Inside SAC's shark tank

March 01, 2010  

The notorious Steve Cohen is on the rebound, but efforts to raise capital have been muted as investors remain spooked about what really goes on below the surface.

By Britt Erica Tunick

Illustration by Balint Zsako

Steve Cohen became one of the world's top art collectors when, in 2007, he paid $8 million for a decaying shark submerged in a tank of formaldehyde. Created by the notorious British artist Damien Hirst, the shark's high price shocked the critics as a symbol of how much the market had become captive to crass materialism.

If anyone seemed the perfect buyer for such a piece, it was surely Cohen—something of a notorious figure himself. SAC Capital Advisors founder Cohen's take-no-prisoners trading approach has long been controversial; he is said to routinely control as much as 3% of trading on the New York Stock Exchange and 1% of the Nasdaq Stock Market. Likewise, Cohen's relentless drive for an information edge, his ruthlessness toward employees, arrogance toward investors and outlandish lifestyle in an industry where conspicuous consumption is a given have turned the 53-year-old manager into the shark of the hedge fund world.

The multimillion-dollar price tag on Hirst's real shark, titled The Physical Impossibility of Death in the Mind of Someone Living, made the artist an overnight celebrity in the conceptual art world, while steady outsize returns gave Cohen—who is commonly referred to as Stevie—a personal fortune reported to be as high as $8 billion.

Then came the Crash.

By December, Hirst's art had lost a reported 50% of its value, reigniting criticism that a dead fish floating in chemical preservatives doesn't constitute art after all. Hirst's sinking value would have little impact on Cohen's huge art collection or overall wealth, but losses at his hedge fund firm were another story entirely. When its flagship SAC Capital lost roughly 28% in 2008, Cohen—whose initials gave the firm its name—responded with mass firings and a refocusing of his trading strategies, according to ex-employees and investors. In 2009 the fund rebounded to show a 28.6% gain.

SAC isn't swimming in the clear just yet. After a former employee was charged in the recent hedge fund insider trading scandal, Cohen was sued by his ex-wife, who claimed she knew of illegal dealings by Cohen, and the Federal Bureau of Investigation is reportedly investigating the firm. Neither Cohen nor his firm have been charged with anything, and both the FBI and the SEC declined to comment on whether they are investigating the firm. Yet an aura of mystery surrounds the elusive and secretive SAC.

Insiders have long said that SAC's penchant for privacy stems from the fact that roughly 70% of the firm's capital, which was $12 billion as of January 1, is Cohen's own. (In keeping with his distaste for publicity, Cohen declined repeated requests for interviews.)

But after being closed to new money for years, SAC has been trying to woo new investors—with limited success. Even though he has altered his terms to make them more palatable to investors, Cohen has raised only $1.3 billion since he reopened last June. In today's hedge fund market, where investors are skittish about fees and lockups and paranoid about scandal, SAC is a hard sell.

The enormity of the challenges facing SAC became apparent in late January at Morgan Stanley's annual capital introduction conference at The Breakers hotel in Palm Beach, Florida. The typically reclusive Cohen was a featured speaker at the event, during which attendees say he rebuilt his trading desk in his hotel suite and locked himself away, trading for most of the trip.

Cohen's speech highlighted SAC's ability to recruit top-notch fund managers and its internal risk controls and heightened compliance, according to one attendee, who quipped that the pitch was almost a replica of Israel Englander's spiel for Millennium Partners—but with higher fees. "SAC today is a diversified, research-driven investment management firm built around a core position in long/short equities, as well as significant positions in quantitative and other strategies," the firm's marketing documents state.

Although Cohen naturally generated buzz at The Breakers, some investors remain wary. "There's zero chance in my mind that SAC can go out and gather a significant amount of institutional investor money," says the chief investment officer for one prominent institution. "If you're a plan sponsor, you're making zero dollars. So you say to yourself, 'I'm not making enough money to take this kind of career risk.'?" SAC's exorbitant fees, the lack of clarity regarding its investment practices and today's tough regulatory climate make the firm an unattractive option for many.

