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NY feds claim most lucrative insider trading case

Adam Shell, USA TODAY
2:35PM EST November 20. 2012
http://www.usatoday.com/story/money/markets/2012/11/20/ny-feds-most-lucrative-insider-trading/1716799/

NEW YORK — Federal authorities in New York have charged a former hedge fund portfolio manager with what they call the most lucrative insider trading scheme in history, with benefits reaching more than a quarter of a billion dollars.

The Securities and Exchange Commission on Tuesday filed a complaint against Mathew Martoma, charging him with avoiding trading losses and earning illegal profits totaling more than $276 million in July 2008.

In announcing criminal charges at an afternoon press conference in New York City, Preet Bharara, the U.S. Attorney for the Southern District of New York, said Martoma and his hedge fund benefited from "what might be the most lucrative inside tip of all time."

"The charges unsealed today," said Bharara, "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."

Martoma allegedly traded ahead of a negative public announcement related to clinical trial results of an Alzheimer's drug developed by two major pharmaceutical companies, according to a SEC complaint. The sharing of or trading on non-public information is illegal.

"Today's record-setting insider trading case reinforces the cold, hard lesson of so many other recent cases," Robert Khuzami, director of the SEC's division of enforcement, said in a statement. "When you trade on inside information, you're not just betting your money but also your career, your reputation, your financial security and your liberty."

The SEC also charged CR Intrinsic Investors, the hedge fund where Martoma worked, as well as Dr. Sidney Gilman, a professor of neurology at the University of Michigan Medical School. Gilman was overseeing the clinical trial of the drug, which was jointly developed by Elan and Wyeth, the complaint says.

FBI special agent-in-charge April Brooks said Tuesday's moves are the latest offensive in the FBI's "five-year campaign to root out insider trading at hedge funds and expert networking firms."

Since the crackdown on insider trading began, there have been more than 70 arrests, Brooks said. The biggest hedge fund titan to be ensnared in the multi-year probe was Raj Rajaratnam, the head of hedge fund group Galleon, who was found guilty in October 2011 and was sentenced to 11 years in prison.

"What we see, again, is an unholy alliance between an insider willing to divulge valuable non-public information, and a money manager to whom the information is as good as gold," Brooks said in a statement.

Brooks said that a "recurring theme through all ofthe contact between the insider and Martoma was their knowledge that what they were doing was wrong, prohibited by their respective employers' policies and illegal.

"They engaged in continual subterfuge to disguise or conceal their communications," she said. "A competitive advantage gained through superior research and analysis is one thing. Cheating is another matter altogether. If the information isn't public, you can't trade on it. We will continue to bring these cases so long as people fail to act accordingly."

The SEC complaint alleges that Gilman, who was selected by the two drugmakers to present the final clinical trial results, provided Martoma with the actual data before they were released publicly.

Gilman presented the final clinical results at a July 29, 2008, medical conference, which was to coincide with the public release of the findings after the market close that day.

But the doctor allegedly provided Martoma with information on July 17, 2008, more than a week earlier. Gilman is alleged to have provided the hedge fund manager with the "actual, detailed results" of the clinical trial.

Martoma then sold all his stock holdings in Elan and Wyeth, valued at $700 million, that CR Intrinsic Investors and another unnamed hedge fund held, the SEC charges.

He also shorted those stocks in a trade valued at $960 million, which would be profitable if the stock prices of Elan and Wyeth fell after release of the data. The stocks did fall, giving Martoma huge profits and avoiding huge losses if he had not sold the stocks when he did. A short sale produces profits when a stock falls in value.

"The massive re-positioning allowed CR Intrinsic … and (an unnamed hedge fund) to collectively reap illicit profits and avoid losses of over $276 million," according to the SEC complaint.

Stamford, Conn.-based CR Intrinsic Investors is a division of S.A.C. Capital Advisors, a head fund management firm owned by billionaire Steve Cohen.

Gilman and Martoma met in 2006 through a so-called "expert network firm," where Gilman worked as a consultant. A number of expert network firms have been ensnared in insider trading cases in recent years.

The firms make their money by linking up industry experts, either inside or outside publicly traded companies, with money managers to provide insights into a company's business or prospects.

Martoma, 38, who resides in Boca Raton, Fla., worked at CR Intrinsic between 2006 and 2010, where he managed money beginning in early 2008 until his departure.

Gilman, 80, who lives in Ann Arbor, Mich., served as a consultant to Elan and Wyeth from 2003 until 2009. He also "moonlighted" as a consultant for the expert network firm, where he earned $1,000 per hour for his consulting services, according to the SEC complaint.

Martoma was compensated richly for his involvement in the insider-trading scheme, the SEC charges. The regulatory agency alleges that at the end of 2008 Martoma received a bonus of $9.3 million, a large part of it resulting from the illegal profits CR Intrinsic and the other unnamed hedge fund, referred to as Investment Adviser A in the complaint, earned.

Gilman is said to have received $100,000 from the expert network firm for his consultations with Martoma, the compliant alleges.

His attorney did not immediately return a message requesting comment.

http://www.usatoday.com/story/money/markets/2012/11/20/ny-feds-most-lucrative-insider-trading/1716799/