What ‘Billions’ gets right about insider trading

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“Billions” is back on Showtime — Season 2 began on Sunday — and aren’t you glad? From the start, “Billions” has been a guilty pleasure, a drama about Wall Street that may lack the highbrow seriousness of, say, the Sopranos, but more than makes up for it with wicked portrayals and campy fun.

The central plotline of “Billions” revolves around an epic struggle between a U.S. attorney named Chuck Rhoades (played by Paul Giamatti) and the fictional hedge fund titan Bobby “Axe” Axelrod (played by Damian Lewis). Rhoades is convinced that Axelrod is crooked — guilty of insider trading — and he’s hell-bent on bringing him down. If that sounds familiar, it should: Andrew Ross Sorkin, the financial journalist and co-creator of the show (and a friend and former colleague, I should note) took inspiration for it, in part, from a real-life epic struggle: the one between U.S. Attorney Preet Bharara and hedge fund titan Steven “Stevie” Cohen.

One of the things that makes “Billions” good television is its moral ambiguity. Yes, Rhoades is driven by his desire to put a lawbreaker in jail, but he is also driven by his own ambition and by personal rage. He is also unscrupulous. Last season, finding himself alone with his wife’s computer, he downloaded damning information about his enemy. (In the show’s most implausible element, Mrs. Rhoades, played by Maggie Siff, is a psychiatrist employed by Axelrod.)

As for Axelrod, he’s unscrupulous too, but he’s also a philanthropist and a family man who is loyal to his friends. And while it’s clear that he’ll go to extreme lengths to gain an edge in the market, the question whether he is violating the law by trading on proprietary, market-moving information is anything but clear. Maybe he is. Maybe he isn’t.

A few weeks before “Billions” returned for its second season, a book was published purporting to tell the real story of the battle between Bharara and Cohen. “Black Edge” was written by Sheelah Kolhatkar, a respected business writer now at the New Yorker. (She was formerly a writer for Bloomberg Businessweek.) It has gotten some terrific reviews, and there is much about it to admire. It’s well-written and well-reported, chock-a-block with “you-are-there” moments. What “Black Edge” is not, however, is morally ambiguous. And to my mind, that is its fatal flaw.

In Kolhatkar’s account, there are white hats and there are black hats, with no gradations of gray. The white hats, she writes, are “FBI agents who followed hunches and set up wiretaps, flipping witnesses and working their way up the hierarchy until they reached the guys in charge.” They are also “idealistic government lawyers facing slick defense lawyers making twenty-five times as much money a year.”

The bad guys? “Young traders smashing their hard drives with hammers, shredding files and turning on their closest friends to stay out of jail.”

And “hedge funds like SAC” — SAC Capital Advisors was Cohen’s fund — that “were carefully structured so that the people at the top were protected from the questionable dealings of the employees below.”

And also, of course, Cohen himself.

“Black Edge” presumes that the handful of trades that the government prosecuted — not just against SAC employees but a few other hedge funds as well — were, indeed, examples of illegal insider trading. Kolhatkar almost never uses the word “alleged.” She notes without objection examples of federal agents telling lies to scare targets into cooperating, or inviting the Wall Street Journal to document an early-morning perp walk. She seems unperturbed when prosecutors tell targets that the person they really want to get is Cohen — even though they have no hard evidence against him — and that they’ll get a better deal if they turn against him.

Now compare Kolhatkar’s portrayal with what actually happened. Yes, a few SAC employees turned state’s evidence, but they were small fry who did not incriminate Cohen. One former SAC trader whom Bharara put on trial was Mathew Martoma, who unquestionably committed a crime, seducing an elderly doctor into giving him inside information about a clinical trial for a potential Alzheimer’s drug. In 2014, Martoma was sentenced to nine years in prison; the case is on appeal. Yet despite the harsh sentence, and the fact that Cohen fired Martoma, he never cooperated with the government.

As it turns out, Martoma’s conviction was the best the government got during its sprawling, years-long investigation into Cohen. Three other hedge fund managers — Todd Newman, Anthony Chiasson and Michael Steinberg (the latter of whom was at SAC) — were also convicted of insider trading. All three men had traded Dell stock based on information they received from their analysts. The government contended that the information was proprietary, and that the three men knew it.

But when the U.S. Court of Appeals for the 2nd Circuit heard Newman and Chiasson’s appeal, the judges ripped apart the prosecutors’ arguments. They noted that under a 1983 Supreme Court ruling, an insider-trading conviction could be valid only when a tippee knew that the tipper was receiving a benefit. Though Kolhatkar largely glides over this, there were four layers of people between the Dell tipper and Newman and Chiasson. Not only did Newman and Chiasson (and Steinberg, for that matter) not know of any benefit, they didn’t even know who the tipper was. They have also always contended that the information they used was not gathered illegally.

In December 2014, the 2nd Circuit overturned the verdict against Newman and Chiasson, and the Supreme Court declined to hear the case. Although he was furious about the ruling, Bharara dismissed the charges against Steinberg, as well as others who had pleaded guilty. Bharara believed that the appeals court had, in essence, upended the insider trading law. But I think it is every bit as legitimate to say that the U.S. attorney stretched the law beyond its limit in his effort to nail Cohen, and that the appeals court called him on it. Bharara overreached.

As for Cohen, he ultimately paid a $1.8 billion fine and agreed not to manage other people’s money until 2018. In so doing, he settled insider-trading charges that Bharara leveled against his firm, rather than against him personally. Did Cohen himself trade on inside information? Kolhatkar certainly implies as much. But despite years of trying, the government never brought such a case. Maybe he did. Maybe he didn’t. It’s ambiguous.

Which is why, to get back to where we started, “Billions,” for all its contrivances and exaggerations, is a better depiction of this landmark battle than “Black Edge.”

Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. This column does not necessarily reflect the opinion of Minnesota Lawyer or Bloomberg LP.