SAC Trial Seen by Probe Convict as Latest Abusive Tactic

Former SAC Capital Advisors LP portfolio manager Mathew Martoma could serve more than a decade in prison if convicted on federal insider trading charges at a trial beginning today in Manhattan.

James Fleishman knows what that’s like.

He faced the same potential doom, and like Martoma, argued he was unfairly targeted in a U.S. effort to develop evidence of wrongdoing by others. A former software salesman who found his job with expert-networking firm Primary Global Research LLC on the Internet, Fleishman resisted pressure to make a deal, just as Martoma did. Fleishman was tried for insider trading, convicted and eventually served 14 months in prison.

“The government goes after people and uses them, whether they’re guilty or not,” Fleishman, 44, said in an interview following his release. “They scared people into cooperating. If you actually stand up and fight as a white-collar defendant, you get punished.”

Fleishman's firm was a middleman -- putting public company insiders together with hedge fund managers and analysts at SAC Capital and elsewhere, for a fee. Such matchmaking, and the flow of insider information that resulted, is at the heart of both cases.

As Martoma defends himself in a three-week trial over charges he orchestrated the biggest insider trade in U.S. history, Fleishman reflected on what went into his decision to fight, and the price he paid for it.

Fleishman was sent to a Colorado prison complex that houses the nation’s worst offenders. He worked in the kitchen that prepared meals for men such as the 1993 World Trade Center bombing mastermind Ramzi Yousef and “Unabomber” Ted Kaczynski.

“I fed Ted Kaczynski,” Fleishman said.

Government Ultimatums

The government’s case against Martoma, and others like him, was built on a series of ultimatums made to people like Fleishman -- help us or be charged. Many of the key cooperators in the six-year investigation have been employees of expert networking firms. Two primary witnesses in Martoma’s case worked as consultants for such firms.

Fleishman, thin with a shock of blond hair, expressed anger at the tactics used by Manhattan U.S. Attorney Preet Bharara and the FBI.

“They said they needed my help and I needed theirs,” he said of the FBI agents who confronted him at lunch one day in 2010. “They wanted me to flip and wear a wire.”

Mother’s House

Sitting at his mother’s home in San Jose, California, Fleishman said he decided not to cooperate because he didn’t want to implicate innocent people.

“I didn’t see anything that was going on was criminal activity,” he said. “Not even close.”

The FBI agents weren’t persuaded, and threatened that if he didn’t cooperate, he could face 20 years in prison.

“I didn’t work on Wall Street, I didn’t even trade, so how was I involved in insider trading?” Fleishman said. “They pitched me like I was at a car dealership.”

Fleishman conceded that it was possible his firm’s outside consultants or its client fund managers at firms such as SAC Capital were engaging in insider trading.

“The company could have done a much better job of compliance. But I left that up to others,” Fleishman said. “I always felt I was so far removed that I was safe for what was happening. I wasn’t on those calls and I wasn’t trading.”

Martoma’s Experts

Martoma is charged with using tips from a doctor supervising trials of an Alzheimer’s drug to push SAC to reverse a bullish stance on drugmakers Wyeth and Elan Corp.

The hedge fund eliminated a $700 million position and sold the stocks short a few days after a July 2008 call between Martoma and SAC Capital founder Steven A. Cohen, benefiting the firm by $276 million. Martoma allegedly connected with the doctor, who has a non-prosecution agreement in exchange for his cooperation, through another expert-networking firm. Bharara has brought insider-trading charges against 83 people and four SAC entities. He has so far won 78 convictions, most of them through guilty pleas and many tied to the expert networking industry.

In November, SAC Capital agreed to plead guilty to securities fraud and end its investment advisory business in a record $1.8 billion settlement. The agreement has yet to be approved by a judge. Bharara has said his probe is continuing.

The U.S. repeatedly sought Martoma’s help in their pursuit of Cohen, exerting pressure that at one point caused the 39-year-old to pass out in his front yard when confronted by FBI agents.

Cohen, who hasn’t been charged, has said he did nothing wrong. Jonathan Gasthalter, a spokesman for SAC, declined to comment on the Martoma trial. Martoma’s lawyer, Richard Strassberg, said only that his client is preparing for trial.

