Nov. 26 (Bloomberg) -- Former SAC Capital Advisors LP fund manager Mathew Martoma’s arrest came six years after he set upon a path that has led him to a choice: one between a trial that may land him in prison for decades, or a deal to implicate others, possibly including SAC founder Steven A. Cohen.
Martoma, 38, used illegal tips to help SAC make $276 million on shares of pharmaceutical companies Elan Corp. and Wyeth LLC, according to the Justice Department and the Securities and Exchange Commission. Arrested last week, he appeared today in Manhattan federal court for masterminding what the U.S. calls the most lucrative insider-trading case ever.
It was Martoma’s six-year friendship with Dr. Sidney Gilman, an 80-year-old University of Michigan neurologist involved in a clinical trial of an Alzheimer’s disease drug, that led to his prosecution. Gilman was helping develop the drug for Dublin-based Elan and Wyeth, now owned by New York-based Pfizer Inc. He leaked data on the trial to Martoma, who advised Cohen on whether SAC should buy or sell Elan and Wyeth shares, authorities alleged. Gilman, who entered a non-prosecution agreement according to his lawyer Marc Mukasey, is cooperating with the probe.
The FBI described in its Nov. 20 complaint a “Hedge Fund Owner” whom Martoma dealt with; the SEC, in its parallel suit, called the unidentified person “Investment Advisor A.” Each refers to Cohen, according to a person familiar with the matter.
Martoma denies wrongdoing, and Cohen hasn’t been sued or charged. Martoma, who first appeared in federal court in Florida last week, didn’t enter a plea today in New York. His case is the first of SAC alumni to involve a matter directly tied to Cohen.
Charles Stillman, a lawyer for Martoma, has said he expects his client to be exonerated.
A spokesman for the SAC founder, Jonathan Gasthalter, has denied any wrongdoing and said SAC is cooperating.
Six Years Ago
In 2006, Martoma joined SAC’s CR Intrinsic Investors, eventually beginning work as a portfolio manager on Jan. 1, 2008.
That year, Elan and Wyeth also began jointly conducting a Phase II clinical trial for a potential Alzheimer’s drug called bapineuzumab, or bapi. The trial assessed the safety of bapi in treating mild-to-moderate Alzheimer’s, and how well it worked at various doses.
Gilman met Martoma in the summer of 2006 through an expert-networking firm, according to court papers. Gilman, who worked for Gerson Lehrman Group, according to his curriculum vitae, served from 2006 to 2008 as the head of the clinical trial’s safety monitoring committee. Elan paid him $79,000 for his consultations on bapi in 2007 and 2008.
The expert-networking firm paid Gilman $108,000 between 2006 and 2009 for 59 consultations with portfolio managers and analysts at CR Intrinsic and Stamford, Connecticut-based SAC, including 42 meetings with Martoma.
Gilman came to view Martoma, who had attended Harvard Law School and wrote medical-ethics articles under another name, as a “friend and pupil,” according to the SEC.
On Feb. 9, 2007, Gilman met with Martoma after a safety monitoring committee meeting. The government said they often met after Gilman concluded such meetings, and that he provided Elan’s charts to Martoma on instances of injuries to patients participating in the clinical trial of the Alzheimer’s drug.
In October, Martoma received confidential data about the drug trial at a meeting set up by Gilman’s expert-networking firm, according to court papers. At other times, according to the SEC, the men also “took steps to conceal the true topic of their conversations” from the firm.
As 2007 drew to a close, SAC began amassing a large position in Elan and Wyeth securities, prosecutors said.
In the following months, two CR Intrinsic managers “repeatedly sent” e-mails to Cohen “advocating against the Elan and Wyeth positions and suggesting trading strategies designed to hedge them,” according to the SEC. Cohen also received vocal opposition from “several” employees who argued that uncertainty about the drug trial made the investment too risky.
Cohen 56, “consistently backed Martoma against the naysayers, citing among other things Martoma’s conviction in his recommendation,” according to the FBI.
On March 26, 2008, an unidentified SAC analyst e-mailed Cohen a list of his concerns with the hedge fund’s Elan position. Cohen forwarded it to Martoma, who responded: “Nothing worrisome here,” according to the government.
