Ex-SAC Manager Charged With Largest Ever Insider Trading Scheme

on Nov 21, 2012

On 20 November the Financial Times reported that prosecutors in the US have charged former trader Mathew Martoma with insider trading in what has turned out to be the biggest insider case ever brought to court.

**The Scheme**
Mathew Martoma was a former health-care portfolio manager at CR Intrinsic, one of the units in the $14 billion (£8.8 billion) SAC Capital hedge fund. The employee allegedly made $276 million (£174 million) in profits by trading on insider tips about clinical trials of bapineuzumab or “bapi”, a drug meant to treat Alzheimer’s disease.

The Securities and Exchange Commission (SEC) complaint states that Mr Martoma first bought shares in Elan (NYSE:ELAN) and Wyeth (NYSE:WYETH), two pharmaceutical companies, when he knew the drug was doing well in clinical trials and then later avoided losses by selling the shares before it became publicly known that “bapi” had delivered disappointing results.

“The charges unsealed today describe cheating coming and going — specifically, insider trading first on the long side, and then on the short side, on a scale that has no historical precedent,” Manhattan U.S. Attorney Preet Bharara said in a statement. “As a result of the blatant corruption of both the drug research and securities markets alleged, the hedge fund made profits and avoided losses of a staggering $276 million”

**Steven “Steve” Cohen Linked to the Case**
According to sources familiar with the case, billionaire Steven Cohen, chairman and chief executive officer of SAC Capital Advisors, has been linked to the insider-trading scheme although he is not charged or directly mentioned by name in the federal criminal complaint unsealed on Tuesday. Sources of the Wall Street Journal however identify him as “Portfolio Manager A” – the suspect who allegedly collaborated closely with Mr Martoma in making the trading decisions and endorsed the actions taken by the former manager.

“Portfolio Manager A”, who has also been referred as the “owner” of two hedge-fund affiliates involved in the alleged scheme, rejected the advice of other analysts at his firm that conflicted with Mr Martoma’s positions. On 20 July, 2008 Mr Martoma had already learned of the disappointing results from the “bapi” trial and told “Portfolio Manager A” he is no longer “comfortable” with the large positions the fund has taken in Elan and Wyeth. On the next day, the head trader of the fund was told to sell hundreds of millions of dollars of shares in the two companies. The hedge fund even opened positions betting against the shares in those companies. As a result, SAC Capital first recorded stellar profits and then avoided massive losses when the stocks plunged.
!m[Billionaire Steven Cohen Implicated In The Illicit Trading](/uploads/story/866/thumbs/pic1_inline.png)“Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government’s inquiry.” was the statement Time publication received from a SAC spokesman.
**The Doctor Dodges Prosecution**
Sid Gilman, an 80 year old University of Michigan neurologist and medical consultant, will not be prosecuted for leaking confidential data to Mr Martoma.
According to the FBI, in the spring of 2008 Dr Gilman told Martoma that “bapi” was “reasonably safe for a drug of its kind”. On 17 July, Elan gave Gilman an encrypted PowerPoint presentation that summarized the results and was marked as “Confidential, Do Not Distribute”. Gilman and Mr Martoma then met, spoke for almost two hours and later that day the doctor sent his friend the password needed to open the PowerPoint file. According to Mr Bharara, Martoma then “realized that the massive stake had become a colossal liability, and in a matter of just days, he caused the hedge fund not only to dump its shares but also to short the two drug stocks in advance of the negative drug trial becoming public,” Overnight the former trader went from “bull to bear as he tried to dig his hedge fund out of a massive hole.”
According to the SEC complaint, in January 2009 Martoma received a $9.38 million (£5.9 million) bonus, while Gilman earned around $108,000 (£67,900) for his 59 consultations with the portfolio manager. Gilman is about to testify and will not be prosecuted.
“At the center of the scheme was the cultivation and corruption of a renowned medical doctor,” U.S. Attorney Bharara said at a news conference in New York. “He is prepared to testify in connection with a non-prosecution agreement.”


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