Matchmaker Fleishman

Fleishman grew up in the San Jose area. After his father died when he was 15, his mother Annette, crippled by polio as a child, said he became her main source of emotional support. Fleishman attended San Jose State University, and also taught English in South Korea, he said.

It was there that he met his wife, Hosung Nam, and they were married in 2002. He would return to California and change careers, getting a job selling e-mail security software at a Silicon Valley startup. He joined Primary Global as a salesman.

By 2010, when FBI agents first met with him, expert networking firms were already on the government’s radar. Fleishman and Primary Global had been at the center of an insider-trading probe dubbed “Matchmaker” for more than a year, according to court filings.


Prosecutors said Fleishman obtained and passed confidential data from technology company employees moonlighting as consultants for his Mountain View, California-based firm. The tips were given to fund managers who paid Primary Global for consultation calls, prosecutors said.

“I knew no crimes were going on at the office,” said Fleishman, sitting at his mother’s kitchen table. “I knew I wasn’t involved in criminal activity.”

At Fleishman’s trial, Assistant U.S. Attorney David Leibowitz told jurors in Manhattan federal court a different story.

“He knew confidential information was being passed repeatedly to members of the investment community,” the prosecutor said in his closing argument. “He not only knew it, he helped make it happen.”

Prosecutors cited dozens of Fleishman’s e-mails and phone conversations with cooperating witnesses secretly recorded by the Federal Bureau of Investigation. The U.S. said Fleishman, who earned $275,000 a year and held Series 7 and 63 licenses, helped money-manager clients access the information they wanted to inform their trades, included nonpublic material.

Primary Global

Based in a three-story pink stucco office building, Primary Global promoted itself as a broker for “high-value information” by arranging for investor sessions with employees at public companies who provided legal insight into a specific market. Business was profitable -- in 2010, the firm’s estimated annual revenue was as much as $25 million.

Clients paid a quarterly subscription fee of as much as $15,000 and some investors paid $1,000 per call for exclusive access to employees at public companies working as consultants for Primary Global.

Consultants provided secret tips that included sales numbers and production data on companies including Dell Inc., Advanced Micro Devices Inc., Taiwan Semiconductor Manufacturing Co., and Flextronics International Ltd., the government said.

Eventually, Fleishman and at least 14 others linked to Primary Global would be charged with passing or receiving illegal tips. The company filed for bankruptcy in 2012.

Subway Confrontation

Fleishman was getting lunch at a Subway sandwich shop in Mountain View in May 2010 when two FBI agents approached.

He said they told him they had evidence Primary Global helped hedge fund managers and analysts get inside information. They asked him for his help, warning that if he chose not to comply, he’d be prosecuted.

FBI agents David Makol and James Hinkle said they were concluding a multi-year investigation, Fleishman said. The probe would “dwarf” the Galleon Group LLC case that had rocked Wall Street the year before with the arrest of billionaire fund manager Raj Rajaratnam, they said.

“It was shocking, two FBI agents from New York walking up to me and telling me I was an insider trader,” said Fleishman.

The agents took out a micro-cassette recorder and played a recording of calls where his client hedge fund managers spoke with three consultants for Primary Global, Fleishman said. Employed full time at publicly traded companies, the three men were paid by Primary Global to provide advice to clients, who then used the information to trade.

Bottom Right

The FBI agents showed Fleishman a diagram with about 50 suspects, illustrating where he fit into their investigation.

His name was located at the bottom right.

“They wanted me to know I was not a significant player but part of a gigantic conspiracy,” he said. “They explained they start at the bottom and work their way up. To get to the portfolio managers at the fund, they flipped an analyst.”

Fleishman said agents told him they wanted his help in building a case against his bosses and clients, like more than 60 others who agreed to work secretly for the government in its probe. By doing so, he’d probably avoid prison, they told him.

Fleishman told the agents he wanted to talk to his wife before deciding whether to cooperate. Instead, he went to his superiors at Primary Global to warn them.

“They flew across the country to flip me,” Fleishman said. “But the thought of entrapping people I worked with sickened me.”

Fleishman Arrested

Seven months after the encounter, the FBI was at his front door to arrest him. He was convicted in 2011.