Until recently, Cohen was able to laugh at such concerns. He launched SAC with $25 million in capital in 1992—$20 million of which he and a few friends supplied—and the firm's assets under management quickly soared. In addition to outsize returns that annnualized 35% from inception through 2007, an investor base comprised primarily of wealthy individuals, family offices and funds of funds poured in enough money that SAC's assets reached a high of $16 billion by July 2008. Because of the firm's incredible returns after fees, Cohen had little difficulty getting investors to accept a 3% management fee and a 50% performance fee for the firm's SAC Capital fund, along with a three-year lockup period. So popular was SAC that Cohen closed his main fund to outside money by the late 1990s. And despite the losses in 2008, its 10-year performance was 25.15% through October 2009, earning SAC AR's long-term performance award last fall.

One of eight children, Cohen grew up in a middle-class family in Great Neck, N.Y.; his father worked as a dress manufacturer, and his mother was a piano teacher. A knack for poker, which became a passion by the time of his college days at the University of Pennsylvania, provided a source of pocket money and led to an interest in the markets. Before Cohen even completed his bachelor's degree in economics, he was perfecting his trading approach, using a brokerage account a friend had helped him open at Gruntal & Co. to bet thousands of dollars on the market.

Cohen's success led him to join Gruntal's options arbitrage group in 1978, and after only six years he found himself overseeing a group of traders and managing a roughly $75 million portfolio for the firm. But by 1992 Cohen's desire to be his own boss won out, and he struck out to launch SAC.

In the early days, Cohen became known on the Street for his rapid trading style and his ability to "read the tape"—that is, analyze the trading pattern of an individual stock to determine the direction it was most likely to move in order to take short-term positions to benefit from such movements. Using this method to trade in and out of hundreds of stocks on any given day, he produced a track record that almost immediately caught investors' interest.

By the late 1990s SAC's assets had grown to nearly $1 billion. But such changes as the introduction of decimalization on the NYSE, along with a rise in the number of hedge fund firms and others engaged in short-term trading, forced Cohen to alter his strategy.

He began building an arsenal of analysts and traders, and though short-term trading remained at the core of SAC's portfolios and accounted for the bulk of its investments, the firm gradually expanded its portfolios, even opening up a multistrategy fund that became bogged down in illiquid investments and has underperformed.

At the heart of the firm is an information network Cohen has spent years and billions of dollars building up. SAC is one of the Street's biggest spenders on trading commissions; its annual tab is reported to regularly climb as high as $400 million, just one of multiple ways Cohen is said to garner preferential treatment from the analyst and broker communities. Cohen's aggressive practice of purchasing secondary shares of stocks is another, as such trades often mean hefty commissions for brokers. By spreading commissions across the industry, Cohen has created an information network that all but guarantees he and his traders receive the first news of anything to do with the companies the firm follows—a privilege former SAC analysts and traders confirm is critical to the firm's success.

Such practices have aroused suspicion for years. "In a day and age when you can do algorithmic trading with practically zero commissions, the big question is, why would SAC insist on paying three or five cents a share... they're lining the pockets of everyone in the ecosystem," says one manager close to the firm. SAC's spokesman says the firm pays less than a penny a share.

Cohen has also demonstrated that to gain an edge there is almost no degree he is unwilling to go to. He has even put Central Intelligence Agency operatives on SAC's payroll in an effort to help fund managers assess the validity of information provided by the management of companies they trade—a practice detailed in "Broker, Trader, Lawyer, Spy: The Secret World of Corporate Espionage," by Eamon Javers.

The fine line between gathering information for such an edge and getting nonpublic information illegally came to public attention with last year's revelation of an alleged insider trading ring that brought a quick end to Galleon Group. The probe continues to ensnare an increasing number of hedge fund professionals, including former SAC trader Richard Choo-Beng Lee. A cooperating witness in the government's case against Galleon, Lee pled guilty to insider trading charges related to investment activities after he left SAC, and reportedly told regulators he will provide any information he has on any insider trading that may have occurred while he was at SAC.

