A former portfolio manager for Steven A. Cohen’s SAC Capital Advisors LP was charged with what U.S. prosecutors called a record-setting insider-trading scheme that netted as much as $276 million for the hedge fund.
Mathew Martoma, 38, traded on inside tips about clinical trials of bapineuzumab, a drug intended to treat Alzheimer’s disease, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara said in a criminal complaint unsealed today. The U.S. Securities and Exchange Commission sued Martoma, his former hedge fund and the doctor who allegedly passed him the tips.
Martoma allegedly advised Cohen to sell shares of Wyeth LLC and Elan Corp., the companies that were developing the drug, before bad news about its performance was announced. Cohen’s firm sold its Elan and Wyeth holdings to avoid losses and profited from short positions in the stocks, prosecutors said.
“Mathew Martoma and his hedge fund benefitted from what might be the most lucrative inside tip of all time,” Bharara said at a press conference today. “This is certainly the most lucrative insider-trading scheme ever charged.”
Martoma is the sixth current or former SAC employee implicated in alleged insider trading by U.S. prosecutors. He’s charged with conspiracy and two counts of securities fraud, a crime that carries a maximum 20-year prison term.
While the SEC and prosecutors don’t say whether Cohen knew Martoma’s advice was based on illegal tips, they do allege that Martoma discussed the Elan investments with the hedge fund’s owner before the drug’s test results were out. Cohen wasn't charged or sued over the matter.
More than 80 people have been sued by regulators or charged by prosecutors since 2008 for passing or getting inside tips about pharmaceutical, biotechnology or other health-care stocks.
Martoma worked as a portfolio manager for CR Intrinsic Investors in Stamford, Connecticut, a unit of SAC Capital, according to the SEC. The agency’s suit names as defendants Martoma, CR Intrinsic and Dr. Sid Gilman, a University of Michigan neurologist. Gilman wasn’t charged criminally.
“Mathew Martoma was an exceptional portfolio manager who succeeded through hard work and the dogged pursuit of information in the public domain,” his lawyer, Charles Stillman, said in an e-mailed statement. “What happened today is only the beginning of a process that we are confident will lead to Mr. Martoma’s full exoneration.”
Billionaire Cohen, 56, started SAC Capital in 1992. His hedge fund manages $14 billion. He has been deposed by SEC investigators about trades made close to news such as mergers and earnings that generated profits for his fund, a person familiar with the matter said in June. The person asked not to be identified because the investigation wasn’t public.
“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” Jonathan Gasthalter, a company spokesman, said today in an e-mailed statement.
Martoma was arrested at his home in Boca Raton, Florida, at 6:30 a.m. today, said Peter Donald, a spokesman for the Federal Bureau of Investigation in New York. He appeared before U.S. Magistrate David Brannon in West Palm Beach and was released on $5 million bond secured by two family members, said Mary Delsener, a spokeswoman for Bharara’s office. Martoma is scheduled to be in federal court in Manhattan on Nov. 26, Bharara said.
The SEC claimed Martoma used Gilman’s illegal tips to trade for CR Intrinsic as well as for “hedge fund portfolios managed by an affiliated investment adviser” and controlled by an unidentified “Portfolio Manager A.” That manager was Cohen, according to a person familiar with the matter.
In the criminal complaint, prosecutors said Martoma, who specialized in health-care stocks, recommended to the “hedge fund owner” at his firm that he sell Elan and Wyeth shares before the drug-trial results were disclosed publicly. Cohen is the owner of SAC.
Gilman, 80, is a professor of neurology at the University of Michigan Medical School. He served as chairman of the safety monitoring committee overseeing the bapineuzumab trial, the SEC said. The doctor has entered into a non-prosecution agreement with prosecutors.
“He is cooperating with the SEC and the U.S. Attorney’s Office,” Marc Mukasey, Gilman’s lawyer, said. “We expect to settle with the SEC in short order.”
The doctor was a consultant for an expert-networking firm based in Manhattan and consulted with Martoma from mid-2006 to July 2008, according to the government.
Gilman worked for Gerson Lehrman Group’s Scientific Advisory Board starting in 2002, according to a 2011 curriculum vitae posted online by the University of Michigan.
