NEW YORK, July 25 (Reuters) - The word that Steve Cohen hates is coming back to bite him.
A federal indictment on Thursday of the billionaire hedge fund manager’s firm, SAC Capital Advisors, uses the word “edge” 14 times to describe the way its traders sought information or insight that no one else on Wall Street had.
Some examples cited by prosecutors: an SAC job candidate who shared a house in the Hamptons with the chief financial officer of a large publicly traded industrial company; a portfolio manager who allegedly traded on inside information he said he had received from “a friend of my cousin” who worked in the finance department of Dell Inc ; and an analyst who had a “buddy” who happened to be a “senior guy at Microsoft.”
The indictment quoted another SAC analyst, who was making a recommendation on Sun Microsystems shares, as saying, “My edge is contacts at the company and their distribution channel.”
Ironically, in a 2011 deposition related to a separate lawsuit by a Canadian insurer, Cohen said, “I hate that word” when an opposing lawyer asked him whether it was used at SAC to describe having an advantage over other investors.
Representatives for SAC, Dell and Microsoft Corp did not immediately comment on the indictment. A spokeswoman for Oracle Corp, which owns Sun Microsystems, declined to comment.
SAC Capital, which Cohen launched in 1992 with just $25 million, was the most successful hedge fund to rely on the so-called mosaic theory of investing, which builds an investment thesis on stocks by gathering information from a multiplicity of sources, bringing what Wall Street investors called “edge.”
The fund had $15 billion at its peak earlier this year, and boasted some of the industry’s steadiest and strongest returns in exchange for some of the industry’s highest fees.
Despite Cohen’s apparent distaste for the term, “edge” appears to have been used frequently inside SAC by employees who were struggling to outgun the markets and each other. One variation is “black edge,” which the Justice Department said meant “Inside Information.”
“(T)he relentless pursuit of an information ‘edge’ fostered a business culture within SAC in which there was no meaningful commitment to ensure that such ‘edge’ came from legitimate research and not Inside Information,” the filing said.
According to the indictment, SAC’s computer and phone systems had designated inboxes and voicemails set up for traders to deliver their edgiest ideas. They also had ”semi-regular“ Sunday evening calls and in-person conversations” to apprise Cohen of their best trading ideas.
In some cases, such as the Hamptons share, traders allegedly seized on ordinary friendships and family relationships to produce millions of dollars in profit or avoid major losses.
Perhaps the most audaciously edgy accusations relate to Richard Lee, a portfolio manager Cohen decided to hire even though someone from another hedge fund allegedly warned him that Lee had been on the other firm’s “insider trading group.”
That edginess was not missed by SAC’s compliance officers, but their suggestion to not hire Lee was overruled, according to prosecutors. Employees were wary of their own edge in some cases: one portfolio manager told Cohen it was “too scary” to describe his rationale for shorting a stock on instant message, after having a meeting with compliance officers.
After an analyst described his own “edge” in an email message, longtime SAC portfolio manager Michael Steinberg forwarded the message to another executive, worried that the analyst’s message might be flagged by lawyers.
“I suspect the line about contacts at the company may wake up some of our legal eagles,” said Steinberg.
The executive replied to say it was nothing much to worry about, the indictment said.