments. They were given a whole load of autonomy. And if a pod had a trade that they believed had what they called a very high conviction

[00:13:00] rating, then they would forward that to Cohen and he would trade that on his own personal account. Now, even by Wall Street standards, SAC was known as a very, very tough place to work. If you didn't perform, you were gone. And the system, it kept risk under control, but it also created an enormous amount of pressure to keep delivering. And critics would argue that this pressure pushed people towards

[00:13:28] cutting corners. Now, according to Sheila Kolatkar, who wrote this excellent book called Black Age on Cohen, I read it years ago, it was brilliant. Here's what she had to say. It was not a place you went to have fun or you went because you loved your job. It was a place you went because you wanted to make a lot of money quickly. And it's true. SAC traders were among the best paid on Wall Street. Successful portfolio managers, they could earn several million dollars a year.

[00:13:58] While the very top performers sometimes made tens of millions. And as for Cohen himself, I mean, listen to this. In 2001, he was paid 428 million dollars. In 2002 and 2003, he took home 300 million dollars each year. He was a billionaire by 2003 and he lived and continues to live a very opulent style of living. A 35,000 square foot mansion in Greenwich, Connecticut with an outdoor

[00:14:26] ice skating rink. He also started spending serious money on art. He paid 110 million in 2010 for Jasper John's flag. In 2012, he paid 150 million for Picasso. In total, his art collection is estimated to be somewhere between one to two billion dollars. And look, I know all of this would make you think that

[00:14:50] Cohen is just like every other pretentious billionaire with airs and graces. But that's not really the impression I get. In relation to art, those who know him say he genuinely loves art. He buys paintings that might only cost a few thousand dollars as well. Because apparently, art gives him a distraction. It takes his mind off the stock market. Now, a pretty expensive distraction, if you ask me,

[00:15:18] and paying that kind of money seems a bit obscene to me. But he's also given over 1.3 billion to some very worthy causes like veterans and children's health care. But the thing is, all of the criticisms that I've read of Cohen, and there's lots, but it all comes from those who don't know him personally, or from prosecutors who we'll get to. Because those who do know him, they talk about a very

[00:15:43] down-to-earth, loyal, unpretentious guy. Here's a quote from a lawyer who had been in a huge legal battle against Cohen and got to know him. And he said, Cohen, and I quote, is a regular Long Island guy who happened to make a shitload of money. And he definitely doesn't look like a billionaire. He's a short, bald guy with glasses, dresses like an average guy. And also, current and former employees

[00:16:10] who work with him. They really like him. Here's a quote from one. The people that he believed in, even if you were doing badly, he still supported you and tried to do everything possible to make your life easier. I don't know about other people and bosses, but that's the kind of boss you want to have. So anyway, back to business. We're now in 2008, and by this stage, SAC is managing $16 billion.

[00:16:35] And despite their flexibility and success in the past, even they get cut out in the 2008 financial crisis, and they post their first ever loss of 18%. But 2008 is significant to Cohen and to SAC for another reason. Because it was in this year that the firm conducted what prosecutors would allege was a very, very large insider trading scheme. So what's happened is this. One of SAC's portfolio

[00:17:05] managers, Mark Martoma, he'd been building a massive position, $700 million worth, in two pharmaceutical companies that were co-developing a drug to treat Alzheimer's. He believed that they were onto a good thing. And this Martoma also built a close relationship with an eight-year-old neurology professor who was part of what was called an expert network. Essentially, what you had on Wall

[00:17:31] Street, you had these matchmakers, and they found industry specialists for hedge funds so that the hedge fund could pick the brains of these specialists to get their feedback and input on various sectors like emerging technologies or drug developments. Now, legally, these paid experts are only supposed to discuss broad industry trends. But the thing is that the professor Martoma was talking to also chaired the

[00:18:00] safety monitoring committee that was responsible for the Alzheimer's drug trial. And when you read the details of the case, it's pretty clear that Martoma really kind of, I know, slyly, very cynically groomed the older professor. I mean, yes, the professor did get paid. He got paid around $100,000 in fees

[00:18:24] from SAC. But he was also very, very naive. And I really feel sorry for him because it's pretty clear that he was just a very old man that was being manipulated. He even said that he saw Martoma more of a friend and a pupil. And so after the clinical trials and the results that came back

