Published February 06, 2014
A jury on Thursday convicted former SAC Capital Advisors trader Mathew Martoma of insider trading, providing another win for prosecutors in their long-running legal battle with SAC founder Steven A. Cohen.
Martoma, 39, was found guilty on all counts of using inside information gleaned from doctors involved in a clinical trial for an Alzheimer’s drug under development by drug makers Elan Corp. and Wyeth, which has since been acquired by Pfizer (PFE).
Prosecutors said in terms of the money involved it was the largest insider-trading case ever prosecuted.
After receiving a tip from a doctor, Sidney Gilman, who testified during the court proceedings, that the drug had responded poorly in medical trials, Martoma used the information to begin selling off SAC’s $700 million position in Elan and Wyeth in July 2008.
The negative results of the medical trial weren’t released publicly until later that month.
The trades based on the illegally obtained, confidential information helped SAC generate profits and avoid losses of $275 million, prosecutors said.
“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,” U.S. Attorney for the Southern District of New York Preet Bharara said in a statement.
“In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon, and likely will result in the forfeiture of his illegal windfall and the loss of his liberty,” Bharara added.
Chicago-based securities attorney Andrew Stoltmann said the case was a difficult one for prosecutors because of credibility issues related to Gilman.
“Bringing, trying and winning tough cases deter others who contemplate engaging in insider trading. This case really exposed many of the tactics hedge funds have used for years and provides yet another black eye for Steven A. Cohen,” Stoltmann said.
When Martoma was arrested in November 2012, prosecutors said he had a 20-minute conversation with Cohen after receiving the tip from the doctor. The contents of that conversation are unknown.
Cohen, once one of the most high-profile U.S. hedge fund managers, was not named in the Martoma complaint but is described as “Portfolio Manager A,” who was said to have collaborated with Martoma as trades were made using the illegal information.
Martoma refused to cooperate with prosecutors. FOX Business reported that SAC Capital Advisors apparently paid Martoma’s legal bills.
Cohen has not been criminally charged in any of the insider trading cases swirling around his hedge fund. The SEC wants to bar him from the securities industry for not properly supervising Martoma and another SAC trader, Michael Steinberg, who was convicted in December of insider trading.
Cohen has repeatedly denied wrongdoing.
Thomas Gorman, a partner at the law firm Dorsey Whitney and an expert in SEC enforcement and insider trading, said the Martoma conviction could ultimately help the SEC in its civil case against Cohen.
“The conviction of Mr. Martoma can only aid the SEC in its effort to achieve what the U.S. Attorney did not, establishing wrong doing by Mr. Cohen,” Gorman said.
A criminal indictment against SAC filed by federal prosecutors last summer alleged a comprehensive and elaborate company-wide mindset with a trading strategy predicated on “seeking an edge” through gathering illegal inside information that could generate profits for the firm.
SAC pleaded guilty to the criminal charges in November and has agreed to pay a record $1.8 billion in fines related to the various insider trading charges. The firm has also been barred from investing client's money and now manages only Cohen's considerable fortune, said to be worth about $9 billion.
The U.S. Attorney’s Office noted that Martoma is the 79th person convicted of insider trading either following a trial or by pleading guilty after being charged by Bharara’s office.