The insider-trading indictment of ex-SAC Capital Advisors LP portfolio manager Mathew Martoma sets in motion a criminal trial process that puts new pressure on him to cooperate with the government’s investigation of the hedge-fund firm founded by billionaire Steven A. Cohen.
Martoma, 38, was indicted yesterday in what prosecutors have called the biggest insider-trading case in history. The move follows a trial in New York in which prosecutors presented jurors in another case with e-mails they said showed SAC analysts passing inside information to the firm’s fund managers.
“It’s another step on the government’s march into Cohen’s office,” Erik Gordon, a professor at the University of Michigan Law School and Ross School of Business, said in an e-mail after the indictment. “Given the prosecutors’ success in getting convictions and serious jail sentences, it’s time for anyone at SAC who is connected with insider trading to start having nightmares.”
At issue in the Martoma case is a 20-minute phone call prosecutors said he had with Cohen after allegedly receiving negative test results about a drug that was intended for use by Alzheimer’s patients. The day after the call, SAC liquidated a $700 million position in Elan Corp. and Wyeth LLC, the companies that were promoting the drug.
The government claims SAC netted $276 million in profits and averted losses in the Elan and Wyeth trades. Cohen isn’t alleged in Martoma’s indictment to have known Martoma had inside information. Prosecutors have made no claims about precisely what was said on the call.
Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, declined to comment on the indictment. Gasthalter has said Cohen and SAC acted appropriately in making the trades. Cohen hasn’t been charged criminally or sued by regulators in the case.
Martoma was arrested at his Boca Raton, Florida, home on Nov. 20 and charged in a criminal complaint. The indictment charges him with one count of conspiracy and two counts of securities fraud. If convicted, Martoma faces as many as 20 years in prison on the securities fraud charges and five years on the conspiracy charge.
“Though disappointing, today’s events come as no surprise,” Martoma’s lawyer, Charles Stillman, said in a statement yesterday. “The simple fact is that Mathew Martoma did not trade on inside information, is innocent of all these charges and we look forward to his ultimate vindication.”
Martoma rejected several bids by prosecutors for his cooperation, according to a person familiar with the case. When first confronted by an FBI agent in the front yard of his mansion last year, he fainted, another person said.
Prosecutors, who faced a Dec. 26 deadline to indict Martoma or ask the court for more time, chose to indict. The move showed the government is turning up the heat in its efforts to get Martoma to cooperate with its investigation of SAC, according to Anthony Sabino, who teaches law at St. John’s University in New York.
“This is telling Martoma: You don’t want to deal with us? Fine,” Sabino said. “You’re going to go up the river by yourself, so think about that over Christmas.”
As in the criminal complaint, the 12-page indictment alleges Martoma used the illegal tips to advise an unnamed “hedge fund owner” to trade in the shares of Elan and Wyeth. A person familiar with the case last month identified Cohen as the fund owner.
Prosecutors said Martoma and the hedge fund owner spoke on the phone for 20 minutes on July 20, 2008, the day before SAC started dumping its Wyeth and Elan stock. Martoma’s testimony about that telephone call and other contacts with Cohen concerning Wyeth and Elan would be key to any attempt to prosecute Cohen.
The case is assigned to U.S. District Judge Paul Gardephe, a former federal prosecutor and in-house lawyer for Time Warner Inc. He was appointed by President George W. Bush and took the bench in 2008.
The SAC e-mails were disclosed in the insider-trading trial of Anthony Chiasson, who left SAC to start Level Global Investors LP, and former Diamondback Capital Management LLC portfolio manager Todd Newman. The two men were convicted Dec. 18.
Martoma worked as a portfolio manager for CR Intrinsic Investors in Stamford, Connecticut, a unit of SAC Capital. The indictment claims that from sometime in 2006 until July 29, 2008, he participated in a scheme to get inside information about clinical trials of bapineuzumab, or bapi, a drug intended to treat Alzheimer’s disease. Martoma got the tips from an unnamed cooperating witness, according to the indictment.
A complaint filed last month by the U.S. Securities and Exchange Commission identified the cooperating witness as Dr. Sid Gilman, a University of Michigan neurologist who was head of the safety monitoring committee for the drug trial. Martoma had 42 paid consultations with Gilman through an expert networking firm, according to the government. Gilman worked with Gerson Lehrman Group, according to his curriculum vitae.
Gilman, 80, has entered into a non-prosecution agreement and is cooperating with prosecutors.
At the beginning of the relationship, the doctor passed along generally positive safety data about the trial, according to the government. Martoma allegedly bought shares of Elan and Wyeth for his portfolio. The hedge-fund owner also bought Elan and Wyeth, based on Martoma’s recommendation, prosecutors said.
In mid-July 2008, the doctor passed Martoma secret data showing that bapi failed to halt progression of Alzheimer’s in patients in the clinical test, the U.S. said. The hedge-fund owner, at Martoma’s recommendation, sold off almost all of the fund’s $700 million position in Elan and Wyeth, then sold the stock short, prosecutors claimed.
When the clinical trial results became public, shares in both companies plunged, allowing the hedge fund to make $276 million in profits and losses avoided, according to the government. Martoma received a $9.3 million bonus as a result, according to the indictment.
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).