[00:18:46] were negative, the professor, naively believing he was talking to a friend, he told Martoma everything well before the results were released to the market. I mean, this was insider information. Then, two days later, on a Sunday, Martoma emailed Cohn with the following, It's important that we speak. They spoke on the phone for 20 minutes. The exact contents of that call

[00:19:14] have never been established. But on Monday morning, SAC started selling the entire $700 million position and they also started shorting the stock, betting that the price would fall. And when the trial results were announced publicly, SAC's profit from the trade was $276 million and Martoma was paid a $9.3 million

[00:19:39] bonus. Now, around the same time as that trade, a separate thread was developing at another part of SAC. A senior portfolio manager named Michael Steenberg had received information from an analyst about Dell's upcoming earnings and the analyst said they were going to be negative. So Cohen was looped into the email chain and as a result, he sold his own Dell shares and he avoided a $1.7 million loss.

[00:20:06] Now, all of this, to give it a bit more context, all of this was happening after the financial crisis. You have millions of Americans had lost money, lost their houses, their jobs. People were angry. And Wall Street was rightly being blamed. And then interstage left Preet Bharara, the US Attorney General for the Southern District of New York, an ambitious, media-savvy crusader. And he decided to go after

[00:20:35] the hedge fund industry and launched Operation Perfect Hedge. And his first scalp was Raj Rajarnsnam, a billionaire hedge funder who ran Galleon. And investigators used wiretaps to prove that he was using insider information and he was sentenced to 11 years. But SAC was the big target. Bharara wanted to take down Cohn. You see, SAC was by now one of the biggest and most influential head funds.

[00:21:05] And even though I mentioned that SAC had their first loss in 2008, by 2009, they bounced back with a 29% return. And that year, Cohn took home $1.4 billion. So that's enough to get anyone's attention. But there are other factors at play here. A former SAC trader was caught up in the Galleon scandal. There were two

[00:21:29] other cases brought against SAC in 2006, where they were accused of manipulation through underhand tactics. And while they were cleared in both cases, they could never shake the image that they had been playing, you know, fast and loose. Now, this is because many on Wall Street had always been suspicious of Cohn. Some of it, I believe, was driven by envy. Some of it driven by snobbery. I mentioned that

[00:21:57] earlier. They saw Cohn as just a day trader and to be that successful, he's got to be doing something underhand. But others pointed to the autonomy he gave his traders. And they believed that it was very deliberate. This theory posits that he allowed his traders to gather the information in whatever way they pleased. But he never asked them directly how they got their information. And so that gave him

[00:22:24] plausible deniability. Anyway, Bharara's investigation, it took years. By late 2012, eight SAC employees had been implicated in insider trading, including Steinberg, the guy behind the Dell trade, and Martoma, the guy behind the Alzheimer's drug trade. Now, both Steinberg and Martoma were offered a deal,

[00:22:46] more or less a get-out-of-jail-free card, if they would just admit that Cohn ordered or knowingly approved illegal insider trades. Both men refused to do a deal. Steinberg eventually got off because the information he had on Dell had passed through so many people before it reached him, prosecutors couldn't prove that he was using inside information. With Martoma, I mean, his case was a bit more

[00:23:15] straightforward in that he had direct inside information. But what's not clear is, did he tell Cohn directly about the information and how he got it? My own take on this is that obviously it centres on that 20-minute phone conversation he had with Cohn straight after he got the results from the trial. You see, for SAC to sell all $700 million worth of shares and then take a short position,

[00:23:43] I mean, that would suggest that Martoma had given Cohn some pretty clear assurances. So, either Cohn asked him what information he was using and where he got it, which would mean Cohn was guilty of using insider information, or Cohen didn't ask, which would point to Cohen not wanting to know, because knowing the answer might implicate him. Again, the theory of plausible deniability.

[00:24:13] But Martoma and Cohn, they've maintained that in those 20 minutes they just had their normal portfolio type discussion and Martoma just basically gave Cohn a high conviction rating for selling those trades. And that was enough for Cohn. I mean, it's possible, but it's, I think, improbable. Ultimately, Martoma was found guilty and he served nine years in jail. And the prosecutors, despite

[00:24:43] having Cohn's emails, phone records, wiretaps on his phone, everything, they weren't able to pin anything on him. So, they changed their strategy. First, the SAC, it took a civil case against Cohn. It charged him with what's called failure to supervise, basically arguing that, you know, even if Cohn didn't know exactly what his traders were doing, it was his job to ask and he never did. And I think

[00:25:10] that's a fair point. Then the Department of Justice charged SAC Capital with wire fraud and securities fraud, claiming that SAC's business model was pursuing illegally obtained inside information, what the indictment called Black Edge. And again, that's the name of a great book that I'd recommend you read. In the end, SAC and Cohn, they settled with the Department of Justice, paying a $1.8 billion fine.