Released from government supervision in October, Fleishman said his wife and mother once urged him to plead guilty and cooperate.

He insisted he “did the right thing.”

“Of all the calls that happened, it was probable that someone would get info they were not supposed to have, but that in itself is not a crime,” Fleishman said. “They would have to trade on it for it to be so. I was not on the calls and figured if a client made that decision it was on them since I had no knowledge of it and simply brought the two parties together.”

Jim Margolin, a spokesman for Bharara, declined to comment on Fleishman's case.

Key Contact

The government insisted that Fleishman, whose photo would be featured in a Time Magazine cover article about Bharara’s cases, was a key contact for Primary Global hedge fund clients. In selling Primary Global to fund managers and analysts, Fleishman stressed the need for secrecy, prosecutors alleged at his trial.

“We just try to provide anonymity to some degree for the, for the experts,” he told the analyst. “We don’t typically give you their contact info or even their last name. It’s kind of a sales point with these folks when, when we’re recruiting them.”

The government’s use of wiretaps for insider trading cases, pioneered in the Rajaratnam prosecution, was also crucial to the probe because often company insiders and traders matched with expert networking firms didn’t know each other. The FBI recordings included calls Fleishman had with Primary Global consultants and clients.

Juror John Velasco, a loan manager from Westchester County, New York, said the secret FBI recordings were key evidence in convicting Fleishman.

“Some of the tapes were point blank, where the defendant is pretty much giving incriminating evidence,” Velasco said.

`Rogue Consultants'

Fleishman’s lawyer argued that his client relied on the representations of the firm’s consultants, signed and submitted to Primary Global, confirming they had permission from their employers to do consulting and agreeing not to pass confidential information during calls.

“We may just have had some clients who were breaking the law or rogue consultants,” Fleishman said in the interview. “But we were small fry -- easy targets for the government.”

Primary Global has played a central role in the government’s widening insider trading probe.

It was a clearinghouse for some of the most lucrative illegal tips passed to portfolio managers at Stamford, Connecticut-based SAC Capital, the government said. Recipients included SAC fund managers Noah Freeman and Donald Longueuil, who reaped millions of dollars in illegal profit. Both pleaded guilty.

SAC Connection

SAC Capital was one of Primary Global’s biggest clients. According to government records, the hedge fund paid Primary Global more than $520,000 in 2009 for consulting sessions, up from $52,000 a year before. While the U.S. said SAC employees got illegal tips from Primary Global consultants, they haven’t connected the firm to the Martoma case.

When SAC Capital agreed to plead guilty last year, Martoma’s prosecutor, Arlo Devlin-Brown, said the hedge fund “failed to effectively monitor its own employees’ use of expert-networking firms.”

The government has tied other insider trading cases to Fleishman that eventually caused investigators to focus on illegal trading by other SAC Capital analysts and fund managers. These include more than $1.7 million which Level Global Investors LP analyst Spyridon Adondakis earned from an illegal tip about Taiwan Semiconductor Manufacturing Co. The tip, in 2009, was shared with his friend Jesse Tortora, a Diamondback Capital Management LLC.

That case would lead investigators to another analyst, SAC Capital’s Jon Horvath, the key witness against SAC Capital’s Michael Steinberg, who was found guilty of insider trading last month in Manhattan federal court.

Vast Information

At the Subway shop, the FBI agents told Fleishman Primary Global had been wiretapped for more than a year, and that they’d collected a vast amount of information.

“As they were talking, I realized they weren’t there to get any information from me, they were there to get me to cooperate,” he said. “I told them ‘No, I’m not involved and I don’t see anyone at PGR is either.’”

He said one FBI agent replied, “‘James, we expected you to make a smarter choice here.’”

“I believed the business was 100 percent legitimate, however it turned out that there were a few consultants out of thousands that were crossing the line,” Fleishman said. “The feds used these few to portray PGR as a corrupt organization and wanted my help in doing so.”

Fleishman’s mother, Annette Fleishman, said if her son has a shortcoming, it’s that he lacks “peripheral vision,” or as she explained it, an inability to see wrongdoing by others.

“PGR was not a corrupt organization, at least I never got the sense that anyone at PGR was breaking the law,” Fleishman said.

He added: “They may have looked the other way.”

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

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