For the sixth time, the U.S. government has linked an employee of hedge-fund icon Steven A. Cohen to insider trading while at the firm. For the first time, prosecutors said Cohen had talked with a defendant about the stocks in their complaint, pulling him deeper into one of the biggest investigations of securities fraud in history.
Mathew Martoma, a former health-care portfolio manager at a unit of Cohen’s $14 billion SAC Capital Advisors LP, was charged yesterday with using inside information from a clinical trial of an Alzheimer's drug to help the firm reap as much as $276 million in profits and averted losses on shares of Elan Corp. and Wyeth LLC. Cohen bought the pharmaceutical stocks on recommendations from Martoma and sold them after Martoma was told of disappointing results from the companies’ tests, prosecutors said.
“This is a significant step forward for the government in their tracing of evidence that seems to be leading to SAC,” Thomas Gorman, a partner in Dorsey & Whitney’s litigation and enforcement practice group based in Washington, said in an interview. It also “raises the question of compliance procedures and how well they are policed at SAC.”
Martoma’s lawyer, Charles Stillman, said he is confident his client will be exonerated. Neither Cohen, 56, nor SAC Capital have been charged with any wrongdoing.
“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry,” Jonathan Gasthalter, a spokesman for SAC Capital, said in an e-mailed statement.
Cohen is a renowned art collector who is worth $9.5 billion, according to the Bloomberg Billionaires Index. One of the most successful hedge-fund managers, with average annual returns of 30 percent since he started in 1992, he has repeatedly landed in the cross hairs of a U.S. government crackdown on insider trading that burst into public view three years ago with the arrest of Raj Rajaratnam, founder of Galleon Group LLC.
More than 80 people have been sued by regulators or charged by prosecutors since 2008 for passing or getting inside tips about pharmaceutical, biotechnology and other stocks.
Cohen was deposed earlier this year by the U.S. Securities and Exchange Commission about trades made close to news that generated profits for his Stamford, Connecticut-based fund, people familiar with the matter said in June.
The prosecutor’s complaint against Martoma, filed in federal district court in New York, and a related civil case filed by the SEC are the first to say Cohen discussed stocks involved in insider-trading schemes. The documents don’t name Cohen, instead referring to “the hedge-fund owner.” The SEC identified Martoma as an employee of CR Intrinsic, which is an affiliate of SAC Capital. Cohen is the founder and owner of SAC.
Neither prosecutors nor the SEC alleged that Cohen knew Martoma’s information was obtained illegally.
Martoma, 38, worked at CR Intrinsic from 2006 to 2010, and like other portfolio managers recommended investment ideas to Cohen. He had been talking to Sidney Gilman, a doctor involved in the trials of the experimental Alzheimer's drug, since 2007. Based on Gilman’s inside information on the trials, SAC Capital owned $328 million of shares of Elan and $373 million of Wyeth as of June 30, 2008, according to the criminal complaint.
Cohen held some of these shares in a portfolio he personally manages for the firm, even as other analysts at SAC Capital said they thought the investment was too risky. Cohen had confidence in Martoma’s views because he was “closest” to the drug trial, according to the complaint, which cited a March 28, 2008, instant message from Cohen.
After Martoma got inside information in July 2008 that the trial wasn’t going well, he messaged Cohen.
“Is there a good time to catch up with you this morning? It’s important,” Martoma said in an e-mail to Cohen on a Sunday, after he was briefed by Gilman on the negative trial results of the drug, according to the complaint.
An hour later, Martoma had a 20-minute phone call with Cohen. The complaint didn’t say what the two men discussed.
The next day, Cohen instructed a head trader at SAC Capital to begin selling positions it owned in Elan and “to do so in a way as to not alert anyone else, inside or outside of the hedge fund,” according to the complaint.
The trader used algorithms, which are programs that disguise orders and keep them from being exploited by faster traders, and dark pools, exchanges that hide the identity of the buyers and sellers, to execute the trades.
