Former SAC Capital Advisors LP manager Mathew Martoma, charged with trading on illicit tips from a physician about an Alzheimer’s drug, was accused by prosecutors of getting inside information from a second doctor.
U.S. Attorney Preet Bharara’s office in Manhattan yesterday filed a revised indictment claiming the second source, identified only as “Doctor-2,” did paid consultations with Martoma, which were arranged through an unidentified “financial services firm” that provided expert networking services to SAC, the hedge fund company founded by Steven A. Cohen.
“Doctor-2 provided confidential information about the drug trial and other Alzheimer’s disease drug trials to Martoma with the expectation that Martoma would assist Doctor-2 in obtaining additional clinical trial business,” according to the new indictment.
The U.S. claims Martoma used the information from the two doctors, who were involved in the trial of bapineuzumab, or “bapi,” to help the hedge fund make $276 million by trading in shares of Elan Corp. and Wyeth. The government has called it the biggest criminal insider-trading case against an individual in history.
Martoma pleaded not guilty today to the charges in the superseding indictment during a hearing before U.S. District Judge Paul Gardephe in Manhattan.
SAC, based in Stamford, Connecticut, was indicted in July, partly because of Martoma’s alleged illegal trading. In the SAC indictment, prosecutors claimed that two unidentified SAC health-care analysts exchanged e-mails with Cohen on April 11, 2008, and the next day about information they’d gotten through a paid consultation with an unidentified clinical investigator on the trial of the Alzheimer’s drug.
Cohen allegedly told Martoma to call the investigator and report back, which prosecutors said he did. It isn’t clear whether the clinical investigator is the Doctor-2 referred to in yesterday’s indictment.
The revised indictment against Martoma doesn’t add to the two counts of securities fraud and one count of conspiracy against him. Martoma, who has pleaded not guilty, is scheduled to go to trial Nov. 4. If convicted, Martoma faces as much as 20 years in prison on the securities fraud charges and five years on the conspiracy charge.
The U.S. Securities and Exchange Commission has alleged that the other doctor who tipped off Martoma about the drug trials was Sid Gilman, who headed the safety monitoring committee for the bapi trial.
Gilman, a University of Michigan neurologist, signed a non-prosecution agreement and is cooperating with the government.
Working for Elan in the clinical trial for bapi, Doctor-2 treated Alzheimer’s patients with the drug, then reported to Elan on their conditions, according to the government.
On May 29, 2008, Martoma set up a meeting with Doctor-2 for the evening of July 28, shortly after a briefing in which Doctor-2 was to be told the final results of the bapi trial and a day before they were scheduled to be announced publicly.
In July 2008, Gilman passed Martoma secret data showing that bapi failed to halt the progression of Alzheimer’s, the U.S. said.
When Martoma learned that Wyeth and Elan would report negative data on the drug, Martoma had a 20-minute phone call with Cohen, according to the government. 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.
The revised indictment doesn’t include a claim in the earlier one that Gilman sent Martoma a 24-slide PowerPoint presentation that Gilman got from Elan on July 17, 2008. That presentation was to be used in announcing the trial results.
The new indictment provides additional allegations about Martoma’s attempts to contact doctors on the bapi trial.
According to the government, on Aug. 30, 2006, Martoma sent the expert-networking firm a list of more than 20 doctors who were working as clinical investigators on the trial, asking it to arrange consultations with the doctors. The next day an unidentified employee said that nine had responded. All declined, citing a conflict of interest, the government said.
“Notwithstanding this impediment, Martoma was ultimately able to arrange -- both through the expert networking firm and other channels -- paid consultations with multiple doctors with access to confidential information about the drug trial,” prosecutors said.
The new indictment specifies assets that prosecutors want Martoma to forfeit as proceeds of the insider-trading scheme. According to the government, Martoma should be ordered to forfeit the $9.3 million bonus tied to the illegal trades, his $1.9 million home in Boca Raton, Florida, $3.2 million in his bank account, $245,000 in an account held by his wife, Rosemary Martoma, and $935,000 held in the name of the Mathew and Rosemary Martoma Foundation.
Martoma’s attorneys today asked Gardephe to order the government and the University of Michigan to produce any documents stored on Gilman’s electronic devices that they would seek to withhold due to attorney-client privilege.
One of Martoma’s attorneys, Richard Strassberg, said Gilman waived any such privilege when he surrendered his devices to the government and the university, and that the doctor couldn’t have expected documents stored on school property to remain private.
“There was never any expectation of privacy when using the University of Michigan’s e-mail servers,” Strassberg said.
Gilman handed over the laptop to the government as quickly as possible in an attempt to be “truthful, honest and forthcoming” and talks on surrendering the device were conducted “under the assumption of preserving confidential materials,” Marc L. Mukasey, an attorney representing the doctor, said during today’s hearing.
Gilman surrendered his devices to the university in November 2012, shortly after leaving the school, because his retirement funds were at risk if he didn’t, Mukasey said.
“There was simply no time to dillydally,” Mukasey said.
Gardephe said he wants any material related to Gilman’s knowledge of and consent to university policies on the use of electronic devices owned by the school and its e-mail servers, as well as access to any forms that Gilman may have signed.
The judge said he will order the university to provide copies of any policies relating to the issue in order to determine whether Gilman is entitled to assert his attorney-client privilege.
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).