Loren Riegelhaupt, a spokesman for the New York-based expert-network firm, declined to comment on the case. Bloomberg LP, the owner of Bloomberg News, has an agreement to offer its clients access to Gerson Lehrman consultants.
Over the course of about 42 consultations, Martoma persuaded the doctor to talk about his work on the drug trial, Bharara said.
The doctor passed along the generally positive safety data about the trial, according to the criminal complaint, which doesn’t identify the neurologist by name. The SEC’s complaint names Gilman as Martoma’s source.
Relying on the safety data, Martoma allegedly bought shares of Elan and Wyeth for his portfolio. Cohen also bought Elan and Wyeth, based on Martoma’s recommendation, prosecutors said. By the end of June 2008, SAC held about $700 million in the two companies’ stocks.
“The hedge fund built up over time a massive position in Elan and Wyeth stock. The hedge fund built up this position, even though it was vocally opposed by several others at the hedge fund who were worried about the risk of that investment,” Bharara said. “Martoma was the only person at the hedge fund who was recommending establishing such a large position in Elan and Wyeth based on that drug.”
In mid-July 2008, Gilman received secret data showing that bapineuzumab failed to halt progression of Alzheimer’s in patients in the clinical test, the U.S. said. The doctor e-mailed Martoma a 24-page PowerPoint presentation detailing the results, which he was scheduled to present at a medical conference on July 29, according to the U.S.
“That is when Martoma, according to the complaint, had to do a spectacular about-face, because he understood that with these negative results looming, the hedge fund’s massive $700 million stake had become a terrible bet,” Bharara said. “Overnight, Martoma went from bull to bear as he tried to dig his hedge fund out of a massive hole.”
Prosecutors said that on July 20 Martoma e-mailed Cohen to ask, “Is there a good time to catch up with you this morning? It’s important.” The two later talked for about 20 minutes, according to the complaint.
After that conversation, SAC allegedly sold all its Elan shares and shorted the stock in a little more than a week. SAC also liquidated most of its Wyeth stock and took short positions, the U.S. said.
During that time, SAC’s Elan trades accounted for more than one-fifth of its trading volume, Bharara said.
On July 27, an unidentified “Senior Trader” at Martoma’s company e-mailed Cohen about the week’s trading activity, according to prosecutors.
The e-mail said that the fund “executed a sale of over 10.5 million ELN” for four internal hedge fund accounts. The sales were carried out “quietly and effectively” over four days through dark pools and other means, and booked into accounts that had “very limited access,” according to the e-mail cited in the criminal complaint.
After the results became public, Wyeth and Elan shares plummeted. Wyeth, which is now owned by Pfizer Inc., fell the most in almost six years on the news. Elan dropped the most in three years.
Prosecutors said Martoma was paid a bonus of $9.38 million in January 2009, based largely on the hedge fund’s profit from the Wyeth and Elan trades.
Martoma lost money in the next two years and was fired after another identified employee said in a May 2010 e-mail that he was a “one-trick pony with Elan,” according to the government.
At least five other current or former SAC portfolio managers or analysts have been implicated in insider trading, including three charged criminally by federal prosecutors in New York, including two former portfolio managers Noah Freeman and Donald Longueuil and analyst Jon Horvath.
Michael Steinberg, a portfolio manager at SAC’s Sigma Capital Management unit, has been described by federal prosecutors as an “unindicted co-conspirator” of Horvath, a former analyst he supervised who pleaded guilty to receiving and passing inside information. Longueuil, who worked for SAC Capital’s CR Intrinsic in New York from July 2008 to July 2010, was accused of giving information to Freeman, his friend.
In April 2011, former SAC analyst Jonathan Hollander agreed to settle SEC allegations that he traded on inside information about a pending takeover of the Albertson’s LLC grocery chain.
The U.S., by spelling out the evidence against Martoma in the complaint filed yesterday, may be seeking to persuade him to assist in a probe of others at SAC, said Andrew Frisch, a defense attorney in New York and former federal prosecutor.
“That they’re proceeding by a complaint, as opposed to an indictment, often means the government wants to convince the defendant of the wisdom of cooperation,” Frisch, who isn’t involved in the case, said in an interview. “Cooperation is always a possibility for a defendant, but it’s a question of whether he has information.”
The criminal case is U.S. v. Martoma, 12-MAG-2985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-8466, U.S. District Court, Southern District of New York (Manhattan).