Feb. 7 (Bloomberg) -- Former SAC Capital Advisors LP fund manager Mathew Martoma was found guilty in the most lucrative insider-trading scheme ever as federal prosecutors racked up a seventh conviction in their six-year probe of the hedge fund and its billionaire founder, Steven A. Cohen.
Jurors in Manhattan federal court yesterday found Martoma, 39, used secret tips on clinical trials of an Alzheimer’s disease drug to trade Wyeth and Elan Corp. shares. In doing so, he reaped a $275 million benefit for the fund. Martoma chose to risk a trial after rejecting U.S. offers of a deal for cooperation. He faces as long as 20 years in prison on the most serious counts.
Martoma showed no reaction when the verdict was announced. As the jury forewoman read the verdict tears welled in the eyes of Martoma’s wife, Rosemary, who sat in the front row of the spectator benches behind her husband. The couple, flanked by defense lawyers, walked out of the courtroom arm-in-arm, with Rosemary Martoma crying visibly.
Martoma’s conviction “is a major win for the government,” said Anthony Sabino, a law professor at St. John’s University in New York, in an interview. “It may embolden them to go after Cohen.”
The jury reached the guilty verdict after less than three days of deliberations. The conviction follows a similar verdict against SAC Capital fund manager Michael Steinberg, who was convicted in December of a separate insider-trading scheme involving technology stocks from 2008 to 2009. He hasn’t been sentenced and may yet seek to strike a deal with the U.S.
Martoma’s conviction raises the possibility that he also may seek to cooperate against Cohen in exchange for leniency, said Sabino. The disclosure, at the start of the trial, of Martoma’s expulsion from Harvard Law School for creating a phony transcript may lead prosecutors to reject such a deal, given the possible damage to his credibility as a witness.
U.S. District Judge Paul Gardephe didn’t set a sentencing date and allowed Martoma to remain free on $5 million bond.
“We are very disappointed,” Martoma’s lawyer, Richard Strassberg, said through his spokesman Lou Colasuonno, who added “we are planning our appeal.”
Martoma was convicted of two counts of securities fraud, a charge that carries a maximum 20 years in prison. He was also convicted of conspiracy, which has a maximum penalty of as long as five years in prison. The longest insider-trading sentence of 12 years was given to attorney Matthew Kluger in 2012 for a $37 million scheme. The second-longest of 11 years was imposed upon Galleon Group LLC co-founder Raj Rajaratnam for a $72 million scheme.
In the Martoma case, prosecutors claimed SAC Capital reversed a bullish stance on Wyeth and Elan in July 2008, selling a $700 million position days after Martoma learned the disappointing trial results for the drug, bapineuzumab, and shared a 20-minute phone call with Cohen.
Cohen, 57, who denies wrongdoing, hasn’t been charged with a crime. He faces an administrative proceeding before the U.S. Securities and Exchange Commission claiming he failed to properly supervise trading at his firm.
In November, SAC Capital agreed to plead guilty to securities fraud in a landmark prosecution of the financial company. The hedge fund agreed to end its investment advisory business and pay $1.8 billion. The plea deal must be approved by a judge before it can take effect.
Cohen plans to rename SAC Capital and add a layer of management to oversee traders as the hedge fund becomes a family office, a person familiar with the firm said.
The Stamford, Connecticut-based company, which will manage about $9 billion for Cohen in addition to employee money, will have three trading units after the restructuring, said the person, who asked not to be identified because the firm is private. The changes are expected to take place by mid-March.
The office of Manhattan U.S. Attorney Preet Bharara has filed insider-trading charges against 83 people and four entities -- all of them units of SAC Capital -- in its investigation of fund managers, company insiders and expert-networking firms.
In announcing his case against SAC Capital last year, Bharara called it a “veritable magnet for market cheaters,” citing the series of cases his office made against the hedge fund’s portfolio managers and analysts.
Seven former SAC fund managers and analysts -- Noah Freeman, Donald Longueuil, Jon Horvath, Wesley Wang, Richard Lee, Steinberg and Martoma -- were convicted of insider-trading schemes.
An eighth man, Richard Choo-Beng Lee, an SAC Capital analyst from 1999 to 2004, pleaded guilty in 2009 to insider trading while at Spherix Capital LLC, the hedge fund he co-founded.
Prosecutors said in the indictment of SAC Capital that Lee, while he was at SAC Capital, obtained inside information about technology companies that he passed to the fund’s portfolio managers and others.
