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Thursday, February 6, 2014

Jury Comes in on Martoma Insider Trading Case- Wall Street Journal

Markets

Former SAC Manager Mathew Martoma Found Guilty in Insider Case

Insider Trading is so Common on Wall Street ( remember Martha Stewart?) that a conviction is a mere ripple in the pond...but this case shows how complex and convoluted the convicted schemers were in their machinations

Martoma Found Guilty in One of Largest-Ever Insider Trading Schemes

By connect
Updated Feb. 6, 2014 5:39 p.m. ET

Mathew Martoma, a former SAC Capital Advisors portfolio manager, leaves federal court in New York on Thursday with his wife, Rosemary. A jury Thursday convicted Mr. Martoma of insider trading. Bloomberg News
 
A jury found former SAC Capital Advisors LP portfolio manager Mathew Martoma guilty of insider trading, a verdict that burnishes prosecutors' virtually flawless trial record in such cases in recent years and could bolster a related civil case against the firm's founder, Steven A. Cohen. 

Mr. Martoma was convicted of taking part in what prosecutors say was one of the largest insider-trading schemes ever—illegal trades on two pharmaceutical companies that helped SAC and its traders book profits and avoid losses worth a total of $276 million. With the win, the Manhattan U.S. attorney's office has gone 79-0 in securing convictions or guilty pleas in its recent insider-trading crackdown. 

A jury found former SAC manager Mathew Martoma guilty of insider trading. Could the verdict bolster a related civil case against the firm's founder, Steven A. Cohen? WSJ Law Journal Deputy Bureau Chief Ashby Jones and white-collar defense lawyer Alan Vinegrad discuss on the News Hub.

Who's Who in the SAC Case

Mathew Martoma is the latest former SAC employee to face insider-trading charges. The firm in November pleaded guilty, capping a multiyear probe.
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"Cheating may have been profitable for [Mr.] Martoma, but in the end, it made him a convicted felon," said Preet Bharara, U.S. attorney for the Southern District of New York, in a statement.

Mr. Martoma looked downcast as the jury read the verdict, while his wife's eyes welled up with tears. She began crying as he escorted her out of the courtroom, his arm around her shoulder.

Despite the win, prosecutors had hoped, according to people familiar with the matter, that Mr. Martoma could have given them something that has thus far eluded them: a witness to directly connect Mr. Cohen to illegal trading. Prosecutors allege Mr. Martoma personally advised Mr. Cohen on the illegal trading, and phone and email records show the two were in contact before the trades. Mr. Cohen hasn't been criminally charged and he has denied wrongdoing.

After federal agents arrived at his home in late 2011, Mr. Martoma fainted in his front yard, according to court documents. But even after prosecutors made overtures to solicit his cooperation, a move that could potentially have earned him leniency, Mr. Martoma opted to go to trial. He did so rather than try to cut a deal, such as providing information about the billionaire Mr. Cohen, according to people familiar with the matter. 

The guilty verdict against Mr. Martoma came after roughly 15 hours of deliberation and a trial that lasted more than four weeks in Manhattan federal court. The 12-member jury of seven women and five men convicted him of two counts of securities fraud and one count of conspiracy.

Mr. Martoma now faces as many as 20 years in prison on each of the two counts of securities fraud and five years for the conspiracy charge, though his sentence is likely to be significantly lower under federal guidelines. U.S. District Judge Paul Gardephe, who presided over the trial, has yet to set a sentencing date.
Through Mr. Martoma's spokesman, his attorney said: "We're very disappointed and we plan to appeal."
A spokesman for SAC and Mr. Cohen declined to comment after the verdict.

Jurors declined to comment as they filed out of the courthouse. 

In November, SAC struck a pact with federal prosecutors to resolve criminal charges against the firm, pleading guilty to insider trading and agreeing to pay about $1.2 billion in new penalties. Eight current or former employees at the firm, including Mr. Martoma, have pleaded guilty to or been convicted of criminal insider-trading charges.

The Federal Bureau of Investigation's probe of SAC and Mr. Cohen remains active, according to a person briefed on the matter. Agents are looking into allegations of insider trading, including instances that haven't been made public, the person said.

Mr. Cohen faces a civil case filed by the Securities and Exchange Commission. The trades at the heart of Mr. Martoma's case are some of the same ones the SEC cites in its lawsuit against Mr. Cohen, who is accused of failing to adequately supervise traders at his firm. Mr. Cohen has denied any wrongdoing and said he acted appropriately.