Headlines about insider trading are not new for SAC. In January 2009 the SEC filed a complaint against Ramesh Chakrapani, a former Blackstone Group managing director said to have given information about SuperValu's 2006 acquisition of grocery chain Albertsons to his friend Jonathan Hollander, a trader at SAC's CR Intrinsic Investors. Hollander is alleged to have used the information to generate profits for himself and friends as well as SAC's coffers. In the case of Hollander it was SAC that turned the trader in after an internal investigation uncovered his activities. "I think it was an attempt by SAC to show that they have full compliance and that they're fully legit," says one former employee.

Although there have been no charges against anyone at SAC, the headline risk has made many investors jittery. "If I were sitting on the sidelines and considering an allocation, I would want to wait until the SEC has handed down their all-clear notice on the firm," says one institutional investor familiar with SAC. The nail-biting also exists among current SAC investors, particularly in the funds-of-funds community. "The funds of funds know that if anyone at SAC actually gets charged, and anyone gets indicted, that the whole thing could go down in about a week—just like Galleon," says one fund manager close to the firm. "On the one hand, they want to ride the gravy train and benefit from the tremendous track record, but on the other, they acknowledge that there's too much smoke for there not to eventually be some fire."

If the firm were to find itself embroiled in the insider trading scandal, those close to Cohen believe he would emerge unscathed. "Steve is smarter than Raj—he hardly talks to the Street. He's got a few people he talks to, but he's pretty well insulated, and he recognizes the evils of skating too close to the edge," says a former SAC employee whose firm closely follows Cohen's activities. "His compliance is among the tightest on the Street, and when everything hit with Galleon, his firm was one of the first that we got a call from."

SAC has many supporters who are quick to back the firm in its insistence that trading is aboveboard and its information network is well behind the line separating high-quality analytics and information from insider trading. "In terms of things like insider trading, I think the government has been on a very unfortunate witch hunt to try to criminalize his activity that seems to be particularly Ahab-esque," says one former SAC employee.

Other former SAC employees insist that the firm has been unfairly portrayed as shady for no other reason than simple jealousy of Cohen's success. They argue that if prosecutors really had anything to pin him with they would have done so by now. Yet even Cohen's staunchest backers admit that they can understand some of the reasons Cohen and his firm are under attack.

"He probably brought some of this on himself because he wasn't that great to work for and wasn't a nice guy," says another former SAC employee. "I found him to be unpleasant at times and think he's very self-centered and has a great deal of avarice—but he had a positive, dramatic effect on my career, as he did on hundreds of others."

Those mixed emotions are common. From individuals who left the firm to launch hedge funds of their own to fund managers fired the second their portfolios turned south, Cohen's former employees paint a picture of him as a duplicitous individual. They describe a person so driven to succeed his behavior during trading hours is often cold and bitter toward those who work for him. But the second the final bell rings, they say, Cohen's demeanor changes, and he becomes a down-to-earth individual who is able to laugh with his employees.

"Steve can be charming, and he can be ruthless," says one former employee. "If you do well, he's perfectly nice, and if you do poorly, he's got very little patience."

No matter where they weigh in on their opinions of Cohen, one thing that seems unanimous among those who have worked for him is respect for his trading abilities and the 100-plus hour work weeks he regularly logs. "He's one of the most talented traders who has ever lived," says a former SAC fund manager.

