SAC’s Cohen Focus of Trial as Martoma Rebuffs U.S.

Mathew Martoma may have the one thing prosecutors have been unable to find in their probe of SAC Capital Advisors LP: a direct link between founder Steven Cohen and insider trading. Having refused to cooperate, Martoma now faces trial for what the government claims was the biggest illegal trade in U.S. history.

Jury selection in the prosecution of the ex-SAC portfolio manager is set for Jan. 7, barring a last-minute plea deal. He is accused of benefitting the hedge fund by $276 million in trades of Wyeth and Elan Corp., using secret tips from a doctor supervising trials of an Alzheimer’s drug. The U.S. said SAC reversed a bullish stance on the drugmakers, liquidating a $700 million position and selling the stocks short a few days after a 20-minute phone call between Martoma and Cohen in July 2008.

Pressure on Martoma, 39, to cooperate with the probe included an approach by agents of the Federal Bureau of Investigation that made him faint in his own front yard, and an indictment unsealed in 2012 on the Friday before Christmas. A steady drumbeat of convictions of insider traders in the probe, including SAC portfolio manager Michael Steinberg last month, may have further ratcheted up the pressure ahead of the trial next week in Manhattan federal court.

“I think Martoma was the likeliest link to Cohen,” said Glenn Gitomer, a partner with the law firm McCausland Keen & Buckman in Radnor, Pennsylvania, who’s following the case. “Martoma’s the one with the 20-minute phone call. Depending on what happened, that either gets them there or doesn’t.”

Cohen, who hasn’t been charged, has said he did nothing wrong. Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment on the Martoma trial.

“Mathew continues to fight the charges and is preparing for trial,” his lawyer, Richard Strassberg, said in an e-mail.

Uphill Battle

History suggests he may face an uphill battle. Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara have filed insider-trading charges against 83 people and four entities -- all of them units of SAC -- in a six-year probe of fund managers, company insiders and expert networking firms.

In November, SAC 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. The agreement must be approved by a judge before it can take effect.

Bharara’s office has so far won 78 convictions, most of them through guilty pleas. No one has been acquitted of insider-trading charges in that time.

In the most recent trial in Manhattan federal court, a jury took less than two days to convict Steinberg Dec. 18 of using illegal tips on technology stocks from his former securities analyst, Jon Horvath, to make more than $1.4 million in illegal profits.

Twenty Years

If convicted, Martoma, who has pleaded not guilty, faces as long as 20 years in prison on each of two securities-fraud counts and five years for a single conspiracy charge.

Prosecutors in Martoma’s case plan to call two physicians who allegedly gave him inside information about drug tests and their disappointing results. The doctors, former University of Michigan neurologist Sid Gilman, and Joel Ross, a New Jersey geriatrician and clinical associate professor of medicine at Mt. Sinai School of Medicine, have both been given non-prosecution agreements in exchange for their testimony.

Martoma made a $9.3 million bonus from trades on the doctors’ information, the government claims.

“They’re really going to have to attack the doctors’ credibility,” said Anthony Sabino, a law professor at St. John’s University in New York.

Martoma’s lawyers will have to be careful not to push Gilman and Ross too hard for fear of losing credibility with the jury, Sabino said.

“People are less likely to find fault with a doctor than with a Wall Street guy,” he said.

Cohen Deposition

The trial is expected to take three weeks, lawyers told U.S. District Judge Paul Gardephe, who is overseeing the case. Gardephe, a former prosecutor and civil litigator, was appointed to the bench in 2008 by President George W. Bush, a Republican.

While Martoma’s team has been quiet about trial strategy, pretrial motions filed in the case provide a glimpse of his planned defenses.

His lawyers asked Gardephe to allow the introduction of parts of Cohen’s testimony from a day-long deposition taken in 2012 by the U.S. Securities and Exchange Commission.

Martoma claimed Cohen’s testimony shows that SAC sold its Wyeth stock on the advice of Wayne Holman, a former SAC employee who left and started Ridgeback Capital Management LLC, not because of anything Martoma said.

Incrimination Risk

In pages taken from a 253-page transcript of Cohen’s May 3, 2012, deposition, Cohen testified he remembered only that, in the pivotal 2008 call from Martoma, the fund manager told Cohen he was “getting uncomfortable” with the firm’s Elan investment.

The defense also claims Cohen’s testimony shows Martoma wasn’t involved in decisions to sell Wyeth and Elan shares short, or to liquidate the positions through so-called dark pools and other measures prosecutors said were intended to disguise trading by the Stamford, Connecticut-based hedge fund.

Because Cohen “intends to assert his constitutional rights” not to risk incriminating himself by testifying at Martoma’s trial, the defense should be permitted to use the SEC testimony in its defense, Martoma’s lawyers have argued.

Government Communications

Martoma asked Gardephe to order the U.S. to turn over communications between the government and the two cooperating doctors. Martoma claims that Gilman and Ross both initially told investigators they weren’t involved in passing inside information to him.

Prosecutors said in a filing today that the defense has ample information from witness statements that it can use to challenge the credibility of the doctors and objected to forced disclosure of additional communications.

Martoma is also seeking to bar jurors from hearing that he fainted when confronted by two FBI agents outside his Boca Raton, Florida, home on Nov. 8, 2011. The government claims the reaction shows he was aware of his guilt. Martoma’s lawyers counter that the evidence would unfairly prejudice jurors against their client and that FBI questioning would naturally make someone anxious.

Gardephe hasn’t yet ruled on the requests.

The case is U.S. v. Steinberg, 12-cr-00121, U.S. District Court, Southern District of New York (Manhattan).

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