Jan. 10 (Bloomberg) -- Nine years before former SAC Capital Advisors LP fund manager Mathew Martoma engaged in what prosecutors claim was “the most lucrative insider trading scheme ever charged,” he was kicked out of Harvard Law School for faking his grades.
Martoma, 39, is charged with conspiracy and securities fraud for allegedly using inside information from two doctors supervising a clinical trial of a drug intended to treat Alzheimer’s disease to make $276 million for SAC in 2008. The jury of seven women and five men was selected yesterday and heard opening statements and the first witness today.
U.S. District Judge Paul Gardephe in Manhattan unsealed court papers yesterday revealing a fierce battle by Martoma’s lawyers to keep secret information they called “volcanic,” “grossly prejudicial” and intended to “paint Mr. Martoma as a liar in the eyes of the jury.”
Evidence of Martoma’s expulsion may weaken the potential threat he poses to SAC Capital founder Steven Cohen, should Martoma decide to cooperate with the government and testify against his former boss, said Glenn Gitomer, a lawyer following the case. Martoma initially recommended the stock of the drug’s makers, Elan Corp. and Wyeth, to Cohen, prosecutors said.
Martoma “corrupted” a doctor overseeing the trial in order to gain nonpublic information about the negative results and trade shares on the illegal tips, Assistant U.S. Attorney Arlo Devlin-Brown told jurors.
Martoma “sought out an illegal edge,” Devlin-Brown said. “Ultimately, this case is not about scientific testing and it’s not about trading. The case is about cheating.”
Richard Strassberg, an attorney for Martoma, told jurors his client is “an innocent man. Mathew Martoma did not commit these charges.”
In November, SAC Capital agreed to plead guilty to securities fraud and end its investment advisory business as part of a record $1.8 billion settlement of the government’s investigation of insider trading at the firm. Cohen hasn’t been charged.
Lou Colasuonno, a spokesman for Martoma, said in a statement about the Harvard expulsion that the “event of 15 years ago is entirely unrelated to -- and has no bearing on -- this case.” He added: “Raising it now is a transparent effort by the government to unduly influence the ongoing court proceedings.”
The information threatens to unfairly distract attention from Martoma’s defense, Strassberg said.
“The allegations, findings, and related innuendo surrounding the HLS disciplinary proceedings would trump every other aspect of the case” if made public, Strassberg said in a Dec. 6 letter.
Gardephe yesterday ordered the court papers unsealed after a failed attempt by Martoma’s lawyers to get the U.S. Court of Appeals in New York to intervene. The papers include records from the Harvard Law School panel that recommended in 1999 that Martoma be expelled.
The disclosure makes it unlikely Martoma will take the witness stand during his trial, said Gitomer, a partner with the law firm McCausland Keen & Buckman in Radnor, Pennsylvania.
“They will pick apart and emphasize every black mark or anything showing you have a bad character,” Gitomer said. “Unless you have no other option, you don’t want to expose your client to that.”
While the Harvard expulsion would complicate Martoma’s value as a witness in any case against Cohen, Gitomer said that wouldn’t likely prevent the government from trying to use him.
“They cut deals with murderers,” Gitomer said, pointing to organized crime prosecutions. “If this is all they’ve got, they’ll run with it.”
Strassberg, in his opening statement today, said it was the government’s star witness, Dr. Sidney Gilman, whom the jury shouldn’t trust. Gilman’s story about passing inside information to Martoma has “changed time and time again.”
“There were many, many independent reasons to sell Elan and Wyeth stock in July 2008,” Strassberg said about SAC Capital’s decision to liquidate its holdings in the two stocks. “Inside information was not one of them.”
Martoma was born Ajai Mathew Mariamdani Thomas in Michigan and grew up in Merritt Island, Florida, less than 10 miles from Cape Canaveral, where NASA’s Kennedy Space Center is located. He’s the eldest of three sons whose parents came from India. His mother, Lizzie Thomas, is a doctor and his father, Bobby Martoma, owns local residential and commercial properties, including a dry cleaner.
