Friday, February 7, 2014

Former SAC Trader Convicted of Insider Trading

Mathew Martoma's federal fraud trial ended yesterday with a conviction for trading on material inside information.  Martoma formerly worked as a trader for SAC Capital Advisors, a hedge fund owned by financier Steven A. Cohen.  The jury in the Southern District of New York found that Martoma had obtained confidential information about clinical drug trials for experimental Alzheimer's disease treatments.  After obtaining the information, Martoma caused SAC to begin selling its stake in two companies producing the drugs, Elan and Wyeth.  The illegal trades resulted in unlawful gains to SAC of $275 million.  The jury convicted on three counts - two counts of securities fraud and one count of conspiracy.
The government alleged that Martoma corrupted two physicians working on the drug trials, inducing them to provide him with confidential information about problems developing in the clinical trials.  Martoma learned of the problems in a meeting with one of the physicians on July 19, 2008.  The next day Martoma called Cohen at his home.
Cohen and Martoma had a 20 minute telephone conversation on July 20, 2008, the day before SAC began to liquidate its holdings in the two drug company stocks.  The drug companies announced the results of the clinical trials on July 30, 2008.
The government attempted to turn Martoma and use him to build a case against Cohen.  Presumably, the government believes that the 20 minute conversation on July 20, 2008, involved the confidential information about drug trials.  It is most likely that investigators and prosecutors will, in the aftermath of the conviction, renew attempts to gain the cooperation of Martoma against Cohen.  Even with a new willingness by Martoma to cooperate, without corroboration of Martoma's testimony a successful case against Cohen would be very difficult for the government.
While eight former employees of SAC have now been convicted of insider trading, Cohen has avoided criminal charges.  SAC itself pleaded guilty last year to criminal charges and agreed to pay a penalty of $1.2 billion.  Cohen is in the process of converting his hedge fund into a family office that will manage his $9 billion in personal wealth
The Securities and Exchange Commission has filed a civil action against Cohen alleging his failure to supervise.  The charges arise from the insider trading issues at the firm.  As a civil enforcement action, Cohen faces monetary penalties but no possible exposure to prison.

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