A Manhattan jury has found former SAC Capital manager Mathew Martoma guilty of using illegal tips to earn his employer $276m in a scheme prosecutors alleged was one of the largest ever insider-trading scams.
The 39-year-old Martoma was convicted Thursday of orchestrating illegal trades in two pharmaceutical companies that helped SAC, the troubled hedge fund controlled by billionaire Steven Cohen. The conviction comes amid a multi-year investigation of Cohen’s firm.
It is also another victory for Preet Bharara, the US attorney for the southern district of New York, whose office has now secured 79 convictions or guilty pleas in its recent insider-trading crackdown.
The guilty verdict came after a four-week trial and 15 hours of deliberation from the jury. Martoma faces a maximum of 20 years in prison on two counts of securities fraud and a conspiracy charge, although experts said his final sentence is likely to be somewhere between seven and 10 years.
“Cheating may have been profitable for Martoma, but in the end, it made him a convicted felon,” said Bharara in a statement after the verdict.
Announcing charges against Martoma last year, Bharara said the case was “on a scale that has no historical precedent”. Prosecutors had reportedly hoped Martoma would cut a deal and testify against his former boss, Cohen, who has not been charged with any wrongdoing. Cohen held a 20-minute conversation with Martoma shortly after his employee had allegedly been given insider information but has said he cannot recall what was discussed.
Martoma was accused of illegally trading on insider information he had gained on Elan and Wyeth, two drug firms working on an experimental Alzheimer’s drug known as bapineuzumab. Doctor Sidney Gilman – hired by Elan to consult on a clinical drug trial – testified at the trial that he supplied information to Martoma that the drug trials had run into difficulties.
Martoma and Gilman met on 19 July 2008. When the stock markets opened again on 21 July SAC began unwinding its holdings in the drug companies, betting their share prices would fall. The move earned SAC $276m in profits and avoided losses, prosecutors alleged.
Gilman was chair of the neurology department at the University of Michigan Medical Center at the time of his consultations with Martoma. Before his decision to co-operate with the authorities he faced numerous charges including insider trading and obstruction of justice. The defense team questioned the motivation for Gilman’s testimony and said he had changed his story in order to suit the prosecution.
At trial Gilman testified at the trial that an FBI agent told him that he and Martoma were only a “grain of sand” compared with the government’s real target, Cohen.
Peter Henning, a professor of law at Wayne State University, said the government’s original case against Martoma had looked circumstantial, but that Gilman’s testimony seemed to have swung the case for them.
“The US attorney’s office has a very impressive record in these cases. The circumstantial case leapt off the page in this case given the timing of calls and the sales,” he said.
“When you throw Dr Gilman in there, that really strengthens the case. It seems the jury believed him enough.”
Federal authorities have said they are still investigating allegations of insider trading in several other stocks that SAC traded, although there are no pending criminal cases against any former or current SAC employees.
SAC Capital was fined $1.8bn last year after prosecutors accused the company of fostering a culture of insider trading “that was substantial, pervasive, and on a scale without known precedent”.
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image: © Clyde Robinson