While equity trading may be Cohen's forte, his firm has gotten so big that it has ventured elsewhere. Of the firm's four main funds—SAC Capital Management, its onshore flagship fund; SAC Capital International; SAC Global Diversified, and SAC Multi-Strategy—it's the first two the firm most emphasizes. As of December 31, SAC Capital Management, which launched in 1992, had generated average annual net returns of 30% with a net Sharpe ratio of 2.6. Comparatively, the offshore SAC Capital International, which launched in 1996, has returned average annual net returns of 28% with a net Sharpe ratio of 2.5. According to SAC's marketing documents, the firm boasts 102 portfolio teams—78 dedicated to trading discretionary long/short equity, 17 to quantitative strategies and 7 to global macro and opportunistic strategies. Of the firm's total capital, roughly 85% was devoted to long/short equity as of September 30.

SAC's expansion has met with mixed success. In the mid-1990s Cohen introduced a quantitative model into the firm's trading, gradually expanding the firm's focus to include other strategies such as multistrategy, bonds, macro, fixed income and even private equity investments, along with sector-specific trading in areas such as health care. But in 2008 losses in the multistrategy fund led SAC to offer investors the option of moving money into SAC Capital International, and some $700 million was transferred. Now Global Diversified and Multi-Strategy have only $3 billion between them. Last year, returns from the multistrategy fund lagged, rising only 18%.

Perhaps the most successful diversification has been the push into quants. In 2003 Cohen brought on Neil Chriss, founder of derivatives trading firm ICor Brokerage and director of the New York University Courant Institute of Mathematical Sciences' program in mathematics in finance, to lead the effort. Using quant models predominantly limited to multifactor models trading off fundamental data, Chriss was able to generate hefty returns for SAC and is said by former employees to have approached Cohen seeking some sort of partnership in the firm. After his request was shot down, in early 2007 Chriss left SAC to launch his own firm, Hutchin Hill Capital.

"There was a point where, I believe, the quant group was probably running half of SAC's capital," says a former SAC employee close to the group. "But in the great quant slaughter of '07, like everyone else, they got absolutely decimated, and SAC yanked their capital base."

Between 2004 and 2008 Cohen made a major expansion push, bolstering SAC's senior-level staff along with its offerings. Cohen also broadened the firm's geographical reach, adding a U.K. presence by acquiring Walter Capital Management of London, which was rebranded as SAC Global Investors. At one point, the firm is said to have had nine individual hedge funds. "The way SAC was structured, if you looked at the prospectus, it was frightening how many LLCs they had... [Cohen] had Sigma and all sorts of funds where the vast majority of them were not available and were just funds where other funds would invest," says the head of one fund of funds invested with SAC during that period. This person says that the firm's labyrinthine structure was created by Cohen to keep his trading activities hidden from the Street.

"My biggest complaint with SAC was that Cohen had too many chiefs. Things became way too bureaucratic," adds another head of one fund of funds.

In January 2005 Cohen established CR Intrinsic Investors, a subsidiary of the firm based on fundamental analysis set up to pursue longer-term positions than those taken with SAC's traditional trading strategy. Matt Grossman, SAC's chief of research until that point, headed up CR Intrinsic. Former employees say the post was a reward for Grossman's creation of SAC's so-called shadow system, which funnels fund managers' best trading ideas directly to Cohen. Grossman left SAC in late 2007.

Initially, Intrinsic traded mostly Cohen's own money, according to a former employee. But the unit gradually took in outside capital, building its assets under management to roughly $2 billion by the beginning of 2008. Staffed by a group of traders one former employee describes as "insanely arrogant" even by SAC standards, Intrinsic's trading team was the group responsible for SAC's losses in the Porsche/Volkswagen trade in the fall of 2008. SAC and some of the industry's largest hedge fund firms lost billions of dollars on the trades.

Those losses combined with the overall impact of the market crash left SAC's flagship fund down 27.56% in 2008. It was the firm's first down year—and a dramatic departure from the 20% to 30% annual returns investors had come to expect. Cohen responded by moving nearly 50% of the firm's capital into cash and making significant personnel cuts. Intrinsic's seven portfolio managers and analysts were let go. Although the unit was restaffed, the jobs of roughly 30 back-office employees were eliminated, and SAC pulled the plug on its San Francisco office.

