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.
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 chad.bray@wsj.com and Michael Rothfeld at michael.rothfeld@wsj.com
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.
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