Including Martoma, prosecutors have won 79 convictions, mostly through guilty pleas. No one charged in the probe has been acquitted of insider-trading. Cohen, who didn’t testify at Martoma’s trial, was frequently mentioned during more than three weeks of testimony.
“As the jury unanimously found, Mathew Martoma cultivated and purchased the confidence of doctors with secret knowledge of an experimental Alzheimer’s drug, and used it to engage in illegal insider trading,” Bharara said in a statement.
SAC Capital declined to comment on the verdict through its spokesman Jonathan Gasthalter at Sard Verbinnen & Co.
Some jurors declined to comment after the verdict as they left the courthouse.
Martoma was indicted in December 2012. His lawyers claimed information he obtained about the Alzheimer’s drug was publicly available. They argued that Cohen made the decision to trade Elan and Wyeth shares for reasons unconnected to Martoma.
During the testimony of Chandler Bocklage, who was an SAC Capital research trader described as Cohen’s “right-hand man,” Gardephe warned a lawyer for Martoma not to inquire too closely about Cohen’s trading style, saying it could lead to a broader examination of how Cohen did business.
“That is not a path we want to go down,” Gardephe said, outside the hearing of jurors and spectators, according to a transcript.
Before the trial, Gardephe ruled Martoma couldn’t use testimony from Cohen’s May 3, 2012, deposition before the SEC.
According to a transcript of the testimony, Cohen claimed Martoma said during their pivotal July 2008 call that he was “getting uncomfortable” with the hedge fund’s Elan investment.
Martoma earned a $9.3 million bonus connected to the Elan and Wyeth trades.
His defense lawyers succeeded in preventing the jury of seven women and five men from hearing what they called “toxic character evidence.”
This included evidence that their client was thrown out of Harvard Law School in 1999 for creating a fake transcript and later teamed up with a man under indictment for fraud to create a misleading computer report to support his expulsion appeal.
Jurors also didn’t hear that Martoma fainted in the front yard of his Boca Raton, Florida, home when confronted by two agents from the Federal Bureau of Investigation in 2011.
The panel heard five days of testimony from the government’s star witness, Dr. Sidney Gilman, a former University of Michigan neurologist.
Gilman was chairman of the safety monitoring committee for the Alzheimer’s drug trial and presented the final results at a medical conference in Chicago on July 29, 2008.
He testified that when he was first confronted by FBI agents, one of them said he was “only a grain of sand, as is Mr. Martoma” and that “they are really after a man named Steven A. Cohen.”
Gilman, who said he later learned who Cohen was, told jurors that between 2006 to July 2008, Martoma worked to befriend him. The hedge fund manager pressed for secrets about the drug during dozens of paid consultations arranged by Gerson Lehrman Group Inc., an expert-networking firm, Gilman testified.
Martoma stood out from other hedge fund managers he talked to, Gilman said, because he was unusually curious and well-informed. The doctor told jurors that Martoma reminded him of his son, who had committed suicide.
Gilman testified that he gave Martoma details of the final results of the drug trial over the phone and in a meeting in his former Ann Arbor, Michigan, office.
During cross-examination by defense lawyers, Gilman admitted to “holes” in his memory of the meeting, adding that his recollection of the event came back over time as he was questioned by federal investigators. Martoma’s lawyers told jurors they couldn’t trust the doctor’s testimony.
Gilman also testified that he initially lied about passing inside information to Martoma when he was first questioned by investigators.
“Martoma bought the answer sheet before the exam -– more than once -- netting a quarter-billion dollars in profits and losses avoided for SAC, as well as a $9 million bonus for him,” Bharara said in the statement. “In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon.”
Bharara said the conviction “likely will result in the forfeiture of his illegal windfall.”
Jurors also heard testimony from Dr. Joel Ross, a New Jersey gerontologist who said he gave Martoma confidential details about side effects and the number of subjects in the drug trial. Ross said he met Martoma at the Chicago conference after learning the trial’s results, a day before they were presented publicly.
Both doctors testified against Martoma in exchange for immunity from prosecution. Ross also initially told agents he hadn’t passed inside information to Martoma.
During his testimony, Ross said he was “flabbergasted” that Martoma appeared to know the details of the clinical trial, which prosecutors claim he had already received from Gilman.
“It was like he was in the room with me, with the slides I had just seen,” Ross said.
“A competitive advantage gained through superior research and analysis is one thing,” George Venizelos, head of the FBI’s New York office, which investigated the case, said in a statement. “Cheating is another matter altogether. If material information isn’t public, you can’t trade on it.”
The case is U.S. v. Martoma, 12-cr-00973, U.S. District Court, Southern District of New York (Manhattan).
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