"One day he just got up on his desk and said, 'You're all fired,' and all the fundamental portfolio managers got canned," says a former SAC employee who was there at that time. An SAC spokesperson denies the firings, saying, "This is a myth and not true at all." SAC also eviscerated the firm's credit effort, an area Cohen had aggressively expanded in 2006 and 2007.

Cohen made some significant changes throughout 2009. Like many of his competitors, he realized the need to be more amenable to investors. Though SAC has yet to budge on its fees, Cohen is said to be considering a lower fee class. In June he replaced the three-year lockup period on the firm's SAC Capital International fund with quarterly redemptions and a 25% individual investor-level gate. SAC has also become a bit more transparent about its trading activities, organizing frequent investor calls and providing quarterly reports. At the end of 2009 the firm brought on Citco Fund Services as its independent administrator, another bow to investor pressure.

These days, SAC is making another big push in quant trading. In the summer of 2009, Cohen brought on Ross Garon, previously a partner at defunct Tykhe Capital who had been at D.E. Shaw, to build up that business. The firm has searches under way for quant traders, commodities trading advisors—a fairly new area for SAC—and a handful of senior management positions. "High-frequency trading is now the rage, and SAC recently held a job fair where they invited quants using high-frequency models to strut their stuff," says one former employee. "When SAC was down, the stat arb guys were up 50%, and that's when Cohen decided it's worth straddling the two extremes," he says.

"I think Steve would agree 100% that he strayed too far off the reservation and put up the only negative year of his entire career as a result," says one SAC alum. "He's since simplified and now has no interest in anything involving complex leverage, derivatives or liquidity constraints." In 2009 SAC Capital Management was up 28.6% for the year, while SAC Capital International logged gains of 28.4%.

Many of the individuals who have made their way through the 20,000-square-foot trading floor of SAC's Stamford, Conn., headquarters describe a testosterone-charged environment with Cohen literally at the center. His trading-floor desk is the middle point, with video feeds that relay the guru at his workstation across the room to ensure that no one misses any comments or trading wisdom he might impart throughout the day. The firm's CR Intrinsic group sits at the end of the trading floor, partitioned off by a large glass wall.

It's eerily quiet, the former employees say. Cohen does not like the noise made when the tiny fans inside computers occasionally kick in. Office phones are set to blink instead of ring. "There's a group of security people constantly looking at video cameras to make sure nothing is going on," says a former SAC employee. And since no one in the building has ever been able to get a cell phone signal, traders believe Cohen has intentionally blocked signals throughout the firm's headquarters.

Even Cohen's preference for a 70-degree work environment—which he is said to believe is the optimal temperature to elicit the best performance from his traders—has become a key part of the firm's culture. To keep employees warm, Cohen has long issued black fleece jackets embroidered with SAC's logo. These jackets have come to symbolize the firm's exclusivity. "It's my good luck charm," says a former SAC employee of his fleece. Though he's packed away his SAC jacket since leaving the firm for fear of appearing arrogant, he says he now wears a solid black version of the exact Patagonia Synchilla style worn at SAC.

SAC has a clannish atmosphere, and employees must promise to keep its inner workings secret. Those joining and leaving the firm must sign extensive legal documents that have helped the firm keep the intricacies of its trading strategies well shrouded.

"You get these huge exit agreements that say if you're ever contacted by the press, you have to call them immediately," says a former SAC employee who, like nearly all his peers, would speak only on the promise of anonymity. Even so, he remained extremely worried about what would happen to his career if Cohen ever discovered he had spoken about SAC—a sentiment repeated time and again by the more than two dozen people who spoke to AR for this story.

"SAC is an extremely private manager, and they want to stay out of the media at all costs. And there's very little upside for someone like me to talk about them," says one former fund manager. Cohen's clout is another reason: "Steve has the ability to outsource capital to people. There are just so many people who have been through there and have connections that, really, everybody has something to lose." The extent of Cohen's penchant for secrecy was demonstrated in early January, when SAC was able to convince editors at Thomson Reuters to kill a story on the Wall Street legend.

