Preet Bharara, U.S. Attorney for the Southern District of New York, announces insider-trading charges against former hedge manager Mathew Martoma at a Tuesday news conference.(Photo: Stan Honda, AFP/Getty Images)
NEW YORK -- The government's five-year war to root out illegal
insider trading on Wall Street displayed fresh firepower Tuesday when
prosecutors charged a former money manager at a unit affiliated with
hedge fund titan Steven Cohen's SAC Capital Advisors in what they're
calling the "most lucrative insider-trading scheme" ever.
case is stunning because of the sheer size of the allegedly ill-gotten
gains, which federal prosecutors say are around a quarter of a billion
Also, the "evidence trail" appears to be edging to the
billionaire founder of SAC, says Thomas George, partner at law firm
Dorsey Whitney and former senior counsel at the Securities and Exchange
Commission's division of enforcement. "This is a very high-profile case
due to the size of the ill-gotten gains and where the case might go," he
says. "Stay tuned for the next chapter."
To be perfectly clear, Cohen and SAC Capital were not charged or even mentioned in the 21-page complaint USA v. Mathew Martoma.
The 38-year-old former portfolio manager at SAC affiliate CR Intrinsic
Investors, Mathew Martoma, was arrested Tuesday. He was the only one
charged with allegedly helping the hedge fund make $276 million in
illegal profits and avoided losses on shares of drugmakers Elan
Pharmaceuticals and Wyeth in July 2008, after getting illegal inside
tips related to clinical trial results of an Alzheimer's drug the two
companies were developing - and trading on the information before it was
made public, which is illegal.
SAC did not return a call from USA TODAY or provide a statement. An SAC spokesman e-mailed TheWall Street Journal
that "Mr. Cohen and SAC are confident that they have acted
appropriately and will continue to cooperate with the government's
The government has stepped up its scrutiny of SAC
Capital in recent years. Four former employees of the hedge fund firm or
its affiliates have already pleaded guilty to criminal charges during
the government's most recent push to weed out illegal insider trading.
Last year, Congress probed the firm's trades in the options market.
allege that Martoma got "sneak peeks at drug data" before other
investors via phone calls, e-mails and PowerPoint presentations from an
80-year-old neurology professor at the University of Michigan Medical
School who was overseeing the drug's clinical trial, as well as
providing consulting services to the hedge fund via a so-called expert
networking firm, where he "moonlighted" for $1,000 an hour.
announcing the criminal charges, 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." Also Tuesday, the SEC filed a parallel civil complaint, charging
Martoma, CR Intrinsic and the neurologist, Dr. Sidney Gilman, who is
cooperating with prosecutors.
The complaint references Martoma
speaking to the "hedge fund owner where he was employed" about his
"recommendation" to sell shares of Elan and Wyeth after receiving the
illegal inside information on July 17, 2008, that the Phase II trial of
the drug did not go as well as Wall Street was expecting. The complaint
alleges that on July 21, 2008, both Martoma and the "hedge fund owner"
instructed a trader at the firm to sell its entire positions of Elan and
Wyeth before the public dissemination of the trial results, scheduled
for release on July 29, 2008.
The hedge fund ended up selling 10.5
million shares of Elan and 7 million shares of Wyeth. The hedge firm
also placed a big trade that would allow it to profit if the stock fell
in value once the bad news on the drug trial findings went public. And
that's what happened. Shares of Elan plunged 42% and Wyeth fell 12% in
the first trading day after the drug's poor trial results were made
The evidence trail pointing toward Cohen includes the
mention of Martoma speaking to the "hedge fund owner" about the illegal
It also includes the fact that CR Intrinsic
Investors is an affiliate of SAC and was named as a defendant in the SEC
case. Intrinsic also shares the same address with SAC, adds Jack
Sylvia, co-chair of the securities litigation practice at Mintz Levin.
Sylvia notes, "there is nothing in the complaint that states that the
person Martoma is alleged to have provided the information to was aware
the information was non-public or aware of the source of the
information, ... the fact that Steven Cohen owns SAC (leads to the)
inference that Cohen is the hedge fund owner referenced" in the
Adds Jacob Frenkel, head of the securities
enforcement practice at Shulman Rogers, "The wording of the charges
suggests strongly that there still are other targets inside the hedge
funds and expert networks whom the government has not charged yet."
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."
crackdown on insider trading began, there have been more than 70
arrests, says Brooks. The biggest hedge fund titan to be ensnared in the
multiyear probe was Raj Rajaratnam, head of hedge fund group Galleon,
who was found guilty in October 2011 and was sentenced to 11 years in