Billions: Based on a True Story?

Here at YU, it is extremely common to hear people say that they are pursuing careers in investment banking in order to move over to the “buy side;” many YU alum succeed in doing so, landing jobs at prestigious hedge funds and private equity firms. Despite the successful track rate, though, none have managed to land a job at the biggest, baddest fund on the Street: Axe Capital.

Axe Capital is a hedge fund run by self-made billionaire Bobby Axelrod. His offices are stunning, employees well-paid, and returns magnificent. Unfortunately, the firm is under intense scrutiny from both the Securities and Exchange Commission (SEC), the United States District Attorney for the Southern District of New York, and the United States District Attorney for the Eastern District of New York due to a large-scale insider trading scandal. Axelrod has been arrested, charged with insider trading, forced to give up his license to trade securities and thus turn over his firm to Taylor Mason; his wife has filed for divorce; and he is at risk of losing his fortune to the government.

Billions is in its third season on Showtime, and is a hit drama that captivates both casual television watchers as well as Wall Street professionals. It is also the television show in which Axe Capital, Bobby Axelrod, and all of those investigations take place. But it could be real, right? Perhaps there is a reason for this aura of authenticity. Carefully examining Bobby Axelrod and others in the show reveals a striking connection to the real life story of S.A.C. Capital and its CEO, Steven A. Cohen.

Before agreeing to return all outside capital, not invest outsider’s money until January 1, 2018, and converting into a family office called Point72 Asset Management, Steven A. Cohen presided over one of the most successful hedge funds in history. The firm regularly posted returns of about 30% annually, and were therefore able to bypass the typical two and 20 fee structure most hedge funds employ and instead charged three and 50. For the uninitiated, hedge funds typically charge investors a fee of two percent of assets under management (AUM) and 20 percent of profits; S.A.C. Capital, on the other hand, charged investors three percent of AUM and 50 percent of profits. But with the returns he was generating for his investors, they did not seem to mind the exorbitant fee structure.

But how did they achieve these returns when other hedge funds, even successful ones, were not performing nearly as well? The answer lies in SEC Rule 10b-5 — the prohibition against insider trading. Insider trading is the trading of securities based on material, nonpublic information. For example, if your dad is an insider at a publicly traded company, knows that the stock price is bound to surge after the upcoming earnings call, and decides to let you know that the company would be a good one to add to your investment portfolio, you and your dad have engaged in insider trading. While Cohen was never convicted of insider trading, a number of his employees — notably, portfolio manager Mathew Martoma — were. As a result, S.A.C. Capital was forced to pay a $1.8 billion fine, return all outside capital, and convert to a family office that only invested Cohen’s $11 billion fortune. In addition, despite not being able to link Cohen directly to the insider trading occurring in his firm, he was banned from managing outside capital until January 1, 2018.

While the government may have billed this settlement as a win, it wasn’t. They had been investigating Cohen and his firm for nearly a decade, and the U.S. Attorney at the time, Preet Bharara and his deputy Richard Zabel had a reputation for being a Wall Street crusader; some legends like Cohen, however, just cannot be taken down.

So this brings me back to Bobby Axelrod, Axe Capital, and Billions. How realistic is it? Not only are the storylines of Billions and the S.A.C. Capital investigation nearly identical, but the characters in the show seem to be based on individuals involved in the Cohen case. Bobby Axelrod is Steven A. Cohen, Chuck Rhoades is a cross between Preet Bharara and Richard Zabel, and Bill “Dollar Bill” Stearn is Mathew Martoma. Allow me to explain.

Axelrod and Cohen both grew up in middle class families, have firms that are just shortened versions of their names, and are self-made billionaires who will not settle for anything less than absolute victory, no matter the cost. In the show, Axelrod was forced to forfeit his license to do the very thing he was born to do — trade securities and make money for his investors. In real life, Cohen lost his reputation and his ability to prove to the world that he can still achieve those outrageous returns without breaking the law. So far with Point72, Cohen has not been able to mimic the returns of the “glory days.” Maybe this is saying something or maybe it’s just the market not being a good one for hedge funds across the board. Either way, Cohen is out to prove to the world that he is still the king of the hill, and despite not being allowed to trade securities, Bobby Axelrod is trying to do the same thing (I won’t say how because I abhor spoilers and I would never do that to you). But these two men would not be in this sort of trouble if not for the powerful attorneys on the other side of the battle, working to to clean up the Street: Preet Bharara and Richard Zabel in the S.A.C. Capital case, and Chuck Rhoades in the Axe Capital one.

Preet Bharara was the United States District Attorney for the Southern District of New York from 2009 until 2017 who, according to the New Yorker Magazine, had a reputation for being “The Man Who Terrifies Wall Street.” Richard Zabel, the son of Founding Partner of Schulte Roth & Zabel LLP William D. Zabel, was Bharara’s right hand man, and also played a significant role in the S.A.C. Capital case. As a result, the corresponding character in Billions is based on the two men who made it their life’s mission to put Cohen away.

In Billions, the District Attorney for the Southern District of New York is a man named Chuck Rhoades. Like Zabel, his father is extremely wealthy and influential, he lives in a brownstone in Brooklyn, and he has a flair for using outlandish metaphors to get his point across. Like Bharara, Rhoades is a man who was born to be in front of cameras. His bravado at the podium is that of a politician, and he has a reputation for invoking fear in traders, bankers, and other Wall Street professionals.

Also like Bharara, Rhoades’s is known to overstep in the name of justice. Andrew Ross Sorkin, contends that Bharara achieved his reputation of being a Wall Street crusader by overstepping his bounds and overreaching where he should not have. Evidence of this can be found in a federal appeals court that overturned two of Mr. Bharara’s most prominent insider trading convictions (not Martoma). While I will not divulge any of Rhoades’s conduct here in this article, I will say that he is not afraid to overreach if and when he deems necessary, despite the moral and legal implications.

Mathew Martoma was a portfolio manager at S.A.C. Capital who is currently serving a nine year sentence in prison for insider trading, and he is a quintessential representation of the blind loyalty many employees at S.A.C. Capital felt towards Cohen. The oft-used tactic of using junior mobsters to eventually bring down the mob boss did not work in the S.A.C. case, evident by his 2014 conviction. To this day, it is not known why Martoma, who was fired after producing lackluster returns for two years, would not cooperate with the authorities in the investigation. On the outside, it seemed that he had nothing to lose in cooperating, seeing as the evidence against him was so conclusive. Like Martoma, Bill “Dollar Bill” Stearn is arrested for insider trading; unlike Martoma, however, Stearn walked free and received his large bonus for being loyal to Axelrod. While the similarity here is not as clear cut, and the character development in Billions of “Dollar Bill” Stearn is not as significant a narrative as Martoma’s case is to the S.A.C. Capital investigation, the parallels are difficult to ignore.

These are just three of the many similarities the exist between S.A.C. Capital and Showtime’s Billions. Axe Capital is not S.A.C. Capital, Bobby Axelrod is not Steven A. Cohen, and Billions is not real life, but to ignore the obvious connection between the two is nearly impossible. While the parallels are not perfect, the excitement, risk, and larger than life personalities who dominate Billions do exist in real life; for those interested in such a lifestyle, maybe those two years as an investment banking analyst are worth the suffering.