Not shown: zip-up sweater. Photographer: Amanda Gordon/Bloomberg
Not shown: zip-up sweater. Photographer: Amanda Gordon/Bloomberg

Here's a story about how sad Steve Cohen is now that his hedge fund has been shut down. The answer is, a medium amount of sad:

[Cohen's wife] Alex, for one, saw a benefit in her husband’s difficult passage. It had taught him a valuable lesson. He was humbler and wiser, and realized how lucky he was, especially compared with some of his former employees. “He knows what’s important now,” she said. Steve Cohen had his freedom, his wife, his kids, his homes, a business -- and $11 billion. It was something.

Sure. But in addition to being a searing portrait of a man who's down to his last $11 billion,1 this story contains some crucial insight into insider trading law:

CFOs who formerly jumped on the phone with an SAC analyst now steered clear, concerned that just talking to someone associated with an indicted company was risky. For outsiders, SAC and his family office, which he named Point72, were one and the same. “People at Steve’s firm complain that they don’t get as much corporate access,” said one colleague. “That’s a challenge.”

The government's view of SAC Capital has long been that it was a haven for insider trading, whose consistent stellar performance was due mostly to cheating. And this ... I mean, SAC is basically saying "we can't get nonpublic information from corporate insiders and so it's really hard to do our job." That sounds a lot like confirmation of the government's theory, no?

But it probably isn't. It's probably just, you know, fundamental equity research is a lot of talking to people about companies. Sometimes those people are chief executives, or chief financial officers, or investor relations officers, at the companies you're thinking about investing in:

Many investment funds now have policies -- both explicit and unspoken -- that they won't take a stake in a company before meeting with the CEO ... Brian Hogan, president of the equity and high-yield business at Fidelity Investments, the largest active mutual fund company, says meeting a CEO can yield "nuances" about a company that don't come across in earnings transcripts, and help him "put the entire mosaic together."

And it turns out that the more you meet with those people the better your investment decisions tend to be.2 And so investors are focused on getting access to management: Access to management is one of the key products sold by the sell side, and investors well beyond the SAC Capital orbit seek out that access.3

So big equity funds talk to corporate insiders about their companies' performance all the time, and those funds make investing decisions based on those conversations, and those decisions are important for those funds' performance. That is: Investors get information from corporate managements that "alter the total mix of information available" to them, which is (sort of4 ) the insider trading standard.

But it's not insider trading. It's normal practice. It's so normal that people at SAC Capital, which did so much insider trading that they can't call themselves SAC Capital anymore, see no reason to be embarrassed about complaining "that they don't get as much corporate access" as they did before they were caught doing all the insider trading.5

This creates some awful confusion. It leaves companies unclear on what they can say to investors: CFOs flee from Point72 calls to avoid the risk that anything they say might be characterized as insider trading. And it leaves investors unclear on what they can hear from companies: Poor Todd Newman and Anthony Chiasson traded in Dell stock based on third-hand information from a Dell investor relations officer and were sentenced to years in prison for it, because they couldn't convince a jury that talking to investor relations officers is what equity analysts do. It creates horrible discontinuities where, if you get moderately useful information from company insiders, you get rich, but if you get slightly more useful information from company insiders, you go to prison.

The purpose of those insider trading prosecutions is, I suppose, to make small investors confident that the market isn't rigged against them, that it's a level playing field. The problem is that that's crazily false. It's not a level playing field. Big investors always get more access to management, and so more insight into public companies, than you or I get. Now they get more access than SAC Capital gets, too.

1 Though his fleece supply, at least, is undiminished:

At the Point72 offices, Cohen wore his usual jeans and sneakers and, because he kept the trading floor cold to prevent dozing off, a zip-up sweater—he had dozens of them in his office closet.

2 That Wall Street Journal article cites this study (of a single firm) by David Solomon and Eugene Soltes:

We find evidence that investors who meet privately with management make more informed trading decisions in periods when they meet, increasing their position before periods of high returns and decreasing their positions before periods of low returns. This improved timing ability is concentrated in hedge funds, and does not appear to be driven by fixed investor skill, investors communicating with each other, or investors endogenously choosing to meet simply when they have pre-existing private information. The increase in timing ability is larger during periods of greater uncertainty and more public information availability, consistent with a mosaic theory of investing. Our results suggest that, despite the passage of Regulation Fair Disclosure, private meetings help a subset of investors make more informed trading decisions.

3 And, like SAC, whine when they can't get it:

It used to be chummier and less cutthroat. When Bob Bacarella, 65, started investing in stocks 30 years ago, he could phone executives -- and actually speak to them -- while asking for information that could get someone thrown in jail today: "Hey, how were sales last week?"

4 Here I ignore all the big important questions about violations of duty and personal benefits.

5 It's so normal that prosecutors and the Securities and Exchange Commission are okay with it. One of my very favorite details from the SAC investigation is that the SEC caught Mathew Martoma's insider trading in Elan stock after "sifting for months through every phone call to SAC from anyone connected to Elan." It took them months to sift through all the legitimate conversations between SAC and Elan to catch the handful of illegal ones. The rest were fine!

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Zara Kessler at zkessler@bloomberg.net.