[00:25:36] And Cohen negotiated a two-year suspension for managing outside money, which expired in 2018. So, SAC is long gone. Cohn is now running 0.72. It manages $45 billion. And it continues to perform really, really well. So good that in 2025, Cohn took home $3.4 billion. That is the highest annual

[00:26:02] earnings of any hedge fund manager ever. Like, that's around $9 million a day. And he's not only spending his money on art now. In 2020, Cohn bought the New York Mets baseball team for $2.4 billion. And he's put an additional $2.5 billion into the team. And look, I'm not a New York Mets fan and I'm not a baseball fan. But the feedback is that the fans do appreciate the ambition and the willingness

[00:26:30] of Cohn to spend and invest in the team. But apparently there's still a lot of frustration because despite all this investment, the Mets have yet to win a World Series under Cohn's ownership. But one thing that did come out of the ownership is that Cohn kind of emerged from being a private person. He became a bit more public. He started to engage with fans through Twitter and he earned

[00:26:52] the affectionate nickname Uncle Steve. But this new public Steve got into a very, very public spat when he found himself right in the middle of the GameStop shitstorm, I suppose you'd call it. So this was in January 2021. And this, you know, ragtag army of retail traders on Reddit's

[00:27:16] WallStreetBets, they orchestrated what is now this historic short squeeze. So they were driving up the GameStop share price. Meanwhile, Melvin Capsule, a hedge fund run by a former SAC star trader called Gabe Plotkin, he had made a massive bet against GameStop. He was shorting it, betting, that the stock would collapse. And Cohn had one billion invested with Melvin. So when the squeeze

[00:27:43] was happening, Cohn, alongside Citadel's Ken Griffin, they stepped in with an additional $750 million emergency bailout. Now, Cohn didn't help the situation by goading the WallStreetBets traders on Twitter. In fact, he kind of emboldened them and inflamed the whole situation. And eventually, GameStop shares rose by 1700%. And that broke Melvin. Melvin had to sell out his short position,

[00:28:12] it had to close down, and Cohn ended up losing about $1.5 billion. I mean, bad, but, you know, with a current net worth of $23 billion, Cohen, he can afford this. So where do I stand on Cohen? I mean, he's undeniably brilliant at what he does, by all accounts, the best. But, man, in relation to

[00:28:35] pushing the envelope, there is definitely a lot of smoke. Having said that, the fact remains that despite trading at the very highest level for, what, 45 years now, and despite all the investigations, he has never been found guilty. Now, of course, this could mean that he's 100% clean. But not even Cohen admits to that. In a Vanity Fair article, he more or less concedes that in the early days of SAC,

[00:29:04] things were different and compliance wasn't very important. My own read on it is, I think that as SAC grew, Cohn very shrewdly put structures and processes in place that protected him. But there is definitely a valid suspicion over the autonomy he gave his traders and the lack of questioning in relation to the source of their information. In terms of his personality, as I

[00:29:32] said, he does very few interviews. But of the ones that I've read, I really like the guy. I mean, Brian Burrow, the guy who wrote The Barbarians at the Gate, one of my favourite business books ever, he had the following to say about Cohn in an extensive article that he wrote. And he said, Of all the CEOs and billionaires I've met over the last 25 years, Cohn comes off as the most

[00:29:56] unpretentious. And that's my read of him as well. There's very little ego. Despite all the money, the billion or two billion dollar art collection, he comes across as someone who doesn't take himself too seriously. Except of course, when it comes to trading. Some might disagree, but whatever you think of Cohn, he makes for a fascinating story. And that brings us to listeners emails. And this one

[00:30:24] comes from Larry, who would love me to do a story on Sam Zell, the legendary billionaire real estate guy. And he is some character. A brilliant suggestion. Thanks, Larry. And remember, if you have any comments, any corrections, or any story that you'd like me to cover, email me at info at gbspod.com. All the best, folks.