He attended Merritt Island High School, where he was a model student, involved in an array of school clubs including the debate team and the Beta Club, an association that promoted academic achievement, according to his yearbook entry.
After high school, Martoma headed to Duke University in Durham, North Carolina, and during his first year was inducted into Phi Eta Sigma, an honors society for freshmen who attain at least a 3.5 grade point average, according to the school’s registrar. Martoma graduated in December 1995 with a degree in biomedicine, ethics and public policy, according to the registrar.
He was hired by the National Human Genome Research Institute’s Office of Genome Ethics in Bethesda, Maryland, where he was a deputy director. He co-wrote three medical-ethics papers that were published in 1997 and 1998, one of which was about genetic testing for Alzheimer’s disease.
Martoma, who still went by “A. Mathew Thomas,” entered Harvard Law School in 1997 and compiled “an excellent record” in his first year-and-a-half, in the words of the law school administrative board that would later recommend he be dismissed. He was on the Board of Student Advisers, an editor of the Journal of Law and Technology and a semi-finalist in the school’s annual moot court competition. He co-founded the Society of Law and Ethics.
Strassberg today told jurors that Martoma is “the quintessential American success story” and described his client’s background with no mention of Harvard Law School.
In December 1998, he created a phony transcript that inflated his first-year grades, while applying for a prestigious position as a clerk to a federal appeals court judge after graduation, according to the administrative board’s findings.
On the fake transcript, Martoma changed his first-year Civil Procedure grade from B to A; Contracts from B+ to A; and Criminal Law from B to A. He let stand his grades in Torts (B+), Property (A) and Negotiation (A-), according to the panel. The fake transcript was sent to 23 federal appeals court judges.
Martoma claimed that he created the phony transcript only to make his parents think his grades were better than they actually were. He said he arranged for his younger brother to assemble and mail the clerkship applications to the judges.
The brother mistook the doctored transcript for a real one and sent it out to the judges, Martoma claimed. His mother, father and brother all testified to the administrative board that the story was true.
After he learned the wrong transcripts had been sent, Martoma interviewed with three judges on the federal appeals court in Washington. The court is frequently a feeder to even more prestigious clerkships with U.S. Supreme Court justices.
A clerk in one of the courts Martoma had applied to checked Martoma’s transcript with the law school’s registrar. When the registrar told Martoma the altered transcript had been discovered, Martoma told him “it was all a joke.”
Martoma sent letters to the judges withdrawing his applications, but not before one of them called to offer him a position.
Harvard held four days of hearings, recorded in more than 550 pages of transcript and a day of videotaped testimony, Strassberg said in court papers.
The proof included “highly sensitive information about Mr. Martoma’s personal and family circumstances, including medical and mental health matters,” he said.
In his efforts to remain at Harvard, Martoma hired a lawyer, took two polygraph tests and even submitted a report from a computer forensics firm prosecutors claim he created for the purpose.
The board found Martoma had “falsified his transcript, interviewed with judges under false pretenses, and gave untruthful answers to questions of administrators at the law school.”
The panel said Martoma “was apparently under extreme parental pressure to excel academically.” Some of the board members believed Martoma had changed the date on his computer to create a backdated e-mail saying he was no longer seeking a clerkship, to the secretary of Morton J. Horwitz, an emeritus professor of American legal history who had agreed to send recommendation letters for Martoma.
The panel recommended he be dismissed from the school. Martoma appealed.
The appeal was heard by Harvard Law professor Randall L. Kennedy. Charles Ogletree Jr., founder of Harvard’s Charles Hamilton Houston Institute for Race and Justice, testified.
The Harvard Law School faculty voted to expel Martoma on Sept. 17, 1999, after the appeal within the school administration failed. Ogletree had argued that dismissal was much too harsh a punishment.
