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Is Steven Cohen the Lance Armstrong of Wall Street?

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The seven-time Tour de France winner has apologized to Oprah; can we expect the same from the leader of the world's most profitable hedge fund?

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In cycling, doping has been rampant for much longer than people think (check out Wikipedia's exhaustive list of doping cases in cycling). Among champion riders, it has been a common thread, particularly since 2000 when the test for erythropoietin (EPO) began. Note this is the same year the SEC's Fair Disclosure rules were adopted.

EPO is one of the drugs that Lance Armstrong was accused of using. It is a hormone naturally produced in the kidneys that stimulates the production of red blood cells. Putting additional EPO into the bloodstream creates more red blood cells. This allows for more oxygen to enter the bloodstream, giving the doper a better ability to recover and higher endurance. In addition to EPO, Armstrong was accused of using blood transfusions, corticosteroids, and testosterone. In a sport where most of the top competitors were using such drugs, how could he, with such ambition and natural talent, deny himself the edge to allow him to realize his potential? Employees at SAC must feel the same way.

Investigations and Trouble

Cohen's SAC is at the heart of a six-year, multi-agency (including the SEC and the Department of Justice) investigation into illegal trading activity on Wall Street. The investigation has so far led to 73 convictions or guilty pleas. And it's not just the little guys that are getting busted: Last year, Raj Rajaratnam, the co-founder of the Galleon Group, was convicted for insider trading.

For years Cohen remained outside of any kind of clear connection to insider trading, but that changed last year. On November 20, Matthew Martoma, a 34-year-old portfolio manager for SAC, was charged with securities fraud for trading health care companies Elan (NYSE:ELN) and Wyeth (BSE:WYETH) with advance, illegal news of a new Alzheimer's drug. Earlier, when Martoma had invested in the companies without any hedge, he drew skepticism from nearly everyone from the firm, except for Cohen, that is.

On January 23, Martoma pleaded not guilty. He is the eighth SAC employee linked to allegations of insider trading, but the first so closely linked to Cohen himself.

On that same day that Martoma was charged, SAC received a Wells Notice, indicating that civil charges may be coming.

In cycling, the EPO test that began in 2000 started identifying and disqualifying more competitors. Somehow, Armstrong was able to get through his historic winning streak at the Tour de France without testing positive. But in 2006, one of Armstrong's primary competitors, Floyd Landis, the winner of the race that year, tested positive in a drug test and was stripped of his title.

After years of positive tests and scandals in the cycling world, Landis pointed his finger at Armstrong, with a series of claims that his former teammate had been doping as well. Armstrong adamantly denied the claims as he had done since 2004 when journalists Pierre Ballester and David Walsh published their expose L.A. Confidential.

By 2010, a federal inquiry had begun, and in 2011, the US Anti-Doping Agency began its investigation into Armstrong's alleged doping. On October 10, 2012, the USADA published its findings, stating that, yes indeed, Armstrong had used performance-enhancing drugs. The Union Cycliste Internationale, the governing body of cyling, decided not to appeal. Moreover, he had led a complicated and wide doping ring in the professional cycling circuit. Allegedly, he was encouraging the pursuit of the edge by proliferating performance enhancing drugs. Like Cohen, his competitiveness had made the edge a necessity.

Apologies

We have the evidence for Armstrong's use of performance-enhancing drugs (as much as many of us have had to fight the urge not to believe it), but we don't have conclusive evidence that Cohen is enhancing his performance at SAC. What we do know is that Cohen's hedge fund is very competitive, and that his employees need to produce returns and results if they want to stay on. In order to produce consistent returns, it's likely that those employees, like Martoma, are using illegally obtained information that gives them a competitive edge. Martoma is denying illegal activity, but so did Armstrong. Will continued pressure change his tune? Will Cohen eventually be charged? Will he have to apologize to Oprah?

Lance Armstrong has lost his image, his reputation, his record-breaking performance. His cheating was unfair, yes, but he wasn't playing around with billions of dollars, moving the stock markets, and affecting the world's economy. Cohen, at his biggest of hedge funds, is.

We are all upset about Armstrong. If it turns out that Cohen is at the heart of illegal insider trading activity at SAC, we should be much more upset with him. At least Armstrong's performance inspired us, however artificially fueled it may have been. Unfortunately the sport of cycling is tainted, but so is Wall Street, and so is our economy. Illegally enhancing one's performance at a hedge fund, stealing virtually untold amounts of money -- that is the real crime.
No positions in stocks mentioned.
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