Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

Author: Sheelah Kolhatkar

Every now and then, we hear of big insider trading scandals rocking Wall Street. When SAC capital pled guilty to insider trading in 2013 and settled with the SEC for a landmark amount of $1.8 billion, the world stopped and took notice. While several employees of SAC Capital were indicted, the owner, Steven Cohen walked away unscathed with over $10 billion of assets. Sheelah Kolhatkar does an excellent job in chronicling all the twists and turns around this case and the many different characters who were left without a chair when the music stopped. 

If you have been around for a couple of decades you won’t have trouble appreciating that at the turn of the last millennium "Watching the Dow Jones industrial average go up became a national obsession”. It is during these heady times that hedge funds ballooned and their managers kept pushing the envelope so they could keep the high double digit returns going.  SAC capital was one of the most successful hedge funds, pushing its traders and portfolio managers to go hunting for an “edge” to get ahead of other investors in the market. This could be by capitalizing on some inefficiences in the market, an analysis that nobody else had, or some information that most people didn’t have yet. It is the latter that is the most dangerous and has the potential to get you into “insider trading” territory which the author terms as “black edge”.

As you read one story after another on insider trading you can't help but conclude that it is rampant in the investment industry. The quest for "edge" seems natural for anyone who is looking to increase their chance of success. From the many different recent rulings on insider trading it's not even clear if the law lays down a very clear line that must not be crossed. Seven of the convictions described in the book where recently overturned on appeal because the court ruled that the person sharing the insider information must have somehow benefited from the transaction. Unlike other crimes like murder, assault or stealing where you can picture the victim, insider trading is harder for humans to conceptualize since the victims are not well defined. 

In the end you're left with the question of why Matthew Marthoma didn't flip and implicate Steve Cohen, so he could have avoided a lengthy prison term. The last few pages of the book make a feeble attempt to outline some theories, but this is one piece of the puzzle that does not fit nicely. At times it's hard to keep up with the many different characters and different investigations that are going on but you get a huge appreciation for how difficult it is to prove insider trading cases.