Cohen's hold on his former employees doesn't stop with the firm's quasi gag orders. Portfolio managers who join SAC are required to sign contracts agreeing that if they leave the firm to launch hedge funds of their own, Cohen is entitled to 50% of any fees they generate for up to 10 years and has the option to finance such funds up to 40% of their capacity. "The two other conditions of employment are that you don't put Steve Cohen at risk and you don't make him look bad," says one former SAC employee.

Fund managers and traders at the firm are split into groups that operate much like mini hedge funds yet whose trading collectively feeds into SAC's four primary funds to varying degrees. Traders say the atmosphere at SAC has become somewhat less clubby in recent years as the firm's head count has climbed to nearly 800, including more than 100 analysts. Cohen's "eat what you kill" approach to compensation keeps interaction between different groups at a minimum, with traders closely guarding their strategies from one another.

Under what is often referred to as SAC's shadow system, Cohen continuously monitors the trades of his fund managers, and when he spots a position he believes is likely to pay off will usually shadow it by adding the same position to his own portfolio. "He's basically taking the best idea of each trader and instead of giving them more capital or leverage is just putting it in his management book," says one fund manager close to SAC. He says that the practice sometimes creates resentment among some of SAC's portfolio managers, who view it as a way for Cohen to keep from paying them as much as they are worth. Though fund managers may not reap the same financial rewards for sharing their ideas that they would if SAC simply let them increase the positions in their own portfolios, traders whose ideas are used by Cohen are compensated based on the amount he makes from implementing their trades, which is said to vary based on individual traders' employment agreements with the firm. SAC's spokesman said the shadow trading notion is "completely false."

The average SAC portfolio manager is allowed to manage between $300 million and $500 million. If their peak-to-trough loss reaches 5% of their funding, the firm usually halves their capital, whereas losses as high as 10% will most often mean termination. Still, not all portfolio managers are treated equally. Beyond the $4 billion traded by Cohen himself, six managers oversee portfolios in the $750 million to $1.3 billion range; 14 managers trade between $500 million and $700 million; 20 managers fall in the $300 million to $450 million range; 18 managers control between $200 million and $250 million, and 19 managers oversee portfolios of $150 million or less.

A combination of the firm's onerous employment terms, extreme competition and Cohen's penchant for firing people the second their trading performance hits a bump in the road has led to high turnover during SAC's 18 years of operation. Because the firm is able to pay more than most of its competitors, it has little difficulty attracting traders and fund managers. But SAC alums say the way employees are treated and compensated makes cashing in on the brand by going it alone an attractive option for fund managers who have put in a few years.

"If you come in as a portfolio manager and you go in-house and negotiate a deal, you'll get 20% of the P&L that you generate. But at the end of the year you get nickeled-and-dimed on getting allocations from the trading desk and everything else, and the net you get is more like 14%. So you start thinking you can do better on your own," says one former SAC trader. He says SAC's practice of deferring compensation as a way of retaining talent breeds resentment, as does the fact that Cohen almost never lets fund managers advertise their SAC records when they go out on their own.

"It's pretty much unheard of to take your track record. Just that you've worked in the 'hallowed halls of SAC' is more than enough to get hired elsewhere," says the trader. Another former SAC employee notes that Cohen doesn't really believe any of his employees' performance stats are actually their own since he ultimately has the ability, which he frequently exercises, to rein in positions he views as potentially troublesome and therefore curb any potential losses. But with so much controversy surrounding Cohen and his firm these days, some former employees are worried SAC's cachet could have an expiration date. "I have a fear that there will come a point where SAC could become a blot on your résumé—kind of like a Galleon," says a former trader. With that possibility in mind, he says he is aggressively interviewing now.

