Another bombshell dropped on Tuesday in the sprawling insider
trading investigation being run out of Preet Bharara's office.
The U.S. Attorney for the Southern District of New York unveiled
an indictment against former SAC Capital portfolio manager Mathew
Martoma accusing him of trading on inside information.
According to the government, the illegal tips allowed SAC
Capital to reap profits and avoid losses of $276 million, making
it the largest insider trading case ever. The conduct alleged in
the indictment is nothing short of shocking and egregious.
It is alleged that Martoma sold massive amounts of Elan (NYSE:
) and Wyeth shares in the days leading up to the release of key
drug data for the two companies in July 2008. The stock sales
came after the trader was tipped off that the drug in question,
an Alzheimer's treatment known as bapineuzumab, was not as
effective as had been expected. Even more shocking, the
government alleges that the illegal information came from an
octogenarian doctor who served as the chairman of the safety
monitoring committee overseeing the clinical trial.
Martoma, 38, who was a trader for an affiliated SAC Capital
hedge fund known as CR Intrinsic, is the sixth current or former
SAC employee implicated in insider trading violations. He has
been charged with conspiracy and two counts of securities fraud.
He allegedly cultivated a relationship with a renowned University
of Michigan neurologist named Dr. Sidney Gilman, 80, who
subsequently provided Martoma with highly lucrative inside
The two were introduced to one another through a so-called
"expert networking" firm. According to Bharara, over the course
of around 42 consultations at $1,000 an hour, Martoma convinced
Gilman to share information on the drug trial he was working on.
Furthermore, the two reportedly became friends and Gilman treated
Martoma like a colleague and pupil.
On Gilman's advice, Martoma built up a large stake in both
Elan and Wyeth, which was subsequently acquired by Pfizer (NYSE:
). Billionaire trading legend and SAC Capital founder Steve Cohen
also acquired large stakes in the companies based on Martoma's
recommendation. The pivotal drug data which would substantially
effect the price of the two stocks was set to be presented by Dr.
Gilman on July 29, 2008.
Prior to the presentation, Dr. Gilman was provided with an
encrypted 24-page PowerPoint document which revealed that the
drug's efficacy was well below expectations. In fact, the data
showed that bapineuzumab failed to halt the progression of
Alzheimer's in patients in the clinical trials.
According to the Feds, Gilman subsequently spoke with Martoma
for around 1 hour and 45 minutes and actually sent the PowerPoint
presentation to the trader along with the password needed to
access it. Gilman has been charged civilly by the SEC, but has
entered into a non-prosecution agreement with the government and
is not named in the criminal indictment. He is cooperating with
At this point, Martoma and Cohen, who is referred to as
"Portfolio Manager A" in the indictment held a roughly $700
million position in the two stocks. Specifically, the firm had
acquired around $365 million in Elan shares and $335 million in
Wyeth shares. This was a very substantial position, even for SAC
Capital. Even more significant is the fact that the drug data was
expected to be a binary outcome -- either good or bad -- with a
dramatic move in the stock price in either direction.
Suffice it to say, that even in the hedge fund world, this
kind of bet was seen as bizarre and risky. In fact, other SAC
traders had expressed concern over the size of the position given
the unpredictable nature of clinical drug trials.
When Martoma saw the leaked data, he realized he was in
trouble. When the information became public, his and Cohen's
positions would be buried. Upon learning the news, Martoma
allegedly emailed Cohen, asking "Is there a good time to catch up
with you this morning? It's important." Subsequently, the two
spoke for around 20 minutes on a Sunday.
The following day, Cohen instructed his head trader to begin
liquidating the fund's position in Elan and Wyeth and "to do so
in a way as to not alert anyone else, inside or outside of the
hedge fund." The indictment does not specify the nature of the
discussion between Martoma and Cohen other than to say that
Martoma expressed that he was no longer comfortable with the
Cohen has not been charged and it is unclear if he was aware
of the nature of Martoma's information. That certainly will be a
question that the Feds will want answered and it is likely that
they are pressuring Martoma to flip on his former boss if Cohen
did indeed know about his inside source. In any event, after the
conversation between Cohen and Martoma, SAC Capital began
executing a very large liquidation order in Elan and Wyeth shares
using dark pools and trading algorithms.
