The New Yorker’s October 13 issue featured Patrick Radden Keefe’s bombshell journalistic investigation of a major hedge fund scandal. Mathew Martoma, a trader at S.A.C. advisers, a major fund, had been getting inside information about the progress of clinical trials of an Alzheimer’s drug. When his source, a physician and researcher at the University of Michigan, told him the trials were progressing well, the fund bought massively into the drug’s parent company’s stock. When the results of the trial were eventually presented, the drug’s effects were less robust than expected, and most observers expected S.A.C.’s gamble to produce heavy losses. But to the surprise of everyone but Martoma and the firm’s C.E.O., the fund had not only gotten out of the stock, but had shorted it to the tune of a $175 million profit. Did Martoma’s source at Michigan give him the insider information to produce this incredible piece of financial maneuvering? Or was it simply a case of a trader listening to the right people at the right time, gaining what hedge fund brokers call “edge?”
According to the federal judge and jury convened in New York, Martoma’s “edge” was criminal. He was sentenced to 9 years in prison and ordered to pay heavy fines. But Martoma proclaimed his innocence throughout, and Keefe cites sociologist Diego Gambetta to explain why. In his book Codes of the Underworld, Gambetta argues that people engaged in dubious conduct develop coded languages to speak together, since they cannot talk openly about what they are doing. The language of “edge,” Keefe implies, may be one such coded language. Traders can talk about “edge” without fear, because to outsiders, it means only knowing whom to talk to and when. Martoma’s case, however, shows that “edge” may be sometimes, or even often, deployed as a language to talk about insider trading of the kind Martoma was engaged in. Keefe argues that at S.A.C., conversations about sources and insider information were always steered toward the language of “edge” in order to deflect suspicion and attention. Martoma may have thought he had done nothing wrong because he learned his trade in an environment where “edge” was simply the language of doing business.