Mr. Martoma, who worked at SAC for four years but was fired in 2010, was accused of trading using inside information provided by two doctors, Sidney Gilman and Joel Ross, about the trial of an Alzheimer's drug being developed by Elan Corp. and Wyeth Pharmaceuticals. Elan is now part of Perrigo Co., and Wyeth is part of Pfizer Inc.

The trial was a key test of the drug's safety and efficacy. Dr. Gilman, who was chairman of a safety committee overseeing the trials, leaked the final results of the trial's second phase to Mr. Martoma in July 2008, more than a week before their public release, Dr. Gilman told jurors.

After learning the results from Dr. Gilman and deducing that the drug wasn't ready to market, Mr. Martoma and SAC began unloading a position in Elan and Wyeth stock worth more than $700 million. The hedge fund also took on new "short" positions, or bets that the stocks would fall in reaction to the bad trial results.
Fresh off the insider-trading conviction of another portfolio manager, Michael Steinberg, in December, prosecutors arrived at Mr. Martoma's trial with what they privately felt was one of the strongest cases to emerge from their decadelong investigation into SAC.

Prosecutors called both Dr. Gilman and Dr. Ross as witnesses. They testified that they passed inside tips on drug tests to Mr. Martoma, providing a direct link between Mr. Martoma and the alleged inside information.
The testimony of Dr. Gilman appeared particularly damaging. The 81-year-old neurologist overcame the defense team's attacks on his credibility and recollections, remaining steadfast in saying he "systematically" passed confidential information to Mr. Martoma and explaining that he initially lied to federal investigators about what he did because he was "ashamed." 

Prosecutors had conceded to jurors that Dr. Gilman's memory was "far from perfect" but hoped that the physician could still sway them. During closing arguments on Monday, prosecutors asked jurors to trust the doctor, who they said Mr. Martoma flattered and cultivated as a "canary in the coal mine" on the drug trial results.

Dr. Gilman, who reached a nonprosecution agreement with the U.S. attorney's office, won't be criminally charged. 

"Dr. Gilman didn't really have interest in anything other than telling the truth," said his lawyer, Marc Mukasey, "and the jury's verdict would suggest that they credited his testimony."

During closing arguments, a lawyer for Mr. Martoma questioned the memory and motivations of Dr. Gilman. The defense lawyer, Richard Strassberg, lambasted the doctor as an unreliable witness whose memory was "ever-changing" and who lied about recalling details he only knew from reviewing evidence with prosecutors shortly before the trial. 

Under cross-examination by defense lawyers earlier in the trial, Dr. Gilman explained that FBI agents told him he wasn't their true target. "[The FBI agent] also mentioned I am only a grain of sand, as is Mr. Martoma," Dr. Gilman said. "They are really after a man named Steven A. Cohen. "

New details emerged during the trial about SAC's inner workings. Several SAC employees testified that Mr. Cohen had ultimate control over trades in firm-wide accounts but kept the advice he was receiving close to the vest. 

SAC, whose heavy trading activity has long made it one of the most lucrative clients for Wall Street firms, is in the process of transitioning into a so-called family office, a leaner organization that will only manage the wealth of Mr. Cohen and his employees. The firm agreed to stop managing outside money as part of its settlement with the government. The company recently closed its London office and laid off a handful of U.S. portfolio managers. The slimmed-down firm is likely to still be large, however, with as much as $9 billion in assets in its new form.

Some of the testimony could prove useful to the SEC in its case, with regulators getting an advance look at what SAC employees could say if they are put on the stand, legal observers said. The SAC employees could be forced to testify during the SEC's administrative proceeding, under the terms of a civil settlement last year.

"It will be difficult for Mr. Cohen to say he properly supervised his employees when he has a series of employees who have been convicted of the same thing: insider trading," said Thomas Gorman, a partner at Dorsey & Whitney LLP and former SEC enforcement lawyer.

The date for Mr. Cohen's civil proceeding won't be set until a federal judge decides whether to accept SAC's guilty plea, according to a person familiar with the matter. U.S. District Judge Laura Swain is scheduled to rule on the plea deal next month.

Write to Christopher M. Matthews at christopher.matthews@wsj.com and John Carreyrou at john.carreyrou@wsj.com

Full Coverage: The SAC Insider-Trading Cases

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