Dark pools are trading venues where large investors can
execute trades anonymously away from the exchanges. The platforms
do not identify the brokers and institutions who are trading on
the system and orders are hidden until a transaction is
completed. Trading algorithms break up large orders into smaller
chunks and then efficiently hunt for liquidity to execute
against. The purpose of these tools is to cloak the trading
activity of large investors such as SAC Capital so that other
market participants cannot sniff out their orders and front-run
"This was executed quietly and effectively over a 4-day period
through algos and dark pools and booked into two firm accounts
that have very limited viewing access," the head trader wrote to
Cohen on July 27, 2008. "The process clearly stopped leakage of
info from either in or outside the firm and in my viewpoint
clearly saved us some slippage."
While the liquidation of $700 million in stock just days ahead
of the release of key drug data might have raised some red flags,
what SAC did next was truly shocking. The firm, on the advice of
Martoma, began shorting Elan and Wyeth. Portfolios managed by SAC
subsequently went from being $700 million long Elan and Wyeth to
around $260 million short in the matter of days.
Prior to the July 29 announcement, the firm was short 4.5
million Elan shares and 3.3 million Wyeth shares. According to
the government, the reasoning for the flip-flop is pretty obvious
-- Martoma knew exactly what was going to happen.
This type of trading activity by itself is extremely
suspicious. In fact, the government's case, is the absolute best
explanation for it. Selling or trimming the positions ahead of
the trial data would have been understandable. Selling $700
million in shares and then going short to the tune of $260
million basically overnight, on the other hand, looks suspicious.
Its amazing that Martoma even attempted this.
When the data was released on July 29, both Elan and Wyeth
plunged. Readers should pull up a chart of Elan, in particular.
The stock fell 42 percent on the news and has never recovered.
Wyeth lost 12 percent. SAC Capital and Mathew Martoma's portfolio
made millions off of the bearish positions that were allegedly
established with insider information.
In the short-term, the whole thing turned out unbelievably
well for Mathew Martoma. At the age of 34, he reaped a $9.38
million bonus for the year. Subsequently, however, Martoma lost
money for the firm in 2009 and 2010. In May 2010, he was
terminated on the recommendation of a SAC Capital employee who
called him a "one-trick pony with Elan" in an email.
Despite losing his job, the trader was, by all accounts,
living the good life prior to Tuesday morning when the FBI came
knocking at 6:30 in the morning. After leaving SAC, Martoma
secured a job at Boston-based hedge fund Sirios Capital, although
it is unclear if he is currently still employed.
The government caught up with him at his $2 million Boca Raton
home which he shares with his wife, who is a pediatrician. The
Mediterranean-style house is equipped with a luxurious pool and
even an elevator, according to the New York Post which called it
a "country club estate." The couple even has a foundation which
was funded with nearly $1 million.
Basically, it seems like Martoma was living on Easy Street
after his big score at SAC. Now, he faces a potential 20-year
sentence in Federal prison and will be pondering his future while
out on a rather steep $5 million bail.
In the wake of the charges, Martoma's lawyer immediately went
on the defensive. "Mathew Martoma was an exceptional portfolio
manager who succeeded through hard work and the dogged pursuit of
information in the public domain," his attorney, Charles
Stillman, said in an e-mailed statement. "What happened today is
only the beginning of a process that we are confident will lead
to Mr. Martoma's full exoneration."
The second part of this story will focus on the other former
SAC traders that have been ensnared in the government's sprawling
investigation, the history of Steve Cohen, and an analysis of
what exactly the Feds are up to in relation to SAC Capital. Stay
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