Six Degrees of Cru, and Why AMC=SAC

Rudy Kurniawan wasn’t the only wine enthusiast convicted in a Manhattan federal court on Wednesday. Just hours after jurors returned a guilty verdict against Kurniawan, another jury announced that it had found a 41-year-old portfolio manager named Michael Steinberg guilty on four counts of securities fraud and one count of conspiracy to commit securities fraud. It is a little surreal when someone whose name is almost identical to yours is in the news for a crime (okay, maybe it isn’t all that unusual if your name is John Smith, but if your name is Michael Steinberger….). It is jarring when you also happen to know the person. Through our mutual interest in wine, I was casually acquainted with Steinberg, who worked for SAC Capital Advisors, the embattled hedge fund run by billionaire investor Steven A. Cohen. Steinberg’s trial took place across the street from Kurniawan’s, but I didn’t see any of it; courtroom voyeurism isn’t my thing, and frankly, I would have been embarrassed had Steinberg caught me gawking at his trial.  He was charged with securities fraud, Kurniawan with wine fraud, yet their cases were strikingly similar in how they unfolded and how they concluded. They were also noteworthy for what they failed to achieve.

I met Steinberg five or six years ago, either at a wine tasting or a wine auction. I had first seen his name on erobertparker.com, where he would occasionally post. He was familiar with my name, as well, and we had a good laugh when we were finally introduced. I liked him instantly: he was smart, personable, and didn’t seem to have any Wall Street, monster-of-the-universe swagger. The longest I spent with him was at an Acker Merrall & Condit (AMC) auction at Cru in 2007. Cru, of course, was the scene of some of Kurniawan’s wildest nights, and also the site of his unmasking. It was an evening auction, and Steinberg, spotting me across the room, invited me to join him and some friends for dinner at their table. He was a Burgundy guy and treated us to a 2002 Lafarge Volnay Clos des Chênes off the list (Cohen apparently has a taste for Burgundy, too; from what I gather, he takes a hefty annual allocation of DRC from a retailer in Greenwich, Connecticut, where he lives). While I knew that Steinberg worked for a hedge fund, I had no idea that it was SAC, and he didn’t mention it. Only later did I learn that he was said to be Cohen’s right-hand man. It was undoubtedly a very lucrative position, but it was also a dangerous one when his boss became the primary target of a government crackdown on insider trading.

If you aren’t familiar with Cohen, you can read about him here.  He is known to be a brilliant trader, but his results have been so phenomenal that they have long aroused suspicion. Over the last two decades, SAC has notched 30 percent average annual returns, a performance that struck many observers as too good to have been achieved without cheating. Rumors of insider trading have dogged Cohen for years, and SAC, which manages around $14 billion, has been under investigation since the mid-2000s. But the pressure on the firm ratcheted up considerably when Preet Bharara became U.S. Attorney for the Southern District of New York four years ago. In the wake of the global financial meltdown, Bharara launched a sweeping assault on Wall Street corruption. Since 2009, he has won 77 convictions for insider trading without a single loss.

It no secret that the man Bharara most wants to take down is Cohen, and he and his team have been using the time-honored strategy of going after little fish in order to snag the big one. Before Steinberg’s arrest in late March, seven SAC employees had been charged with insider trading and six of them had pleaded guilty (the other case is still pending). Just two weeks before Steinberg’s arrest, Cohen agreed to pay $616 million to settle insider trading charges brought against his firm by the S.E.C. In July, the Justice Department indicted SAC on five counts of insider trading. The hedge fund pleaded guilty last month and agreed to pay $1.2 billion in penalties and forfeited profits in order to settle the case. It also agreed that it would no longer take money from outside investors; SAC is now being converted into a family office that will primarily manage Cohen’s personal fortune, estimated at $9 billion.

However, the guilty plea and the enormous fines are all tied to misconduct by Cohen’s underlings; what prosecutors have yet to come up with is evidence proving that Cohen himself broke any laws, and that is clearly what they are after. But Cohen has repeatedly proclaimed his innocence, and he has certainly not been acting like a man who thinks his days of fresh air, sunshine, and private showers are numbered. In fact, his conduct has struck many as defiant, almost taunting. On March 26^th, 11 days after SAC agreed to pay the SEC the $616 million and just three days before Steinberg was arrested, Cohen, a major art collector, paid $155 million to purchase Picasso’s “Le Reve” from casino magnate Steve Wynn. A week after Steinberg was led from his Park Avenue apartment in handcuffs, Cohen purchased a house in the Hamptons for $60 million. Correctly or not, these acquisitions were widely construed as Cohen essentially mooning the prosecutors (not a pretty image, I will acknowledge, but you’ll have forgotten it by Christmas Day—I promise!).

Steinberg’s arrest was said to mark a dramatic escalation in the government’s pursuit of Cohen; his stature at the firm seemed to bring the investigation perilously close to Cohen. Prosecutors clearly hoped that Steinberg, facing up to 85 years in prison, would provide them with incriminating evidence against his boss in exchange for leniency. But either because he didn’t have anything to offer the government or wasn’t willing to turn against Cohen, he opted to fight the charges instead.  Cohen was not asked to testify during the month-long trial, and Steinberg’s defense team didn’t call any witnesses. Given Bharara’s undefeated record on insider trading cases, going to trial was a very risky move for Steinberg and it backfired, badly. He seemed to know that even before the jury announced its decision: on entering the courtroom Wednesday afternoon to hear the verdict, he fainted.