Despite Cohen's success in quickly building SAC into a powerhouse business, his intense secretiveness kept him out of the media spotlight for years. But the soap-operatic antics of his personal life, a number of lawsuits and the new scrutiny of hedge funds have turned up the wattage.

In November 2006 Andrew Tong, a junior trader at SAC at the time, filed a sexual harassment suit against SAC and his boss, Ping Jiang, in New York State Supreme Court. Tong's suit recounted a fraternity-like atmosphere he claimed was part of SAC's training program for traders, where he alleges that his boss tied him up, urinated on him and forced him to take estrogen pills, dress in women's clothing and perform oral sodomy. Though the outlandish charges were widely recounted throughout the Street, the court documents were sealed. Tong eventually withdrew his suit, but not before his claims prompted the involvement of the Equal Employment Opportunity Commission—which launched an investigation into the matter that was closed without action in the spring of 2008—and an FBI investigation, according to press reports. In late 2009 court documents from the case were unsealed, reigniting media coverage.

Cohen's name went mainstream, however, in 2006 when 60 Minutes showed a grainy photograph with Cohen's head circled in an episode reporting on a suit filed by Biovail against SAC and others. The suit was dismissed last summer, and SAC in late February 2010 countersued for vexatious litigation.

But according to Cohen's ex-wife, Patricia, the TV show got her thinking. In December, she levied charges of her own against her former husband, his firm and his brother Donald. The former Mrs. Cohen's suit, which sought $300 million in damages, alleged that her ex-husband hid assets during their divorce and gave false affidavits between 1988 and 1991. Perhaps most damning, however, were her claims that she was aware of insider trading activities Cohen was involved with during their marriage, including deals such as General Electric's takeover of RCA in 1986, and that he was involved in ongoing racketeering activities, including mail and wire fraud.

The timing of Patricia's case against her ex-husband aroused suspicion as it was filed a matter of weeks after the former SAC employee got caught up in the Galleon trading ring. The suit was withdrawn when Patricia changed lawyers. Her new attorney, Gaytri Kachroo, who rose to prominence for her legal representation of Madoff whistle blower Harry Markopolos, says the case will be refiled within the next couple of weeks.

Kachroo says that the reasoning for her client's choice of the racketeering statute to pursue her ex-husband will become clear when the new complaint is filed. "We're not giving up on the RICO. It makes sense based on what's occurred," she says. SAC's spokesman denounced the suit's claims as "ludicrous allegations made by a former spouse that are entirely without merit."

And it looks like SAC's attorneys will have no shortage of work in the coming days. According to a source close to hedge fund firm QuantZ Capital Management, after the firm hired Prasad Chalasani, a former robotics professor who had been laid off from Millennium spinoff WorldQuant, he bypassed the initial getting to know your workplace approach most people take on their first day and immediately began probing the inner workings of QuantZ's proprietary quant programs. Chalasani's digging aroused suspicion among his new employers, who began making calls and discovered that their new employee had "shopped his offer letter to SAC" to land himself a job with Cohen—which was all but confirmed when he failed to return after his first day with QuantZ.

Though SAC initially refused to acknowledge his employment, a call to the firm put us straight through to Chalasani, who declined to comment. QuantZ is understood to be considering its legal options against both Chalasani and SAC, and the firm's counsel has already sent legal notice to Chalasani. A spokesman for QuantZ declined to comment on the matter.

For all the legal issues surrounding the firm, many point to the fact that Cohen in 2001 brought on Peter Nussbaum, a former partner with Schulte Roth & Zabel, as SAC's general counsel. One former senior-level SAC employee describes Nussbaum as a "cross the t's and dot the i's" kind of attorney who is extremely cautious in his interpretation of the law and has applied his conservative approach to SAC's oversight. SAC alums say the firm is constantly reminding traders of the importance of operating within regulatory guidelines—an idea driven home in multiple annual compliance sessions employees must attend.

