Former SAC Fund Manager Out on $5 MiIlion Bail

The former SAC Capital Advisors hedge fund manager accused of enabling a quarter of a billion dollars in profits through insider trading was released on $5 million bail Monday.

Mathew Martoma appeared in Manhattan federal court on charges related to one of the biggest insider trading cases in the country. The multi-year investigation has also pulled his boss, famed financier Steven A Cohen, closer to accusations of conspiracy and fraud.

Federal prosecutors say Martoma, who worked for SAC affiliate CR Intrinsic Investors LLC between 2006 and 2008, received confidential information over an18-month period from a neurology professor who was overseeing a trial for an Alzheimer’s drug being jointly developed by Elan Corp. (NYSE:ELN) and Wyeth LLC, which is now part of Pfizer Inc. (NYSE:PFE). Drug trials are typically conducted in three phases and while the first two seemed promising the third was unexpectedly negative.

Martoma purchased shares in the pharmaceutical companies when he thought they were doing well but sold their shares short when he was tipped to the negative news of the third phase ahead of a public announcement in 2008.

When Martoma told the firm to buy $700 million in shares of Elan and Wyeth and then sell them all, it did. The tip earned Martoma a $9 million bonus and averted losses of $276 million. Martoma’s money-saving recommendations caught the eye of his billionaire boss, who at the time was one of the most successful hedge-fund managers in the world.

Prosecutors say Martoma dumped his shares in a way “so as not to alert anyone else” and used dark pools and algorithms to do it. A dark pool is a type of alternative trading system that lets investors anonymously trade larger blocks of stock without tipping their hand to the broader market. Algorithms are used to break up orders to disguise their size. When used together, dark pools and algorithms cloak trades, making them much harder to detect.

There are about 40 dark pools operating in the U.S. and accounting for 30% of the country’s equity trading per month. In 2009, the SEC proposed a series of rules to help shed more light on dark pools, but they were never finalized.

The insider-trading case against Martoma marks the first time Cohen has been linked to securities fraud. Court documents repeatedly allude to Cohen and his dealing with Martoma leading up to the news about the drug trail. However, Cohen has not been charged or mentioned by name. He is referred to as “Portfolio Manager A” in the $276 million insider-trading civil complaint filed by the SEC and referred to as  Martoma’s boss in the criminal suit.

For its part, the government has tried for years to tie Cohen and SAC to securities fraud charges. In November 2010, the FBI subpoenaed SAC and other hedge funds. Martoma is the fourth person associated with SAC to be arrested on insider-trading charges in the last four years.

Martoma's defense attorney, Charles Stillman, says his client is innocent and will be back in court to fight the charges against him.

Martoma had to surrender his passport and is only allowed to travel to New York and New Jersey, and to his homes in Florida and Massachusetts. There is a preliminary hearing for him on Dec. 26, but there's a chance he could be formally indicted by a grand jury prior to that.