SAC Capital unloaded its $700 million of shares in both Elan and Wyeth and then bet the stocks would fall, making $76.2 million from short sales, according to the complaint.
Both stocks fell when the trial results were announced on July 29. Elan’s stock slumped 42 percent the day after the announcement, and Wyeth tumbled 12 percent.
According to the complaint, Martoma was forbidden by his hedge fund’s policy to trade on the basis of inside information. The expert-networking firm that arranged his meetings with Gilman also told Martoma that Gilman couldn’t discuss the experimental Alzheimer's treatment because he was involved in the trial.
Gilman has entered into a non-prosecution agreement with the U.S. government, according to his lawyer, Marc Mukasey. He is cooperating with the SEC and the U.S. Attorney’s office, the lawyer said.
Gilman’s cooperation could increase the legal pressure on Martoma to help the government. Investigators would need to get Martoma to disclose what was said in his conversation with Cohen if they wanted to charge the hedge-fund titan with insider trading, according to Peter Henning, a professor at Wayne State University Law School in Detroit.
“If Martoma isn’t willing to say that he told Cohen his recommendation was based on inside information, then the government is stuck,” Henning said in a phone interview. Even if Martoma did divulge that information, it’s a circumstantial case. “It’s he said-he said,” Henning said.
Investors say that SAC Capital has told them it has stringent measures to prevent traders from dealing in insider information. Cohen’s staff includes about 30 legal and compliance workers who, among other things, monitor instant messages and e-mails, including those sent and received by Cohen.
Harvey Pitt, former chairman of the SEC, and Stephen Cutler, former head of the regulator’s enforcement unit, have held workshops with SAC Capital employees about complying with SEC rules.
Last year, U.S. criminal prosecutors said they were looking at SAC Capital’s trading accounts, including one run by Cohen that is made up of the best ideas from the firm’s portfolio managers and analysts. Since the start of government’s probe, six employees have been tied to insider trading while working at SAC Capital.
Portfolio manager Michael Steinberg, who has worked at the hedge fund for 15 years, has been described by federal prosecutors as an “unindicted co-conspirator” in the securities-fraud case of Jon Horvath, a former SAC Capital technology analyst that he supervised. Former SAC Capital portfolio managers, Donald Longueuil and Noah Freeman, last year pleaded guilty to securities and wire fraud for insider trading while at SAC Capital. Longueuil is currently serving a 30-month prison term, while Freeman has been cooperating with the government’s investigation.
Former SAC Capital analyst Jonathan Hollander agreed in April last year to settle SEC allegations that he traded on inside information about a pending takeover of the Albertson’s LLC grocery chain. The SEC alleged that Hollander tipped others about the acquisition and that he and others earned $95,807 in illegal profits.
Hollander, who was trading in his personal account, agreed to pay more than $222,000, said his lawyer, Aitan Goelman.
The government has charged or sued three former SAC Capital employees in its investigation for activities that occurred after they left the firm. They are Richard Choo Beng Lee, a former partner at San Jose, California-based Spherix Capital LLC; Anthony Chiasson, co-founder of Level Global Investors LP; and Chip Skowron,a former fund manager at FrontPoint Partners LLC.
Chiasson is currently on trial. Lee pleaded guilty, and Skowron is currently serving a five-year sentence for insider trading.
Martoma was arrested at his home in Boca Raton, Florida, at 6:30 a.m. yesterday, said Peter Donald, a spokesman for the Federal Bureau of Investigation in New York. He appeared before U.S. Magistrate David Brannon this morning in federal court in the Southern District of Florida, according to a court clerk.
Martoma earned a $9.4 million bonus for 2008, mostly attributable to his calls on Elan and Wyeth. On May 5, 2010, an SAC Capital employee emailed a recommendation that Martoma be fired after losing money in 2009 and into 2010, calling him a “one trick pony with Elan.”
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).