Martoma Found Guilty For Historic Insider Trading Scheme
A federal jury in New York has found Mathew Martoma, a former portfolio manager for SAC Capital Advisors, guilty for orchestrating what authorities say may have been “the most lucrative inside tip of all time.”
The verdict — announced Thursday after roughly 15 hours of deliberation — marks a landmark victory for the government in its ongoing crackdown on insider trading. Since 2009, that dragnet has resulted in charges against 85 individuals and four entities. The government has now won 79 of those cases through either a guilty plea or conviction at trial. Ten cases are still pending.
Martoma was accused of using secret information to execute a massive trade in shares of Elan Corp. and Wyeth Pharmaceuticals. According to the government’s complaint, he cultivated sources inside the companies, and in 2008 was leaked the details of a disappointing clinical trial for a once-promising Alzheimer’s drug.
Martoma followed by emailing Steven A. Cohen, the founder and CEO of SAC Capital, to say it was “important” that they speak. In the 20-minute conversation that followed, Martoma indicated he was no longer “comfortable” with SAC’s $700 million stake in Elan and Wyeth. When trading began the next day, SAC began to reverse its position, ultimately netting $276 million in profits and avoiding losses.
With today’s verdict, SAC, a firm that was once the envy of Wall Street for its outsized returns, has now seen two of its former employees convicted of insider trading within less than three months. In December, a jury found Michael Steinberg guilty on five counts of securities fraud and conspiracy. Six additional SAC employees have pleaded guilty to securities fraud.
Martoma’s arrest came three years into the government’s sweeping investigation into insider trading. Many observers initially speculated that he could avoid trial all together if he turned on his former boss. For years, authorities have searched for clear evidence that Cohen engaged in insider trading, and in Martoma, they believed they had it. But Martoma refused to cooperate, and he now faces as many as 20 years in prison on each of two counts of securities fraud, and five years for an additional conspiracy charge.
“In the short run, cheating may have been profitable for Martoma, but in the end, it made him a convicted felon,” said U.S. Attorney Preet Bharara after the verdict was announced.
Martoma’s lawyers have indicated they plan to appeal the verdict.
Much of the case turned on the testimony of two doctors involved in developing the Elan and Wyeth drug: Joel Ross, a geriatrician and clinical associate professor at the Icahn School of Medicine at Mount Sinai in New York, and Sidney Gilman, a former neurology professor at the University of Michigan.
In his testimony, Ross told the court that he regularly provided Martoma with confidential information about his work. Nevertheless, Ross testified that he was “flabbergasted” that the former SAC portfolio manager knew so much about a private presentation he attended in 2008 detailing the results of the Alzheimer’s drug trial. The presentation was the first time that investigators involved in the clinical trial were told of the results.
“It was like he was in the room with me, with those slides I had just seen,” Ross said.
According to the government, Martoma knew as much as he did because Gilman had tipped him off more than one week earlier. Gilman confirmed that charge, testifying that he leaked the results of the drug trial for bapineuzumab in advance of the July presentation.
“I revealed information that was confidential about a drug trial to Mathew Martoma inappropriately,” Gilman told jurors. Both he and Ross won immunity from the federal government in exchange for their cooperation.
Gilman served on a committee overseeing the clinical trials of the drug. He testified that he first met Martoma in person in 2006 through his work as a consultant for the Gerson Lehrman Group, an expert network firm. Gilman told jurors that he initially resisted slipping details about his work, but was ultimately won over by Martoma’s persistence.
“He said he wanted to be friends,” Gilman testified. “He said that to me several times.”
Gilman’s testimony provided new insight into the government’s long-running probe of SAC and its billionaire namesake. According to Gilman, when FBI agents first questioned him about his relationship with Martoma, they told him their real target was Cohen.
“I am only a grain of sand, as is Mr. Martoma,” Gilman said while recounting a meeting with the FBI in 2011. “They said they are really after a man named Steven A. Cohen.”
For his part, Cohen has avoided criminal charges, but he faces a civil lawsuit filed by the Securities and Exchange Commission that accuses him of failing to properly supervise his employees. The complaint alleges that Cohen ignored multiple red flags that should have led him to investigate suspicious trading activity at SAC. In a 44-page response, Cohen’s attorneys wrote that their client “did nothing wrong, and any fair review of the evidence will show that the SEC’s charges are unfounded.”
The firm as a whole, meanwhile, has pleaded guilty to insider trading violations as part of a record $1.8 billion settlement with the government. The agreement forced the firm to shut down its business of managing money for outside investors.
Although a judge has yet to sign off on the deal, SAC has already begun the process of reshuffling. The firm is returning client money as it transitions to a family business dedicated to managing employee money and Cohen’s estimated $9 billion personal fortune. It has closed an office in London, laid off employees, and is said to be considering a name change.
Amidst that transition, SAC finds itself facing a potential flight of lenders and trading partners. Earlier this month, The New York Times reported that Deutsche Bank cut ties with SAC, citing the “reputational risk” of dealing with the hedge fund. It’s unclear which, if any, banks will follow, but at a minimum, SAC appears to be girding itself for change. As a spokesman told The Times:
Steve Cohen and the management team are determined to do what they can to prevent a repeat of the problems we experienced and so we are simplifying out business, increasing management oversight and continuing to strengthen our compliance program … This goes beyond rebranding.