Much to his dismay, scrutiny of Cohen's astronomical wealth extends beyond his methods for earning it to the ways he spends it. In 2009 he ranked 36th on Forbes' annual list of the 400 Richest Americans, with an estimated net worth of $6.4 billion. An active philanthropist, Cohen is a member of the boards of trustees of Paul Tudor Jones' Robin Hood Foundation and Brown University. But it is his mammoth home in Greenwich, Conn., and his art collection that attract the most attention.

In 1992, the same year he launched SAC, Cohen married his second wife, Alexandra, or Alex, whom he met through a dating service. The couple have four children together, not including their children from previous marriages. Shortly after they wed, Cohen and his new bride took the unusual step of appearing on the English-language spin-off of a Spanish talk show called Cristina in an episode entitled "He Acts Like Her Husband, Too." During the program, Cohen admitted to sleeping with his ex-wife, Patricia, after he was already in a relationship with Alex—footage of which was recently unearthed by the media after the filing of Patricia's lawsuit.

It is not the only time the couple has made headlines. The multiple renovations to the extravagant home on 14 acres of land they bought in 1998 have served as consistent tabloid fodder over the years. Features of the walled-in compound include an ice-skating rink, an indoor pool, a movie theater and a two-hole golf course. "When he first bought the house, Steve used to joke that the neighbors were going to say, 'Here come the Clampetts,'?" says a former senior-level SAC employee close to Cohen.

Then there's their art. Though the Cohens began collecting art only in 2000, they have built up one of the world's largest and most notable private collections, which is closing in on $1 billion in value. Cohen is even reported to be adding a private museum on his estate. In addition to pieces by Hirst, his collection includes works by Van Gogh, Gauguin, Andy Warhol, Roy Lichtenstein, Monet, Degas and Keith Haring.

"He's a highly respected investor and art collector. He's bought some spectacular things, in part because he has a spectacular amount of money," says Donald Thompson, a marketing professor at Toronto's Schulich School of Business and author of "The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art"—whose title is a nod to the sum Cohen was initially reported to have paid for the Hirst work.

Cohen has found a way to meld his two passions by diving into the financial side of the art world. As of March 2009, SAC had accumulated a 5.9% stake in Sotheby's, making the firm one of the auction house's largest shareholders. But he's on the hook to Sothebys in another way. "Mr. Cohen is one of about five people who have been identified by Sotheby's over the years as someone who has been buying guarantees," says Thompson. Sotheby's guarantees artists a minimum for their work, but financiers like Cohen are paid to assume that risk. The collapse of the art market could have triggered losses for these financiers to cover. Thompson says these guarantees remain one of the art world's most closely guarded secrets.

Cohen's immersion in the art market is of little surprise, given the money to be made and Cohen's passion for making it. At times, however, that passion may take over. One former SAC employee recounts the birth of Cohen's youngest child in 2002. "The birth date was planned for July 3 because it was a slow trading day. So Alex went in to have labor induced, and I think the thing was scheduled at two o'clock—the whole idea being that he was going to be there to witness the birth of his child," he recalls. "But we're sitting there trying to get him to stop trading, and he won't. He missed the whole thing." SAC's spokesman says the birth date was chosen because the doctor was going on vacation, that the doctor told Cohen to go to work and that he left for the hospital as soon as soon as the doctor told him to do so.

Those close to Cohen believe that he has been misunderstood and just happens to have a love of and a talent for trading that has made him an insanely wealthy individual. "I pray that he dies at his trading desk because that is the greatest blessing that he could ever have. This is a person that has lived and breathed trading and has been passionate about it," says one former SAC employee. Adds another: "Cohen will only leave SAC in a box." If he's right, for Cohen's sake, let's just hope it's not one encased in glass and filled with formaldehyde. AR

Fact file: SAC Capital Advisors

Assets under management: $12 billion (January 1, 2010)

Offices: Stamford, New York, Boston, Chicago, London, Hong Kong & Singapore

Flagship (onshore): SAC Capital Management 30% since inception August 1992

Founded: 1992

Founder: Steve Cohen

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