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Trading Charges Reach SAC

Complaint Against Portfolio Manager Ties Insider Case to Fund-Titan Cohen

By MICHAEL ROTHFELD, CHAD BRAY and SUSAN PULLIAM
Updated November 20, 2012, 12:47 p.m. ET
http://online.wsj.com/article/SB10001424127887323713104578130930796204500.html?mod=WSJ_Markets_LEFTTopStories

Federal prosecutors charged a Wall Street portfolio manager in what they described as the most lucrative insider-trading scheme ever, but their ultimate target appeared to be one of Wall Street's most successful and prominent investors: hedge-fund giant Steven A. Cohen.

The portfolio manager, Mathew Martoma, worked for an affiliate of Mr. Cohen's SAC Capital Advisors L.P. and was accused in criminal and civil complaints of obtaining secret data while there from a former University of Michigan neurology professor who worked on a clinical trial for an Alzheimer's drug.

Mr. Cohen wasn't charged or mentioned by name. But the civil complaint alleged that Mr. Martoma worked closely with someone identified as "Portfolio Manager A," described as the "owner and founder" of the firm and identified by people close to the investigation as Mr. Cohen. The criminal complaint refers to the hedge fund "owner" in the same context.

Authorities claimed the two bought shares for their funds in two drug companies involved in the clinical trial, and then bet on the companies' shares to fall when Mr. Martoma learned of negative news in 2008.

The hedge funds reaped $276 million in profits and losses avoided based on that information, criminal and civil authorities said—far dwarfing that of any previous insider-trading case. The bulk of the trading profits generated by Mr. Martoma was paid to Mr. Cohen, a person close to the hedge fund said.

"Mr. Cohen and SAC are confident that they have acted appropriately and will continue to cooperate with the government's inquiry," a spokesman for the hedge fund said in a statement.

Mr. Martoma, 38 years old, was charged with conspiracy to commit securities fraud and two counts of securities fraud. Each fraud count carries up to 20 years in prison. He was arrested by the Federal Bureau of Investigation at his Boca Raton, Fla., home and released on $5 million bail after a court appearance Tuesday.

Mr. Martoma's lawyer said his client "succeeded through hard work and the dogged pursuit of information in the public domain" and will be exonerated.

Manhattan U.S. Attorney Preet Bharara, who declined to comment about Mr. Cohen, described the allegedly illicit profits in the case as "on a scale that has truly no historical precedent." The investigation is ongoing.

A complaint filed by the Securities and Exchange Commission said that Portfolio Manager A authorized many of the trades based on Mr. Martoma's alleged inside information, and rejected the advice of other analysts at his firm that conflicted with Mr. Martoma's positions. There was no allegation Portfolio Manager A knew Mr. Martoma was receiving inside information.

The charges come amid a historic period for insider-trading prosecution in the U.S. Federal prosecutors in Manhattan and the FBI have secured 69 convictions or guilty pleas out of 73 people charged in the past three years. Mr. Martoma is the fifth person formerly associated with SAC to face criminal charges in the broad government crackdown.

The case is part of a broader examination of whether Wall Street traders have received early confidential data about clinical trials, which often have huge impact on the prices of pharmaceutical companies' stocks.

For years, authorities conducting insider-trading probes have investigated Mr. Cohen's activities. He has never been charged.

Mr. Cohen, 56, is among the world's best-known hedge fund managers. He has amassed an art collection that at times included works by Van Gogh, Andy Warhol and Roy Lichtenstein.

SAC portfolio managers have been partly paid based on the success of the trading ideas they pass to Mr. Cohen, people close to the hedge fund say. The government alleges that Mr. Martoma received a bonus for 2008 of $9.3 million, based largely on the successful drug-company trades. Failing to sustain that performance, Mr. Martoma was fired in 2010, and was labeled "a one trick pony with Elan " by one hedge-fund officer, according to the complaints.

The majority of the money invested in SAC—$8 billion of $14 billion the company manages—is Mr. Cohen's money, according to a person close to the hedge fund. Mr. Cohen collects roughly 75% of the trading profits generated by SAC.