Two days later, Cohen sent a message to an analyst saying that Martoma anticipated positive news on the trial, and he was “closest” to it.
On June 17, Elan and Wyeth released top-line results of the clinical trial. While the news release stated the study hadn’t attained statistical significance, it noted that it showed “statistically significant and clinically meaningful benefits” in some patients. The company said it would release more detailed data at a conference on July 29. Gilman was later chosen to present the results at the conference.
By the end of June, CR Intrinsic and SAC owned $373 million of Wyeth stock and $328 million of Elan stock, the U.S. said.
In mid-July, Martoma and Gilman spent more than 90 minutes discussing the final safety data presented to the safety monitoring committee. Gilman continued to interpret it as “largely positive,” according to the FBI.
Gilman took a private jet to San Francisco on July 15 to get full results of the clinical trial from Wyeth and Elan. The data showed that the symptoms of Alzheimer’s patients taking the drug got “markedly worse over the 18-month drug trial, rather than getting better or stabilizing.”
Two days later, Gilman received an e-mail from Elan with the subject “Confidential, Do Not Distribute” and an encrypted, 24-page slide presentation attached. Gilman and Martoma spoke for an hour and 45 minutes. Gilman then sent Martoma the slides and a password so he could open it. The men spoke three times by telephone the next day, according to court papers.
On Sunday, July 20, at 8:52 a.m., Martoma e-mailed Cohen, writing: “Is there a good time to catch up with you this morning? It’s important.”
Cohen replied with his mobile phone number. Beginning at 9:43 a.m., the men spoke for 20 minutes, according to prosecutors. As of that day, SAC and CR Intrinsic owned about 10.5 million shares of Elan.
On Monday, July 21, Cohen and Martoma instructed SAC’s head trader to “begin selling the Elan position, and to do so in a way so as to not alert anyone else, inside or outside of the hedge fund,” according to the FBI.
By day’s end, the senior trader e-mailed Martoma to say he sold 1.5 million shares of Elan and “obviously no one knows except you me and” and the hedge fund owner. Cohen isn’t named in either the criminal complaint or SEC lawsuit.
The trader used algorithms, which are programs that disguise orders and keep them from being exploited by faster traders. He also used dark pools, or exchanges that hid the identity of the buyers and sellers, to execute the trades.
On Tuesday, Cohen sent an instant message to Martoma, saying they sold 3.8 million Elan shares in two days. Martoma replied: “if possible to do more, would do so.” The hedge fund sold more Elan shares, bringing the total to 4.5 million.
Martoma and Gilman spoke for 39 minutes that day, the government said.
The next weekend, Cohen received an e-mail from the senior trader saying the firm sold 10.5 million shares of Elan at an average price of $34.21.
“This was executed quietly and effectively over a 4 day period through algos and dark pools and booked into two firm accounts that have very limited viewing access,” according to the e-mail, the government said. “This process clearly stopped leakage of info from either in [or] outside the firm and in my viewpoint saved us some slippage.”
On Monday, July 28, after selling all of its Elan shares, SAC shorted about 4.5 million more shares over the next two days. The firm, having sold all of its Wyeth shares, also shorted about 3.25 million shares of that stock.
Over the preceding week, the firm’s trading of securities represented 20 percent of the reported Elan trading volume, and 11 percent of the reported trading volume in Wyeth stock.
After the market closed, Elan and Wyeth released the drug trial results to investors and analysts. By the next day, Elan shares fell 42 percent and Wyeth shares fell 12 percent. Analysts cited the fact that patients didn’t improve on the drug.
As a result, SAC gained profit and averted losses of $220 million on Elan and $56 million on Wyeth, the SEC said.
The following January, Martoma was awarded a bonus of $9.38 million for his work over the previous year, based largely on the results for Elan and Wyeth, the government said. He received no bonus for his work in 2009.
By May 5, 2010, the government said, an SAC employee recommended that Martoma be fired after losing money, saying he appeared to be a “one trick pony with Elan.”
He was later fired.
The criminal case is U.S. v. Martoma, 12-mj-02985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).
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