Source: NY Times Dealbook
Mathew Martoma had been on his way to being another American success story. Today, he is the eighth person who once worked for the hedge fund titan Steven A. Cohen to be convicted of insider trading.
A federal jury in Manhattan on Thursday found Mr. Martoma guilty of seeking out confidential information related to a clinical trial for an experimental drug for Alzheimer’s disease — information that enabled Mr. Cohen’s SAC Capital Advisors to earn $275 million.
The son of immigrant parents from India, Mr. Martoma, 39, graduated from Duke, attended Harvard Law School and earned an M.B.A. from Stanford Business School before he landed a job as portfolio manager at SAC, one of the most successful hedge funds in the world.
Now, Mr. Martoma is expected to receive a sentence of seven to 10 years in prison, legal experts said
As a guilty verdict on two counts of securities fraud and one count of conspiracy was read in the courtroom in Lower Manhattan, Mr. Martoma’s wife, Rosemary, a pediatrician, cried, while he sat stone-faced.
“We’re very disappointed and we plan to appeal,” said Richard Strassberg, a lawyer for Mr. Martoma
For Mr. Cohen, meanwhile, it is business as usual, albeit on a somewhat reduced scale. He is moving ahead with plans to convert his 22-year-old firm into a family office that will manage no outside money, just his $9 billion in personal wealth. The firm will still employ more than 800 people and maintain offices in several cities. At one point during Mr. Martoma’s trial, Mr. Cohen, a noted art collector, attended a New York Knicks basketball game at Madison Square Garden with the art dealer Larry Gagosian.
The case against Mr. Martoma was notable because it was the first time that Mr. Cohen was linked to questionable trades at his firm. The two men had a 20-minute phone conversation on July 20, 2008, the day before SAC began selling two drug stocks. For more than two years, federal prosecutors and agents with the Federal Bureau of Investigation pressed Mr. Martoma to cooperate and tell them what he and Mr. Cohen had discussed.
But with the conviction of Mr. Martoma, an investigation that lasted almost a decade of Mr. Cohen, 57, and his Stamford, Conn., hedge fund may have seen its last criminal prosecution.
When SAC was indicted last summer, federal prosecutors called the onetime $14 billion firm a breeding ground for inside trading activity and a “veritable magnet for market cheaters.” And federal authorities have said they are continuing to investigate accusations of insider trading in several other stocks SAC traded.
But there are no pending criminal cases against any former or current SAC employees. (The firm agreed in November to plead guilty to insider trading violations and pay a $1.2 billion penalty.) And prosecutors are not close to bringing any charges against Mr. Cohen, according to a person briefed on the investigation, who spoke anonymously because he was not authorized to speak publicly about it.
Still, Mr. Cohen faces a civil action over an administrative failure to supervise charge filed by the Securities and Exchange Commission, which arises largely from the insider trading charges on which Mr. Martoma was convicted.
“Cohen built fire walls between him and the illegal action that so far have protected him from criminal proceedings,” said Erik Gordon, aUniversity of Michigan business professor.
Jonathan Gasthalter, an SAC spokesman, declined to comment.
Until his arrest in November 2012, Mr. Martoma had seemingly checked off all the boxes on the path to success. At SAC, he earned a $9.3 million bonus in 2008, which enabled him and his wife to buy a $1.9 million home in Boca Raton, Fla., for themselves and their three young children.
But much of Mr. Martoma’s adult life was checkered with cheating.
In 1999, he was kicked out of Harvard for doctoring his law school transcript to try to gain a federal clerkship. Soon after, he changed his name from Ajai Mathew Thomas and was admitted to Stanford, where officials were apparently unaware that Mr. Martoma had been expelled from Harvard. His deception at Harvard remained a secret for years, even among those who worked alongside him at SAC.
Prosecutors said that in July 2008, two years after he began working at SAC, Mr. Martoma “seduced” and “corrupted” two doctors to provide him with confidential information about problems with a clinical trial for an experimental Alzheimer’s drug being developed by Elan and Wyeth, two pharmaceutical companies. SAC had amassed $700 million worth of shares in the two companies, based largely on Mr. Martoma’s recommendation.
After a secret meeting on July 19, 2008, with one of those doctors, who had disclosed the final results of the trial, Mr. Martoma called Mr. Cohen at his home on a Sunday, prosecutors said. The very next day, at Mr. Cohen’s instructions, the hedge fund began selling those stocks.
The jury convicted Mr. Martoma of charges that he used that inside information to recommend that SAC liquidate its position in those stocks.
Even though prosecutors introduced evidence that he played an instrumental role in the selling of those stocks over four days, Mr. Cohen was not charged with wrongdoing.
The sales enabled SAC to avoid losses and generate profits totaling $275 million by the time the drug companies publicly announced the results of the clinical trial on July 30, 2008.
“Martoma bought the answer sheet before the exam,” said Preet Bharara, the United States attorney in Manhattan.
Dr. Sidney Gilman, a former University of Michigan medical professor and an expert in brain diseases, who provided Mr. Martoma with those final clinical trial results, testified that an F.B.I. agent told him in September 2011 that the real target of the investigation was Mr. Cohen.
“I am just a grain of sand, as is Mr. Martoma,” Dr. Gilman recalled the F.B.I. agent telling him.
Mr. Martoma’s lawyers sought to undermine the credibility of Dr. Gilman, while also raising questions about whether the information the doctor said he had passed on to Mr. Martoma was in fact secret.
The conviction of Mr. Martoma adds to the perfect record of the United States attorney’s office in Manhattan in prosecuting insider trading cases in the hedge fund industry. The office has now secured 79 convictions or guilty pleas since the current crackdown began with the October 2009 arrest of the Galleon Group founder Raj Rajaratnam, who was convicted of 14 counts of securities fraud and conspiracy in May 2011.
Throughout the trial, Mr. Martoma sat next to his lawyer, quietly taking notes. His calm demeanor was a stark contrast to his reaction when F.B.I. agents first approached him in 2011 to tell him they were investigating him for insider trading and wanted him to cooperate. Mr. Martoma briefly fainted and then refused to cooperate with the authorities.
The judge, Paul G. Gardephe of United States District Court in Manhattan, did not immediately set a sentencing date for Mr. Martoma, who has been free on bail since his arrest.
The trial began as Judge Gardephe unsealed information in the case revealing that Mr. Martoma had been expelled from Harvard in 1999 for changing several Bs to As on his transcript, including one for a course in criminal law. But the evidence of Mr. Martoma’s cheating at Harvard was not introduced at trial.
The jury of seven women and five men, which included the chief executive of a shoe and accessory company, a New York University professor and a lawyer, reached a verdict after a little more than two days of deliberations. Several jurors contacted immediately after the verdict declined to comment.
An alternative juror who was dismissed on Tuesday at the start of deliberations said he had initially thought that Mr. Martoma was not guilty, but had changed his mind.
“I don’t think there was one smoking gun or slam-dunk piece of evidence that would have swayed anyone 100 percent,” said the juror, Joseph Linksman, who is also a lawyer. “It was all the circumstantial evidence tied together that created a story that made a lot more sense.”