The broader investigation of Mr. Cohen heated up in late 2008 when federal prosecutors received permission from a judge to wiretap a phone in his Connecticut residence, a person close to the investigation said. The wiretap of Mr. Cohen's personal phone lasted for about two weeks. It is unclear what information, if any, was gathered by the wiretap.

Earlier this year, SEC investigators took a deposition from Mr. Cohen in New York about the trading referenced in Tuesday's complaints, people familiar with the case say.

At issue in the Martoma case is trading in shares of Elan Corp. and Wyeth Pharmaceuticals, now part of Pfizer Inc. There is no suggestion that these companies had any involvement in the alleged scheme.

The complaints assert that Mr. Martoma, a portfolio manager at SAC's CR Intrinsic Investors division, received secret data over an 18-month period from the professor about a trial for a drug being developed by Elan and Wyeth.

The professor, Sidney Gilman, was chairman of the safety committee overseeing the drug trial and moonlighted as a paid consultant for Gerson Lehrman Group, a New York expert-network firm, which links industry experts with investors for a fee, according to investigators and other familiar with the case.

There is no suggestion Gerson Lehrman had any involvement in wrongdoing. It declined to comment.

Dr. Gilman, 80, has a nonprosecution agreement with the U.S. attorney's office and won't be charged criminally. He will forfeit $181,871, representing his consulting income for the drug trial and from Mr. Martoma's hedge fund, according to the agreement. Dr. Gilman's lawyer said he is cooperating both with the SEC and with prosecutors.

Dr. Gilman, who faces civil-fraud allegations by the SEC, was paid nearly $108,000 for consultations with investors, including 42 with Mr. Martoma, both complaints said.

The complaints describe a series of interactions between Mr. Martoma and Portfolio Manager A as CR Intrinsic and SAC built a more than $700 million position by the end of July 2008 in Wyeth and Elan based on indications from Dr. Gilman earlier in the year that the drug trials were going well.

In the spring of 2008, two CR Intrinsic analysts repeatedly urged Portfolio Manager A to hedge the growing positions in Elan, citing negative reports, the SEC said. Portfolio Manager A forwarded one such email to Mr. Martoma, who responded, "Nothing worrisome here," the SEC said.

After a positive announcement about the trial in June, the positions increased in value, the complaints said.

But on July 20, 2008, after Dr. Gilman advised Mr. Martoma of problems with the trial and forwarded him a confidential presentation, Mr. Martoma emailed Portfolio Manager A saying it was "important" that they speak, according to the SEC complaint. They spoke for 20 minutes, and Mr. Martoma indicated that he was no longer "comfortable" with their positions, according to the civil complaint.

The next day, Portfolio Manager A's head trader began selling hundreds of millions of dollars of shares in the drug companies, ultimately unloading the entire position of the hedge funds, according to the complaints.

The trader was told to "do so in a way so as to not alert anyone else, inside or outside of the Hedge Fund," the criminal complaint said.

As the selling unfolded, Mr. Martoma and Portfolio Manager A exchanged text messages about it, according to the SEC complaint. Mr. Martoma wrote on July 22, "would do more today if possible."

When Portfolio Manager A indicated the selling was done for the day, according to the SEC, Mr. Martoma wrote: "my sense is today-thurs are best days so if possible to do more, would do so[.]"

After that, the SEC said, Portfolio Manager A ordered more selling.

After liquidating their positions, the hedge funds shorted both Elan and Wyeth stock, placing negative bets with millions of shares. When the poor drug trial results were announced on July 29, Elan's stock fell by 42%, and Wyeth's by 12%, and the funds earned $76 million more, authorities said.
— Jenny Strasburg contributed to this article.

Corrections & Amplifications
Mathew Martoma left a unit of Steven A. Cohen's SAC Capital Advisors in 2010. An earlier version of this article cited the incorrect year and misspelled Mr. Cohen's first name.

Write to Chad Bray at [e-mail] and Michael Rothfeld at [e-mail]

A version of this article appeared November 21, 2012, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Trading Charges Reach SAC.

http://online.wsj.com/article/SB10001424127887323713104578130930796204500.html?mod=WSJ_Markets_LEFTTopStories