SAC Capital Advisors founder Steven Cohen, facing several insider-trading investigations, testified earlier this year that he is often unsure of what constitutes illegal trading and what does not.
Cohen was deposed over two days in February and April as part of a market-manipulation lawsuit against SAC and other hedge funds filed by Canadian insurer Fairfax Financial Holdings. A judge has since dismissed the case against SAC, and the Securities and Exchange Commission has dropped a parallel investigation.
But in excerpts of Cohen's deposition obtained by Reuters, the billionaire said that insider-trading rules are "very vague" and that he often relies on SAC's lawyers to determine whether a trade is legal or not.
"The answer is when you're trading securities, it's a judgment call," Cohen testified. "Whatever the compliance manual says, it probably doesn't take into account every potential solution."
Cohen appeared calm and controlled during the questioning, although he occasionally sparred with Fairfax lawyer Michael Bowe. "We're having this conversation for about three hours about what's material and whatnot," Cohen says at one point. "It's pretty clear that you and I have different views on it."
For his part, Cohen said that, for example, he would not consider it insider-trading to buy a stock if he has learned in advance that an analyst plans to downgrade it, "because I'm on the other side of the trade." Others might disagree, he aknowledged.
"I can argue that someone else could think that being short in front of a sell recommendation is a non-event because it's not going to move the stock, and somebody else would think, you know, that's trading on material non-public information regardless if it moves the stock or not," Cohen testified.
Cohen also acknowledged the widespread rumors that SAC has engaged in insider-trading, and said that he—on the advice of his public relations team—began to make himself more available to reporters in the wake of the Galleon Group scandal.
"There are rumors and what we wanted to do was dispel any notion of that," he said. But pressed by Bowe to describe the rumors, Cohen demurred, identifying them as "the rumors you just stated, that people weren't sure how we conducted our business."
Cohen also complained to Bowe that he "hates" the word "edge."
"They think you know something everyone else doesn't, right?" Bowe asked.
"You know," Cohen replied, "I think that's an over—I think that's an incorrect characterization of the word.
Bowe also asked Cohen about other hedge fund managers he speaks to. Cohen identified his friends Jay Goldman and Kenneth Ginsburg, the former of Jay Goldman Associates and the latter of Althea Capital, as well as Exis Capital's Adam Sender, Third Point's Daniel Loeb and "somebody" at Kingdon Capital Management. Both Ginsburg and Sender are former SAC traders, and both Exis and Third Point are plaintiffs in Fairfax's lawsuit.
But Cohen denied that he speaks with other hedge fund managers with any frequency, telling Bowe, "I've always talked to very few funds" and "it's not something I did a lot."
"Very rarely would I talk to somebody in other firms, but it certainly happened."
It also happened that Bowe on one occasion referred to Cohen as "Stevie," a matter which seriously exercised Cohen's lawyer, Martin Klotz.
"You have the authority, Stevie Cohen, to ignore the compliance manual?" Bowe asked. But Cohen didn't get a chance to answer.
"Object to the form," Klotz interjected. "And I particularly object to the obnoxious, deliberate use of 'Stevie' in addressing Mr. Cohen."
"It wasn't deliberate," Bowe said. "It was a mistake."
"No, it was intentional," Klotz replied.
"Knock it off. How do you know?"
"Because I know."
"I know you're trying to be a tough guy in front of your client, but why don't you knock it off?" Bowe shot back. "I know you're trying to be tough, defend your big client. I understand that. This was a mistake."
Turning to Cohen, Bowe apologized "if I offended you."
But Cohen had another comment on his mind. "I'm not a big client," he said.