“To this day, the circumstances of his dismissal from Harvard Law School cause Mr. Martoma great embarrassment,” his lawyers said in court papers.
During his defense against the Harvard charges, Martoma’s lawyer introduced him to a man named Stephen Chan, whom he said could help with technical issues with his appeal, according to Strassberg.
The lawyer said Chan proposed they start a computer forensics company together, founding Computer Data Forensics in May 1999. Martoma submitted a report from the firm in his appeal of the Harvard charges, without disclosing his interest in the company, Strassberg said.
In August 1999, Chan and Martoma founded another company, Instant Corporate Infrastructure, Strassberg said.
Martoma would later be questioned about Chan by the Federal Bureau of Investigation, according to court papers. In a filing on an unrelated issue, the government said Martoma in 2000 was interviewed by the FBI about an unidentified former business partner who was later sent to prison on a crime unrelated to Martoma.
A man named Stephen K. Chan pleaded guilty to conspiracy and mail fraud in a case in 2001. Chan admitted to defrauding banks, including G.E. Capital Corp, according to court records. He was sentenced to more than four years in prison and ordered to pay $12.6 million in restitution.
After leaving Harvard, Martoma spent a year volunteering, “as a form of personal rehabilitation,” Strassberg said in court papers. He changed his name in 2001 to Mathew Cochukattil Martoma. Martoma’s mother, father and two brothers all changed their names to Martoma from 1994 to 2001, his lawyers said in court papers. The name is based on the Mar Thoma Syrian Church, based in the Indian state of Kerala where Martoma’s parents are from.
Martoma took his new name to Stanford University’s Graduate School of Business, near Palo Alto, California, where he was admitted to the class of 2003, according to Barbara Buell, a spokeswoman for the school.
In July of that year he married Rosemary Kurian, 38, a New Zealand-born doctor from San Jose, California, according to marriage records. The couple got married in a Mediterranean-style cathedral in Coral Gables, Florida.
The following month, Martoma joined a little-known hedge fund in Boston called Sirios Capital Management LP as a research analyst. He worked there for about three years before landing a job at Cohen’s hedge fund-firm SAC Capital, based in Stamford, Connecticut.
Jonathan Gasthalter, a spokesman for SAC, declined to comment when asked about due diligence or background checks SAC performed when they hired Martoma.
Martoma’s move to Connecticut marked his leap into the big league.
SAC Capital had posted among the highest profits in the industry -- an annual average of 30 percent since its 1992 inception -- turning its founder into a multi-billionaire, while its portfolio managers were among the best paid. Within three years, Martoma himself would earn a $9.38 million bonus, which prosecutors claim was the result of illegal tips SAC used to trade in the stock of Wyeth and Elan.
He started out at CR Intrinsic, which along with another SAC unit, Sigma Capital Management, would later become the focal point of the government’s investigation into the hedge fund.
Eight former SAC employees have been charged with insider trading. Six have pleaded guilty and one, SAC portfolio manager Michael Steinberg, was convicted of conspiracy and securities fraud by a Manhattan federal jury last month.
Martoma landed in one of the two most-competitive groups at the hedge fund, covering healthcare stocks. Last year, there were about a dozen healthcare teams at SAC Capital, each fiercely competing against each other for the best trades.
Martoma’s $9.38 million bonus that he got in January 2009 was his last. He lost money in 2009 and 2010, and was fired in September 2010 after an SAC executive called him a “one-trick pony,” according to the government’s complaint.
Martoma and his wife, who have three children, moved back to Florida to take care of family matters, a person familiar with his situation said in November 2012.
The couple made donations through their foundation to the National Parkinson Foundation, according to a 2012 report by its South Palm Beach County Chapter. They had also donated to the Boca Raton Museum of Art, according to the organization’s 2011-2012 annual report, as well as local schools.
They also sold an apartment in Boston for $1.45 million for which they paid $1.25 million in 2006, according to public records.
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).