Kurniawan, by contrast, remained impassive when the jury forewoman read the guilty verdict against him late Wednesday morning. But the two cases otherwise played out in similar fashion. I have to assume that when prosecutors ordered Kurniawan arrested last year, they thought they were pulling a thread that would unravel a broader conspiracy. Given the enormous number of counterfeit bottles that Kurniawan appeared to have sold, it seemed very unlikely that he had acted alone, and speculation about possible accomplices quickly focused on one person in particular: John Kapon. For what it’s worth, I never believed that Kapon had been in on the plot. He was certainly guilty of greed and gross negligence. It still blows my mind that Acker tried to sell those fake Ponsots; my 12-year-old son, seated at his computer, could have done all the due diligence that was required in probably two minutes or less (a visit to the domaine’s website quickly reveals that Ponsot didn’t make Clos Saint-Denis prior to the 1980s). Evidently, Acker’s authentication process went something like this: if it came in a dark green glass bottle, had a cork, and contained a liquid that looked like wine, it was deemed authentic.

But I thought Kapon was too smart and had far too much to lose to risk it all in a counterfeiting scheme, and the emails that he exchanged with Kurniawan at the time of the controversial Spectrum auction in London last year did not suggest they had been partners in crime; quite the opposite, in fact. If you recall, Kurniawan had defaulted on $10 million in loans from Acker, and as part of a deal to work off that debt, he had agreed that he would not sell any wines without first obtaining permission from Kapon. When it was reported that Kurniawan had consigned wines to the Spectrum sale through a third party, Kapon was furious; in the emails, he demanded to know if the rumors were true and sternly reminded Kurniawan about the terms of the agreement (“You know you can’t do this, Rudy, without our written consent”). Based on those emails, and based on what I knew of Kapon, I never bought the idea that he had conspired with Kurniawan.

However, it was easy enough to understand why others made that leap. Kapon called Kurniawan his best friend, the two seemed inseparable, and to say it was a mutually beneficial relationship would be an understatement: John made Rudy, but more importantly, Rudy made John. In 2005, Acker was a middle-of-the pack auction house; then came the two Kurniawan sales in 2006 that together grossed $35 million, and suddenly, Acker was atop the league table, a position that it has maintained pretty much ever since. No one profited more from Kurniawan’s emergence on the wine scene than Kapon, and when Kurniawan was arrested, it was inevitable that people would wonder whether he had somehow been involved. But even before Kurniawan was caught, there were doubts about Kapon and Acker. It was the startling size of the sales ($24 million here, $15 million there) and all the record prices; it was the extreme rarity of some of the wines being sold and the improbably large quantities in which they were being offered; it was the boisterous atmosphere at the auctions and the fact that they so often seemed to consist of friends selling to friends through a friend; it was Kapon’s youth and brashness—to a lot of people, something just didn’t seem right (and at least with regard to the Kurniawan wines that Acker sold, we now know that something was very wrong).

In essence, the two big Kurniawan sales turned Acker into the SAC of the wine auction market, and Kapon became the wine world’s answer to Steve Cohen. And like Cohen, Kapon has been defiant in the face of controversy. He didn’t lower his profile after the fraudulent Ponsot bottles were pulled from the Acker auction in 2008, he didn’t do it after Kurniawan was arrested last year, and he didn’t do it even as his former best friend went on trial this month. Kapon would surely say that he did nothing wrong and thus had no reason to become less visible, and it’s certainly true that he has not been charged with any crime in relation to the wine counterfeiting scandal. Still, it was surprising to see him tweeting photos from a Lafite tasting the weekend before Kurniawan’s trial began, and as I noted in my previous post, Kapon tweeted a provocative photo on the night that Kurniawan’s case went to the jury: it was hard not to interpret that one as a raised middle finger aimed squarely at the prosecutors and at Laurent Ponsot, too. Whatever the explanation, Kapon, like Cohen, has not been acting like a man who fears that he may be headed to a federal prison anytime soon.

Kapon didn’t testify at Kurniawan’s trial, and the defense called just one witness. This was the first time the government had pursued a criminal case involving wine counterfeiting, and it was a big win for Bharara’s office, and in particular for lead prosecutor Jason Hernandez. But I very much doubt that investigators believed, when Kurniawan was arrested, that the counterfeiting probe would begin and end with him. (That’s where the Steinberg case differs: the government’s pursuit of Cohen didn’t commence with Steinberg’s arrest and won’t end with his conviction.) I am sure they hoped that the prospect of spending as much as 40 years in prison would lead Kurniawan to name any co-conspirators that he had. But evidently, Kurniawan wasn’t willing to play ball: he either refused to talk or didn’t offer the government enough information to justify making a deal with him. (Given the apparent scale of his operation, I don’t think there is any chance that he acted alone; he had to have had help.)

Kurniawan will be sentenced on April 24^th, and Steinberg will be sentenced the following day. Both intend to appeal their convictions.