The worst kept secret on Wall Street is the identity of the FBI's most wanted trader: billionaire investor Steven A. Cohen. All this week the bureau has been raiding hedge funds and handing out subpoenas in a widespread crackdown on insider trading. A number of the investigation's targets, SAC Capital, Diamondback Capital Management and Level Global Investments, have either direct or indirect ties to Cohen. The hedge fund manager's uninterrupted success as a trader (30 percent annualized returns since 1992) and high profile (#87 on Forbes's world's richest billionaire list) make him a big fish. Up to this point, however, the FBI hasn't accused Cohen of any wrongdoing.

  • The FBI Wants This Badly, writes Bess Levin at Dealbreaker:
Let’s just cut to the the chase– in a conference room at FBI HQ’s, you will (most likely) find a bulletin board with a photograph of Steve Cohen in the middle, surrounded by a web of smaller pictures of various people who he previously and currently does business with, with little strings linking everyone.
  • Cohen Has Been Mind Bogglingly Successful, writes Duff McDonald at Fortune:

When we see someone make the right call on bigger and bigger trades for nearly 20 years running—and deliver 30% returns even after charging an absurd 3% of assets and 35% of profits as Cohen does—it's not envy that is the instinctive response; it's disbelief. No one, the thinking goes, can be that good—and that lucky—for so long. Ergo, he must be cheating. Specifically, engaging in insider trading. And that's why they've been after him for all this time...

Just as all roads lead to Rome, all insider trading investigations lead to SAC Capital's Steve Cohen. He can't shake the Feds because he's too good to be true.

  • They'll Start with the Underlings, writes Charles Wallace, speaking with Jay Dahya, an economics professor at CUNY.
It's common for the SEC to start a case with small characters and then use their testimony against bigger participants in the fraud. "I get the impression that they are going to set an example, a Hollywood-type example of someone," Dahya says.

He says hedge funds are now struggling in a down market to make decent returns and as a result, many are taking large risks, and "more people are crossing the line." If that's the case, the feds will have yet more suspects to flush out. Putting them away, however, could be a lot harder.
In essence, they're investigating outsiders -- the hedge funds -- for insured trading violations. This could be difficult to prove in court, because there's no statuary definition of insider trading. There's only a kind of fraud, known as the abstain or disclose rule, which maintains that if you have material nonpublic information and an obligation to keep it secret, then you're not allowed to trade on it until the information is disclosed to the public.
  • Will They Manage to Get Cohen?  Duff McDonald at Fortune offers his theory:

Here's my bet on how this is going to play out. In the next year or two, Cohen is going to retire. In the process, he will likely wind down SAC—a huge proportion of which is his own money in any event—and will amuse himself with his gigantic art collection, doing things like selling a Manet for $33.2 million, as he did this past June. He will tell people he has nothing left to prove, and that the constant hounding by the authorities took all the joy out of the thing.

And he may be telling the truth. Either that, or the Feds will have finally driven home the fact that the game can no longer be played the way he just might have been playing it all along. In which case, what's the point of doing it at all?

  • No One's Going to Get Burned Here, writes Henry Blodget at Business Insider:
The unfolding insider-trading investigation has now engulfed not just a few powerful hedge funds, but massive mutual funds like Wellington, Janus, and MFS Global. And given that the Feds are still raiding offices and issuing subpoenas, the investigation is likely far from a conclusion. That sounds scary, but it's actually good news for Wall Street. If the powers-that-be decide in hindsight that a widespread research practice that everyone was using should have been illegal, there will be safety in numbers. Ultimately, the firms will just have to pay some money and promise not to engage in the practice again.
  • Either Way, Let's Not Jump to Conclusions, cautions Barry Ritholtz at The Big Picture:

Call me old school, but innocent until proven guilty is still the law. If SAC is found guilty, you can tar and feather them, but until then, I’d rather reserve judgment until the evidence is out there (No, we don’t no any business with them).